Assessing the economic impacts of drought regulations

M.Cubed was asked by the State Water Resources Control Board to prepare an economic assessment of the emergency regulations ordered by the Governor to reduce municipal water use by 25%. We gathered a team that included Roger Mann of RMann Economics, Tom Wegge of TCW Economics, Richard Howitt and Duncan MacEwan of ERA Economics, and prepared the report in about two weeks. The SWRCB included a summary of those findings in its regulatory digest.

The innovative aspect of our study is to steer away from a single point probabilistic estimate of the benefits of the regulations and instead to focus on the potential vulnerability and consequences of the risk of continued drought in the future.

The EO is intended to address potentially significant economic vulnerabilities – risks – rather than statistical or probabilistic expectations. If the drought and high temperatures continue in California, water saved as a result of the order will become increasingly valuable. Under these circumstances, costs estimated to be associated with the EO this year could be more than exceeded by greater adverse impacts next year if the EO had not been issued.

Australia had an extended drought that lasted 10 years before ending in 2012 that cut 1.6% off its GDP. For California that would be $35 billion in a single year which is multiples of the range of costs we estimated for the regulations. In other words, the probability of continued drought would have to be less than 4% to make this option uneconomic.

We also pointed out that while the water utilities will lose revenues this year, as mostly public agencies, they will have to make up those losses in the future. For this reason, those revenue losses should be treated as eventual economic costs.

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5 thoughts on “Assessing the economic impacts of drought regulations

  1. Pingback: UCLA professors comments not helping California’s drought problem | Economics Outside the Cube

  2. Pingback: Looking to the Aussies to solve California’s water problems | Economics Outside the Cube

  3. Mark

    Thanks for posting a link to the paper! I wasn’t sure if the costs associated with less water flow into the various wastewater treatment facilities was captured or not. I toured EID wastewater facility a few years back and learned a bit about the benefit of wet years to diluting out the treated water. As a lot of the states wastewater facilities don’t have tertiary treatment capabilities I was wondering if the concentration of various chemicals might be a bit higher this summer with less water going into the facilities.

    Depending on how the different waste water treatment facilities allocate costs for their services their might be a shortfall in revenue due to the executive order as their will be reduced sewer flows. If memory serves me correctly some agencies (ie Placerville) work up their budgets for cost allocation based on flows coming into their facilities.

    My local Home Depot has seen a bit of an increase in sales of gutters of late. As a just in case the drought keeps going we installed gutters on our in-law quarters building in time to capture some of the run off from the storm a week+ ago for use in our gardens, and orchards. We didn’t need to invest any funds in containers as we had some food grade vessels in the barn that we set out at the end of a couple of the downspouts. I did buy a bit longer flexible extension hose to make it easier to fill the various containers.

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    1. mcubedecon Post author

      Mark, we hadn’t considered the impact on waste water agencies. I’m giving a presentation to the California Association of Sanitation Agencies (CASA) in August, and I’ll bring this up. I expect given the rather crude, round estimates that we had to come up with in 2 weeks, that the impacts are lost in the range of uncertainty. But that doesn’t mean that they are necessarily trivial to individual agencies. I would think that the range of flows should be relatively small because stormwater drainage that captures outdoor irrigation run off is supposed to be separate from municipal wastewater, and stormwater is not billed on a volumetric basis.

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