Competitiveness and effectiveness concerns in water charge implementation: a case study of the Paraíba do Sul River Basin, Brazil

Abstract

Policymakers should be aware of the potential trade-off between environmental effectiveness and competitiveness concerns involving water charge implementation. This trade-off can be particularly important in countries such as Brazil, which adopt a decentralized and participative water management approach through River Basin Committees. In such a regulatory framework, it is crucial for the consensus reaching process to evaluate in advance potential impacts of water charge schemes. This paper aims at assessing the economic and environmental impacts of industrial water charges in Brazil. The analysis is based on a survey of 488 plants located within the Paraíba do Sul River Basin. The survey indicates that a significant proportion of the industrial plants approves the water charge mechanism and that increasing water costs are already inducing them to undertake conservation measures. Simulations based on an econometric water demand model suggest that water charges can induce significant industrial water demand reductions with limited impact on firms' costs. Regarding pollution control, the estimated marginal effluent treatment costs are far above the current values established for the pollution-related component of the water charge. These results indicate that competitiveness conflicts will not necessarily pervade the political economy of water charges in Brazil.