More Water Please, It's Getting Hot! The Effect of Climate on Residential Water Demand

Abstract

Climate change is expected to alter the supply and demand for water in the residential sector. Existing studies exploit the differences in climate across seasons mostly in North America and Europe, and identify changes in consumption levels attributed only to households' short-term responses. The results from models that simulate household consumption of water are sensitive to the parameters that govern the behavior of climate variables and household responses in the upcoming decades, and fail to consider short-term determinants of water consumption. The findings in the literature suggest an inexistent or small effect of climate on residential water demand. This paper studies the relationship between climate conditions and residential water consumption that corresponds to households' long-term adaptation to climate, while controlling for the effect of short-term determinants of water demand. I take advantage of the geographic variation in climate conditions across municipalities of Ecuador to identify the effect of temperature, precipitation and humidity on water demand. I adopt average prices and an IV technique to address the endogeneity problem between water prices and quantities that arise from the use of increasing-block water tariffs. I find a large and significant effect of temperature on residential water demand, whereas precipitation and humidity have a small effect. Temperature also has a stronger effect on water demand among low-income households.