Economy-wide implications of water quality management policies: A case of the Olifants river basin South Africa

Abstract

The deterioration of water quality threatens the functioning of ecosystems and the sustainability of socioeconomic growth and development more especially for a water-stressed country like South Africa (SA). The Olifants river basin, which is one of the nine water management areas in SA, faces serious water scarcity, with declining surface and groundwater quality due to pollution from mining activities, irrigation agriculture, and industrial waste disposal. This has led to great competition for water among different economic sectors and between upstream and downstream users. As a result, the government has implemented a series of pollution control measures with the view to mitigating pollution and water shortage in the basin. This study developed and used a regional, environmental, computable general equilibrium (CGE) model to assess the environmental, economic, and social impacts of protecting the basin‘s water resources. To calibrate the model, the study also constructed an environmental social accounting matrix (ESAM) using the framework of an environmentally extended SAM. Results of the environmental and economic impacts of taxing water pollution suggest that internalising the negative externality of water pollution in the Olifants river basin will effectively reduce pollution discharge (i.e., achieve its environmental goals). This, however, comes at some costs to the regional economy of the basin. The economic burden of the tax happens to be fairly small though, due to the small relative share of the water pollution supply and abatement costs in total production costs. Furthermore, recycling the tax revenue through income transfers to households or a subsidy to pollution abatement mitigates the adverse economic impacts. Results of the distributional impacts of taxing water pollution in the basin indicate that the water pollution tax is progressive (inequity and poverty-reducing) on the income side as the poorest and vulnerable derive lower shares of their income from capital, which bears the biggest burden of the tax. On the expenditure side, however, the tax is regressive (inequity and poverty increasing), due to the higher share of pollution-intensive goods in poor households‘expenditure. The net effect of the tax is, however, not pro-poor. Recycling the tax revenue through a subsidy to pollution abatement sectors reduces the adverse effect of the tax on household welfare whereas uniform direct lump-sum transfers to households‘income results in a progressive outcome. This study has demonstrated the importance of using an integrated framework that allows non-linear substitution possibilities and endogenous price determination to account for both the direct and indirect costs of water quality management policies. The findings should, however, be viewed with caution due to some limitations inherent in basic assumptions of this study. Firstly, demand for pollution abatement services by production sectors, is specified in a simple way using exogenously determined clean-up rates and the assumption that unit costs of pollution abatement are fixed. Secondly, this study did not account for the economic benefits from water quality improvements as well as from technological advancements that lead to reduced pollution intensities.