Taxing water: what’s it worth?

Fifth in our series of blog posts considering our recommendations for new Welsh taxes, we’re considering whether Wales should introduce a water tax.

At the ‘New Taxes for a Better Wales’ seminar we held last October, there was real appetite for the idea of a tax which reflected the value of Wales. Initially, I was really sceptical. What would this be? A tax on Welsh cakes? Delegates were in fact much more interested in taxes which would benefit – and in some cases protect – Wales’ communities as well as acknowledging the value of our often underrated natural resources.

Wales’ resources and attributes have been a source of our country’s wealth for centuries. Our mining heritage is well documented, our natural parks are one of the main draws for tourists and we have a developing wind and tidal energy sector.

One area in particular stood out as an obvious choice whereby taxation could affect behaviour and reduce environmental harm – water.

Why tax water?

The introduction of a tax on water is intended to reflect the value of Wales’ natural resources, and the environmental ‘cost’ of extracting and using it. It is intended to make those companies which use Wales’ water for commercial gain aware of the impact that their behaviour has on the current and future generations, and limit wastage. It would cover a wide range of water extraction, including reservoirs, use of river water and ground water / aquifers.

The current scheme run by Natural Resources Wales requires an operator to obtain a licence in order to begin commercial extraction (above 20 cubic metres of water).  While the annual charges do take into account the amount of water extracted, the revenue appears to be allocated for covering expenditure, rather than more widely in the community.

There is little data available about water extraction and wastage in Wales, so it is difficult to estimate what such a tax would raise. However, Natural Resources Wales currently regulates 1,160 water extraction licenses.

A water tax would enable the National Assembly for Wales to collect financial compensation to reflect the wider costs of extracting Wales’ natural resources, and begin to benefit for the export of water to England. It would also seek to change the mindset of those who collect and consume the water, by making them more aware of the overall environmental cost of water extraction.

Is there a precedent?

Water taxes have been introduced in various means and to differing levels of success, and have often focussed on the use of water as a resource for commercial gain.

Since 1991, a Water Conservation Tax has formed part of Singapore citizens’ monthly water bill. The government states that this is to raise awareness of how precious water is and to encourage water conservation. It is calculated to ensure that the price of drinking water is equivalent to the cost of production, and is intended to reflect how scarce water is in Singapore. For domestic customers, it is currently 30 or 45% of their Water Tariff (a higher rate is applied to those with higher consumption levels), and 30% for non-domestic and shipping customers.

The Water Conservation Tax forms part of a raft of measured introduced in Singapore to reduce water consumption. Although total consumption has risen due to population increase, household consumption has fallen since the tax and other measures have been introduced. In 1994, domestic per capita water consumption was 176 litres per day,  buy by 2015 this has been reduced to 151 litres per day.  The Water Conservation Tax has contributed to almost a 15% reduction in domestic water consumption.

Water taxes can go beyond simple water consumption. Russia taxes corporations for their use of water areas (in m3), as well as the use of water bodies for creating hydroelectricity and for the purpose of wood-floating. This last tax is calculated based on a formula which takes into account the amount of area covered by the wood and the distance it floats.

Brazil also has a long-established tax on water usage associated with hydroelectric power. The 1997 Water Law imposed a 6.75% levy on hydroelectricity which is charged to compensate for the use of water resources. According to an OECD study, in 2009 the levy raised €527 million. This is then shared between the National Water Agency and the national, state and municipal governments in areas where hydroelectricity is generated. Although a portion of the levy is invested in the management of water resources, the majority is spent according to government priorities.

What should Wales do?

If Wales were to introduce a water tax, it must take every precaution to ensure that it is not regressive. Singapore’s model is likely to lead to a regressive tax, so this is not a desirable model. Instead, the tax should focus on how it is used, who has the ability to pay and what the  likely implications are of the tax being introduced.

A tax paid by those with water  licences is a possible option, especially if it reflects the quantity of water they are using. Also, taxing water companies that abstract water from Wales is also another option. Both would result in a reduction in wasted water, and would enable the National Assembly for Wales to start benefiting from the use of this particular natural resource.

Of course, there would be some difficulties to overcome with a Welsh water tax, such as fears over increases to water charges and the difficulties in defining the ‘Welsh’ part of a cross border water source, but as Wales’ funding is being squeezed perhaps it’s time it looks at the resources it already has to boost revenue.

Nisreen Mansour is policy & research officer at the Bevan Foundation. 

Each week, we will be profiling our interim recommendations for new devolved taxes for Wales. To learn more about our work on devolved taxation, please click here.