Recent research on the City of Toronto’s water pricing system illustrates just how useful markets can be.
This research finds that price is an effective tool to reduce residential water consumption. The study finds that between 2005 and 2012, Toronto experienced a dramatic drop in both its absolute and per capita water consumption rates, at the same time that the City implemented an aggressive water pricing policy. As water prices increased by 6% to 10.8%, residential water use declined by 24% on a per capita basis during the same time period. While further study needs to be conducted to measure causality between these two variables, the analysis shows that when compared with alternative explanations, water price increases are the primary contributing factor to the decline in residential water consumption.
This decline in water consumption is great news for municipal governments who are financially responsible for managing the wear and tear that heavy water consumption puts on local water infrastructure. And of course, water conservation in cities means that nature can continue to provide the vast array of ecosystem services that we have relied on for so long.
This research highlights what we like so much about markets: that they create a platform on which to ensure that the environmental services we take for granted (like clean air or clean water) are properly valued.
We know that markets sometimes fail when the results of environmentally beneficial or environmentally harmful activities are not properly accounted for. But markets don’t always fail. We believe that when markets are designed properly, they can help to create positive environmental outcomes. This can be achieved by ensuring that there are financial disincentives for negative environmental actions and financial incentives for positive environmental actions. There are two main ways we can create environmental markets in Canada:
At SP, we want to stimulate conversations about how best to promote environmental markets for the benefit of a clean and prosperous Canadian economy. To begin this conversation, we are starting a new research series entitled “Price Works”. This series will feature examples of research that shows how markets do work to provide both economic and environmental benefit.
The research on the decline of Toronto’s residential water use is the first piece in this series. Stay tuned for more to come!