The NDRC has been signaling industrial water & wastewater tariff hikes to encourage more efficient water use in industry and rein in industrial water pollution. However, for pricing to be an effective tool in encouraging efficiency and discouraging pollution, fundamental changes in both the industrial water pricing mechanism and a revision of existing industrial wastewater discharge standards to reflect the current environmental quality standards are necessary.
Currently, conflicting standards and inadequate pricing have led to low water prices and high untreated wastewater discharge and has failed to encourage companies to adopt water-saving technologies in their production facilities. These combined with an inefficient wastewater fee collection system have meant that it is cheaper to pollute than to clean up. Professor MA Zhong, the Dean of the School of Environment of Renmin University gives us an in-depth view of why the current industrial water fees do not reflect the all-in real cost of industrial water use and wastewater discharge, let alone the environmental cost of industrial pollution.
China Water Risk (CWR): Can you please give us some background on existing water pricing policies in China? What are the different types of fees and who is responsible for setting and collecting them?
Professor MA ZHONG (MZ): China’s current water price policy comprises four parts:
- Water Resource Fee;
- Tap Water Fee;
- Wastewater Treatment Fee; and
- Wastewater Discharge Fee.
Each of these fees are levied depending on the water intake from natural sources, municipal & industrial water use as well as municipal & industrial wastewater discharge. Central, provincial and municipal governments, as well as various government departments responsible for pricing, finance, water resources, urban development, environmental protection, all have input into pricing. Revenues collected from Water Resource Fees and Wastewater Discharge Fees are shared by both central and local governments, whilst revenues from water fees and wastewater treatment fees are exclusively collected by local government (see the table below):
CWR: What are the main drawbacks of the current water pricing policy?
“The current discharge standard is lower than the environmental quality standard and therefore discharge fees will be inevitably low”
MZ: Currently the Wastewater Treatment Fees are charged based on the construction and operation costs according to the “Water Pollution Prevention & Control Law”; while Wastewater Discharge Fees are determined based on treatment costs under the “Regulations on Collection, Use & Management of Wastewater Charges”.
Since discharge standards determine treatment costs, it also determines the discharge fees. The current discharge standard is lower than the environmental quality standard and therefore discharge fees will be inevitably low.
The relatively lower discharge standards compounded with low water prices will lead to more wastewater discharge, causing serious water pollution. On one hand, low discharge standards lead to high concentrations of wastewater pollutants; and on the other, low water prices are not able to encourage companies to recycle water, save water usage and reduce wastewater discharge. Whenever water pollution becomes serious, the government has to set aside funding, such as ‘special funds’ to deal with the problem.
CWR: How much lower are discharge standards compared to the current water quality standards which form part of the environmental quality standards? Why is it so important to solve the mismatch?
MZ: The current water quality standard is “Surface Water Quality Standards (GB3838-2002)” issued in 2002. According to this standard, the quality of surface water is categorized into Grade I – V classes: Grade I – III water bodies are qualified as drinking water sources, Grade IV water bodies are generally used for industrial use and recreational use without direct human contact, and Grade V water bodies are mainly for agricultural and landscape water use. Water worse than Grade V is categorized as Grade V+: basically, not suitable for any usage.
The current discharge standards consist of three categories: “Integrated Wastewater Discharge Standard (GB8978-1996)”, “Discharge Standard of Pollutants for Municipal Wastewater Treatment Plant (GB18918-2002)”, and discharge standards of industrial pollutants. These standards are all far below the environmental quality standards, and also lack of consistency with each other.
”In 2009, treated industrial wastewater discharge of 23.5 bt had an average COD concentration of 188 mg/L, more than 4x that of the Grade V requirement of 40mg/L …
… untreated industrial wastewater discharge is an additional 15.5 bt “
According to GB18918-2002, wastewater discharging into key rivers, lakes and reservoirs, should meet Level I-A standard, wastewater discharging into Grade III water bodies should meet Level I-B standard, and wastewater discharging into Grade IV & V water bodies should meet Level II standard. However, taking COD concentration as an example, the dischage limits for Level I-A, I-B and II are 50 mg/L, 60 mg/L and 100 mg/L, respectively; while, the standards for Grade III, IV and V water bodies are 20 mg/L, 30 mg/L and 40 mg/L, respectively. In other words, the dischage limits have exceeed the environmental quality standards by 3x, 3.3x and 2.5x respectively.
In 2009, the treated industrial wastewater discharge of 23.5 billion tonnes had an average COD concentration of 188 mg/L, more than 4x that of the Grade V requirement of 40mg/L. The untreated industrial wastewater discharge is an additional 15.5 billion tonnes, with an even greater COD concentration. That means, all the discharged wastewater in China did not meet Grade V requirements for that year.
With deteriorating environmental capacity, this means that industry is discharging more Grade V+ water into existing Grade V+ water bodies. This vicious discharge cycle makes it impossible for the government to treat the water to bring it back to Grade IV, no matter how much money it spends.
CWR: Does this mean that businesses/companies are not paying the proper price?
“China’s water pollution is mainly caused by businesses…
… extra revenues from low treatment costs whilst polluting the environment, are estimated at RMB1.8 trillion during 2001-2010.”
MZ: The existing low discharge standards and low water prices are due to both environmental and financial subsidies provided to businesses for their water use and wastewater discharge. China’s water pollution is mainly caused by businesses, thus the cost of water use and wastewater discharge (including the environmental cost) should be internalized and borne by them. These operational water costs should be set to ensure no resource degradation and environmental pollution.
In 2013, the total industrial water fees were only more than RMB60 billion, only 1/105 of the total industrial revenue at RMB6.3 trillion, much lower than the costs of salaries or fuels. For a long time, the low water price has helped businesses gain a huge amount of extra revenues from low treatment costs whilst polluting the environment, estimated at RMB1.5-4.4 trillion during 2001-2011.
Thus, to some extent, the high revenue and rapid growth of Chinese companies are at the expense of the environment, which is not sustainable and will inevitably lead to deterioration of water resources and frequent water pollution incidents.
“Given the current state of environmental degradation, this “free bonus” from the environment disappears and the government will have to pay to clean up industrial pollution.”
Given the current state of environmental degradation, this “free bonus” from the environment disappears and the government will have to pay to clean up industrial pollution. This is a vicious cycle. During 2001-2011, central government spent about RMB180 billion in treating water pollution, mostly from industrial discharge.
This is against the principle of “polluters pay”, and will seriously harm public interests, causing more environmental pollution as well as misuse of public funding.
The root cause of long-term low discharge standards, untreated discharge and low water prices is the pursuit of economic growth. In short, China’s economic growth has been at the expense of the environment. This fast-speed economic growth with big gains at low costs has benefit companies and the society has support this with the understanding of “pollute first & clean up later; development first & protection later”. However, due to limited environmental capacity, this cannot last any longer. In fact, China has entered a time of high incidence of environmental pollutions and damages. Long-term low water standards will inevitably lead to degradation of the water environmental quality; harm public health and ecological environment; and result in huge loss and management, treatment & recovery costs.
“Investing RMB1 trillion may help Beijing bring back blue skies, but perhaps even RMB5 trillion will not necessarily deliver the promise of cleaning up China’s water resources.”
Air pollution has proved that development at the expense of the environmental is not sustainable. Beijing city will invest RMB1 trillion to clean its air (mostly government funding). Compared with air pollution, water pollution is less obvious to the public and yet is harder to resolve and to recover. Thus it is more difficult to tackle. Investing RMB1 trillion may help Beijing bring back blue skies, but perhaps even RMB5 trillion will not necessarily deliver the promise of cleaning up China’s water resources.
CWR: Can you give us a rough idea of additional revenues the government could collect if standards are aligned?
MZ: Low discharge standards and low wastewater discharge fees make large amount of pollutants entering the environmental “legal”, which means the environment is subsidizing corporate profitability.
In 2011, the average industrial water resource fee is RMB0.13/tonne, only about 1/12-1/3 of the actual water intake cost (RMB0.4-1.6/tonne); the average industrial wastewater discharge fee is RMB0.12/tonne, only about 1/83-1/42 of the actual treatment cost (RMB5-10/tonne); the average industrial wastewarer trearment fee is RMB1.28/tonne, about 1/8-1/4 of the actual treatment cost (RMB5-10/tonne). In another words, companies who intake water directly from natural sources and then discharge treated wastewater, only need to pay a total fee of RMB0.25/tonne. The total industrial wastewater discharge was 40 billion tonnes in 2009, comprising 24.5 billion tonnes of treated wastewater (average COD concentration=188 mg/L), and 15.5 billion tonnes of untreated wastewater (average COD concentration=400 mg/L).
”[If] 40bt wastewater is discharged at the higher limit of Level I-A, the amount of COD discharged at this limit concentration of 50mg/L will be 2 mt … 8.81mt less than the actual COD discharged … “
Assuming this 40 billion tonnes wastewater is discharged at the higher limit of Level I-A, the amount of COD discharged at this limit concentration of 50mg/L will be 2 million tonnes. This is 8.81 million tonnes less than the COD amount discharged in 2009 of 10.81 million tonnes. If the discharge limit is further raised to Grade IV water quality requirements at 30 mg/L, the COD discharged will be 1.2 million tonnes or 9.61 million tonnes less than the 2009 amount. Not only will there be a significant improvement in COD discharge, more fees will levied as the discharge fee at Level I-A will be RMB2.00/tonne which is 1.6x the treatment fee and 15.4x the discharge fee. Furthermore, the COD discharge fee under Grade IV requirements is RMB5.00/tonne which is 3.9x the treatment fee & 38.5x the discharge fee.
Therefore, if discharge standards were aligned, even at current water prices, the external cost of companies’ pollution would be internalized to encourage them to significantly reduce wastewater pollutant discharge.
CWR: So does this mean it is not necessary to adjust industrial water prices?
” surface water resource fee for industrial use in 22 provinces is <RMB0.20/t … to treat wastewater discharge only costs RMB1.28/t & to discharge wastewater costs even less at RMB0.13/t”
MZ: No. What’s worse than mismatched standards, is the low water intake fees amongst the 31 provinces & municipalities. The surface water resource fee for industrial use in 22 provinces is <RMB0.20/tonne, and for 15 provinces is even lower at <RMB0.10/tonne. However, to treat wastewater discharge only costs RMB1.28/tonne and to discharge wastewater costs even less at RMB0.13/tonne.
So it is cheaper for business to operate by taking surface water than it is to pay for wastewater treatment let alone install internal water treatment equipment.
“it is cheaper for business to operate by taking surface water than it is to pay for wastewater treatment”
So the current discharge standard regulations should be changed so that it does not place emphasis on whether the company can afford to pay the discharge fees. Instead, industrial water pricing should be revised to a level that reflects all-in real cost of water which should include production costs, environmental costs and opportunity costs.
CWR: What about the water fee collection system in China? What are your views on this?
MZ: In 2011, the total revenue of various types of water fees was RMB105.5 billion. Contribution from the Water Resource Fee and Wastewater Treatment Fee were quite small:
In absolute terms, industrial water use > domestic water use > domestic wastewater discharge > industrial wastewater discharge. The amount of industrial wastewater discharge is slightly higher than domestic wastewater discharge; however, the collected industrial wastewater fees are merely a seventh of the domestic wastewater fees. Thus, the current water pricing does not match the relevant water use amount.
“industrial water resource fees are only a tenth of the domestic water resource fees”
“Based our research, under the current water pricing policy, we estimate the uncollected water fee to be RMB23.29 billion in 2009″
Due to the inefficient fee collection system and low fee collection rates, the collected water fees are much lower than expected. Taking Water Resource Fee as an example, the collection rate in Hunan province is only around 70% at the provincial level and 45% at the municipal & county levels. Liaoning Province has an even lower collection rate, at 35%. Based our research, under the current water pricing policy, we estimate the uncollected water fee to be RMB26-63.5 billion in 2011, about 2.5x-6x the actual collected water fee.
CWR: So it seems from a provincial perspective, collection rates could vary widely. Is this also the case for water pricing?
MZ: Yes. The national average comprehensive industrial and domestic water prices are RMB3.80/tonne and RMB 2.70/tonne respectively (industrial water is 38.8% higher than domestic water). Tianjin has the highest industrial water price of RMB7.85/tonne; 5.6x that of Lhasa, the lowest at RMB1.40/tonne. Tianjin also has the highest domestic water price of RMB4.90/tonne; 4.9x that of Lhasa, again the lowest at RMB1.00/tonne. As you can see fees can differ significantly from province-to-province.
“gap between cities for industrial and domestic Water Resources Fee can be as high as 95x and 125x …
As for the Wastewater Discharge Fee, a national fee is applied across cities.”
The variance between cities is due to the Water Resources Fee where the gap between cities for industrial and domestic Water Resources Fee can be as high as 96x and 126x, respectively. Meanwhile, for Tap Water Fee and Wastewater Treatment Fee the variance between cities is relatively small at 4.4x and 4.6x for industrial & domestic Tap Water Fee, and 10x and 13.5x for industrial & domestic Wastewater Treatment Fee. As for the Wastewater Discharge Fee, a national fee is applied across cities.
Therefore due to the large variance in Water Resource Fee between cities in China, at a city level, the contribution of this fee to the comprehensive water price is much lower than the national average. For the 36 major cities in China, domestic & industrial Water Resource Fee only contributed 4.9 % & 4.8 %, respectively compared to 12.8% at a national level.
CWR: The government is expected to implement a plan to raise the standards of industrial water-saving technologies. This plan may also look into higher water pricing to encourage water-savings so the water use quotas can be met. Do you think this policy will be implemented?
MZ: As explained before, the current industrial water fees are far below the all-in real cost of water and in reality, subsidized by government finance and the environment. If the basic price has not even been raised to a reasonable level, how can it be punitive?
“If the basic price has not even been raised to a reasonable level, how can it be punitive?”
For example, as seen from my recent research in Nanjing, the local industrial water price is merely a few cents higher than the domestic water price. Clearly this is not the all-in real cost as a result of government subsidies. So on one hand the government is subsidizing industry, on another, it wants to set a higher punitive water price. Is this cohesive? This conflicting approach will not lead to an effective result.
CWR: Currently farmers do not need to pay the Water Resource Fee. How do you see the water price reform in rural areas given food security? How would agricultural water price reform differ from that for industrial and domestic water?
MZ: There are two different aspects of rural water use, namely domestic household water use and production water use such as water use in irrigation, animal husbandry and fishery. In absolute terms, household water use is less than production water use. In other words, the potential for pollution control and water-savings lie in the latter.
“Although basic grain production is of a public service nature and receives financial support as such, water for this should not be free.”
As a basic principle, domestic water availability should be ensured. Meanwhile, water use for agriculture should be viewed in two categories: water for producing high-value cash crops, animal husbandry and fishery and water use in basic grain production. Although basic grain production is of a public service nature and receives financial support as such, water for this should not be free. These underlying principles for the various categories of basic needs should be discussed and identified for further guidance and policy making. However, until now, there is no unified national plan or program.
Compared with industrial and municipal water, agricultural water is the most difficult to manage. For instance, metering in rural areas is very difficult, considering the relatively immature pipe network, which in turn greatly limits the collection of water fees. Another issue is the ability of agricultural water users to pay the bill. After all, although higher water price can be an incentive to promote the development of water-saving technologies, equipment and services, it is not the ultimate purpose.
CWR: Early this year, some cities implemented tiered water pricing pilots, such as Guangzhou. Can you briefly explain key differences in tiered pricing for industrial water?
MZ: Implementing tiered water prices for domestic water use is relatively easy, due to well-established pipeline network and better management. We already know that compared to agriculture and industry, domestic water use is the lowest. So tiered water pricing will be more effective on agricultural and industrial water use, from the perspectives of water saving and pollution prevention. In fact, tiered water prices should be applied to all sectors. This would be a fair and efficient approach.
However, a one-size-fits-all national water pricing policy approach will not work due to the different water environmental capacities and water resource conditions. The basic price for industrial water use should reflect the all-in real cost, whilst the next tier price should be set to reflect the excess costs, especially in areas which face water scarcity and heavy pollution. As a result, industrial water price will be significantly higher than domestic water price, and may eventually be transferred to the end consumer.
“Implementing tiered water prices for domestic water use is relatively easy”
“… tiered water pricing will be more effective on agricultural and industrial water use, from the perspectives of water saving and pollution prevention.”
“The basic price for industrial water use should reflect the all-in real cost, whilst the next tier price should be set to reflect the excess costs especially in areas which face water scarcity and heavy pollution.”
CWR: In the guidelines to promote the Urban Three-Tiered Tariff System by the NDRC and the Ministry of Housing & Urban Construction, it recommends that “tiered water pricing in water scarce regions should be wider”. However it did not state which regions are water scarce. How would you define water scarce regions?
MZ: Water scarce regions are defined based on data such as water resources per capita. Many regions in China, especially in the North, are water scarce. The key is to focus on big water users. There are still lots of work to be done regarding water rights and discharge rights between upstream and downstream users.
“Many regions in China, especially in the North, are water scarce. The key is to focus on big water users …
… water rights between upstream and downstream users are not clearly defined”
Take Beijing as an example. The two reservoirs located in Beijing have a total capacity of more than 8 billion m3, which should more than cover its current annual water use of around 3.5 billion m3. However, the actual annual flow from one of these two reservoirs to the city is only 0.1 billion m3 as the rest of the water is held by hundreds of upstream dams and used for local irrigation, production and diversion. Is this a fair usage of water? Is water wasted as water rights are not clearly defined? Currently, no one has been able to address what is a fair allocation of water rights between upstream and downstream users.
The South-to-North Water Transfer Project has cost hundreds of billions whereas water conservation in local upstream areas may only need tens of billions. Not only is transferring water over long distances inefficient, it disrupts natural water resource distribution and is expensive. If the water price from the South-to-North Water Transfer Project is determined based on the full cost, it certainly will not be attractive to users.
CWR: What is the biggest obstacle to fundamental changes in industrial water pricing?
MZ: To study the causes and problems of the current low water price, we need to pay attention to the decision-making process, as well as issues in water resources management and water quality. The current low discharge standard and environmental standards are in fact a result of system related issues. Real problems in water generally do not surface in the short term; it takes time to see the full environmental costs.
“Profits generated in the short term are owned by polluters, while the damages to water resources in the long term are usually shared by the public.”
Profits generated in the short term are owned by polluters, while the damages to water resources in the long term are usually shared by the public. To solve this “timing issue”, we should not just rely on changes from policymakers or even changes in public awareness. Policymakers should prioritise the full disclosure of information. Market competition should be dynamic rather than mechanical and setting high water prices will encourage technological innovation to save water and therefore costs, without necessarily passing on the cost to the end consumer.
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