Welfare impacts of introducing water pollution tax in the Olifants river basin in South Africa: A revisited analysis using a top-down micro-accounting approach

ABSTRACT

Addressing the high levels of poverty and inequality in South Africa remains a central policy concern. In this regard, this paper uses a Computable General Equilibrium (CGE) microsimulation approach to revisit the effects of taxing water pollution on poverty and inequality at the level of a river basin. We combined the commodity and factor price changes from a regional environmental CGE model, after introducing the water pollution tax, with household survey data from the 2012 National Income Dynamics Survey (NIDS) to explain the welfare impacts. The result shows that the tax policy will in general have adverse impacts in terms of welfare, poverty, and inequality. However, the tax policy coupled with a supply-side compensatory measure such as subsidising water pollution abatement has the potential to reduce regional poverty and inequality as well as improve the ecological status of the river. Our finding has policy implications for national and regional water resource managers.

KEYWORDS:

• Poverty
• inequality
• microsimulation
• water pollution tax

JEL Classification:

• Q52
• Q53
• R13

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 For a detailed description of the Olifants environmental CGE model, see Kyei (2019).

2 The 2012 NIDS data is used to ensure similarity in the value of the consumer baskets between the SAM for 2012 and micro-data. It is, however, likely that using any of the subsequent NIDS datasets (i.e. wave 4 or 5) would yield qualitatively similar findings.

3 Please note that three poverty lines namely food, lower-bound and upper-bound are provided by Stats SA. However, we chose the lower-bound poverty line because we believe it’s a good indicator of general wellbeing and hence represent moderate poverty. Moreover, it’s the preferred poverty line that is commonly used for SA’s poverty reduction targets such as those outlined in the NDP and the Medium Term Strategic Framework (MTSF) (Stats SA 2017).

4 That is, the proportions of black African and Coloured below the poverty line are higher than that of Indian/Asian and White (Stats SA 2017). Results are available upon request.