The economic impact of water taxes: a computable general equilibrium analysis with an international data set

Water is scarce in many countries. One instrument for improving the allocation of a scarce resource is (efficient)pricing or taxation. However, water is implicitly traded on international markets, particularly through food andtextiles, so that the impacts of water taxes cannot be studied in isolation, but require an analysis of internationaltrade implications. We include water as a production factor in a multi-region, multi-sector computable generalequilibrium model (GTAP), to assess a series of water tax policies. We find that water taxes reduce water use andlead to shifts in production, consumption and international trade patterns. Countries that do not levy water taxes arenonetheless affected by other countries’ taxes. Taxes on agricultural water use drive most of the economic andwelfare impacts. Reductions in water use (welfare losses) are less (more) than linear with the price of water. Theresults are sensitive to the assumed ability to substitute other production factors for water. A water tax onproduction would have different effects on water use, production and trade patterns and the size and distribution ofwelfare losses than would a water tax on final consumption.