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Key departmental publications, e.g. annual reports, budget papers and program guidelines are available in our online archive.

Much of the material listed on these archived web pages has been superseded, or served a particular purpose at a particular time. It may contain references to activities or policies that have no current application. Many archived documents may link to web pages that have moved or no longer exist, or may refer to other documents that are no longer available.

Environmental Incentives:
Australian Experience with Economic Instruments for Environmental Management

Environmental Economics Research Paper No.5
Consultancy report prepared by: Dr David James, Ecoservices Pty Ltd
Commissioned by Environment Australia
Commonwealth of Australia, 1997
ISBN 0 642 26850 9

5. User charges for waste management

5.1 General application

Wastewater Treatment and Disposal

State and local governments throughout Australia apply user charges for the treatment and disposal of household and industrial wastewater. The Industry Commission (1992) undertook a comprehensive review of issues, practices and potential improvements in the management of water supply and wastewater disposal.

In many instances, water authorities are responsible for water supply, the treatment and disposal of wastewater, the sale of treated effluent and sludge, and treatment and disposal of liquid trade wastes via the sewerage system. Water authorities may also have additional environmental responsibilities, such as control of stormwater run-off and water quality in receiving waters.

A major environmental problem requiring the attention of water management authorities for inland rivers in Australia is eutrophication and toxic algal blooms associated with effluent discharge. Salinity is sometimes also linked to effluents. In near-shore ocean waters, the discharge of sewage effluent, often subject only to primary treatment, has resulted in beach pollution, and adverse health and aesthetic effects. There have also been concerns about concentrations of pesticides, intractable wastes and heavy metals resulting from the discharge of industrial wastes to the sewerage system.

The complex interrelations among the multiple functions of water agencies create difficult problems of pricing for water authorities. Effluent volumes and quality may be affected by the pricing policies that are applied to inputs to the sewerage system. The pricing of potable water, for example, can have significant effects on the total volumes of water used by households and industry. Pricing policies for discharges of trade waste can affect the volumes and quantities of wastes carried by the sewerage system. Other prices to be taken into account include charges for sewerage services and for reclaimed saleable products such as effluent and treated sludge. The effectiveness of recycling programs will depend strongly on the pricing regimes that are implemented.

If separate pricing functions are adopted for water supply and wastewater treatment, efficiency gains may be achieved for the separate activities. However, it is essential to develop consistent approaches to water management functions, including appropriate environmental protection measures and strategies.

Environmental protection may be deliberately factored into the pricing policies of water authorities and/or enforced through environmental standards imposed by an environment protection agency or by the water authority itself. Such standards may relate to total loads and concentrations of pollutants for inputs entering the system (especially from industry), as well as to effluents discharged to the environment. The management of environmental quality in relation to wastewater treatment and disposal may thus be achieved through a combination of pricing and environmental regulation. Outright bans may be imposed on the discharge of some substances, such as intractable waste, to the sewerage system.

It is evident that the user pays and polluter pays principles have been applied on a rather ad hoc basis by water authorities in different parts of Australia. In the past, water and sewerage charges were based heavily on property values, with water being supplied virtually as a free resource, leading to profligate use. Cross-subsidisation among different sectors was another outcome of property-based charges. Some water authorities still follow these pricing practices.

Two-part tariffs, consisting of a property value (or service access) component and a user charge, have the potential to overcome some of the disadvantages of charging systems based solely on property values, and are widely used. However, the user pays component has often not been sufficient to have an impact on the level of demand. There is little doubt that considerable improvements in resource use efficiency, such as the postponement of new reservoirs, higher levels of materials recovery and reuse, and more efficient use of infrastructure, could be achieved through more rational pricing policies.

In theory, maximum economic efficiency would be achieved through marginal cost pricing, although there are a number of practical difficulties in implementing the principle. Marginal cost pricing for water services is discussed by the Organisation for Economic Cooperation and Development (OECD 1987) and the Industry Commission (1992), among others.

Some water authorities have succeeded in implementing user pays pricing policies that have had demonstrable effects on the level of demand for water services. Some examples are the Hunter Water Corporation, the Water Authority of Western Australia and ACT Electricity and Water.

In moving to a user pays pricing system, water authorities may face constraints of a political nature, as well as problems of explaining the benefits to the community. Equity effects have been cited as an additional constraint, but these can be overcome by means of rebates, minimum fixed charges and educating the community on water conservation programs. It is important for authorities to communicate clearly any proposed changes in charges to customers to encourage shifts in behaviour. Education about pricing policies is an important way of gaining public acceptance of proposed changes.

An unresolved problem in pricing is the use of subsidies to offset 'community service obligations' (CSOs). Most governments recognise the place of CSOs in pricing policies, although the definition of CSOs in the context of water services is somewhat contentious. In broad terms, CSOs refer to measures that do not generate revenue directly for water authorities, but nevertheless result in benefits of various kinds to the community. Such benefits may relate to equity effects and considerations of 'fairness'.

Protection of environments affected by wastewater should be a goal of sustainable resource use, and is recognised as such, but whether environmental values should be incorporated in CSOs is a contentious policy matter. Some water agencies are moving towards an essentially corporate approach to their management functions, requiring prescribed rates of financial return on their investments. However, it is often possible to demonstrate broader community environmental benefits of improved effluent treatment, based on benefit-cost analysis, that are not matched by financial returns. Water authorities can still meet environmental targets, provided block grants are made by Treasury and finance departments to cover the relevant costs.

An alternative approach to the problem is to designate the water authority as an 'operator' and ensure that environmental standards are appropriately set by the relevant environment protection agency (the regulator). The function of the operator would be to supply basic water and sewerage services at least cost to the community, subject to its normal operating conditions and environmental constraints. Economic instruments may of course be used instead of, or in conjunction with, direct regulations for this purpose. Any additional direct costs of pollution control would be passed on to the community by way of higher water and sewerage rates, based on the user pays principle. In reality, equity effects may force some compromise.

The Sydney Water Corporation has had a policy objective of discouraging excessive consumption of water. In the past, the pricing structure adopted by the former Sydney Water Board did not encourage water conservation and reuse as charges were based primarily on property values. Incentive effects were evident only in the industrial sector where, for example, BHP in Port Kembla uses reclaimed effluent as a cost-effective source of water for slag heap cooling.

Environmental groups in the Sydney region are generally in favour of full cost recovery through pricing reform for water, and the community has supported the principle of saving water. The charging system now used by the Sydney Water Corporation involves a constant rate per kilolitre consumed. The level of the charge has had some success in encouraging water conservation, but the impacts appear not to have been as large as those achieved by the Hunter Water Corporation.

The system used by the Hunter Water Corporation was specifically designed to have a demand management effect. Initially, there was community resistance to the user pays system, but it is now generally supported. Water consumption per household has declined from 300 litres per day to 220 litres per day. Wastewater charges adopted by the Hunter Water Corporation are also based on the user pays principle. The demands on the sewerage system are estimated indirectly, using formulas based on the kind of activity and the volumes of reticulated water used.

In South Australia, the Engineering and Water Supply Department considers its system to be well accepted by the community and to be fair. The use of property values to calculate charges contains an element of income redistribution, but does not affect water demand.

The economic efficiency of wastewater management may be improved by the sale of commercially viable by-products. Melbourne Water has provided recycled water (purified effluent) to golf clubs, orchardists and gardeners since 1975. Users bear the costs of an independent pipeline, pumping equipment and maintenance costs. Effluent is of high quality, but is supplied only for uses approved by the Health Department, such as industrial and agricultural applications.

Trade Waste (Discharged to Sewerage System)

Of particular interest are systems of industrial user charges that relate to the disposal of waste through the sewerage system. Numerous examples can be found in Australia.

The Trade Waste Policy and Management Plan introduced by the Water Board (now the Sydney Water Corporation) has had incentive effects, resulting in reduced quantities of substances discharged to the sewerage system. This can be expected to increase as the charges are raised in future years.

Melbourne Water receives significant revenue from trade waste charges, with collective treatment of effluent within Melbourne Water suggesting economic efficiencies of scale. Regular amendments to charges have been made based on yearly increases in treatment costs. It is intended to address the problem of cross-subsidies between different classes of dischargers as there have been frequent comments from clients and political sources about rates of charges and their equity aspects. However, comparisons with European standards appear to indicate parity. The effect of the charges has been to encourage waste minimisation among clients, but there has not yet been an observable reduction in concentrations or flows.

The Hunter Water Corporation also has a system of trade waste charges. Anecdotal evidence is available indicating that particular firms are taking the costs of trade waste disposal into account and are modifying their discharges accordingly. Administration costs are recouped as revenue from trade waste charges. There is general community acceptance of a polluter pays approach to trade waste charging.

The Industry Commission (1992) describes details of trade waste systems used in other States.

5.2 Sydney Water Trade Waste Policy and Management Plan

Problem Identification

The detection of toxic substances such as heavy metals and organochlorines in marine biota near Sydney's sewerage outfalls resulted in strong public demands for an improvement in controls over effluent quality. The main source of these substances was discharges to the sewerage system by industries in the Sydney region. To overcome this problem, the Water Board (now the Sydney Water Corporation) introduced the Trade Waste Policy in 1988. The policy was supplemented by the Trade Waste Policy and Management Plan in July 1991.

The aim of the Trade Waste Policy was to promote ecologically sustainable development. It was designed to ensure continued protection of the environment, the safety of Water Board employees and the protection of community assets.

Instrument Selection

The policy consists of a combination of direct regulations and user charges, aimed at controlling the quality of trade wastes discharged to the sewerage system. Regulations control the quantities and types of substance that are permitted to be discharged. Discharges of intractable waste are strictly banned. Charges are imposed on a user pays basis, according to type of substance, effluent concentrations and total load.

This combination of instruments should ensure that the environment will not suffer damage from intractable wastes and high levels of toxic substances, provided illegal dumping does not occur. The system has been accepted by industry and there is an inducement for dischargers to improve the quality of waste and reduce the quantities of waste discharged to the sewerage system. The levels of the charges will be increased over time to create a stronger economic incentive effect.

Description of Instrument

The official designation of the program is the Trade Waste Policy. It has been administered by the Wastewater Source Control Branch by means of negotiated agreements with industry. The branch is also responsible for monitoring, enforcement and the keeping of performance records.

The Trade Waste Policy and Management Plan 1991-1994 was released in July 1991. It defines a set of Trade Waste Acceptance Standards applicable from July 1994. The standards have been designed to move one step closer to optimum levels of 'residential sewage equivalence'. The standards are intended to provide maximum limits on effluent quality. Dischargers are expected to achieve at least the prescribed standards.

The plan also defines a scale of charges for substances discharged to the sewerage system. The system of charges is described as 'liquid waste charges'.

As stated in the Trade Waste Policy and Management Plan 1991-1994, the Water Board Act 1987 empowered the board to manage the discharge of trade waste into the board's sewer and prohibit the discharge of trade waste to stormwater systems. Subordinate legislation included:

The policy strictly bans the discharge of intractable wastes to the sewerage system, and prohibits discharge of other prescribed hazardous substances. Trade waste, however, excludes domestic waste.

Properties discharging trade waste are classified in terms of the following four discharge categories.

Trade waste quality charges are based on the concentration and total mass of substances discharged. For Categories One and Two, charges are based on an estimate of average and 95 percentile concentrations or on a 'discharge factor', defined as the percentage of the metered water supply to the business process which is discharged to the sewer as a trade waste. For Categories Three and Four, charges are calculated according to schedules forming part of the service agreements or permissions granted to each customer.

The formulas used to calculate the cost to the customer depend on the type of substance and the kind of sewage treatment plant to which it is disposed. Substances are classified as residential (Biological Oxygen Demand, suspended solids, grease and sulphate) or non-residential (metals and compounds). Charges for acidity/alkalinity are based on pH levels. The level of charges has been designed to increase annually by 15 per cent on the 1991 level. This will create strong incentives for dischargers to improve their treatment processes.

As well as user charges on discharges to the sewerage system, other fees are payable under the plan. They include agreement and permission fees and inspection fees.

Between 1991 and 1994, every customer or potential customer whose trade waste discharge did not meet the July 1994 standards was required to develop an Effluent Improvement Program. This was to ensure at least full compliance on or before that date and indicate how the disposal of substances produced as a consequence of the improvement program would be addressed.

Where a customer is required to undertake an Effluent Improvement Program as part of a service agreement or permission, they must lodge a bond or security. They do not have to lodge a security if the program is to be completed within six months of the commencement date of the service agreement or permission, or if the amount of the security is $1,000 or less.

Any customer or person breaching the conditions of an agreement is liable to prosecution. Maximum penalties under the Trade Waste Regulation are $10,000 for individuals or $20,000 for companies per offence. In addition, the New South Wales Environmental Offences and Penalties Act allows for fines of up to $1 million and/or up to seven years imprisonment.

Assessment Against Criteria for Evaluation

The Trade Waste Policy and Management Plan has been a successful application of pricing policies. The announced schedule of increasing charges has provided strong economic incentives for industry to improve the quality and reduce the quantity of waste discharged to the sewerage system.

Monitoring results indicate that discharges of certain pollutants have declined since the plan was introduced. The effectiveness of the plan in achieving environmental protection can be expected to improve over time. A large number of small commercial properties are not metered for water use, and this makes it difficult to adopt a polluter pays approach to these properties.

The plan has had a largely positive reaction from industry and commerce. If particular customers are faced with cost difficulties, the arrangements for Effluent Improvement Programs provide for such customers to receive special consideration.

Concluding Evaluation

The Trade Waste Program appears to be a successful application of an economic instrument to a service function provided by government. The structure of the charges has provided incentives for dischargers to reduce the quantities of waste discharged to the sewerage system. Additional regulations, monitoring and compliance have been required to support the program. There have already been improvements in the environmental quality of receiving waters achieved, and this improvement is expected to continue.

5.3 Other charging systems

Solid waste generated by households and industry is handled largely by local councils, but State governments may also carry out certain functions, including the setting of standards for disposal and charges to be applied. Some States tailor charges and regulations to reduce the bulk of material generated and to encourage recycling. One of the risks of user charges, particularly for household waste, is that it may encourage illegal dumping of waste and degradation of the environment.

In New South Wales, a Waste Disposal Levy is applied to household and industrial waste. It is expected that the levy will be increased progressively. The levy has had incentive effects, such as an increase in rates of recycling.

In Tasmania, the Department of Environment and Planning is investigating the implementation of a waste disposal fee on a per tonne basis. This system is considered to be more equitable, and may also encourage waste minimisation and recycling.

In South Australia, the Waste Management Act 1987 has been repealed. Henceforth, charges will be applied under the Environment Protection (Fees and Levy) Regulations of the Resource Management Act. The previous system of flat fees, administered by the South Australian Waste Management Commission, will be replaced with a system relating the fees to the volume of waste to be treated or stored. A proposal is also under consideration to increase the solid waste charge to subsidise the cost of establishing a kerbside recycling scheme.

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