Sometimes important questions in environmental economics are not particularly glamorous. Take for example, a recent project I completed together with Laura Taylor, Professor and Director of the Center for Environmental Economics at NCSU and Jonathan Lee, a Ph.D. student at NCSU. This project examines cost effectiveness of a program in Cary, NC that offers rebates to households that replace old toilets with new, low-flow toilets. On good days we call this the “toilet project.” I’ll leave it to your imagination to determine what we call it on bad days!
The Town of Cary (TOC) introduced its High Efficiency Toilet (HET) Retrofit Rebate program in June 2008. During the first 13 months of the program, TOC offered a $150 rebate per toilet for water customers who replaced toilets that use 3.5 gallons or more per flush with WaterSense labeled high efficiency toilets which use 1.28 gallons per flush (gpf).
In June 2010 we mailed a survey to the 305 households that received a rebate during the first year of the program. We received responses from 245 (80.3%) of participants. The survey is structured to let us to compute the water savings that can be attributed to the rebate program.
Before we talk about economics, let’s think about engineering estimates of water savings. On a per-flush basis, an engineering estimate of the water savings is simply the difference in gpf used by the original toilet and the HET. To compute an annual savings, we multiply the per-flush savings by the expected number of flushes per year. Carrying out this multiplication exercise and using data on how many toilets are in the home and how many people live in the home, we estimated an average savings of 4,577 gallons per high efficiency toilet installed.
Why might the water savings from the rebate program differ from these engineering estimates? This is where the economics begins. First, there is the possibility of a “rebound effect.” That is, people install a higher efficiency appliance and they feel justified in using it more. In the case of HETs the concern is probably NOT that they go to the bathroom more, but rather that they flush more because the toilet doesn’t work as well as they would like. Second, some of these toilets may have been replaced even without the rebate. A household doing a complete bathroom remodel may replace their low-efficiency toilets anyway and the rebate is just a windfall gain to that household.
We are able to examine real water savings from water utility bills for both program participants and similar households that did not participate. We find little evidence of a rebound effect, the HETs toilets seem to deliver the expected engineering reductions in water use and that each toilet installed saves between 4,000 and 4,500 gallons per year per toilet. The water savings that is attributable to the rebate program, however, is significantly less – approximately 1,750 gallons per year, per toilet installed with a rebate. About 40% of the rebate participants would have replaced their old toilets with an HET even if the rebate had not been available to them. In addition, we find that approximately 20% of rebate recipients would have replaced their old toilets with a new standard toilet (not HET) had the rebate program not been available to them. New toilets are much more water efficient even if they aren’t HET. The water savings of going from a new toilet to a new HET toilet are only 0.4 gpf (1.6 gpf for new toilet – 1.2 gpf for a new HET toilet).
Our final analysis focuses on the cost-effectiveness of the rebate program. By investing in HET toilet replacement through the rebate program, the Town of Cary avoids future costs over the lifetime of the HET (assuming the old toilet would not be replaced in the future). We focus on two measures of the avoided sewer treatment costs associated with fewer gallons flowing back to the system as a result of HET installation. The present value of the avoided costs outweigh the initial investment cost (the rebates) if one assumes all toilets were replaced because of the rebate program. However, if we consider only the water savings that is directly attributable to the rebate program, we find that the rebate program’s benefits to the Town of Cary did not outweigh the initial investment cost.
One way to increase the cost effectiveness is to reduce the up-front cost of the rebate program. Our calculations indicate that if the Town of Cary reduced the rebate to $115 per toilet, the program would have been cost-effective under all scenarios considered. Since the first year of the program, the Town of Cary has reduced its rebate from $150 to $100. Even with the lower rebate, the Town reports that the requests for rebates have exhausted each year’s budget, suggesting the $100 rebate is still a substantial incentive to households. If the $100 rebate results in about 30% of rebate takers being households that would not have replaced their toilet at all without the rebate, and another 20% being households that chose an HET over a new 1.6 gpf toilet as a result of the rebate, then the program is cost-effective.
Questions for Discussion:
- One of the analytic challenges for the project was determining what the costs-savings were to the TOC when a toilet uses less water. Our first approach assumed that if they didn’t sell a gallon of water to one of their own households, that was a gallon they could sell to a neighboring utility. However, the central NC utilities have an agreement to sell water to each other at their lowest residential rate. So no profit would be made by selling water to Durham instead of to a Cary resident. We settled on avoided treatment costs. What do you think the benefits to the TOC are? How could the program be adjusted to provide more benefits to the TOC for conservation?
- Another strategy for increasing cost-effectiveness of the rebate program is to better target rebates to households that wouldn’t otherwise replace their toilets. Can you think of feasible ways to do that?