Introduction

The purpose of this chapter is to show how double dividends could be obtained from using market instruments to tax water use in a developing country. The double dividends are namely environmental (water conservation) on the one hand, and poverty reduction dividends on the other. We apply a water tax on selected industries in South Africa to reduce demand for water, and then transfer the revenue from this tax to the poor to achieve reduction in absolute levels of poverty.

South Africa is classified as a semi-arid country. Precipitation has been fluctuating over the years with an average of 500 mm per annum, well below the world average of about 860 mm (DWAF 2002). The total flow of all the rivers in the country combined amounts to approximately 49 200 million m³ per year, while the National Water Resource Strategy estimated the total water requirement for the year 2000 at 13 280 million m3 per year, excluding environmental requirements. In addition, South Africa is poorly endowed in groundwater as most of the country is underlain by hard rock formations that do not contain any major groundwater aquifers (DWAF 2002).

While currently only about 24% of rural people have access to water on site, additional sources of water supply are environmentally, financially and politically hard to develop. At the same time, unemployment in rural areas of South Africa is extremely high, which results in severe poverty conditions in these areas.