Building Resilient Water Supply Systems Through Economic Instruments: Evidence from a Water Resource Fee-to-Tax Reform

Abstract

Water supply systems (WSS) face various threats such as climate change, declining freshwater availability, and over-extraction of groundwater. To improve the resilience and sustainability of WSS, both technological innovation and effective institutional and economic mechanisms are required. This study evaluates China’s recent water resource fee-to-tax reform as a quasi-natural experiment. It analyzes panel data from 222 prefecture-level cities between 2012 and 2023 and applies a multi-period difference-in-differences model to assess the impact of this reform on water use structure and efficiency. The two main research goals are to examine whether the reform has enhanced the structural resilience of WSS in terms of the shift from groundwater dependence to surface water, and whether it has improved water use efficiency to ensure sustainable water use. Our results show that the reform significantly reduced reliance on groundwater and increased the proportion of surface water use, thereby enhancing the structural resilience of urban water supply systems. Further analyses confirm that these effects are most pronounced in eastern and central regions, where water stress is higher. On the other hand, while the reform improved water use patterns, its positive impact on water use efficiency remains limited due to the current tax design. Overall, our research results demonstrate how fiscal instruments can be leveraged to improve sustainability of WSS. They provide policy insights for strengthening resilience of WSS against resource scarcity and environmental risks.