Welfare impacts of introducing water pollution tax in the Olifants river basin in South Africa: A revisited analysis using a top-down micro-accounting approach

ABSTRACT Addressing the high levels of poverty and inequality in South Africa remains a central policy concern. In this regard, this paper uses a Computable General Equilibrium (CGE) microsimulation approach to revisit the effects of taxing water pollution on poverty and inequality at the level of a river basin. We combined the commodity and factor price changes from a regional environmental CGE model, after introducing the water pollution tax, with household survey data from the 2012 National Income Dynamics Survey (NIDS) to explain the welfare impacts. The result shows that the tax policy will in general have adverse impacts in terms of welfare, poverty, and inequality. However, the tax policy coupled with a supply-side compensatory measure such as subsidising water pollution abatement has the potential to reduce regional poverty and inequality as well as improve the ecological status of the river. Our finding has policy implications for national and regional water resource managers.