Dodging Day Zero: Drought, Adaptation, and Inequality in Cape Town

A near-catastrophic drought in Cape Town, South Africa illustrates three general implications of climate change for publicly-provided utility services. First, to reduce aggregate water demand, the public utility increased prices, leading to large demand reductions by richer households. Prior to the drought they use twice the public piped water of poorer households. At the peak of the drought, they use less. Second, some of the differential demand reduction comes from richer households substituting away from public water toward privately financed groundwater. This private adaptation both lowers the public utility's total revenue and shifts costs onto poorer households, consequences that persist after the drought abates. Third, policy interventions mitigate some of the fiscal and distributional impacts of private adaptation. These findings highlight how climate adaptation, in the context of publicly provided goods and services, can create pecuniary and environmental externalities with equity consequences.