Climate and the productive structure of the urban water industry
Climate is likely to affect the productive structure of urban water supply systems through its effects on reservoirs’ volume, water quality, and consumption. This paper investigates these effects by analyzing the role of temperature and rainfall in water utilities’ costs with a multiple-equation cost function model and a rich firm-level database that describes the operations of 3845 firms from 2008 to 2018 in Brazil. Results reveal the presence of causal effects of rainfall and, in some cases, temperature on costs, with small firms being more vulnerable to cope with adverse (dry) weather. Results also suggest significant economies of scale and density yet to be realized by the industry. Considering the highly fragmented Brazilian urban water industry, the findings show potentially large cost savings associated with an eventual regional consolidation of operations, particularly under the realization of climate change scenarios that show hotter and drier weather conditions.