Jul 28, 2008

Pricing a Drop to Drink

by Laura Starita

A few weeks ago we published a post about water scarcity, which advocated for a future in which water is treated as a commodity with appropriate pricing. This week two more relevant pieces have been published on the subject of water, both of which point to pricing as a likely medium-term development in the water wars. The first published in Scientific American and written by Peter Rogers, a professor of environmental engineering at Harvard, provides some background on the causes of the world’s increasing water scarcity and proposes some mechanisms for improving conservation. Appropriate pricing is first on Rogers’ list, positively impacting many areas. First, making users pay for what they consume places the burden on the heaviest users—agriculture and industry. It also creates incentives for those users to adopt better management practices, such as drip irrigation, and ‘gray’ water recycling. The owners of water resources, namely governments, will also then have water revenue in hand to update and improve the delivery infrastructure, thus decreasing the drips and damage that are so often ignored and waste so much of our water resources. For some perspective on how serious water waste is, see this 2003 New Yorker article which described the project in New York City to build “Tunnel 3”. Tunnel 3 is a nine mile water delivery pipe that has been in production since 1969 and is required because the antiquated Tunnels 1 and 2 are “literally crumbling”. They lose massive amounts of water every day and are on the verge of complete collapse, but cannot be fixed without turning off the water supply, an impossibility in the country’s most populous city.

The second article, from the Financial Times, describes the efforts of a few hedge fund managers and commodities analysts to create a futures market for water. One purchased 95-year water rights on three glaciers in Norther Europe, the run-off from which he is planning to capture and sell to water scarce regions. The article also highlighted longer term efforts that point toward a view of water as a commercial resource, including a twenty-five year government-sponsored effort in Australia to create a trading market for water. (The Rogers’ article also mentioned this initiative, but went further to point out that the needs of the natural environment were not adequately allocated).

Whether the motives are commercial or environmental, almost everyone seems to agree that the time to put a price on water has come. Where thoughts differ is whether water should become fully commercialized, or whether ownership, delivery and management should largely continue to reside with governments. Advocacy organizations are pushing back on the notion of water as a fully commercialized, privately owned and trade-able commodity. Their concerns are well-founded. Historical efforts to privatize water out of government hands have often been disastrous, both generally and in particular for the poor. This was certainly the case in the late 1990s when the Bolivian government, with help from the World Bank, leased the water rights for its third largest city to a consortium of investors. The result was a decrease of reliable supply to the poorest of South America’s poor, a neat trick given that the government hadn’t been doing such a great job themselves.

It will be tough to find the balance and avoid the mistakes of the past. But ensuring a future for the world’s fresh water supply is worth it.