Wednesday, July 3, 2013

Water: A looming crisis


The case for a higher price on water – CongressEA continues to explore the Water-Energy-Food Nexus and Impact Investing

Water – the word evokes symbolisms of life. Its importance to the human race needs no further introduction. Intellectually we fathom that freshwater is not an infinite resource but our actions point to the contrary, with potentially disastrous consequences. The specter of water wars abound. The UN predicts that by 2025 two thirds of the global population will live in water stressed regions and the Water Resources Group points to an average 40 % gap between demand and supply of freshwater. With an estimated population of 9 billion in 2050 the problem will persist without dramatic change and extensive efforts to reverse the situation. Current practices will generate social cost, environmental collapse and direct economic losses in water stressed regions. Water scarcity is today adversely influencing businesses wishing to expand operations in these regions and sustainability executives rank water as a top concern. The “business as usual” scenario will negatively impact the global economy and not be restricted to specific areas. Unsurprisingly the World Economic Forum places water scarcity in the top four global risks in its Global Risk Report from 2013. Ahead of terrorism and climate change in terms of likeliness and impact.

What or how much will it take to ensure sustainable water use and global water security? Arriving at an accurate number is notoriously difficult but the World Economic Forum’s 2013 Green Growth Investment Report floated a figure of 1.2 trillion USD/year until 2020. Undoubtedly large investments, especially in times of austerity, but as the WHO has pointed out, every $1 invested in water and sanitation results in an average of $4 in increased productivity. As with investments to combat climate change it’s a matter of investing now rather than later, which would imply far larger sums. Not to mention the moral imperative of ending water poverty as soon as possible.

The true value of water

Investments of aforesaid magnitude will go far but must be coupled with setting the “right” price on water. Addressing this deep rooted and controversial issue should not be postponed for political considerations but enacted due to environmental urgency. Given the current rate of usage and estimated future demand and supply freshwater is economically undervalued. Water is charged based on extraction, collection, purification and distribution costs – an administrative price. What other vital, limited commodity has no real price for itself? As a joint resource with historical rights, governments have to invest in the necessary infrastructure and guarantee access to all its citizens. The biggest consuming sectors are agriculture, using 70 % of freshwater resources while industry uses 20 %. The remaining 10 % is from residential use. With long standing subsidies, water is in many regions considered a political good rather than an economic good. Raising its price will be tough and require bold political leadership. The low price is encouraging bad water management, with drained aquifers and chronic underinvestment in infrastructure as unfortunate outcomes. 

Shall prices be raised across the board? If not, why? Squeezing the residential sector alone would make little impact overall and in some instances cause unwarranted financial burdens. The agricultural and industrial sectors insist on a low price as they contribute to society in terms of jobs and tax revenue and many actors have legacy arrangements to fall back on. However, governments need a return on investment in order to continuously reinvest in new and greener water infrastructure. It is therefore imperative that water be valued correctly to both regulate its use and give governments much needed economic resources to ensure future water access. A level playing field must be encouraged, to ensure growth of new sectors that don’t have the same long standing beneficial agreements as the agricultural sector.

A conceivable way forward combines politics and economics. By allocating water entitlements to all sectors and more specifically to organizations and residents, access to water is ensured, an inalienable human right, as declared by the UN. The entitlements guarantee a quota of water, at cost, to all users. Furthermore, caps are put in place so overall extraction is in line with sustainable use for each water source. For users like big industry or large scale farms more water can be purchased from other sources at a market price, just like any other commodity. If individuals or organizations don’t intend to use their share they can decide to sell parts of it at a price determined by the market. A system that uses this type of trading scheme and caps to limit overuse can satisfy both environmental demands and ensure that all individuals are guaranteed access through entitlements, at cost. The value of water will be easier to grasp and efficient use encouraged, especially for the agricultural sector that will need to plan its use of water more diligently. Similar systems have already been implemented in water scarce regions in Australia.

The Water Nexus and Impact Investing

Sustainable water use comes not only from introducing a viable market but also from understanding its role and interconnectedness to other key areas like energy and food. The Water-Energy-Food Nexus provides a new, holistic approach where investments in either sector are not seen in isolation but consider effects across the Nexus. For example, vast amounts of water are needed to produce energy and immense energy inputs are needed in processes like desalination. Before rushing into big investments that from the onset seem like a great idea, for example first generation biofuels, factor in water use and loss of food producing land. The final analysis might show a considerable deficit from an environmental and or social perspective, translating into long-term economic losses.

As the Nexus implies, water investments also need to be a force for positive environmental impact. Investments that need to return economic profit and environmental/social benefits are best served by Impact Investing, a new investment philosophy that emphasizes both. The traditional investment industry is out of sync with realities on the ground. Treating environmental and social benefits as an afterthought will lead to continued underinvestment in critical areas and an unceasing string of negative impact investments. The following pivotal areas represent both needs and opportunities in the water sector over the short and long term:

Efficiency measures:
It is imperative to reduce water footprint across the board. Energy production uses up about 15 percent of the world’s total water withdrawal, estimated to grow by about 20 percent between 2010 and 2035 (IEA 2012). Renewable energy sources, excluding large-scale hydroelectric dams, use much less water than fossil fuels or nuclear power and are more positive to the climate and the environment in general.

Infrastructure improvements:
A combination of investments in new and old infrastructure (in need of upgrades) is needed to reduce emissions and conserve water throughout the water life cycle. Drinking water infrastructure in the US is an illustrative example, there are an estimated 240 000 water main breaks per year. The cost to replace pipes over the coming decades could spiral to more than 1 trillion dollars, according to the American Water Works Association.

Smarter agriculture for resilience and water security:
Investing in less water intensive crops and irrigation processes can help reduce deforestation to lessen the loss of sediments, halt soil erosion and land degradation. It also increases water quality, availability and capacity for energy production. Improving agricultural productivity is crucial in the pursuit for water security and better drainage, drip irrigation and crop enhancements are a few examples to increase the yield. Combined with a higher price of water, consumption rates can be reduced considerably, without reducing agricultural output, as studies have shown.

As CongressEA has argued before there is a perfect match between the Nexus, including water, and Impact Investing. They both require a long-term perspective, a holistic approach, demand quantifiable results and strive for positive environmental impact. Our collective efforts must now be directed at government and business all over the world to steer their financial resources via this new investment paradigm. The water challenge demands nothing less. 

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