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.
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.