More trading could help to alleviate water shortages

Water

A soluble problem

Jul 19th 2008
From Economist.com

More trading could help to alleviate water shortages

AFP

SO WORLD markets are short of oil, and supplies of food are running thin. The prices of all sorts of basic commodities are soaring, and now there may also be reason for many to worry about the most fundamental of necessities—water. Some experts believe so, at least, and they are spreading doom-laden warnings of a Malthusian crisis in the world’s water supply.

Goldman Sachs, an investment bank which likes to ponder the future of the world, recently suggested that a global lack of water could prove to be a bigger threat to mankind than rising food prices or the depletion of energy resources. Sir Nicholas Stern, who reviewed the economics of climate change in a big report for the British government in 2006, is worried too. He points to some big local problems, for example in the Himalayas, where melting glaciers risk disrupting supplies of usable water in the region, just as many underground aquifers are drying up. He argues that water—at least the fresh sort—is not a renewable resource, and because it is not priced properly it has been “mined” without restraint.

Global water consumption is doubling every 20 years says Goldman Sachs. According to Sir Nicholas, in many places supplies are running short as rising consumption cannot be matched by fresh rainfall. As a result, suggests Goldman Sachs, the price of water is bound to rise: bad news for the poor and thirsty, but an opportunity for investors. The excited bank even suggests that water might be considered to be the “petroleum for the next century”.

It expects profits to be made less from selling the stuff directly, and more from investments in infrastructure and new technology. The bank estimates that America alone needs to spend around $1 trillion on new pipes and waste-water plants by 2020. It estimates that the higher-tech side of the industry—for example in desalination efforts, or ultraviolet disinfection—is now worth $425 billion dollars, globally.

There could be plenty of money to be made in supplying water. However, more efficient use of the stuff depends on pricing it properly. Mark Zeitoun, a researcher at the London School of Economics, suggests that agriculture is responsible for the greatest waste of water, largely because of government subsidies. Farmers often plant water-intensive crops which slurp up supplies precisely where they are most limited. Growing potatoes, a thirsty crop, in Israel looks to be particularly wasteful, especially given desperate shortages of water in nearby Palestinian territories. Similarly Egyptian oranges, Australian cotton and Californian rice require huge amounts of water to produce crops that could in theory be cultivated more easily and cheaply in wetter climates. But when such crops produce valuable exports and create local jobs, governments have been keen to provide subsidised water.

Local conditions and needs vary so much that talk of a global water shortage is misleading. In total there is more than enough water for all, but it is often in the wrong place and is difficult and expensive to transport. And discrepancies are likely only to get worse as the effects of climate change becomes more pronounced. That Canada and Brazil have more water than they need is of little consolation to parched Yemen and northern China. Even within individual countries distribution is unequal. Cherrapunji is one of the wettest places on earth; elsewhere in India, Gopalpura receives only a few inches of rain a year. Surprisingly though, it is Cherrapunji which suffers the water shortages. Sensible water management would go a long way to redressing the balance.

Better functioning water markets would be one way to share out water more efficiently. Once governments have defined water rights clearly, farmers, and others who use water, could be encouraged to trade, first with each other and with industrial and urban users. Allotting options that can be taken up as and when required rather than handing out permanent water rights would encourage water trading and avoid accusations of water “theft”. It may be difficult to rein in the world’s extravagance with water, but Byron had it right when he wrote: “Til taught by pain, men really know not what good water is worth.”