Can water trading prevent droughts?
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David Stevenson Aug 01, 2008
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Population, climate and pollution pressures are making fresh water increasingly scarce. Is a water trading system now inevitable? David Stevenson reports.
Are we really running out of water?
Of what's easily accessible, it seems so. The amount of water in our ecosystem is the same as it was ten million years ago, but more than 97% is in the sea. The growing population, climate change and pollution are piling pressure onto the 1% that is both fresh and readily available.
The World Water Council has warned of a potentially "chronic, pernicious crisis in the world's water resources". Merrill Lynch estimates that by 2025, two-thirds of the planet's population could be suffering 'water stress', which is when demand exceeds supply. And Goldman Sachs recently suggested that with water consumption doubling every 20 years, a global water shortage could prove a bigger threat to mankind than rising food prices or the depletion of energy resources.
So what's the answer?
"Previously the price of water has been set mainly by social concerns," says Christopher Gasson of Global Water Intelligence. "Now the main driver will be scarcity." One solution is to create a water market to set the price more efficiently. This won't create more water, but could improve the way we use it.
The first water trading system, the buying and selling of water entitlements, started in Australia 20 years ago. Farmers were depleting the country's reserves, so the authorities decided that if they wanted permanent water rights or annual allocations, they should trade them with each other. An Australian Agricultural and Resource Economics Society research paper in 2007 showed that between 1984 and 2005, the volume of water consumed by irrigation in the country fell by 13%, yet the area of irrigated land rose nearly 50%.
Water trading: how does it work?
An independently-monitored water exchange called Watermove, which acts a bit like a stock exchange, has been set up. It automatically matches buyers and sellers of water rights and works out trading volumes. Fees for this can add up to some $1,400 per trade, split between both sides. Then there are the costs of delivery.
As water is heavy, bulky and expensive to transport, trading can only take place where a suitable transfer system is in place. But the market is now growing at 20% a year and trading rules have been relaxed. National water broker Waterfind reports that $1.3bn in permanent and temporary water rights were traded last year as drought conditions drove up water values.
Shouldn't water be publicly owned?
As Jim Rogers puts it, the benefit of a water market is that "when something's free people use it. When it's priced, people use less, then find more, which they then bring to market. Simple economics." But the idea of turning a substance vital to human life into a casino chip for speculators is unpalatable to many. "How would water trading support access to water for the billions of people who don't have it?" asks Danielle Morley of Water Aid. "In countries without strong regulators, you would have corruption and private buying, taking the rights to water away from poor people."
Of course any trading system must be coupled with government regulation, control, and protection for the poor, accepts Dan Nees of the World Resources Institute. "But that's not an argument for not having a market. It's an argument for not having poorly designed markets or poor governments."
So where's water trading heading?
New pricing mechanisms are inevitable, says Nees. "We're going to get the right price signals in place country by country, some via water trading, others via municipalities raising rates... then it's just a matter of time before we can move to a global market." In Australia, although most trading is still done between farmers, some national and international investment groups are moving in and water derivatives are being developed. "People can now invest in water and hold it without land," says Waterfind chief executive Tom Rooney. "It's starting to turn into a commodity."
Perhaps America, facing widespread drought conditions across the South, needs to "adopt some of the trading knowledge learned in Australia", says US water analyst Roger Bate. But for the States to set up a proper water market, three steps are needed, says Michael Greenstone of the US National Bureau of Economic Research. First, remove restrictions on trading of water rights across state lines; second, water property rights need to be clearer; and third, there needs to be a government-funded central market if one doesn't develop privately. This could take some time – but that hasn't stopped some big players from betting heavily on water (see below).
Who's cashing in on water?
Canadian hedge fund Sextant Capital Management has bought 95-year water rights to three northern European glaciers. "Two years ago we were looking for the next big commodity and settled on water. It was underappreciated, mispriced, and growing scarce", says Sextant chief executive Otto Spork. He plans to float his glacier-owning companies, and says he's in talks with major commodity exchanges on developing a global market in water futures.
In America, oilman T. Boone Pickens owns more water than any other US citizen and is looking to control even greater amounts. He has spent $100m buying up Texas water rights and building a 250 mile pipeline to Dallas. He's hoping to sell 65 billion gallons a year to the city. So far he's had little success, but he's unphased. "Our project has a life of 200 or 300 years, costing between $2bn and $2.5bn. But I'm not in any big rush. As with natural gas, the longer you wait without selling it, the more valuable it becomes."
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