water pricing, water trade, water footprint caps

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Pricing and trading schemes could help balance competing demands for water. So why aren't there more of them? is asked in a newspaper article in the Guardian:

The thoughts and suggestions are split up into three categories:
- how to put a price on water?
- trading for efficiency
- water footprint (caps)

I am copying the text below, in case the link does not work…

Any thoughts regarding those ideas and suggestions?

Text from the Guardian, 17 May 2013

The world faces a growing challenge: to balance the water demands of residential, industrial and agricultural users with what's available to use.

Freshwater is known as a "common-pool resource", which means it often has two distinctive features: it's not privately owned and there are competing interests that need or want access to it. Governments have to ensure that everyone who wants water has access, that the water is clean, that infrastructure is maintained, and that demand does not exhaust limited supplies.

How to put a price on water

Leaving aside residential water supply, the way governments try to balance these existing demands is by pricing water, either by setting an administrative price or by allowing prices to be determined in markets for water units.

The former is more common but is hard to get right. If the price is set too low you'll have a water shortage from overuse. If it's set just right, you'll cover the cost of service, maintaining networks and the water supply itself. And if it's set too high, you'll overcharge customers for no reason. A price determined by market mechanisms - such as cap and trade - is an alternative strategy.

Charging for water can help regulate use in theory but sometimes prices are set too low to affect behaviour. At the heart of the problem lies the water charging regime for agriculture, which is often too low or too subsidised due to factors such as historical access and the sector's contribution to society in terms of food production and employment.

"Agricultural water prices are set too low - they reflect the cost of service, but they neither reflect the scarcity of water nor do they pay back the capital investment made by the government," says David Zetland, senior water economist and author of The End of Abundance.

This can result in uneconomic and inefficient uses of water. In Cyprus, for example, farmers use groundwater and drain aquifers to grow crops. The government allows them to, even though it's bad water management, because it is keen to preserve the country's traditional agriculture.

"Water is usually managed as a political rather than an economic good - when farmers are given privileged access to water supplies, whereas city and industry are not," says Zetland.

Dr Tom Le Quesne, chief economics and development adviser at WWF-UK, concurs. "What we are trying to move away from are situations where people with entitlement to low value water are using it in ways that are uneconomic, unproductive and environmentally damaging, and at the same time there are growing industries that can't get access to water."

Trading for efficiency

A different approach can be found in Australia's Murray-Darling Basin - the largest water system in the country and its most significant agricultural region. In 1995, the state and federal governments agreed to place a cap on water extraction in the basin, which meant that if users wanted more water, they had to purchase it from someone else. This created a market price on water, which fluctuates depending on the level of demand and the amount of water available.

A water user may choose to sell their allocation for a single year, but hold onto their water entitlement, known as allocation trade. A user may also choose to sell their water entitlement, known as an entitlement trade. "One of the most significant water reforms we have made in Australia is to separate water property rights from land rights and cap water use so water can be traded on the market, " says Rhondda Dickson, chief executive of the Murray-Darling Basin Authority.

"Now, businesses and individuals can sell or buy water in any given year and make decisions based on the type of crops they grow, the amount of water in storage and the seasonal forecasts."

Water footprint caps

But market mechanisms on their own aren't enough, argues Arjen Y Hoekstra, professor in water management at the University of Twente in the Netherlands, who says this type of approach doesn't always deal with the over-exploitation of water, and links access to those who can pay the highest price.

Hoekstra proposes water footprint caps - regulated and enforced - so each water basin has a maximum extraction limit. "If you don't have a cap, you can't guarantee there'll be no overuse," he says.

"Pricing is good because it shows the value of the water to the users and creates an incentive to save it and use it efficiently. But it's not a solution to the central problem, which is the over-exploitation of water. To solve that you need a cap, then you need to address the question of who gets the water."

He says this should be a political decision - it's the only way to decide how to divide up water for residential, agricultural and industrial use.

In Hoekstra's vision, politics is key to changing the water management paradigm. But since the 1992 International Conference on Water and the Environment in Dublin where water was recognised by nations as an economic good in the "Dublin Principles", politicians have generally failed to impose water prices that better reflect scarcity, especially in the agricultural sector.

Politics seems to be both the problem and the solution. But if the past 20 years were about inertia, the next 20 have to be about action. The world and its peoples are depending on it.