A Global Price on Water Might Help Tackle Climate Change

DDo you have to pay for water? The answer may seem like an obvious “yes”—you probably get a water bill every month, charging you a cent or two for every gallon that comes out of the taps in your home. A family of four in the U.S. paid $73 per month to water for consuming 100 gallons each day. This does not account for variations between states or cities. But those dollar and gallon amounts are almost completely divorced from the true impact of our lives on the world’s water resources.

For one thing, residential water prices in the U.S. are based largely on delivery costs—with utilities charging for the cost of getting water to you and not for the actual resource. Additionally, only about a third of your water usage is used for the infrastructure and products that enable you to live a normal life. Businesses that use water for their products can pay very little depending on where they are located. Or they might pay just for the privilege to access a source of water, and not for actual water consumption. The average American resident uses nearly 2500 gallons of water per day, depending on estimates from the Water Footprint Network water monitoring campaign.

“We still operate the world economy with freshwater largely as a free resource,” says Johan Rockström, co-director of Germany’s Potsdam Institute for Climate Impact Research, and a specialist in water resources. That doesn’t make sense, Rockström argues. A massive body of evidence, he explains, shows that this same global economy is disrupting the water cycle—through greenhouse gas emissions, the destruction of ecosystems, and pollution—and therefore making the essential resource increasingly scarce. “We’re not factoring that into the economy, and therefore not into governance or management of water either. It’s a market failure.”

Shafter, Kern County California: A water irrigation channel

Citizen of the Planet/UCG/Universal Images Group/Getty Images

Price-in to the Environment

The solution to that disconnect may lie in a global water market—in which businesses or governments trade credits for water use or doing things which affect water supplies, effectively paying a unified price for freshwater. Experts in water argue that this system would be similar to the carbon dioxide emission credits traded by some regions. It could also incorporate economic incentives to protect a healthy water cycle, for example, by offering a country like Brazil payments if it protects the Amazon rainforest, whose trees generate large amounts of South America’s rainfall through evapotranspiration.

Rockström says a water market is one of the ideas under a “very early phase” of discussion at the Commission on the Economics of Water, which launched last week with him as one of its co-chairs. It aims to encourage policymakers to reform global water management. The Initiative will present its recommendations at the U.N. Summit on Water in New York in March 2023.

Water is the latest front in economists’ confrontation with market capitalism’s failure to take into account both how it impacts the environment, and how it depends on favorable environmental conditions. The U.K. government commissioned a 2006 report to evaluate the economic consequences of climate change. This process began in 2006. Nicholas Stern, an economist, calculated that climate change failure would reduce annual per-capita GDP by around 20% and that the economic costs of releasing a metric ton carbon dioxide were $85. Stern’s insights (along with a blooming field of climate economics research) have encouraged governments representing 46 nations to introduce carbon emissions markets or carbon taxes.

More recently, hundreds of programs around the world have tried to address the economic cost of the destruction of nature by introducing so-called “payments for ecosystem services.” For example, farmers are paid in the U.K. to rewild or reforest a certain amount of their land, to reflect the economic value of things like biodiversity and natural flood defenses.

Rockström says a water market—or some other mechanism to regulate water use—could combine elements of both the carbon and ecosystem services approach: it could assign a value to a cubic meter of freshwater, and offer incentives, such as paying landowners who protect forests that help trigger rainfall, while also delivering penalties like charging businesses that use excessive amounts of water.

A dry canal in Badokhar in Uttar Pradesh, India on May 21st, 2022, after a heatwave that caused severe drought conditions across large swathes in India’s agricultural heartlands.

Ritesh Shukla—Getty Images

Water markets as a concept have existed for quite some time.. A few places already have some form of a water market: the most well established is in Australia’s Murray–Darling Basin, where authorities operate a cap-and-trade system. Some water trading takes place also in some irrigation districts of the western U.S. States. But according to a 2021 U.N. report, the small scale of existing water markets and “the absence of standardized approaches to valuation leads to considerable divergence in water values,” which undermines their impact on water efficiency.

A group of U.S.-based economics stated that the solution to increasing water shortages in America’s West was a regional water trading program. They pointed out that, despite that year’s punishing drought, growers of alfalfa—“a low-value and high-water-use crop”—had produced enough crops to export millions of tons to Asian countries, while producers of higher value crops had been forced to leave hundreds of thousands of acres of land fallow. “If there were ways to trade water, some farmers could cut back on the production of more water-intensive, lower-value crops and lease or sell the conserved water to desperate fruit and nut growers or thirsty cities,” the researchers wrote in a Wall Street JournalOp-ed published at that time.

Water flows around the world

To be really effective, though, a water market may need to be global, Rockström says. That’s in part down to how water is produced: hydrologists are increasingly clear that the primary driver of rainfall in many parts of the world is not the ocean—as previously thought—but on-land ecosystems that can stretch across regions. Farmers in Argentina rely on “flying rivers”—large bands of moist air—produced by the Amazon rainforest in Brazil, and India relies heavily on the stable melting season in the Tibetan highlands for its rain.

Water is also used in an international way; countries already “virtually” trade vast amounts of water embedded within products. Chile uses a lot of water to grow avocados and then sends them to the U.K. Denim producers in China, on the other hand, use a lot more water to make jeans for export to India. Between 1986 and 2007, the volume of water traded nearly doubled. The 2020 Study NatureIt is predicted that it will increase by three times between 2010-2012, as climate change will make water-stressed nations more dependent on imported water-intensive goods.

These virtual water flows would not be subject to a cost. The cost of water will rise if companies pay more. Consumers will suffer the consequences. The impact of this would be especially severe for food production, which is responsible for 70% of the world’s freshwater consumption. A water market system would need to provide shelter for poorer nations and those living in poorer areas of wealthy countries to avoid the negative effects of price rises. (The E.U. is currently tackling this issue when it comes to carbon; the bloc’s parliament is debating a “social climate fund” to help vulnerable households deal with carbon-related price increases, using money generated by its emissions trading scheme and other sources.)

Despite the complications, Rockström says that failing to overhaul the economy’s relationship to water will cost us more in the long run. The World Bank estimates that a “business as usual” water management scenario will trigger GDP losses of up to 10% a year in some regions by 2050. “As long as we have these market failures, we will continue to destroy the functioning of the Earth’s system. And in the end, we will have so much water scarcity that we will have increasing food prices anyway,” Rockström says. “We have to find a smart way of doing this.”

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