by Dan Vermeer, Executive Director of EDGE
If water is so valuable, then why is it so cheap?
Economists have long been fascinated by the water paradox – clean, abundant water keeps us healthy, provides our food, sustains our ecosystems, and keeps our businesses operating. Yet we have routinely undervalued water, and have been willing to pay much higher prices for non-essentials such as diamonds. This paradox has informed our approach to water until recently. Water was abundant and cheap, and since it is a small fraction of most companies’ overall costs, it has lurked at the bottom of their priority list.
A Changing Market
The water situation is changing fast. Global demand for water is outstripping available supply, and this will accelerate in coming decades. A much-cited 2010 report by McKinsey estimated that the global gap between water demand and supply could reach 50 percent by 2030. In contrast to many other critical resources, water is non-substitutable, and we are generally limited to using the 1% of the planet’s water that is fresh and accessible.
This global water shortfall translates into countless local water conflicts between uses and users. In many parts of the world, lack of water is often the most important constraint on increasing food, extracting resources, expanding energy supplies, and growing industrial output.
For example, in Chile water demands from copper mines are draining local aquifers, making it impossible for farmers and vineyard owners to grow their crops. In China, rapidly growing cities in the northeast provinces are competing with agriculture and mining interests for dwindling supplies.
In India and the U.S., regional over-extraction is depleting groundwater reserves. While each of these issues may appear local and situational, the global threat to economic growth and well-being is increasingly clear.
Unsurprisingly, as water demand tips past supply, water prices are also rising. While water is still highly subsidized in most markets, there are many municipal providers that are raising their rates. For example, a recent Circle of Blue study of 30 major U.S. cities found that water prices have risen 18 percent over the last two years. And we can expect that rates will continue to rise, especially as new or long-overdue infrastructure projects force the question.
Water Affects Business’s Bottom Line
Why should businesses care? For one thing, direct and indirect water costs will increasingly hit companies’ bottom lines. Nearly every business uses water in their operations, as an input to their products, or for cleaning and processing. Further, companies that only track their water bills may miss other water-related costs such as water quality monitoring and treatment, managing wastewater, etc. – these are real costs that are often hidden in a company’s operations and balance sheet.
Water is also a critical element in most companies’ supply chains, from minerals to agricultural inputs to electronics. Constraints on water can disrupt the company’s suppliers with real impacts on business continuity and costs.
From Texas to Australia, severe droughts have disrupted agriculture, constrained power generation, and threatened water access and business continuity. For instance, peanut production in the U.S. dropped 13% in 2011 due to drought, resulting in peanut prices tripling in one year. Similar impacts were seen in prices for beef, cotton, and several other commodities.
Welcoming Higher Water Prices
Upgrading water infrastructure for demands and threats of the 21st century will require significant investment. That is why companies should welcome higher water prices, and find ways to encourage broad-based investment in the water sector. Water will inevitably become a bigger portion of a company’s cost structure, but these increased costs are starting from a small base in most cases, and should be manageable.
The bigger risk is that water continues to be underpriced, and regions fail to invest in sustainable water systems. Without these investments, companies will face increasingly acute challenges, from more stringent regulation, business disruptions, and conflict with other users.
Creating a clearer market price signal is also essential to stimulate water innovation. Many new technological innovations are emerging in water treatment, transport, re-use, and analytics. If wasting water becomes costly, then the solutions to reduce water use and maintain quality become more attractive. New companies like Xylem and Banyan Water are pursuing growing markets to provide these solutions.
Some companies are also rethinking water use in product design. For example, Levi’s has introduced “waterless jeans” that require less water both in manufacture and in washing.
Increased pressure on water resources is also encouraging the development of water markets, where users can buy and sell water access to put water to its most productive use.
Leading companies are recognizing the urgency of addressing these challenges – and the need to work with other companies and stakeholders to find solutions. In the last few years, many new collaborative efforts have emerged to take on water challenges – including the Water Futures Partnership, CEO Water Mandate, and many other parallel efforts.
Managing water will soon be everybody’s business. And companies that anticipate these risks and develop solutions will have real advantages in an increasingly water-constrained world.