Earlier in the month, this New Zealand Herald article caught my attention:
Will 2021 be the year the world really values water?
If Wall Street sets the tone, it will be.
For almost 230 years, agricultural commodities have been bought and sold in New York's finance district.
And now the Nasdaq stock exchange, which celebrates 50 years of activity next month, has put a price on our most vital substance.
Water contracts for five water districts in drought-prone California are being bought and sold.
The new water futures contract allows buyers and sellers to barter a fixed price for the delivery of a fixed quantity of water at a future date.
In December, for the first time, water futures for drought-hit California districts are also being traded on the floor of the world's second-biggest market.
The concept, which has been mooted for decades, finally came about in December.
That all seems pretty sensible so far. A futures contract allows the water user to 'lock in' a future price for water, reducing the risk that they will be caught out by unanticipated future price rises. However, then we get to this bit:
The move was quickly criticised by public health specialists.
Pedro Arrojo-Agudo, the United Nations' special rapporteur on the human rights to safe drinking water and sanitation, was direct in his opposition.
"You can't put a value on water as you do with other traded commodities.
"Water belongs to everyone and is a public good. It is closely tied to all of our lives and livelihoods, and is an essential component to public health.
"Water is already under extreme threat from a growing population, increasing demands and grave pollution from agriculture and mining industry in the context of worsening impact of climate change."
There are several problems with this line of reasoning. First, water is not a public good. As I noted in this 2017 post on the same topic, by definition a public good is a good that is non-rival (where one person using the good doesn’t reduce the amount of the good that is available for everyone else) and non-excludable (where the good is available to everyone if they are available to anyone). Unless you live in Ankh-Morpork [*], the first condition clearly doesn't hold - one person using fresh water leaves less available for everyone else. Fresh water is rival, not non-rival. A good that is rival and non-excludable is a common resource. However, that isn't the case for California water, which is allocated through water rights. You must have water rights to draw water, making water excludable. A good that is rival and excludable is a private good. Fresh water in California is, by definition, a private good.
Second, although the availability of fresh water may be under threat from increasing demand, putting a price on water is a solution to that problem, not something that exacerbates the problem. With a price on water, the price will dictate how much water people use. In times of drought, the price of water should rise (unless the price is controlled by the government, like it is in Auckland), and people will use less water. Goods that are scarcer have higher prices - as water gets scarcer, the price will rise. This is a means of better managing scarce fresh water supplies, not some nefarious plot to take water out of the hands of the people.
Third, water already has a price in California. To draw water, you need water rights, and those water rights cost money. The only thing changing is that a futures contract has been introduced, so that water users can better manage the future uncertainty of water prices. If a drought is expected in the future, then the price of the futures contract will rise. Water users will have an incentive to act now to ensure that their future water use will be lower. That probably makes water use more efficient.
You don't have to be a market fundamentalist to realise that prices can actually help. In the case of fresh water, the alternative is a free-for-all, where the water supplies will almost certainly be depleted faster.
*****
[*] Terry Pratchett noted that the water in the Discworld's largest city must be very pure, because of the number of kidneys it had already passed through.
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