Is Water Too Cheap?

A growing problem with water scarcity is fueling a long-simmering debate over a stark question: is water too cheap?

Climate change is blamed for the shifting patterns in the hydrological cycle. As water evaporates, rains onto the watershed, and flows to the basin, populations and businesses concentrate around the resulting lakes and rivers. But as weather patterns shift, causing droughts and floods, water is growing scarce where we need it, when we need it.

The World Bank says two-thirds of the world lives in a water basin with water stress—defined as demand for water outstripping supply—for at least part of the year. Around four billion people live under highly water-stressed conditions for at least one month of the year, according to the non-profit World Resources Institute.

Supply, in short, is very tight. And yet, in almost every country, the price of water is below its cost of treatment or distribution, says Dr. Alex Money, a water researcher and teaching fellow at Britain's Oxford University, our guest on the most recent edition of The Call.

Water is subsidized for good reason: All of us would die within a week of going without water. So governments see water as an essential need and are—understandably—reluctant to price water like other commodities; a strict market pricing may put water beyond the reach of society’s most vulnerable, especially in areas where water is scarce.

There is, however, a cost to cheap water. “Low water prices have led to inefficient use and reduced provision and expansion of (water) services, particularly for the poor,” said the World Bank in a recent report. Subsidies and below-market delivery also discourage badly needed investment in upgrading water infrastructure.

As water-stressed regions around the globe grapple with the realities of water scarcity, it is sparking geopolitical conflict in localities, as rival claims to shrinking water sources cause tensions that, in some cases, have erupted into violence. Water shortages are also becoming a significant business risk.

Water remains essential to growing food, accounting for roughly 70% of global freshwater usage. It is also a core element to the supply chains used to produce just about everything we consume, from clothing to semiconductors to energy. Depending on the methods, it can take 35 gallons of water to produce a cup of coffee, according to the Water Footprint Network, a platform for corporation collaboration on water issues.

For several years now, businesses, in particular the food and beverage industry, have put themselves a step ahead of a looming water crisis, using a "shadow price" to determine the true economic and social cost to its operations of water rather than what they pay to their local utility or municipality.

This helps focus the operation on water risks. “In the same way carbon pricing will put a different thought process around the cost of emitting, that same lens is meant to be applied on the water front,” Simon Fischweicher, head of corporations and supply chains at environmental non-profit CDP North America, said of water pricing strategies. 

Some will resist this innovation, worried that the current internal pricing may soon become a disclosure requirement or another blunt instrument of regulation. Others will write it off as more of the excessive climate apocalypticism that has haunted business for years.

For now, water scarcity is a real and growing operating risk. And corporations see new internal pricing methods as a best practice, improving transparency, decision making, and helping to set investment priorities. Dr. Money has been part of a team of researchers who released a comparison of differing methods of internal water pricing. 

“The results of our analysis surprised us,” said the study, which polled 188 companies and found that 84% of sampled respondents either used or explored the use of an internal water price. “Its application is both more widespread and more diversified than we had anticipated,” the study said.

Contributions from Masha Angelova.

About the authors

Jay Sapsford

Jay Sapsford is Senior Vice President for Global Risk Analysis and helps lead the Chamber’s efforts in assessing geopolitical and economic risks that impact the business community. He plays a key role in identifying global trends, risks, and opportunities on behalf of the Chamber’s membership.

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