Trickle-Down Economics

There’s a free-market solution to the world’s water crisis. Make people pay by the drop.
December 5, 2011 |
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As the U.N. climate change meetings meander on in Durban, South Africa, with little sign of major breakthrough -- and soon after news that the last year saw the largest rise in carbon emissions in history -- it is a good time to think about how to deal with some of the impacts of a global warming that appear increasingly inevitable. One big impact involves water -- both that there's soon going to be too much of the salty stuff subsuming low lying areas as the ice caps melt, and too little elsewhere. A warmer world will be wetter overall, but current models predict that climate change will make some dry parts of the planet -- Northern Africa, for one -- even drier. Many of the places are already the very regions suffering from the greatest shortages. Even without climate change, global patterns of water usage are unsustainable, but global warming is a big reason to start using the stuff with greater care. The simplest way to encourage that? Make people pay for it.

Water is essential stuff, and sometimes we're willing to price it accordingly. How else to explain why U.S. consumers spend $7 billion on bottled water a year when they can't tell the difference with what comes out of the tap in taste tests -- and despite the fact it often costs more than three times as much per gallon than gas. But at other times we demand, like air, that it should be free -- or at least significantly subsidized. Farmers in California alone received about $236 million per year in effective subsidies from access to cheap water in the 1990s, for example. But California is far from the worst example of subsidizing unsustainable water use worldwide. And unless we start charging consumers what it costs to deliver piped water, many parts of the planet are simply going to run out -- even absent the impacts of climate change. Meanwhile, the world's poor consumers, mostly unconnected to piped delivery, will continue to pay considerably more for their water than the connected rich -- adding inequity to unsustainability as a cost of mispricing the stuff.

One-third of the world's population already faces water shortages. A recent McKinsey report estimates that based on current trends, by 2030, a third of the world will live in areas where the gap between water needs and accessible, reliable supply is greater than 50 percent -- so they'll have to be planting and drinking on borrowed time by that point. Agriculture is the big problem -- irrigation of cropland is responsible for 71 percent of freshwater needs worldwide, and accounts for over 93 percent of the freshwater we take out of rivers, lakes, and the ground and cannot then clean and re-use, according to the World Bank. By 2030, without efficiency improvements, global water requirements will climb from 4,500 cubic kilometers (about the volume of Lake Michigan) to 6,900cubic kilometers each year-- largely thanks to the growing demand for food. That is some 40 percent above current accessible, reliable supply.

The picture is not that grim, however. For a start, we have seen a 1 percent improvement in efficiency in water use in agriculture per year in the period 1990-2004, alongside irrigation network growth that has occurred at a similar pace. If these trends continue, between them, these may address 40 percent of the gap between supply and demand in 2030, according to McKinsey.

Second, there are a number of methods to dramatically, and very cheaply, increase water efficiency at a considerably more aggressive rate than 1 percent a year. No-till farming, irrigation scheduling, reduced over-irrigation, and irrigated drainage all can have a dramatic impact. And a number of water-saving investments are very cheap -- including proper maintenance and repair as well as  the use of drip irrigation. McKinsey estimates the total global cost to close the 2030 water gap to be $50-$60 billion a year -- around 0.06 percent of the world's predicted gross domestic product that year.

Increasing the efficiency of water use and finding the money to extend efficient irrigation are problems linked to water pricing -- in developing and developed economies alike. When Italy charges about 60 percent of costs for irrigation water or Pakistan charges only about a third of the costs of water delivery, connected farmers in both places waste water -- and the system doesn't produce enough revenues to finance either repair of existing services or expansion to unconnected farmers who are usually among the poorest. About eight years ago, an early experiment in democracy in China showed that it is possible to reform dysfunctional irrigation systems. Farmers in the Yangtze Basin elected "water user's association" executive committees to oversee the operation of local irrigation systems -- raising funds for operation and maintenance from water pricing. Since the introduction of the associations (and pricing water by volume), farmers are using less water per hectare, delivery losses have fallen, and despite lower water use, grain yields have actually increased by 6 percent. Each user's association has saved an average of about 1.2 million cubic meters of water a year.

International trade provides another important part of the answer to looming global water shortages. Rather than farms forming circles of green in the middle of the Saudi desert (this in a country which spends billions of dollars on desalinizing sea water), Saudi Arabia should just import more food from places with more H2O. Whatever the recent spikes in agricultural prices, it remains far cheaper to grow crops where there is substantial natural rainfall than in places where there isn't, which is why about three-quarters of the country's cereal needs are already imported. The only reason that number isn't higher is because -- once again -- of considerable subsidies.

The problem of underpriced water affects people living in cities as well, with similarly harmful consequences for the poor. World Bank analysis suggests that utility water prices in developing countries cover about 30 percent of costs on average. Just as with irrigation systems, if water companies don't charge enough to cover their supply costs, they can't sustain the current network, let alone lay pipes to new customers. A small elite of richer consumers is left with a degrading quality of service -- sewage-tainted supplies that run for only a few hours a day, and pipes that lose huge amounts of water.  Think Nairobi, where taps have remained dry recently despite unseasonably wet weather.  Leaking delivery systems in the developing world lose about 16 billion cubic meters of water each year -- enough to meet the water needs of 200 million people. Meanwhile, poor households are usually not connected to the utility network at all. They are forced to buy water from vendors at five to 16 times the metered price, or more. If they had access to a tap delivering water properly charged at the price to deliver, they would pay a fraction of what they currently do for water.

The idea that water should be free or nearly free is a convenient one for large farmers and elites in the city. But subsidies are flushing global water security down the toilet -- it's time for them to end.  Properly pricing water is a multiple win: It will reduce the impact of climate change, ensure future generations have access to water for drinking and food, and improve the quality and reach of piped supplies, saving money and improving health for billions worldwide. All that, and it doesn't even take an international climate agreement -- which is great news, given everything that hasn't been happening in Durban.

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