Q&A: Brian Richter and Frederick Kaufman on Market-based Water Pricing

Brian Richter: I mean, people will act to be more conservative with their water use if they understand, if the impact of their water use is very apparent to them, and if they care about that impact. So, there are people in our society that love their local rivers, for whatever reason — you know, they love to canoe, they love to fish, maybe there is some spiritual or cultural connection to it — if you draw the connection for them that your use of water, or our use of water collectively in a community, is impacting that thing that [they] love, then that’s another effective way of controlling and influencing behavior.

But in our modern society, unfortunately, particularly in urban settings, we’re so disconnected from where that water comes from that people don’t connect those dots, they don’t understand that their water use is actually having an adverse impact on something like the fish in their local river. The Nature Conservancy did a poll last year: around the order of, I think it was 77 percent of Americans have essentially no idea where their water comes from. It just gives you some evidence to the point that I’m making, which is: if you don’t know what the impacts are of your resource use, then you likely don’t have much motivation to change your behavior for your consumption of that resource. So, if you don’t have that kind of connection, then what other kind of connection do you have to control human behavior? And you can boil that down to cost. So that’s kind of the conundrum I think we’re in.

Frederick Kaufman: [Through] many of my discussions with traders and bankers in food commodities, I think it really came as a great surprise to them that the tripling of grain prices from 2002 to 2012 had had this kind of massive effect on human misery — to them, it’s just a price; it’s an index. They don’t perceive it as that [the value of] food is more than cash. I think that when you turn water into a commodity, you tempt people to perceive it in a particular way; you tempt them to perceive it as a ticker, just as though it were the price of [a stock in] General Electric or Apple. And, of course, like food, water is different. Spiritual or not, water is different, and it has to resist all sheer equivalencies with cash.

I think there is a real — that there is a humanitarian — end to this. So that if you start pricing water and you start seeing spikes and volatility in the price of water, you’re going to see, really, billions of people suffering. And I think there are probably better ways and other ways for people to understand scarcity; other ways and better ways for them to save water and reserve water than simply a price. A price is such a basic thing, and a price can be exploited and subverted so easily. There will be a sense that you can start searching for water as large industrial venturers do for gold and for other precious resources, or for oil, obviously. So what’s going to happen are a lot of people — who might be living on land that’s traditionally been theirs and they have traditionally farmed — all of the sudden, they find that the governments have sold the water right out from under them. This is already happening. This is happening now. It’s happening all over the world, most notably in Africa.

If water were actually given a very specific price on an exchange, we would see even greater activity in the sector, and so the global land grab and water grab — which is already causing so much misery — would only be given more force and impetus.

Brian Richter: So none of this works well in the absence of government or in the absence of regulation. Sandra Postel and I wrote a book back in 2003 called Rivers for Life, and one of the things that we kind of stood on pretty solidly in that book was that governments do need to put a cap on how much water is taken from underground. And if you’re in favor of water market systems and you think that those are a helpful part of the solution, you can’t have a highly successful water market system unless you have a couple of essential things: you have to cap the total water usage, and the right to use has to be very, very clearly defined, and then there has to be some way for the use of water to be traded among different users. That is how successfully functioning water markets operate. But without some of the essentials — without the capping — then you can’t protect the environment, for one, and also you’re not going to have as much influence on the way that people use water, because it’s not a limited resource until we actually, literally dry it up, right? So, the punchline there is that there most definitely is a role for governments, but if they are not going to play a complete role, well then at least they can play some of these minimum essentials.

One of the real knee-jerk reactions, adverse reactions, to the idea of changing the price of water or increasing the price of water is that it will harm people that have difficulty in affording the water. And that is absolutely the case; that is absolutely an issue that has to be addressed when we have these considerations. But, there are ways of addressing that; there are ways of getting around that. You can set a different price structure to, in essence, subsidize and keep the price low and affordable for the portion of the population that that is going to be a hardship for. So when I talk about the need to raise prices — in the way that I think about it — I’m always thinking about making sure that you are addressing the potential for that there exists some portion of the population that this is going to create a hardship for. We need to address that. We need to address that explicitly, and we need to address that head-on. The other part that I think is a given is that, in any system like this, you have to be ensuring that enough water remains in the natural system: you know, the freshwater sources, how do you sustain their health?

So those two things — social equity, or the social considerations, and the environmental considerations — are always part of the baseline. But the question then is for the water that is available for use in a discretionary way or available for use in commercial purposes. And that sort of thing, we want that water to be managed well; we want it to be used as conservatively as possible; we want it to be used as productively as possible. So yes, different businesses are going to use water, and they are going to make a profit from the using of the water, and I don’t think that that’s necessarily a bad thing at face value — I mean, it is a part of the global economy.

And to say that companies are profiting off of the use of the water: well, we profit off of the use of a lot of resources. And I don’t think that there is, given those previous considerations — the social considerations and the environmental considerations — I don’t think that it necessarily should be thinking of water in any critically different way from the way that we think about the use of other resources: timber resources and others. So yes, the companies are going to continue to make profit through the use of water. And that is a reality. And that is kind of what I see driving the economy, is their ability to do that.

In the case of water in almost all cases that I’m aware of anywhere around the world, corporations cannot actually own the water itself. They can own the right to use the water, but the government ultimately retains ownership of the water, and the government issues permits or rights to companies and to individuals to use the water. And so — to the effect that there isn’t property involved — it’s actually the right to use, which can be taken away by the government. That’s not to say that you can’t make, or that there aren’t some places where you can’t make, money off of buying and selling water rights: there are some places in the world where you can do that, but that is ultimately the government who has the ownership of the water.

But the case that I think is a really legitimate concern: when people talk about [places where] privatization is introduced, what that usually refers to in a situation is where the government is a public entity and is contracting with a private company for the distribution of water to companies and to homes and businesses. They are not actually selling the water itself: they are not giving the water away to the companies. They’re contracting for the service of distributing the water to people who want it. One of the biggest problems is that the private company — some of those private companies — will raise the rate of their service so high that it puts the poorer portion of the population, in some countries a large portion of the population, in a real hardship because of the price of the water.

Frederick Kaufman: We can see how the Dodd Frank/Wall Street Reform Act has failed in its ability to bring back position limits to get bankers out of the sector. It’s a failure. OK. And, so once you allow it to happen, well, then — of course — there are all sorts of laws and legal constructs and regulations and re-regulations and de-regulations that are going to occur. And so, once again, why would we play with fire?

In my mind, here’s the danger of water futures. Being introduced at this point in the history of commodity markets, which is that this is a real transition point in commodity markets, just as it is a transition point in the global economy — commodity markets [have] worked really well since they were created in their modern form after the Civil War: the American grain markets were the first financial derivative product, and they really did what they were supposed to do, for the most part, which is to help hedgers and speculators discover price and manage risks, and that’s what those markets are actually supposed to do. [But] for various reasons — technical reasons, global economic reasons, all sorts of reasons, de-regulatory reasons — those markets were transformed, shifted, in the period: really post-financial meltdown, in 2008. And now we’re looking at a very different beast with very different players in very different ratios.

And so, on the one hand, there is a valid reasoning that, if we were to commodify water, we actually might help stabilize this product — which I think is right — and help market forces steady it. However, that shows a real, I think, almost willful ignorance of the state of our commodity markets today, which are highly volatile and 4/5 controlled by speculation.

What I argue in my [recent Nature] article is that now is not the best time to start a water futures market. We have to stop it before it starts, because, once it starts, it’s very hard to stop. And we can see that in the $US 648 trillion global derivatives business, which is, I think, that everybody perceives that it went out of control. And I think everybody now is beginning to understand how hard it is to bring it back under control — we can even see how hard it is to get bankers out of the food supply, which was the topic of my most recent book.

Brian Richter: In no way do I see this as a silver bullet; I think some people see it as a silver bullet, and I don’t. I think it’s one of the tools in the toolbox. It’s one of the effective levers that we’ve got, so why not use it? The real issue is that we’re using and consuming too much relative to how much is available. And when you do that, there are these spin-off adverse impacts that do result: ecological degradation, increasing social problems, inequities in access to water, things like that. So, ultimately the problem is using too much relative to what’s available and the impact that accrues from that. And so the issue then is: how do you address that problem?

Through the experience that I have gone through over decades of working on water issues, I don’t come to an economic solution naturally, or even comfortably, but I have always stayed very intensely focused on the problem as I perceive it, which is governments aren’t doing an adequate job of controlling the use of water. And, by the way, even in the places that are, [the places] that you think are doing the best job, like even individual states within the United States, almost none of them — there are a couple states that are doing a pretty good job — but almost none of the states in the United States are adequately protecting what we call “environmental flows.” We aren’t managing water in a way that allows sufficient water to remain in the rivers and the streams to be able to adequately be able to protect their ecological health. And, in some cases, they make no attempt at that whatsoever.

And it’s not a problem for everywhere in the the world: we’ve been doing a lot of global analysis on water shortages, on water scarcity, and it’s a serious problem in a pretty small fraction of all the world’s watersheds — maybe something around the order of 15 to 20 percent of watersheds are really experiencing these problems of true water shortage, where we’re using the water resource to the point where we’re drying it up or depleting the aquifer. So it’s a small percentage. But in those places, we just don’t see too many effective solutions being implemented. So we really have to come up with a solution; so we have to try something new.

Frederick Kaufman:There is no shortcut. People think that price is going to be some shortcut, that a commodity market is going to be a shortcut to efficiency — but that’s not the case. The example I bring to bear is the management of the rural water basin: what you have is this kind of messy, 500-plus-member water parliament. And they’re all stakeholders, and it’s factional politics, and everybody is horse trading out there. You might think, “Oh, ‘politics’ is a dirty word.” But that’s democracy — that’s how democracy works, and that’s how representative democracy works — and, so far, that has been the best system.