Markets, by their very nature, are chaotic. When functioning properly, they’re impossible to predict and often act in unpredictable ways. Designing an effective market relies entirely upon creating a series of codified rules that must be obeyed. These rules can define ethical behaviour, outline rules that legally allow trade and characterize what a market itself may resemble. Designing markets from the ground up poses the same problem. Any dynamic and effective market will see the pushing of boundaries, regulation and legislation. But never has the pressure been higher to design a market that functions seamlessly, works in favour of consumers and addresses the failures of capitalism than in designing a market for water.

Water represents a unique challenge: a non-renewable resource, water has been formally recognized as a human right under international law since 2010. With the entire human population dependent upon approximately 10% of annual precipitation for personal, agricultural and industrial usage. Crucially, precipitation is also not equitably distributed. Drought and pollution has lead to 1.2B people globally living in water scarcity. In the past, the impending tipping point is the time to innovate, discover new materials and generate new technologies. This will admittedly boost supply somewhat. But fresh water is undeniably non-renewable.

Managing water demand means designing a mechanism that caters to the underserved while effectively bringing together a high volume of buyers and sellers to create an equitable price point, make transactions safe and overcome congestion by streamlining transactions.

The first hurdle is preserving existing water security. Protecting water access and preventing the intrusion from foreign bodies requires sovereign actors to think beyond traditional borders; if four nations rest on one aquifer, access to the water within must be divided accordingly. Instead of answering a question, this serves to pose a few more: are state-level actors interested in maintaining national sovereignty over natural resources? Will they act cooperatively or competitively? How would nations reconcile the inevitable struggle between international demand in times of shortage and maintaining national security?

The second hurdle is coordinating buyers. The issue of sovereign actors comes back into play. Transitioning water from a right to creating structures where futures can be traded on an established market would change it’s view from a right to a currency-denominated commodity. The failure to deliver the commodity at the set price upon date of term could have massive implications for a nation dependent upon the delivery of this commodity. And, unlike a failure to deliver pork bellies, the commodity in question is an unquestionably agreed upon human right. Response to short-term fluctuations in supply will depend upon having trusted buyers. Should a nation who fails to deliver upon their contract during an El Nino see their credit rating slashed if a decision is made to use their water to feed their people?

It may seem as if coordinating buyers and sellers would be the simple part – every idea mentioned above has a set precedent that can be adopted forward. State actors have successfully coordinated the sale of a commodity to allow for national sovereignty over natural resources before. Short-term fluctuations in supply simply sees adaptive sectors thrive. But it is crucial to note that these systems have been created with the idea that supply, although somewhat inconsistent, would grow over time alongside demand. The supply of water will not grow over time – but climate change, population growth and resource degradation will all drive up demand. Adopting mechanisms that differentiate rights in times of scarcity is not enough when a system revolves around governing a resource designed to become scarce.

The final hurdle is streamlining transactions. As national players become more involved, the emergence of nations interested in the transfer of water rights will grow. No sensible individual can argue that removing transfers will render a market anything about hopelessly inefficiency and inequitable. But the recent uptick in populism ensures that barriers to transfers will become political rallying cries that create higher than ideal barriers to entry. Moreover, a political landscape that fails to involve community members or affected third parties in decisions with national consequences. This process would slow trade and potentially stymie it all together.

All of the concerns raised are valid when the volume of water traded is non-impactful relative to the total supply. But when transfers threaten a community’s economic base, they can have devastating effects. And that’s the point – a market needs to be designed that allows for it’s rules to be pushed. If the market is effective, legislation, regulation and boundaries will be pushed to their limits. The only hope for success is if the rules are clearly established and institutions are created that foster sound water management. Preferably without a structure that has nations drowning in regulation.

References:

https://www.robeco.com/images/RobecoSAM_Water_Study.pdf

Livingston, Marie Leigh; DEC. 1993. Designing water institutions : market failures and institutional response. Policy, Research working paper ; no. WPS 1227. Washington, DC: World Bank. http://documents.worldbank.org/curated/en/347021468764739584/Designing-water-institutions-market-failures-and-institutional-response

 

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