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Water as the ultimate commodity?

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Water trading in the pipeline
10 Nov 2008 
Author: Oliver Balch 




Energy use and water use have some common traits. Both are intrinsic parts of 
many industrial processes, both have huge public impacts and both need to be 
reduced. 

Arguably, measuring and managing water use should be even more of a priority 
for companies than cutting carbon emissions, says Mike Tuffrey, director at 
UK consultancy Corporate Citizenship. After all, it is the consequences of 
carbon-related climate change, not climate change itself, that affect a 
business. “And one of the most obvious consequences of severe weather is 
fresh water availability,” Tuffrey says.

Comparisons with carbon are exercising the minds of water experts as well. 
The price of H2O, like its CO2 equivalent, is regularly out of sync with its 
value as a public good. 

In the case of water, government subsidies for farmers continue to keep the 
cost low. Demand for industry, food production and domestic supply is likely 
to push up prices, warns Jacob Tompkins of UK non-profit Waterwise. So too 
will future norms on water quality and sewage, as well as infrastructure 
costs related to climate change such as dams and flood resilience measures. 

In the case of carbon, a fair price was found through market-based schemes 
such as the European Union’s emissions trading scheme. By turning it into a 
commodity, a market was created. The same should be done for water, some 
water campaigners are saying. 

A first step is currently on the table at the World Trade Organisation. An 
alliance of non-profits last year proposed that the WTO consider creating a 
“virtual water trading council”, through which water can be traded between 
water-rich and water-stressed countries.

The term virtual water is becoming common parlance among hydrology 
professionals. It captures the amount of water embedded in a product – the 
amount of water that goes into making it. One kilogram of wheat, for example, 
requires about 1,000 litres of water, giving it a virtual water content of 
1,000 litres. The trade in virtual water rather than water itself relieves 
the exporting country of putting its own water security at risk. 

The virtual supply of water would also help reduce the financial and 
environmental cost of transporting physical water. France and Turkey, for 
example, both currently import water by tanker from Algeria and Israel 
respectively, whereas trading in virtual water would enable the importing of 
water-reliant crops grown elsewhere, rather than moving the water itself. 

Virtual trading schemes such as the WTO proposal remain untested so far. 
Physical water trading, however, has a long track record. Australia, for 
example, began toying with a trading system to buy and sell water 
entitlements two decades ago. Watermove, an independent water exchange, was 
recently set up to facilitate these deals, most of which are between farmers.

Stuart Orr, fresh water policy officer at environment group WWF, remains 
sceptical about physical water trading. The environmental and financial costs 
of transporting water physically restrict any such system to the very local, 
he argues. 

As for a trade in virtual water, Orr is cautious of drawing too close a 
parallel with carbon. He says: “A tonne of carbon is a tonne of carbon 
regardless of where it’s emitted. But water differs from place to place, so 
pricing will depend on very local situations.” 

The institutional, pricing and technical challenges inherent in a global 
trading scheme are “very, very difficult”, says. 

There are other problems to consider when comparing carbon to water. Water 
sources, for instance, need to be increased in the future – the opposite is 
true for carbon. There are also ethical objections to turning a life-giving 
substance such as water into a tradable commodity.