Banks screwing with price discovery mechanisms: water’s next

Frederick Kaufman in the current edition of Nature:

Making money come out of the tap means that fresh water must be given a price anywhere it is traded — a global price that can be arbitraged across the continents. Those in Mumbai or midtown Manhattan who understand the increasing value of water in the world economy will speculate on this undervalued ‘asset’, and their investments will drive up the cost everywhere. A water calamity in China or India — and the food inflation, political instability and humanitarian crisis that will surely follow — will reverberate in price spikes from London to Sydney. This is how bankers will profit.

Economists have begun to model a global water-based futures market featuring financial puts, calls, shorts, longs, exchange-traded funds, indices of indices, options piled on top of options, and all sorts of opportunity for over-the-counter swaps. Flood-insurance companies will certainly want to buy stakes that could mitigate their financial risk. In fact, every corporation that conducts its business in a flood plain, anywhere, would probably participate. Farmers will want to hedge their bets that it will or will not rain, as will frackers and fishermen. As for the speculators, we know who they will be.


The reverberations of a global water futures market can hardly be imagined. This much is clear: a water betting game will leave crops thirsting and push the global price of food far beyond the peaks of the past five years.

The good news is that, unlike the failed attempts to regulate the derivatives markets in food, something can still be done in the case of water. There are plenty of examples of valuing water outside the realm of pure commodification. One of the best examples has been developed in the Ruhr basin in Germany. This riverine resource is managed not by the invisible hand of the market, but by a policy-creating body called the Ruhr Association. Cities, counties, industries and enterprises in the region are represented by associates and delegates. A total of 543 stakeholders negotiate water-abstraction fees and pollution charges. The politics may be messy, but it works. Unfortunately, that is the way with democracy.

There is no easy panacea for the world’s water needs, least of all the global derivatives business, which has proved that it is not to be trusted with mortgage-backed securities, much less our most precious resource. There is no need to initiate a futures market in water only to create yet more financial madness that seems to resist all attempts at regulation. This time around, let the business stop before it starts.

Worth reading the whole thing. He’s pretty scathing about Payments for Ecosystem Services (PES) and work on The Economics of Ecosystems and Biodiversity (TEEB).

Transboundary water: your cut-out-and-keep guide

And so to a veritable treasure chest for scarcity nerds everywhere: the Atlas of International Freshwater Agreements, brought to you by Oregon State University’s Program in Water Conflict Management and Transformation.

Here’s what you need to know. First, there are currently 263 rivers that either cross, or demarcate, international boundaries. Europe has most of them (69), followed by Africa (59), Asia (57), North America (40) and South America (38).  Here they are on a handy map (larger version at the link above):

Second, you should know that these international river basins account, according to OSU, for nearly one-half of the earth’s land surface; generate roughly 60% of global freshwater flow; and are home to approximately 40% of the world’s population. A taste of the vulnerabilities that come with this:

A total of 145 countries contribute territory to international basins. 33 nations, including such sizeable countries as Bolivia, Chad, the Democratic Republic of the Congo, Niger, and Zambia, have more than 95% of their territory within the hydrologic boundaries of one or more international basins. Perhaps even more significant is the number of countries that share certain individual basins … The Congo, Niger, Nile, Rhine, and Zambezi are each shared by more than 9 countries while the Amazon, Aral Sea, Ganges-Brahmaputra-Meghna, Jordan, Kura-Araks, La Plata, Lake Chad, Mekong, Neman, Tarim, Tigris-Euphrates-Shatt al Arab, Vistula, and Volga basins each contain territory of at least 5 sovereign nations.

Third, the good news. You might think that the quote above suggests that we’re in for a century of water wars. But it’s worth remembering this: “in the largest quantitative study of water conflict and cooperation, researchers at Oregon State University found that cooperative interactions between riparian states over the past fifty years have outnumbered conflictive interactions by more than two-to-one”.  Shared water has to date much more often been a stimulus for cooperation than for competition – a point our buddy Geoff Dabelko also makes consistently. This isn’t a new story, either: “the history of international water treaties dates as far back as 2500 bc, when the two Sumerian city-states of Lagash and Umma crafted an agreement ending a water dispute along the Tigris River”.

But… ah yes, there’s a but. And it is this:

158 of the world’s 263 international basins lack any type of cooperative management framework. Furthermore, of the 106 basins with water institutions, approximately two-thirds have three or more riparian states, yet less than 20 percent of the accompanying agreements are multilateral. Moreover, despite the recent progress noted above, treaties with substantive references to water quality management, monitoring and evaluation, conflict resolution, public participation, and flexible allocation methods, remain in the minority. As a result, most existing international water agreements continue to lack the tools necessary to promote long-term, holistic water management

On top of this, there’s the small matter of climate change to consider – and especially, Cleo Paskal’s observation that “water-sharing agreements, especially those based on a set amount of water, rather than percentage of actual flow, will become problematic as water levels alter dramatically” (Cleo has a new book out, btw). So, lots done – but lots to do.

Jose Ramos Horta on E Timor: “In 20 years, we’ll be killing each other over land and water”

Ten years of freedom for East Timor today, and a notably graceful editorial in the Jakarta Post:

Indonesia would have learned a great deal from the fatal mistakes of its 24-year occupation of the then East Timor, now Timor Leste, so it hardly needs more lessons. Well perhaps one more: a lesson on statesmanship from President José Ramos-Horta.

On the 10th anniversary of the UN-sponsored independence referendum that ended Indonesian rule, Ramos-Horta’s speech Saturday was worthy of his standing as a Nobel Peace Prize laureate, part of which read “My stated preference, as a human being, victim and head of state, is that we once and for all close the 1975-1999 chapters of our tragic experience [and] forgive those who did us harm.”

 It concludes:

Timor Leste is fortunate to have truly great statesmen like Ramos-Horta and Gusmao. Statesmanship will remain in short supply among Indonesian leaders for as long as we continue to let human rights violations go unpunished. While our leaders are busy talking the talk at international forums, we are certainly not walking the human rights walk.

But in an FT interview, Ramos-Horta’s own preoccupations are focused on the future:

José Ramos Horta, the president, who shared the 1996 Nobel Peace Prize for his efforts to end the Indonesian rule that left more than 150,000 Timorese dead, says that when a shortage of water and dependence on subsistence agriculture is added, the scale of the problems the country faces cannot be overstated.

“With this population growth and poverty, [and] increasing pressure on water and land, 20 years from now we will start killing each other over water and land,” he told the Financial Times. He has no doubt that, unless more attention is paid to rural areas, urban migration – particularly among the rapidly escalating ranks of disillusioned and unemployed youth – will be so great that it will create a “time bomb”.

On the web: Hillary’s big speech, water in the Middle East, British defence spending…

– Over at Politico, Ben Smith has more news about the Secretary of State’s big foreign policy speech, to be delivered today at the Council on Foreign Relations. Placing the last six months of US diplomacy into perspective, it will also offer Hillary the chance to begin putting her own distinctive stamp on policy. As Smith comments:

Clinton appears increasingly comfortable expressing her views. State Department officials have suggested that she’s been a hawkish internal voice, pushing Obama toward more confrontational stances toward adversaries from Iran to Cuba.

– The NYT has an interesting article highlighting the importance of water, as well as land, to Middle East peace. “[W]hen it comes to water”, Stanley Weiss suggests, “every nation is in the same boat”.

– Elsewhere, the FT’s Brussels blog identifies five priorities for the next European Commission – defending the single market; reforming financial regulation; clarifying climate change and energy security policy; unifying a foreign policy voice; and finally the small matter of appointing a new President. Deutsche Welle, meanwhile, has an interview with Hans-Gert Pöttering, the outgoing President of the European Parliament.

– Finally, a veritable slew of polls – well ok, two – on British defence spending. A PoliticsHome poll suggests 66% of voters feel defence should be protected from inevitable cuts in public spending (79% among Conservative supporters, 64% for Labour supporters, and 49% among Lib Dems). Details here. The Guardian, meanwhile has an interesting ICM poll (pdf) indicating that 54% of British voters now support nuclear disarmament, with only 42% in favour of replacing Trident.

Landgrab deals: actually water grabs

We’ve been posting regularly here about the various ‘landgrab’ third party food supply deals that have been such a feature of the last year or two (see the map that Mark posted a couple of weeks ago) – particularly in Madagascar, where a particularly dubious example of such a deal is perceived to have played a part in fomenting the recent coup d’etat there.

Over at, though, Nestle CEO Peter Brabeck-Letmathe has a different and interesting take on the issue:

The purchases weren’t about land, but water. For with the land comes the right to withdraw the water linked to it, in most countries essentially a freebie that increasingly could be the most valuable part of the deal. Estimated on the basis of one crop per year, the land purchased represents 55 to 65 cubic kilometers of embedded freshwater, an amount equal to roughly 1½ times the water held by the Hoover Dam. And, because this water has no price, the investors can take it over virtually free. It’s not quite a scenario from a James Bond movie, but the rush to lock up scarce water resources in agricultural belts is nonetheless disturbing. It suggests another food crisis might not be too far away.

In a sense, the great water grab is only prudent: Some 70 percent of all freshwater withdrawn for human use goes into agriculture, but underground aquifers are falling—in some regions by several meters per year—and rivers are running dry due to overuse. The worst problems are in some of the world’s most important agricultural areas: eastern Spain, the U.S. Great Plains, the Middle East and North Africa, and parts of Pakistan, northwest India, and northeast China. As the former head of the International Water Management Institute warned, “We could be facing annual losses equivalent to the entire grain crops of India and the U.S. combined” if current trends hold.

Water cap and trade

Just did an interesting interview with Neil Eckert, the CEO of Climate Exchange PLC.

They’re the private company that owns the European Climate Exchange, which does 95% of the trading in EU carbon permits and CERs, and the Chicago Climate Exchange, which does all the existing carbon trading in the US. It also owns the only carbon exchange in China, and has pilot projects in India and Australia.

So in other words, they completely dominate a global market that is about to boom. Smart fellows.

One thing he mentioned that interested me is that the company is currently doing a pilot scheme to introduce a cap and trade market at the Great Lakes for water.

Eckert said: ‘Trading water is not that difficult. You cap extraction rights for a source, such as the Great Lakes, and then allow the main extractors to trade quotas among themselves.”

He expects an international water trading market to grow up: ‘If water becomes more and more scarce, people are going to be pumping it over long distances, like oil. The Middle East, in particular, could be a big buyer of water rights.’

As it happens, the Economist suggested using cap and trade for water in its latest issue. Synchronicity or what.