As many water blogs and tweets have recognized, McKinsey and Company has recently released its report Charting Our Water Future – produced for the 2030 Water Resource Group. The report does a good job of depicting the future water gap (above), and evaluating opportunities to reduce the gap (below). This post, not surprisingly, focuses on the reports limited recognition of water market design.
I have to admit, I was disappointed in the lack of emphasis on water markets in the report. In my opinion, water markets easily address two of the three options to close the supply and demand gap.
1. Increasing productivity from shifting water from low valued uses to high valued uses.
2.Reducing demand by eliminating water uses of low economic value and encouraging water efficiency.
In all fairness, the report does provide a few paragraphs on market design near the end (page 130) of the report. But, a few paragraphs in a 198 page report? Come on, where is the love?
Regardless, here are the highlights:
“There is ample evidence from across the world—from Mexico and Chile to Australia and Spain—that countries with different levels of development and institutional capacity can, when pressed by fiscal or resource constraints, design market mechanisms that achieve a more effective management of water resources.”
“The staged development of Australia’s water sector reform shows an example of a path forward. The establishment of water rights and trading mechanisms for the Murray Darling Basin created the price signals needed to incentivize major shifts to high-value crops. This market improved agricultural productivity in Australia by 36 percent from 2000 to 2005, protected and created industries, and developed a large financial water market (worth $1.7 billion in 2007-08).”
“Certain countries already have formal institutions that are capable of market-based water allocation systems. Such countries have further options, ranging from water banks, where water is sold at “cost-plus” in a clearinghouse of buyers and sellers, to spot markets, where price is set by a market of buyers and sellers who post offers and requests for water on bulletin boards of local irrigation offices or via the internet.”