SOLUTIONS for a GLOBAL WATER CRISIS: the End of 'Free and Cheap' Water
Total Page:16
File Type:pdf, Size:1020Kb
SOLUTIONS FOR THE GLOBAL WATER CRISIS The End of ‘Free and Cheap’ Water Citi GPS: Global Perspectives & Solutions April 2017 Citi is one of the world’s largest fi nancial institutions, operating in all major established and emerging markets. Across these world markets, our employees conduct an ongoing multi-disciplinary global conversation – accessing information, analyzing data, developing insights, and formulating advice for our clients. As our premier thought-leadership product, Citi GPS is designed to help our clients navigate the global economy’s most demanding challenges, identify future themes and trends, and help our clients profi t in a fast-changing and interconnected world. Citi GPS accesses the best elements of our global conversation and harvests the thought leadership of a wide range of senior professionals across our fi rm. This is not a research report and does not constitute advice on investments or a solicitation to buy or sell any fi nancial instrument. For more information on Citi GPS, please visit our website at www.citi.com/citigps. Citi GPS: Global Perspectives & Solutions April 2017 Elizabeth Curmi Edward L Morse Global Thematic Analyst Global Head of Commodities +44-20-7986-6818 | [email protected] +1-212-723-3871 | [email protected] Willem Buiter Aakash Doshi Global Chief Economist Senior Commodities Strategist +1-212-816-2363 | [email protected] +1-212-723-3872 | [email protected] Dr. Richard Fenner Adriana Knatchbull-Hugessen University of Cambridge Commodities Strategy Team +1-212-723-7193 | [email protected] Eric G Lee Elaine Prior Senior Commodities Strategist ESG and Sustainability Research +1-212-723-1474 | [email protected] +61-2-8225-4891 | [email protected] Prof Keith Richards Patrick Yau, CFA University of Cambridge Head of Singapore & Malaysia Research +65-6657-1168 | [email protected] Anthony Yuen Global Energy Strategist +1-212-723-1477 | [email protected] Contributors Prof. Julian Allwood, University of Cambridge Prof. Jim Hall, University of Oxford Michelle Zuohang He, Citi P.J. Juvekar, Citi Patrick Lau, CFA, Citi Seth M. Siegel April 2017 Citi GPS: Global Perspectives & Solutions 3 SOLUTIONS FOR A GLOBAL WATER CRISIS The End of ‘Free and Cheap’ Water Over the years there have been many academic studies, government policies, non- governmental organizations (NGO) reports, industrial plans, and others all focusing on ways to improve the management of water and reduce inefficient water use over time - and yet we are still faced with the problem of a looming global water crisis. So why haven’t we solved this problem? The main reason is that we are terrible at managing this resource. In the last decade there have been improvements to the use of water resources; however, there are still an estimated 800 million people who do not have access to clean water and some 4 billion people who live under water scarcity at least one month per year. Several regions are also depleting their freshwater resources at a very fast pace — many major river basins in both developed and developing countries, are facing extremely high levels of water stress. Water is badly managed in many of these places. It is underpriced, subsidized and in some cases given away for free. In many regions the unsustainable water use is usually acknowledged when a crisis occurs such as a flood or drought. A typical example of this is in California, the over-abstraction of groundwater has been largely ignored, until a drought hits the region, costing the state approximately $2.7 billion per year. Unmanaged water-related risks such as floods and droughts can cost an economy billions of dollars, not to mention the tragic loss of life. Water is vital not only for the production of food, but also for energy production, for the extraction of materials, to maintain aquatic ecosystem services, for the livelihoods of people, and not least for the economy. Despite only accounting for just under 4% of global gross domestic product (GDP) in 2014, the agriculture sector consumes the majority of the world’s freshwater resources (estimated at 70%), against 23% for industry and 8% for municipal use. Business as usual cannot continue — the global demand for water is expected to nearly double over the next 15 years. With dwindling supplies in many regions this could turn into a global water crisis affecting communities, industries, food production and the environment. There are, however, a number of solutions available which, in the words of Professor Keith Richards, should be ‘sustainable, collaborative and adaptive’. Investment in well-needed infrastructure is one part of the solution. On a global level, a total of $7.5 to $9.7 trillion is needed in investment for water and sanitation and related equipment. In developed countries investment is needed to upgrade and maintain aging infrastructure, while in developing countries investment is needed to build new infrastructure. Other solutions include pricing water efficiently, developing tradable permits to encourage efficient allocation of water and adequate regulation. Technology also has an important role to play — for example, smart meters encourage users to understand their consumption practices and precision agriculture is enabling farmers to collect real time data on weather, soil, and crop maturity. There isn’t a shortage of available solutions. Finding the right solution is a matter of good governance, and choosing a mix of solutions that works for your local community. It is, however, imperative that we do get it right this time as otherwise we will be sleepwalking into a global water crisis. © 2017 Citigroup Reaching the Boiling Point with Water Stresses from population, agriculture, and energy require investment and innovation THERE IS A MISMATCH BETWEEN THE LOCATIONS OF AVAILABLE FRESHWATER AND WHERE MOST OF THE GLOBAL POPULATION LIVES Freshwater Availability in Different Regions Source: Curmi et al, Hejazi et al (2014), UN Population Statistics, Citi Research Europe % global % freshwater USA population available Africa 16% 10% Asia Asia 60% 33% North America 5% 29% Latin America 9% 16% Latin Oceania 1% 3% America Africa Europe 10% 8% Oceania GLOBAL DEMAND FOR WATER IS RISING DUE TO INCREASING POPULATION, THE RISE OF MEGACITIES AND INCREASED FOOD DEMAND WITH SHIFTING DIETS Water intensity of each calorie consumed increases as diets shift towards greater meat consumption Source: Water Footprint Network, Citi Research The number people living in towns and cities is expected to increase: Bovine meat 10.19 2017 2030 Nuts Sheep/Goat meat 3.9 billion 5 billion 3.63 4.25 60% Food Fruits Pig meat Eggs Chicken meat Demand 2.09 2.15 2.29 3 Increase 2050 Starchy roots Cereals Sugar crops Butter Oil crops Pulses Vegetables Milk 0.47 0.51 0.69 0.72 0.81 1.19 1.34 1.82 litre/kcal © 2017 Citigroup WATER ISSUES CREATE REAL ECONOMIC ISSUES Cumulative water investment required in different regions Source: Citi Research Total global economic $24bn losses annually from inadequate water supply and sanitation in 2010 $63trn Source: WHO Costs annually of fl uvial fl ood losses globally Amount of global GDP $260bn Source: Sadoff et al (2015) at risk by 2050 if current water management practices continue Source: IFPRI SOLUTIONS TO AVOID A GLOBAL WATER CRISIS Three ways to help alleviate the global water crisis: Source: Citi Research 1 2 3 Water infrastructure Regulation and market- Technology solutions Investments of $7.5 to $9.7 based instruments including smart water trillion needed globally to i.e. pricing mechanisms tools (metering, big upgrade, maintain, and build and setting up tradable data), desalination, new water infrastructure water markets precision agriculture and benefi cial re-use of produced water 6 Citi GPS: Global Perspectives & Solutions April 2017 Contents What is Water? 7 Framing the Challenges 11 The Scale of the Problem 12 Water and Economic Growth 20 Sector Analysis 33 Agriculture - Will Feeding the Hungry Leave the World Thirsty? 34 The Energy Sector 51 Shale Exploration 54 Harnessing the Fruits of Produced Water 58 Power Generation and Water 63 Water Issues and the Mining Sector 68 Other Uses of Water: Urban and the Environment 74 Framing the Solutions 79 Complexity of Water Management 80 Demand-Side Solutions: Market-Based Instruments and Regulation 83 Supply-side Solutions: Investment in Infrastructure 92 The Role of Technology 100 Case Studies 115 Bringing it All Together - Case Studies of Singapore and Israel 116 Conclusion 123 © 2017 Citigroup April 2017 Citi GPS: Global Perspectives & Solutions 7 What is Water? It is no secret that the world confronts multiple critical challenges in the management of water. Nor is there any hiding from the fact that these challenges arise across the chain, from source to end use, with huge issues associated with distribution. There are also multiple conflicting challenges of access and ownership in each of these three areas and they are exacerbated by the many challenges the world faces in providing adequate potable water. Most of the challenges to designing policies to improve the supply and distribution of water and to adjudicate conflicts over end-use stem from conflicting answers to the question, “What is water?” To an economist there is a temptation to define water as a commodity and suggest it should be priced according to market principles of supply and demand. Like other commodities, it is consumed and therefore should be priced in terms of its scarcity. Abundant freshwater and ease of water access in primitive societies enabled water to be treated as a free good. Abundant freshwater and ease of water Scarcity should provide a pricing mechanism or a distributive regulatory mechanism access in primitive societies enabled water for sharing. In society today, one of the principle issues for market pricing relates to to be treated as a free good tapping into seawater to provide freshwater where scarce.