September 30, 2008
Throughout the first two Global Innovation Outlook deep dives on Water and the Oceans, a concept known as “virtual water” has come up again and again. The idea is straightforward enough: virtual water is the amount of water used in the production of a good or service.
For example, it takes 246 liters of water to make one kilogram of potatoes. Or 10,600 liters to make one pair of jeans. In each instance, the amount of virtual water estimated in the production of these goods is a cumulative total of the entire development cycle. For potatoes most of the water is accounted for through irrigation of the crop. For jeans, the growing of cotton is taken into account, along with whatever industrial practices -- including dying and washing -- that are added into the process later on.
For some, these measurements are useful, especially when estimating the amount of virtual water embedded in different kinds of international trade. In other words, a water-scarce nation may want to reconsider exporting a water-intensive product, like beef or produce. It’s easy to see how understanding water use in various products could have an impact on trade strategies in some regions.
Many people feel that the concept of virtual water would also be useful in raising consumer awareness of water use. Some have suggested that products should come with labels that estimate their virtual water content. And that some day consumers would add virtual water to the list of things on which they base their buying decisions.
But there are a few important shortcomings to the notion of virtual water. For one thing, it doesn’t take into account the source of water that was used for the product. Wheat that was grown using 80 percent rain fed water supplies should have a different virtual water content than wheat grown using 80 percent irrigation. Desalinated water has a greater environmental toll than surface water. And so on.
Virtual water also makes the assumption that if that water had not been used to grow potatoes or make a pair of jeans, it could have been used for some other purpose. This is not always the case. Distinctions also need to be made between the use of “green” water (from rainfall), “blue” water (surface or groundwater), and “grey” water (polluted discharge.)
See how quickly a simple measure of water use can become too complicated for the average consumer to worry about? Virtual water is instructive to be sure. But it’s not clear whether it is a viable tool for shaping trade policy, or even informing consumer decisions. To do that, far more variables need to be taken into account, and distilled into easily understood, actionable metrics.
September 24, 2008
The Economics of Water
Holding a Global Innovation Outlook deep dive on Water and the Oceans in Atlanta was no accident. Atlanta is among the most water-stressed areas in the United States at the moment. Over the last 18 months, one of the worst droughts in the history of the Southeast has brought with it mandatory conservation, a three-state scramble for resources, and an acute awareness of how climate change is redirecting fresh water supplies the world over.
For this reason, the tenor and content of this deep dive was far different than our last one in San Diego, which focused more on ocean systems. The participants were well-equipped to tackle the multi-faceted issues of our so called land use of water, which includes agriculture, industry, and domestic consumption. There were representatives from the Georgia Environmental Protection Division and Atlanta’s Bureau of Watershed Protection; experts on water and energy technologies from Siemens Water Technologies, Energy Recovery Inc., and Fieldstone Energy Corporation; and executives from some of the most water-intensive industries in the world, including The Coca-Cola Company and Nestle Waters. And finally, there were economists, financial advisors, and investors, all focused on the rapidly evolving economics of water.
Given this makeup, it is not surprising that we engaged in a passionate and purposeful discussion of the price of water. “People call me up all the time and say they want to invest in water,” said one participant from a global investment bank. “I tell them ‘Sure, pick up and copy of the Wall Street Journal and tell me what it’s trading at.’”
Water, or course, has no single price. It is not a commodity. It cannot be traded in the futures market. In fact, in many parts of the world, water itself is free. It’s the cost of the pipes and other means of distribution (or treatment) that gets passed along to the consumer.
It is a curious fact of water that though it is universally valuable and increasingly scarce, it is not monetarily valued in any consistent way. As David Zetland, an economist and prolific blogger on water issues at Aguanomics.com, pointed out, it’s known as the Diamond-Water Paradox, which questions why diamonds, which are far less useful, command a vastly higher price in the market. Adam Smith explained it thusly: The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.
In this sense, one could argue that water is already priced fairly. But it would be hard to argue that it is priced in a way that encourages sufficient conservation, a source of frustration for many who seek to curb overall demand, and in particular waste, of freshwater supplies (though perhaps not for much longer).
All of which makes it particularly difficult to invest in water, as our investment banker friend rightly pointed out. Difficult, but not impossible. There are ways to invest in water that can not only turn a profit, but encourage conservation at the same time. Steve Vassallo is a Principal at Foundation Capital, a venture capital company focused on information technology and Cleantech. While most investors are looking for ways to make money by increasing water supplies to water-constrained areas, Vassallo is looking the other way. Play the video to hear him explain:
The real beauty of demand side investing is that decreasing demand has a much greater impact back upstream in the supply chain. In other words, if a consumer saves 100 gallons of water or 5 kilowatts of energy a week, the water treatment facility or electricity production plant enjoys an order of magnitude of savings on the backend, largely because of the stunning waste during distribution of these resources.
There were many other insights that we’ll tease out over the course of the next few weeks, leading up to the Singapore deep dive in October, so come back often and contribute freely.
September 19, 2008
The Need to Know
Global Innovation Outlook topics always have a sense of urgency to them. By definition they are global challenges that require immediate and substantial innovation. But this is particularly true with Water and the Oceans. And so with that in mind, we wasted no time in our first deep dive in San Diego, asking the toughest question right out of the gate: If tomorrow you were elected Global Water Czar, what would be your first edict?
The room was packed with experts that represented all aspects of the hydrological cycle, from the deep ocean to freshwater drinking supplies in developing countries. There were oceanographers from the University of Rhode Island, the Bermuda Institute of Ocean Sciences, and the Scripps Institution of Oceanography. There were conservationists and researchers from The National Geographic Society and The Beacon Institute for Rivers and Estuaries. There were venture capitalists, NGOs, and representatives from two of the most influential corporations in the world, The Dow Chemical Company and General Electric.
So it’s not surprising that the answers to the Water Czar question ran the global gamut, from general to specific, from practical to fanciful. Here is a partial list of the edicts:
Create an international commodity trading market for water
Ban bottled water
Require companies to report water usage on balance sheets
Mandate drip irrigation for all agriculture
Prohibit building cities in the desert
Require that all rivers reach the sea
Enforce the U.S. Clean Water Act on a global basis
Eliminate polluting discharge
Order a global evaluation of water assets
Tax nations based on the quality of water that leaves their system, not how much they use
Make a movie about water scarcity (a la Inconvenient Truth)
Initiate a massive global education campaign
Prohibit showers one day a week
If nothing else, this exercise and the responses it yielded demonstrates the breadth of action needed to address the many challenges before us. It also highlights the stunning complexity of global water systems, and the need for holistic, informed approaches. In fact, one participant after another bemoaned the crippling lack of data, on everything from groundwater to ocean ecosystems, upon which to base decisions.
“There is an admission that all experts need to make on their own ignorance,” said one participant. “We simply don’t know enough.” It was a humbling sentiment that was echoed time and again throughout the day. “We only know 3 percent of the oceans,” said another. “We have barely scratched the surface of understanding,” said yet another.
Dr. Anthony Knap, the President and Director of the Bermuda Institute of Ocean Sciences, puts the challenges in studying the oceans in proper perspective in this video clip:
The litany of different systems that need further measurement and understanding is indeed daunting. There is a need for better data on the true global value of water; on the effects of climate change on the ocean; on the ocean’s ability to sequester CO2; on industrial consumption and discharge; on the migration patterns of marine life; on the trade offs between food, energy, and water use; on acidification of the oceans; and so on.
Fortunately, the cross-section of experts in the room in San Diego did manage to open each others’ eyes to their respective challenges. And there was a sense in the room that even as we discussed the dire need for better, more integrated information on ocean, freshwater, and climate systems, we were already getting smarter about how to get it done.
September 15, 2008
Those of you who enjoyed a proper weekend without the intrusions and distractions of work, the Internet, or a stray newspaper woke this morning to the stunning news that two of the largest and most revered investment banks in the world were on the brink of insolvency. Add to that the desperate state of one of the largest insurance companies in America and you’ve got a lot of hand-wringing going on in the world financial markets.
These are uncertain times, to be sure. And the events of the past three days have cast new light on the stability, or lack thereof, of the financial systems that underpin global commerce. But what’s this got to do with water and the oceans?
The successive speculative bubbles that fueled (and then gutted) the technology and housing markets (and one could argue for oil here as well) were the result of complex financial constructs that distorted the reality of supply and demand in the markets. That is not to say that Wall Street is entirely to blame. We were all complicit in these distortions, individuals and banks, from London to Tokyo to Shanghai. Nobody likes to be left out of a bubble.
With regional water scarcity currently hitting some parts of the world hard, the idea of new pricing structures, water futures trading, and other mechanisms of finance playing a role in alleviating, or at least redistributing, global water supplies has been gaining traction. In principle, these concepts are sound. They are based on the belief that if water were to be priced as a global commodity, with that price being tied to supply and demand, it would create new efficiencies in global distribution and eliminate waste in regions that enjoy a surplus. (To some extent this is already done in the form of the bottled water industry.)
But if these pricing structures are to be adopted, they must be carefully crafted to prevent the kind of supply disruptions and wild price swings that plague other commodities that trade on global markets. Paying $150 for a barrel of oil is a major financial inconvenience and can be devastating to energy-intensive businesses. But imagine the global consequences of a speculative bubble that quickly drives up the price of water.
This is just one of the reasons why we are in dire need of more accurate information about water. We know that we have enough water on the planet for all our needs, but where is it? How are the routes it takes changing? Where is it being wasted? How is it being consumed? Only in a world in which these questions and others can be answered with precision can we even consider setting global prices on such a critical resource.
CORRECTION: In a blog entry dated June 6, 2008, we mistakenly characterized data tethering as a service that allows an individual to “know where a piece of personal information about them comes from and where it goes throughout its lifetime.” This is incorrect. Data tethering actually ties the original record, or master copy, to all subsequent copies of the data. Even if the data is passed along an infinite amount of times, one change in the master copy is then reflected throughout the data chain. Apologies to Jeff Jonas, Chief Scientist, Entity Analytics, IBM Corporation, who spoke about data tethering at the Vancouver Deep Dive in early June. Here is a link to Jonas’ explanation of data tethering at his blog.
September 04, 2008
Location, Location, Location
As we prepare for our first deep dive on Water and the Oceans in San Diego in two weeks, the Global Innovation Outlook has been kicking around a number of tough questions to stimulate thinking among our participants. Part of the mandate of the GIO is to never ask well-worn questions that yield obvious answers. We always want to push beyond the headlines; move the conversation forward ten or twenty years; and never settle for ordinary thinking.
For this topic, however, conceiving good, fresh questions is no easy assignment. So much has been talked about already. So many questions have already been asked (and many gone unanswered.) But we have a few that we think will get people thinking around corners. Questions like: If you were elected Emperor of Global Water Systems, what would be the first three edicts you would hand down? Or, what is the true monetary value of water, and are we pricing it accordingly today?
But one of my personal favorites, and the one I’d like to get some feedback from readers on, is whether water management is a regional or global issue. Before you answer too quickly, think about the nuances of this issue.
It would be easy to argue that all water, like politics, is local. After all, if you live in an area with plentiful rainfall, sufficient ground water supplies, or access to abundant desalinated water, you probably don’t think very much about water scarcity. If you live in a water-constrained, arid part of the world, it may be all you think about.
The same goes for the oceans. Whether a country is mining the oceans for energy, food, or freshwater, their operations probably take place very near their own shores. With the exception of some shipping through international waters, ocean harvesting would also seem to be mostly local in nature.
Indeed, there are areas that enjoy an abundance of water resources and those that suffer under the tyranny of water scarcity. Water is, without a doubt, a poorly distributed resource. This would seem as solid an argument as any for globalizing water supplies, similar to the way oil has been a global industry for decades. The hope would be that this would remove the regional variances that bedevil so many parts of the world.
But in many ways, the world’s water supply is already global. No, we don’t load up tanker ships and export raw water, or build thousands of miles of water pipelines (though some areas do have extensive aqueduct systems). We do, however, import and export millions of tons of so-called “virtual water” every year. Virtual water is the amount of water it takes to produce food and other products. For example, it takes about 65 gallons of water to grow a pound of potatoes; 650 gallons to make a pound of rice; 100,000 gallons to make a car.
This virtual water is shipped around the world on a regular basis. In fact, the United States exports about a third of the water it withdraws from the natural environment in the form of virtual water. Countries both import and export virtual water, and the net effects are not dissimilar to that of any other natural resource. That leads to the possibility that as global populations continue to grow, putting more strain on water supplies, global trade could be adversely affected. Add that to the list of tangential consequences of water scarcity, a list that is as long as it is alarming
We welcome your thoughts on this and other water-related issues as we continue to refine the agenda for our Water and Oceans deep dives.