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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 24, 2008 in Water and the Oceans | Permalink


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Note that Smith did not explain the diamond-water paradox. He posed (or repeated) it. It remained a paradox for another 100 years or so, until the "marginalists" explained that the first bit of water is VERY valuable (a glass of water in the desert), while later bits are less valuable -- until we get to the last, marginal, bit that we use to water our driveway. That's the value side, and we get confused when we see people wasting a "precious" resource that's just not that precious when it's abundant.

As you know, I mentioned raising marginal prices so that people would use less, i.e., implement conservation pricing so demand falls to equal supply.

Posted by: David Zetland | Sep 25, 2008 10:34:44 AM

I wanted to make you all aware of this online Economist
Debate going on now until October 10th (see details below) regarding the issue of the
pricing of water. Only a few days into the debate and there is
significant commentary and a slight preference for voting against the
market pricing of water! This is something that Dow is helping to
sponsor - as one element of our overall strategy on water - we have not
actually taken a position in this space to date, but do want to foster
informed dialogue that will help us determine our course!

Take a peek and weigh in if you feel like it!
Scott Noesen

The Economist debate, sponsored by Dow, officially
kicked off this morning at http://www.economist.com/debate/
and will run through October 10.
To kick things off, Steve J. Hoffmann, Managing Director of
WaterTech Capital and co-founder, Palisades Water Index Associates is
arguing for the pro side and Vandana Shiva, Director, Research
Foundation for Science, Technology & Natural Resource Policy for the

Posted by: Scott Noesen | Oct 4, 2008 5:49:44 AM

Hmm interesting post..
I liked it.
Nice Scott Noesen...
Thanks for the links..

Posted by: Central Online Money | Jun 1, 2010 10:40:35 PM

Interesting post! water cannot be traded in the futures market. In fact, in many parts of the world, water itself is free.

Posted by: Nursing pajamas | Jun 28, 2010 6:16:05 PM

I almost agree with you . Water is free itself and can not be traded in market. On the other hand , I am quite interested in diamond-water paradox. Can please give me some more information related to this ?

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Investing in water itself is somewhat amusing. It shouldn't be taken as a means of profit motive. It is universally free stuff and should be always.

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Being that water is politically distributed in the West, it will be difficult for members of Congress and the unelected bureaucrats who have created this crisis in the first place to be willing to make the necessary changes. However, changes will occur whether or not the government acts to get itself out of the water business. That is because government can only create hot air, not water itself.

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