You can “own” a glass of water, but only until you drink it and pee. Once you pee, you don’t own that water anymore.
—Mike Young,
water economist,
University of Adelaide,
Australia
WHEN YOU CHECK INTO one of the Starwood chain’s Four Points hotels in the United States and Canada (there are 109), you’ll find a couple bottles of water in your room. Nothing unusual about finding bottled water in a hotel room—it has become standard, as if the hotels didn’t have much faith in their own tap water, and the glasses and ice bucket they provide.1 What is unusual is that the bottled water is a gift from Four Points—no extra charge for the water, any more than there’s a charge for using the bottle of hand cream by the bathroom sink. Four Points puts a little tag around the neck of the bottles:
“It’s water. Of course it’s free.”
The water is a treat, and the tag is just the right touch of hospitality. Pause a moment and appreciate that Four Points has gotten the customer service right, and it has picked a way of presenting that service with an edge of irony, guaranteed to make its guests smile.
“It’s water. Of course it’s free.”
But why is the tag funny, exactly?
First, of course, it’s funny because in many hotels almost nothing these days is free—from the WiFi to the gym. And of course, bottled water itself is almost never free. But it’s really funny because everywhere else in life water is in fact free, or essentially free. Can you believe the nerve of all those other hotels, charging you for something as elemental as water?
Four Points underscores the idea on its Web site, where it has a page dedicated to the free bottled water it offers. Underneath the slogan “It’s water. Of course it’s free” is the line “What’s next? Paying for air?” The page is illustrated with a picture of a crystalline waterfall with a sign propped in the current reading “$3.99.”2
The silliness is self-evident. Who can put a price on water? Who would put a price on water?
In fact, we have even gotten used to paying for air—at least in one circumstance. Most gas stations now charge 50 cents to use the air hose to fill your tires; if you can find the water spigot at a gas station, though, you can use it without charge.
Four Points hotels is tapping something primal in our relationship to water—we don’t think it should cost us anything. The water bills most people in the developed world get each month from their local utility are nominal—in the United States, it’s $1 or $1.50 a day for always-on, never-fail, unlimited water service at home. At that rate, you have to flush the toilet a hundred times before you’ve spent a dollar on water. London’s water utility, Thames Water, provides clean water to one of seven people in the United Kingdom, and brags that its unmetered customers pay 88 pence per day (about US$1.30) and that its customers with water meters pay 73 pence (US$1.08).3
In some places, water service is almost literally free. Traverse City, Michigan, the charming tourist town along Lake Michigan’s eastern shore, charges $10 for the first 4,500 gallons of water per month. The next 25,400 gallons also cost $10—total. In Traverse City, you can use 30,000 gallons of water a month—1,000 gallons a day, enough to take twenty-five baths— and pay $20. Forget flushing the toilet—in Traverse City, you can fill a swimming pool for less than the price of a bottle of Merlot.
In most communities, in fact, the water bill isn’t for water at all—it is typically just for the cost of getting the water to us, the pumps, the electricity, the staff to monitor water pressure and water safety and to be on standby for water-main breaks. The water itself costs nothing.
But if you had to pick a single problem with water, if you had to pick a single reason that our relationship to water is so out of whack, it is captured in that perfectly turned slogan: “It’s water. Of course it’s free.”
Although we don’t often realize it, free isn’t that great. The lack of a price, on water or on any other resource, leads to all kinds of inequities and inefficiencies. Water may be the most vital substance in every aspect of human endeavor, but the economics of water is a mash-up of tradition, wishful thinking, and poor planning.
Las Vegas—where the water supply is in such desperate shape that home owners are paid $40,000 per acre to rip up their lawns and water police officers enforce the water rules—has among the lowest residential water rates in the country. A typical family’s bill there is $23.62 a month. In Atlanta, the same amount of water would cost you $50. In suburban Philadelphia, an area with ample rain, where water scarcity isn’t an issue at all, it would bring a bill of $80, three times the cost in Las Vegas.4
In Napoleon, Ohio, the Campbell Soup factory, the largest soup factory in the world, simply puts its huge water intakes into the Maumee River and takes all the water it needs. No charge.
Out in California’s Imperial Valley, the vast agricultural basin from which much of our carrots and lettuce and broccoli come, the water is imported from Lake Mead, on the Colorado River, delivered through a vast network of canals. The water is essential to farmers in the Imperial Valley, which, with average rainfall of three inches a year, qualifies as a desert. Every square foot of cultivated dirt in the Imperial Valley has to be irrigated with six feet of water. The Imperial Valley is the eleventh most productive agricultural county in the country; it is also the nation’s largest irrigation district.5
The water is essential, it is imported, it is sucked out of a river that is itself increasingly dehydrated. And the water is cheap. The price for farmers is a flat rate: $19 per acre-foot. That’s $19 for enough water to cover a one-acre field in one foot of water—$19 for 325,851 gallons of water.
The average home in the United States pays $3.24 for 1,000 gallons of water.
The average home in Las Vegas pays $2.71 for 1,000 gallons of water.
A farmer in the Imperial Valley pays six pennies for 1,000 gallons of water.
And here’s the really astonishing thing: The farmer in the Imperial Valley is using exactly the same water as the mother giving her daughter a bath in Las Vegas. The mother is just paying forty-five times as much as the farmer.
A carrot farmer in the Imperial Valley can get about thirty thousand pounds of carrots from an acre of land. Those carrots will use about $114 worth of water to grow. What that means in the grocery store is that the big, three-pound bag of carrots from California required an astonishing 217 gallons of water to grow—and that water cost 1 penny.6
We need carrots, of course—we need affordable carrots. We need farmers, and farmers need huge quantities of water. But why does the water that costs a California farmer $1 cost a Las Vegas homeowner $45?
Las Vegas is often held up as the perfect example of squandering water—not just all those lawns and golf courses, but the casinos with their fountains and canals, all at water rates less than Atlanta or New York City. Without the Colorado River, without Hoover Dam and Lake Mead, Las Vegas really would be a fantasy.
But the Imperial Valley, which depends as surely as Las Vegas on the same imported water, actually uses five times as much water as Las Vegas. And because Clark County, home to Las Vegas, has twelve times more land than the Imperial Valley, the farmer is using sixty times as much water per acre as the casino mogul.7
And why are we growing carrots in the Imperial Valley of California? Just one reason: cheap water available for the farmers. We could grow carrots somewhere else. We’ve decided to have farms in the Imperial Valley as surely as we’ve decided to have casinos in Las Vegas—by providing water to both places, from the very same overtapped Colorado River.
On the surface, Las Vegas somehow seems “unnatural,” a frivolous use of precious water; the farmland, on the other hand, seems smart, a judicious use of the precious water.
Both the Imperial Valley and Las Vegas have huge economic impacts. The water siphoned off to the Imperial Valley generates crops and cattle worth $1.5 billion a year. The water piped into Las Vegas generates gambling revenue alone—not accounting for all the related economic activity, from grocery stores to movie theaters—of $8.8 billion a year. In terms of bang for the bucket, the water we’re using in Las Vegas is having a geometrically larger impact than the water in the Imperial Valley—per gallon, it’s generating twenty-four times more economic activity.8
Once you start to unpack the economics of the way water is used in Las Vegas and in the Imperial Valley—what the water costs and what it helps produce—Las Vegas doesn’t look quite so sinful.
But the really important thing to understand is that Las Vegas casinos and Imperial Valley carrot fields both represent judgments—choices about economic development, water, and water economics. It’s just that we don’t typically acknowledge that they are choices, or that there is an economics of the water required to create both.
There is nothing wrong, in fact, with deciding that casinos can afford more expensive water than carrot farmers—as long as we realize that’s a decision we’ve made.
If we doubled the cost of water to the Imperial Valley farmers—which would surely occasion outrage—the amount of water in the three-pound bag of carrots would be just over two pennies. And the farmers would still be getting water at one-twentieth the cost to the casinos.
Here’s the real reason the economics of water is skewed: The prices the farmer and the casino owner pay for water aren’t prices in the way we think of them. Water prices aren’t fixed in the market—by matching people’s demand for water against its supply. The price of water for both farmers and Las Vegas is simply the cost to deliver the water to each, and nothing more.
So it’s not quite fair to use the term “inequities” for the odd price differentials in the world of water—it is rare to be able to compare such dramatically different water uses and water costs as growing carrots and running a roulette wheel within the same water system. But if the differentials are not necessarily water inequities, they are often water absurdities.
The dramatic price differences exist, in fact, for a quite noble reason: We want to make sure people get the water they need, so we’ve developed a practice of not charging at all for the water itself, we just charge for the water service, the delivery. And in a century of water that was abundant, safe, and free, we’ve haven’t had to ask how much water people used, how much water they should use, how efficient they should be with it—or what they should pay for that water, and what we should pay for their products as a result.
No less a chronicler of capitalism than Adam Smith captured the polarity of water’s value and its price in The Wealth of Nations, in a chapter called “Origin and Use of Money.” Smith compares water and diamonds:
The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called “value in use”; the other, “value in exchange.” The things which have the greatest value in use have frequently little or no value in exchange; and on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.9
Smith published The Wealth of Nations in 1776, when getting water required a lot more effort than it does today. So his insight is truer today than it was then. Gather the half-finished bottles of water from the cup holders and the floor of your minivan and see what you can get for them. Forget “value in exchange”—not even their original drinkers will finish off “old” bottled water. Their best use turns out to be filling the dog bowl.
The irony, of course, is that bottled water is the only water we seem happy to pay for in the first place.
NOT MANY PEOPLE DREAM of owning their own water utility, and Bob Eckelbarger certainly didn’t. The water utility in his tiny hometown of Emlenton, Pennsylvania, was such an antiquated, leaky mess, though, that with a stubborn sense of civic duty, he insisted on buying it in order to save it.
Eckelbarger was hired as the lone employee of the Emlenton Water Company when he was twenty-two years old. Two years later, tired of the unwillingness of the five elderly owners to invest their modest profits in updating the crumbling system, Eckelbarger told them he was either quitting or buying the company.
And so, in 1962, Eckelbarger and his wife, Beverly, came to own their own water utility—the water treatment plant, the storage tank, the pumps, the pipes in the ground, and the water meters. They ran the water company like they would have run a small-town doctor’s practice: always on call. They had four hundred customers—all the homes and businesses in Emlenton, serving about twelve hundred people. Bob did the pump and pipe work. Bev did the bills.
Bob was a young man when they bought Emlenton Water Company, and he was nearing retirement age when they sold it thirty-six years later. “Sixteen hours was the longest we ever had an outage,” he says. “We never had a customer out of water overnight.”
When they took over in 1962, the typical customer’s monthly bill was $2.40. “We had total revenue of $960 a month,” says Eckelbarger.
When he bought the company, Eckelbarger got all the records, going back to its 1876 founding, so he knew that in 1912, the year the little utility first installed a water filtration plant, the typical bill was $1.97 a month.
In the half-century between 1912 and 1962, the price of water service in Emlenton had gone up 43 cents, not even a penny a year. In fact, back in 1912, $1.97 was a substantial sum. As much as such comparisons are meaningful, $1.97 in 1912 is equivalent to more than $43 now—the water bill from 1912 would be 25 percent higher than the typical water bill today.
It was a typhoid outbreak in Emlenton in 1912 traced to the water supply that motivated construction of the filtration plant. For water that didn’t make you sick, $1.97 a month might have seemed a bargain.
The filtration plant that Eckelbarger got with the company in 1962 “was pretty much like it was when they built the plant in 1912.” The town’s pipes were leaking 80 percent of the clean water being pumped, and the pumps, Eckelbarger says, “were not steam pumps, but just one generation beyond steam, belts and jackshafts and pulleys and so on.”
In the first few years, just to raise the money to buy new pumps and pipes, Eckelbarger persuaded his parents to mortgage their farm three times.
He also went to the Pennsylvania Public Utilities Commission for approval for a rate increase. “I wrote a letter to the PUC in Harrisburg,” says Eckelbarger. “I had some numbers, our expenses, our income. And I told them we needed more money. After we wrote the letter, they said they would require us to meet with them, so I packed stuff in a briefcase and I went down there”—220 miles east—“and I sat and talked to the man who was head of the water rates for the state. I showed him what we had done by way of improvements, and what we had to do.
“I was asking for $3.20 a month”—80 cents more. “Well, by the time he looked through all the numbers, he said, ‘You need a nickel more. You won’t make it at $3.20.’ He approved a rate higher than we asked for.”
And so in 1963, the rate for water in Emlenton went, in a single leap, from $2.40 a month to $3.25 a month, a 35 percent increase.
Even at $3.25 a month, the water was still just half the relative cost it had been fifty years earlier. In 1963, it was also comparatively cheap. Americans in those days were spending $7.50 a month on alcohol. Any family with a telephone in Emlenton in 1963 was paying $5.65 per month. So the 80 cents was a big one-time jump, but $3.25 a month for water wasn’t a burden, it was a bargain.10
That wasn’t how the people of Emlenton received it, though. “I nearly started a revolution,” says Eckelbarger. “People weren’t very happy with me.”
Even in 1963, even in a small town with its own water company, the treatment plant right downtown on River Street, two things were true: People didn’t know the condition of their water system or the money required to sustain it, and any increase in their monthly water bill was met with annoyance, if not resentment.
Recently, water rates in Indianapolis, which had been frozen for five years, needed to be raised on an emergency basis in the middle of the recession because of rising interest rates on the utility’s debt. During months of hearings and debate in 2009 and 2010, residents expressed their unhappiness.
“We paid our bills in good faith and get nothing for it,” said one woman, apparently discounting the actual water in her anger at the proposed 17.5 percent rate increase.
“We already pay hellacious water rates,” said another woman, who owned two apartment buildings.
Indianapolis’s “hellacious” water rates, before the increase that was ultimately approved, were $25.50 for a home using seven thousand gallons a month. In the end, Indiana’s regulators approved a 12 percent increase—$3 a month, bringing Indianapolis’s rate to $28.50, still 20 percent below the national average.11
Out in El Dorado County, California, in 2010, the water district was proposing to raise water rates for the first time in ten years—a hike of 35 percent, from $23.75 to $32.07 a month, on average, for a stunning ten thousand gallons of water per home. The El Dorado Irrigation District has 42,000 routine water customers; it received 4,500 letters protesting the rate increase.
Over several months, the water district decided to cut the rate increase to 18 percent—a rise of about $4.25 a month instead of $8.30. The president of El Dorado’s board wrote a piece for the Sacramento Bee, explaining that he and his colleagues were simply trying to make up for years of neglect of the district’s pipes and pump stations by past boards, but apologized for “the upheaval caused by the proposed rate increases.”12
In Washington, DC, in February 2010, the city council approved new water rates that would help dramatically accelerate the replacement of the city’s water mains. The 17 percent rate increase will allow the nation’s capital to replace its water mains over a hundred years. At the previous rates, replacing the water mains was scheduled to take three hundred years.13
The attitude about water and money has a universality that crosses cultures and crises. In Australia, in the midst of a grinding, relentless, potentially permanent shift in rainfall that left the country without enough water to function, elected officials lost their jobs just for talking about raising water prices, or because they did raise them.
Jim Gill, who took Perth and its Water Corporation through the water crisis as CEO, says, “A water utility like ours produces water so cheaply, people expect us to continue that. We are just too good at what we do.”
His successor as CEO of Water Corporation, Sue Murphy, articulates the practice of water managers worldwide: “We don’t charge for the water at all. We charge for the pumping, for the storage, for the convenience.” And like her colleagues, she shares the view that water is what’s called in economic terms “price inelastic”: If you change the price, you won’t change the behavior of people using the water.
“If you change the cost of water by a factor of ten,” says Murphy, whose customers have water bills similar to U.S. bills, about $40 a month—“well, the rich people would still have gardens, and the poor people would live in dust bowls.”
No one, of course, is talking about changing water prices by even a factor of two—and well-off people would, in fact, change their behavior if the routine water bill went from $35 a month to $350 a month.
It is, in fact, people from outside the water utility fraternity who have begun to question the idea that the price of water doesn’t matter anyway, so you might as well keep it cheap. Robyn McLeod, commissioner for water security for South Australia, the vast state that includes part of the shriveled Murray-Darling Basin, started life as a history teacher, and came to water through jobs involving the environment and the private sector. Observing the conflict in Australia over scarce water between cities and farmers, between commercial plant growers and suburbanites with brown lawns, she says, “Water is about the economy. And water is far too cheap.”
People have no incentive, in other words, to pay the slightest attention to what water they use or how they use it—because whether they are farmers flood-irrigating fields or wealthy people filling swimming pools, the price is zero, or close to it, so it doesn’t matter how much they use or what the productivity of the water itself is.
The culture of universally cheap water also means that water systems worldwide rarely charge enough to sustain themselves—whether in Delhi or Washington, DC. They perform worse and worse over time, which not only erodes confidence in the system but also creates resistance to the very price hikes that would help solve the problem.
That, in fact, may be the ultimate irony: Keeping water at, or near, free eventually ends up depriving people of the water that the free water is supposed to make available to them. Free water means there isn’t enough revenue to keep the water flowing.
The very organizations we expect to do a good job of providing water to everyone—including people of limited means—end up starved of resources, whether in the developed world or the developing world.
Free water has a cost, and not a trivial cost.
WHY ARE WE SO STUBBORN about the cost of water coming out of our taps?
Well, as a species, as a culture, we are used to finding the water we need and using it. Adam Smith wrote about the gap between the value of water and its price in 1776. But in his footnotes, Adam Smith cites Plato, in his dialogue “Euthydemus,” in which Plato gives Socrates this line: “For only what is rare is valuable; and ‘water,’ which, as Pindar says, is the ‘best of all things,’ is also the cheapest.” As an epigrammatic summation of water, Plato’s is hard to beat: the very best of all things, and the cheapest. Plato wrote “Euthydemus” 380 years before the birth of Christ (and 2,156 years before Smith wrote The Wealth of Nations).14
But it’s not just that we’re in the habit of free water. We certainly got into the habit of free TV—a much shorter habit than free water—and now 90 percent of U.S. homes pay for TV, either cable TV or satellite TV.15
No, our attitude about water and money is more fundamental. It’s not so much that we’re price-sensitive—it’s almost the inverse. We think pricing water would be wrong. Water is one of the very few things that we don’t think should be distributed based on your ability to pay. If you put a price on water, by implication, there will be someone who can’t afford the price, and so won’t get water. Clearly, that’s inhuman—in Indianapolis or India.
Actually there’s nothing unethical about managing water demand with price, and there’s nothing immoral about allowing the market to help allocate water—just so long as we solve what might be called the first-glass problem, so long as everyone has access to water for their basic needs at the lowest possible cost. Beyond that, a little application of the market might help us use water more wisely, more equitably, keep water cleaner, and leave some for Nature herself.
First, let’s clear up a couple things that may be puzzling or contradictory about water and money.
Although the general view in the world of water utilities is that water is “price inelastic”—that people don’t change their water use based on how much it costs—that’s a piece of accepted wisdom that simply isn’t true, even in the confines of reasonable water charges.16 If water coming into our homes cost twice what it costs now, if the monthly water bill were suddenly $60 or $70 instead of $30 or $40, even that would cause people to be more careful with their tooth-brushing and, especially, their lawn watering. If people were receiving water bills of $80 or $100 a month—right where the typical cell phone bill is—they’d start thinking about how full the dishwasher and the clothes washer were before running them, and even whether to buy the new models of those appliances that use much less water.
The problem isn’t that water consumption is price inelastic, it’s that water bills are so low, it doesn’t pay to be sensitive to the price. Water bills may rise by large percentages, but a 30 percent increase in a bill that’s $25 means $7.50 a month. People don’t bother remaking their lives to save 25 cents a day. We’re not behaving with disregard to price, we’re doing just the opposite: instinctively making the judgment that the effort required to change water consumption won’t save us enough to be worth it.
Large consumers of water—factories, farmers—are very price-sensitive. That, in fact, is the point: If water is almost free—$19 for enough to cover an acre of land one foot deep, as in the Imperial Valley—or if it is literally free—as for Campbell Soup in Napoleon, Ohio—there’s no incentive to spend money on expensive, sophisticated systems that use less water but get the same crop or soup production. If the water gets more expensive, then it pays to retrofit your irrigation system, or your soup-cooking system, with equipment that costs money to install, but reduces the amount of water you use.
The water bill that the typical home or business gets simply covers the costs of delivering the water. It costs a huge amount of money to build and maintain reservoirs, pipes, pumps, treatment plants, monitoring systems; to put staff in trucks, in water plants, in testing labs. And water is heavy stuff. Moving it, pumping it through treatment membranes and filters in plants, maintaining water pressure in water mains—all requires huge quantities of energy. Water utilities use 3 percent of the electricity generated in the United States, equal to the output of 162 power plants, making water utilities the largest single industrial users of electricity in the country. In California, 20 percent of the electricity in the state is used to move or treat water. When the cost of gas goes from $2 a gallon to $3.50 a gallon, the cost of moving your water goes up as well.17 But there is no charge for the water itself—the water is “free” to the customers, as it is typically free to the utilities.
Prices vary wildly for water, in the United States and around the world, because while the water itself is free, the cost of acquiring it and delivering it varies wildly. Traverse City, Michigan, which will happily deliver you a thousand gallons of water a day for $20 a month, sits on the shores of Lake Michigan, one of the largest bodies of clean, fresh water in the world. The city doesn’t have to do much work to get the water it is distributing to its residents’ faucets.
Water is a good deal harder to come by in Santa Fe, New Mexico, which also has among the highest rates for water customers in the country. A family of four using just two hundred gallons of water a day would have a bill of more than $40 a month.
In Las Vegas, or the Imperial Valley, the “price” of the water reflects the cost of supplying the water, but it doesn’t reflect the demand for it. Traverse City could supply water to a lot more people without raising the price much. Las Vegas paid people to take out their lawns to avoid the cost of having to find some new supply of water to keep those lawns—and future lawns—green.
Price differences have to do with the age of the local infrastructure, variations in the cost of energy and labor, and even with the sophistication of utility managers in handling issues like debt and politics.
Some water utilities have begun to price water use in tiers—it’s not just that you pay more if you use more, but there are steps in the prices, and when you jump up above a basic level of consumption, the price per thousand gallons jumps as well. That’s a modest effort to “price” water in relationship to demand—or more precisely, to price it according to how much it will cost to find more water. Bigger quantities of water require more energy and more infrastructure to deliver. And it is much more expensive to acquire the next gallon of water supply, and to deliver it, than to distribute the water a utility already has access to. It’s expensive to plan and build new dams, new treatment plants, new wells, new canals, or, as in the case of Australia, to build new factories that turn seawater into drinking water.
To be effective, such “block” pricing has to be dramatic. In Santa Fe, the city charges $4.43 per thousand gallons, up to seven thousand gallons a month, a reasonable supply for a family of four. For every thousand gallons you use over seven thousand, the rate jumps to $15.84 per thousand gallons, almost four times the base price.18
FOR A WATER ECONOMIST, Mike Young lives every day with the absurdly perfect example of water and price. Young, one of the most thoughtful and influential voices in shaping Australia’s water policy, is a professor of water economics at the University of Adelaide, and director of its Environment Institute.
He lives in a charming neighborhood of quiet, tree-shaded streets with cafés and well-kept yards, just north of downtown Adelaide.
In Young’s apartment building, there are no individual water meters, just a flat fee for water. The water economist could turn on a faucet on June 1 and let it run until July 1, and not pay a cent extra.
And Adelaide, remember, is the capital of South Australia—the driest capital city, in the driest state, on the driest continent in the world.
As Young puts it, “The marginal cost of running the water twenty-four hours a day, or running it for just a drop, is the same: zero dollars. There is no price signal at all.”
Mike Young, fifty-seven, is an unusual economist in a number of ways. First, of course, he’s a water economist, which makes him something of a pioneer. He’s also an economist who puts the environment first in line for water before even human water needs, and who has a sharp economic rationale to justify putting nature first. And Young is an admirer of the Medicis of Renaissance Florence, but not, like most of us, because of their art patronage, but because the Medicis invented double-entry bookkeeping— debits and credits.
“If you run a really good water accounting system,” says Young, using a phrase rarely heard in either the world of accounting or the world of water, “if you give someone more water, you have to give someone less water. Governments have always been keen to find a way to give more water to somebody, but they forgot to work out who is going to have less water.”
Coming out of a century of unthinking water abundance, the situation of Young’s own apartment building, where no one can even measure the residents’ use, let alone price it rationally, is surprisingly common, a symbol of water so abundant we didn’t need economics to help manage it.
The largest apartment complex in New York City is Peter Cooper Village and Stuyvesant Town, a parklike urban enclave on eighty acres along Manhattan’s East River. Peter Cooper Village and Stuyvesant Town together are a single development that encompasses fifty-six apartment buildings, spanning nine New York City blocks, with 11,232 apartment units and 25,000 residents. And no water meters. Like Mike Young, on the other side of the globe, residents pay a flat fee for utilities, and they can use as much or as little water as they want. Not only no charge—no one even knows how much water any apartment is using.
In London, the situation is even more striking. Just 22 percent of the customers served by the water utility, Thames Water, even have water meters. Three-quarters of Londoners can use as much water as they want for a flat rate. You can’t effectively charge people for the water they use if you can’t measure the amount they use, and you can’t give those people a sustainable water system if you can’t charge what it costs to secure and deliver their water. Thames Water’s current goal: to have half the homes in London on water meters by 2015.19
What the century-long golden age of water has done, says Young, is create an incredibly sophisticated system for gathering water and distributing it—an engineering system. But the engineering system assumes one thing: plenty of water. What we don’t have—in Australia, in the United States, in most of the world—is an equally sophisticated system for figuring out how to allocate the water, particularly when there isn’t enough.
“I think petroleum is better managed than water,” says Young. “With all its ugliness, at least it works.”
That’s where economics comes in. Economics is a way of managing scarcity, and market economics—pricing—is a way of letting the people who want something that’s scarce participate in deciding who gets it. We get to vote with our money on how important something is to us—whether we’re consumers lining up for the latest iPhone, or real estate developers lining up for a block of midtown Manhattan land, or drivers balancing the price of July gasoline against the drive to the beach.
Young is also refreshingly realistic. Ask what seems a really basic question about water economics—Who owns water?—and he says, “Nobody does. You can ‘own’ a glass of water, but only until you drink it and pee. Once you pee, you don’t own that water anymore.
“The debate over ownership of water is misinformed. The question is, Who is allocated the opportunity to use the water?”
Young’s laboratory for thinking through his ideas about how to allocate water—how to decide who gets it—is Australia’s Murray River, a sadly perfect case study of the need for an allocation system to match the engineering system. Australia’s rainfall shifted so dramatically in the last decade that from 2006 through 2010, the Murray literally ceased to flow. The result has been a painful mess—economically, politically, socially.
The lack of water in the Murray River, where both farmers and communities are desperate for their share, for their entitlement, illustrates one of Young’s principles: A water market—trading in water, paying for scarce water—is often not a bad solution, or an immoral solution, but just the opposite. A market can be the best, smartest, quickest, even fairest, way to distribute water, especially in the middle of a crisis.
“If you’re running an irrigation system as big as the river Murray,” says Young, “and you have a very dry winter, and you can only give out 30 percent of the water you normally give out instead of 100 percent—how do you organize the political process in a way to have the decisions sorted out in six weeks, before the growing season ends?” No government bureaucracy moves that swiftly, with results that are also effective and widely seen to be fair. But farmers—who know their own situation, their own finances, the state of their land, and the market for their crops—can decide quickly how much water they might buy, or how much they might sell, depending on the price.
A market in water only works, though, if a community, a region, a watershed, has done two things first: set up the water allocation system in advance of the crisis, and set up the water system in a way that acknowledges that water is a different kind of resource. It’s not a new iPhone or a block of valuable city land, precisely because of the first-glass issues.
Some water needs to be secure and guaranteed for everyone, at the lowest possible cost, outside the market system, and some water needs to be unleashed in such a way that the market helps distribute and manage it much more effectively than it does now.
To explain, Young does something that we almost never do with our water systems. Sitting at a café table, he moves aside the coffee cups, takes a clean sheet of paper, and starts to sketch out a water system from scratch.
It’s a water system in the shape of, well, basically a water glass.20
At the bottom of the glass, the first layer of water is for the environment. It’s the water necessary to keep the natural water system itself—the river, the aquifer—alive, stable, and healthy.
Young, who is more economist than poet at heart, calls this “maintenance water.” “That’s the water necessary to maintain the environment, to maintain the system.”
If that seems like a forehead-smackingly obvious way to start, well, in truth it’s a radical concept. Around the world there are rivers that are so overused and so stressed by climate change that they often no longer flow to their own mouths—starting, in fact, with the Murray River, which needs a dam to hold back the sea, and including the Colorado River, the Rio Grande, and the merged Tigris and Euphrates rivers in Iraq, the Shatt al Arab, which no longer holds back the Persian Gulf, so that salt water is now flushed a hundred miles inland.21
“Without water for the system,” says Young, “there is no water for anyone.” That is, a good system starts out safeguarding the very renewable resource you’re trying to allocate.
The next layer of water in the glass has almost the same standing as the “maintenance” layer—it’s what Young calls “critical human needs.” That’s just what you’d guess: “Water to flush toilets, to take a shower, drinking water and water needed by the city and by industries, all operating on very tight water-use restrictions.”
The “critical human needs” layer of water isn’t water to run the hose while washing your car, or take a twenty-minute shower, or run decorative fountains in the plaza of your shopping center. It’s the basic water necessary to keep people and the economy alive—and it’s priced much the way water today is, at cost.
Together, the environmental and the critical human needs might take 20 percent or so of the water from a system—although that percentage depends on the system, how it renews itself, and who depends on it. That’s the solution to the first-glass problem. The first water goes to sustain the ecosystem we all depend on, and to sustain us.
Those first two layers of water in the glass are both simple and self-evident, but in practice, in the way we’ve come to manage water around the world, they are rarely specified and protected with such clarity.
Of course, the volume required for each will not be easy to discover, and certainly won’t be immediately easy to agree on. Upstream users will have every reason to argue that a river needs minimal flows, to keep more water for themselves; urban users will have every reason to argue that decorative outdoor landscaping is a vital economic interest that needs to be protected and watered. Indeed, what qualifies as “critical human needs” beyond sanitation and drinking water will require debate and setting priorities—hospitals are a critical human need, and water parks are not, but what about the auto plant, the steel mill, the plant nursery?
Bringing this kind of economic planning and principles to water will not take the politics out of water, any more than sound economic principles take the politics out of zoning decisions or tax policy. But agreeing on those two numbers in advance—regardless of how fractious the conversation necessary—gives everyone a measure of security, of calm, especially in a crisis.
Above the environmental and critical human needs layers of water, there’s a fat layer of water that Young calls the “sharing” layer. This is all the rest of the water that powers our economy beyond the “critical human needs” allocation. It is everything from swimming pools and factories and luxury hotels to flood-irrigated rice fields. Young’s “sharing regime” is an effort to bring clarity, order, and market pricing to bear on the big bulge of water that, in flush times, has been used with wasteful disregard, and that in times of scarcity, is the source of bitter dispute.
The shared water is divided into two categories—“high security” water and “low security,” or “general security,” water.
The idea is almost transparently simple: People who have high-security water get their water first, and they pay a premium for that guarantee. People who have general-security water pay much less, but they get their water second.
You pay the price you are willing to in order to secure the supply you need. If you’re running a microchip factory or a vineyard of expensive, drought-sensitive grapevines, you might think it’s worth it to invest in high-security water. If you’re running a rice farm—water intensive, but not perennial, and perhaps not profitable enough to justify expensive water—you buy low-security water. If you’re running a city, on top of your critical human needs allocation, you might buy both general-security water and high-security water, to go with whatever other sources you might have—your own wells, reservoirs, or desalination plants.
“If you’ve got high-security water and low-security water, everybody can determine how much risk they want to take,” says Young, “user by user.” They can determine how much risk they can afford to take— economically.
What percentage of the total available water is high-security and what percentage is general-security—as with the slices that go to the environment and critical human needs—depends on the dynamics of each water system, how much water is available, who uses it, how variable the flows are, and how a community is growing economically. The point is to understand the water system and to set the rules for how to use it in advance.
In Young’s ideal scheme, the high-security pool of water is 30 percent of the ten-year moving average of available water. If a river typically has an annual flow of 10,000 gigaliters (half the historic flow of the Murray River), then 3,000 gigaliters—30 percent—would be designated high-security. That leaves 50 percent as general-security water (20 percent has gone to the “first glass” allocation).
If the river, in this example, does flow at 10,000 gigaliters in a particular year, you take off 20 percent—2,000 gigaliters—for the environment and the critical human needs, and 3,000 gigaliters for the high-security users, and the remaining 5,000 gigaliters goes to the low-security users.
But if there is a dry period, and the river only flows at, say, half its normal rate—if there’s a year where it’s just 5,000 gigaliters—the low-security users get no water. The high-security users get all their water first.
And even the high-security users have some risk: If the flow falls even lower, the high-security users only get what’s left, on a proportional basis, after the environment gets its water and the critical human needs get their water.
Young wants the rules set up in advance. Again, it seems obvious, but most watersheds—the interlocking and interdependent systems of sources of water, reservoirs, lakes, rivers, and the users of water, cities, industries, and farms—exist in a kind of patchwork quilt of agreements, jurisdictions, assumptions, overlapping law, and practice.
“The beauty of this system,” says Young, “is that you don’t have to know in advance what’s going to happen with the future of water. Everybody knows the water they’re going to get”—or, if there’s an actual trading market each year, the water they can buy—“and they can focus on, What’s the best outcome I can get with that water?”
People know what proportion of water they’re going to get each year, they know their own circumstances, and instead of fighting, they can make decisions.
For those who might find the layers-of-water-in-the-glass explanation a little too abstract, Young has a metaphor that seems like a wild leap of imagination, but turns out to be very useful.
“A really good comparison,” he says, “is the way corporations are defined. A corporation, a company, is a legal artifact.” That is, corporations aren’t in any sense natural—we invented them. “Corporations have really exciting features, which apply to water as well.”
“Exciting” may be an overstatement—but interesting, certainly.
“If you own a corporation,” Young says, “you have a ‘unit share’ in it— the stock. That’s each owner’s share of an uncertain future.
“The rules about how the corporation operates are all specified in advance.
“If there’s a profit, you get paid according to your share of ownership.
“If there’s no profit, then there’s no dividend, and even though you own stock, you get nothing that year.
“The law around corporations is designed so that they must reveal when something is wrong—with tremendous drama sometimes, but also clearly, transparently.
“Corporations provide the opportunity to take risk.
“And the governance structure is functional. The people who run the company day-to-day aren’t the shareholders, they are the managers. They need a structure that allows them to get quick decisions, decisions as fast as the world is changing.
“Similarly, if we’re running out of water this week, we need decisions this week, not in six months, after everyone with a ‘stake’ is consulted.”
If the comparison between corporate management and water management isn’t, in fact, exciting, it is in fact quite brilliant.
Corporate law doesn’t care what you’re doing with your company— opening a convenience store or writing software—and the rules of the game are set in advance, so you start a company, you go to work for a company, you buy shares in a company, with clarity about the rules and the consequences. You decide what risk you’re comfortable with.
In the water scheme that Young can draw on a single sheet of paper, it likewise doesn’t matter what you’re doing with the water, and the rules are specified in advance. If you’re in a highly water-sensitive business, you buy high-security water, and shoulder the cost. In most years, the low-security users will also get water, but not in every year.
It’s like the difference between preferred shares of stock and common stock.
And like publicly traded corporations, the water system would require openness—about the state of the water, the volume, the availability, the management.
And in a real crisis, the rules are well settled about water for the system itself, and water for the basics of human civilization.
Young thinks this kind of system—which is relatively simple to describe but would require a fair amount of negotiating and politicking to implement in any given community—has something else in common with corporations: It is a robust system. Robust, in his terms, is something very specific: “A robust system for water can evolve and change as the conditions evolve and change.”
If the climate changes, and the water that’s available changes, the buckets of water adapt. If a factory owner, or a farmer, figures out how to improve water productivity, he can sell some of his water to someone who needs it more. The very price of the water itself encourages efficiency and investment—a city facing increasing population may raise rates, or require low-flow plumbing fixtures and appliances, to avoid having to either buy more water or build new treatment plants.
We don’t often think of water itself changing, or of our relationship to water changing. But it does change, just the way our relationship to electricity or transportation changes.
“What looks like the right way to use water this year,” says Mike Young, “won’t look like the right way to use water ten years from now. A robust water system continues to work in harmony with itself, with the environmental conditions, with what people need.
“With a robust water system, you look back and you don’t regret the past, and you look forward and you don’t fear the future.”
Most of us, in fact, do not live in a water system where we can look back without regret or look to the future without fear.
There are two final twists to Young’s model framework.
First, Young sets aside a slice of both the low-security pool and the high-security pool of water for the environment—for the river, the mangroves, the marshes, the lakes, the aquifers—on top of the initial environmental allocation. His point is that the environment has typically been a victim of water neglect and water starvation, when times are flush and when there is no water at all. Humans always put themselves first.
“This way, if anybody gets water, the environment gets water too. That protects the environment from the politics of water.”
A second twist has to do with the actual market for water. Water is a funny commodity—it’s not traded the way copper is traded, or oil, coffee or wheat, or even something intangible like carbon credits. It’s not traded, because in most places, you can’t move the actual water and deliver it the way you can the wheat or the carbon credits. It’s nice that someone in Orlando has a lot of water, but even if someone in a drought in North Carolina is willing to spend money for that water, there’s simply no way of getting the water itself from Orlando to North Carolina.
Water is rarely priced, and rarely priced smartly, and some of that has to do with our attitude about it—but some of it also has to do with the character of water itself. Water and water systems are fundamentally different because the water itself is so independent. Even if you have a willing seller and a willing buyer, the water can be utterly unwilling to be traded.
But there are watersheds where water could be traded. The basic criterion is very simple: If I sell you my water, you have to be able to get the very water that I would otherwise use. A river or an aquifer is a good example—one farmer or factory or community doesn’t take the water it is entitled to, and the buyer of the water takes exactly that amount of water.
Indeed, the Murray River has just such a nascent water-trading market—which has helped, even with the tiny allocations in the Big Dry, as some farmers sell what little water they have and others buy enough water to keep some crops in the ground.
What’s happened in Australia is a reminder of how spoiled we’ve become. In the developed world, water has been so readily available, we’ve completely lost sight of the fact that it is a vital economic resource—one, in fact, that we have no well-constructed economic system to give out. As Young puts it, “Allocating the opportunities to use water gives us the quality of life we have.”
SOMETIMES THE ECONOMICS OF WATER is as clear as water itself.
Before the start of the 2009–2010 NBA basketball season, the Cleveland Cavaliers quietly removed all eighteen water fountains from their home stadium, the Quicken Loans Arena in Cleveland, known as the Q, which seats 20,500 people.
Where the fountains had been, the Q eventually taped up paper signs that said “For your convenience, complimentary cups of water are available at all concession stands throughout the Q.”
For more than three months, through dozens of events and hundreds of thousands of visitors, there were no water fountains in the Q. If you wanted a drink of water, you had to stand in line at the concession stand, and when it was your turn, you could receive a free nine-ounce cup of water or you could buy a bottle of chilled Aquafina for $4.
On February 8, 2010, Cleveland’s daily newspaper, the Plain Dealer, ran a page-one story about the then five-month-old removal of the water fountains headlined “At the Q, No More H2O, at Least not From Fountains.”
Team spokesman Tad Carper said the Cavaliers had removed the water fountains because they posed a risk of spreading germs and illness during the winter flu season, and he told the paper the Cavaliers had followed the recommendations of the NBA and the International Association of Assembly Managers, the trade association for big arenas.
The Plain Dealer reporter called both the NBA and the IAAM, and neither had ever recommended removing water fountains to fight the spread of disease. Carper then said the Cavaliers had simply wanted “to provide the healthiest environment for our fans.”
As to the possibility that the Cavs and the Q were trying to drive bottled water and food sales by sending thirsty fans to the concession stands, Carper said, “That’s simply absurd. That never crossed our minds.”
Cleveland city councilman Anthony Brancatelli wasn’t buying it. “It’s clearly an opportunity to sell more drinks,” he said. “If there were health reasons, we’d be taking [water] fountains out of every school and institution.”
Two days later, the Plain Dealer raised an issue it hadn’t in the first story: The Cavaliers’ removal of the water fountains was illegal on at least two counts—the arena hadn’t gotten a permit to remove the water fountains, and Ohio’s building code requires an arena of the Q’s size and age to have eighteen water fountains.
Cavaliers spokesman Carper backpedaled, telling the paper the Cavaliers were considering reinstalling the fountains now that flu season had peaked.
The day the second story was published, the Cavaliers posted an announcement on the NBA Web site saying that the removal of the water fountains was always intended to be “temporary”—something Carper hadn’t previously mentioned—and promising that the fountains would be reinstalled “as soon as possible.” In an attempt to mollify the anger caused by the water fountain removal, the Cavaliers set up temporary water stations around the arena for the games scheduled before new water fountains were installed, so thirsty fans wouldn’t have to stand in line at the concession stand.
During the time the fountains were absent from the Q, the Cavaliers alone hosted 29 sold-out games at the arena. If just 10 percent of fans bought a bottle of water they wouldn’t have otherwise, the Cavaliers sold sixty thousand extra bottles of water, bringing in nearly $10,000 in additional concession sales per game.22
One of the few real gifts the bottled-water industry has given us, in fact, is some important insight into the economics of water. Two things are clear: We are willing to pay for water, even to pay what amount to ridiculous sums, more than gasoline costs, and we intuitively understand that different waters, in different settings, have different values and therefore different prices.
And, of course, as the Cleveland Cavaliers discovered, like hundreds of city councils before them, we also think that basic gulp of water should be free.
Why, after ten thousand years of organized human civilization, do we suddenly need an economics of water?
As we’ve said, the last hundred years of human society have been an unusual period with regard to people and water: If you lived in the developed world, not having to think at all about where your water would come from was a whole new human experience.
But that flush, unthinking period is over. Many areas that have never experienced water scarcity are being hit with dramatic reductions in natural water availability. Growth in population, millions of people moving into the middle class around the world, and the spreading of factories to developing countries—those three trends put additional demands on water supplies. And population growth carries a dramatic hidden water tax— remember that even in the developed world, where our daily water use is indulgent, we require far more water to make our electricity and our food than we use for drinking and sanitation. The typical American uses about a hundred gallons of real water a day; the food the typical American consumes requires five hundred gallons a day to produce.23 As more people rise into the middle class, their unseen, but very real, water needs increase in the same way.
A second problem is that the hundred-year golden age of water has caused us to think that water delivery is a kind of natural phenomenon— you turn on the faucet, the water comes out. It’s like opening a window and having a cool breeze come in. Except, of course, it’s not. Vast national water circulation systems that were installed a century ago are crumbling and need to be upgraded. The cost to refurbish them is modest compared with their value, it’s modest even compared with what we spend on bottled water, but it’s still tens of billions of dollars a year for many years. An explicit, well-thought-out economics of water would help us with both problems.
One of the most striking changes in our relationship to water in the next hundred years will likely be that we will start using the right water for the right purpose. We won’t use purified drinking water to flush our toilets and water our lawns. We won’t hesitate to tap the most readily available source of water for most cities—our own wastewater. And that layering of water uses dovetails perfectly with Mike Young’s economic framework for water: different waters, different prices.
The most basic ration of water for all of us will be low-price. Beyond that, there will be tiers of water with all kinds of qualities—the cleanliness of the water, the quantity available, the reliability or security of the supply in times of scarcity—and those qualities will all come with prices.
The result should be a richer appreciation of the value, the uses, and the costs of water. It should also mean a water system that is more transparent, that makes more sense, and that generates the money necessary to sustain and improve itself.
None of that flies in the face of the idea of water as a basic human right—pricing water doesn’t require further squeezing people in developing nations who don’t have good water access now. In fact, poor people around the world pay a terrible daily price for their water today, a far higher price than the $34 a month our water costs us. That price is the billions of people in the world’s developing nations who give up education, or the possibility of employment, just to stand in line for hours a week, or walk for hours a day, to get their water; it’s poor people whose children are dying at a rate of a hundred kids an hour from diseases they catch from tainted water.
Indeed, as the residents of the Delhi slum Rangpuri Pahadi remind us, poor people, too, are willing to pay for water when it makes economic sense. Rangpuri Pahadi is the Delhi neighborhood that organized its own miniature water utility, installing storage tanks, laying water pipes, and charging each family that connects a modest monthly fee that pays the costs of the system. Those families, in fact, are much closer to their water supply than the rest of us. They can see the pipes along the side of the dirt paths, they know how their monthly cost relates to the staff and electricity costs, they remember what it was like just six or seven years ago, when they had to stand in line for water of lesser quality. That water was “free” only in the most pinched sense; in fact, water you have to walk for, water you have to stand in line for, is the opposite of free—it’s a kind of water bondage that desiccates the whole rest of your life.
An economics of water should be liberating—both for people and for water itself. It doesn’t mean turning water supplies or water infrastructure over to remote, self-interested, profit-driven corporations. It means putting not just a price, but a value, on the most important substance in our daily lives, and putting a price, and a value, on the work necessary to make sure that substance is available in the quantity and quality that sustains the kind of communities we want to have.
Price is incredibly potent. Indeed, if you had to pick one thing to fix about water, one thing that would help you fix everything else— scarcity, unequal distribution, misuse, waste, skewed priorities, resistance to reuse, shortsighted exploitation of natural water resources—that one thing is price. The right price changes how we see everything else about water.
Mike Young thinks this moment in our relationship with water is as rich with energy, invention, and possibility as the water breakthroughs of a hundred years ago. “I think we’re at an exciting threshold,” he says. “In twenty or thirty or forty years, water management won’t be the exciting, intellectually challenging stuff it is now. We’ll have water largely sorted out, in both the developed and the undeveloped world. We’ll be using water to be prosperous, and water management will be autonomous. And boring.”
A century ago, our forefathers had to create a vast engineering system for delivering water, and then get it funded and constructed. Our task is far easier. All we have to do is change how we value that system and the water it delivers. All we have to change is how we think about water, so that a hundred years from now, a bottle of water with a tag that says “It’s water. Of course it’s free,” won’t be charming, it will be absurd.