The Future of Water
I’m not the smartest guy in the room, but, it feels like we’ve been here before. In the early 2000s, the state of California experienced an electricity crisis: skyrocketing electricity prices, rolling blackouts, and bankruptcies of large electricity distributors. Although there was adequate energy capacity in the state, market manipulation - mostly by Enron - created artificial electricity shortages leading to increased electricity prices. To Enron, it was a game of numbers; to the people in California, it was the devastating manipulation of essential commodities. History is repeating itself.
Amid the year of eye-bulging headlines, Wall Street has quietly introduced a new type of futures contract: water.
On December 7th, 2020 public trading began on futures contracts for water. They are listed under the ticker NQH2O on the Chicago Mercantile Exchange. Investors can use this financial mechanism to bet on the price of water in California. The futures market includes commodities like gold, lumber, and cocoa. While the principle of futures is to reduce uncertainties of future pricing, this financial mechanism opens up the possibility of market manipulation.
The United Nation’s 17 Sustainable Development Goals include “availability and sustainable management of water and sanitation for all.” Allowing for the exploitation of a basic right is a dangerous precedent to set. Real people pay the price. As we turn the fundamental requirements for human life into commodities, we devalue ourselves and the people around us.
So, What are Water Futures?
Water scarcity is becoming a bigger issue in California every year. The state has seen drier summers and more intense wildfires every year. Some of the biggest water users include farmers, municipalities, and home owners. During droughts, the price of water increases as demand increases. During rainy seasons, the price of water decreases as demand decreases. A futures contract (also referred to as futures) allows the holder to buy or sell a commodity at a fixed price at a future time. For example, if you agree to sell a case of water to your friend for $5 tomorrow, you have entered into a futures contract.
Water futures were introduced with the explanation that they would provide certainty in pricing to big users. In theory this allows users to hedge their bets, but ultimately one person’s loss becomes another person’s gain. Speculation can influence the cost of water, which could have drastic impacts on equitable access to water. This sets a dangerous precedent for other markets in the world.
How do Futures Hurt People? - A Case Study: Cocoa in Western Africa
An example of the negative impact of the futures market can be seen in the Cocoa market on the west coast of Africa. Ghana and Cote d’Ivoire (Ivory Coast) are major suppliers for the world’s Cocoa market. Chocolate companies buy large supplies of cocoa and have to pay a price premium called the Living Income Differential (LID). The cost is an additional $400 USD per tonne which is used to help improve the quality of life of impoverished farmers. This price premium is supported by many companies in a response to consumer demand for ethically sourced products. When chocolate companies purchase cocoa from the physical markets in western Africa, the LID is applied to the purchase.
Hershey allegedly used the Futures Market to buy up large quantities of cocoa thereby circumventing the LID price premium. By purchasing a large quantity of cocoa via futures contracts, they could procure cocoa without paying a fee premium which improves the quality of life of farmers in the region.
Futures markets for cocoa are largely used as a financial mechanism for hedging investments, and not purchasing physical beans. Actions within the futures market also directly affected the regular markets. Hershey’s alleged purchase of cocoa in the Futures Market caused a 30 percent increase in the same commodity in the physical markets. The use of these financial tools have a direct impact on the quality of life of the farmers, communities, and other infrastructure that facilitate the production and supply of Cocoa.
Is Water Really a Big Concern?
The United Nations Human Rights Office of the High Commissioner has denounced the introduction of water futures in a news release on 11 December 2020 titled: “Water: Futures market invites speculators, [and] challenges basic human rights – UN expert.”
Water is closely tied to public health, livelihoods, and the public good. In 2010 the UN General Assembly and Human Rights Council formally recognized the right to safe drinking water. Pedro Arrojo-Agudo, Emeritus Professor of Economic Analysis at the University of Zaragoza in Spain, said: “while there are on-going global discussions concerning water’s environmental, social and cultural values, the news that water is to be traded on Wall Street futures market shows that the value of water, as basic human right, is now under threat.”
While some institutions make the argument that the water futures market will provide greater clarity and certainty for water pricing, experts urge that this is a dangerous arrangement.
In an interview with Earther, Basav Sen, a climate justice project director at the Institute for Policy Studies expressed concern:
“What this represents is a cynical attempt at setting up what’s almost like a betting casino so some people can make money from others suffering...My first reaction when I saw this was horror, but we’ve also seen this coming for quite some time.” - Basav Sen
What do the Climate Scientists Say?
The International Panel on Climate Change (IPCC) released a special report titled Global Warming of 1.5 °C. In the summary section alone, there are 14 distinct sections identifying concerns with water in the future. Issues like water security, water stress, food security and water supply, and saltwater intrusion in coastal areas are well documented concerns with the potential to accelerate in severity in the coming century.
Florida, USA, faces an ongoing battle with saltwater intrusion. The difference in elevation of seawater levels and depleting fresh water has caused a gradient allowing salt water to infiltrate fresh water supplies. While Florida is a visible example of saltwater infiltration, as sea levels continue to rise, the potential for infiltration in other coastal cities around the world is a growing concern.
How Do We Protect Water? - Canada Water Agency (CWA)
Through research, innovation, and constructive government policy, our most sacred resources can be protected and managed equitably. In December 2020, the Government of Canada announced the public consultation process for the new Canada Water Agency (CWA). The goal of the Canada Water Agency is to address the issues related to the Climate Crisis, most notably fresh water supply. The CWA provides an opportunity for job creation in a sustainable manner.
The Covid-19 Pandemic continues to stress the job market. Job creation and GDP are directly linked to fresh water access. A discussion paper, Toward the Creation of a Canada Water Agency, released on December 17th 2020 by Environment and Climate Change Canada, identified that access to fresh water contributes to 22% of Canada’s GDP, and 13% of Canada’s employment.
“Fresh water is an economic driver. In 2017, the main water users by sector were electric power generation, transmission and distribution (65%); manufacturing (10%); agriculture (7%); and mining and oil and gas extraction (3%). These industries contributed 22% of total GDP and 13% of Canada’s employment in 2019, highlighting the significant link between sustainable freshwater quality and quantity, and Canada’s economic security.” - Discussion Paper Excerpt
How Do We Protect Water? - Global Water Futures (GWF)
The Global Water Futures (GWF, not to be confused with water futures contracts) is a Canadian-led research program led by University of Saskatchewan and includes: University of Waterloo, McMaster University, and Wilfrid Laurier University. The goal is to develop risk management solutions to manage water resources, and position Canada as a global leader in water sciences. The research program is funded in part by the Canada First Research Excellence Fund. The project aims to be a leader for innovation in water management, and critical decision making for resource management as climate change continues to limit accessibility of our resources.
Canada’s Changing Climate Report (2019, Government of Canada) discusses projections for future changes to the climate. The interactive online report is located on changingclimate.ca.
As the northern climate beings to warm more rapidly, warming temperatures have shifted the peak streamflow following snowmelt. This effectively causes higher water flow in early spring, and sometimes leads to lower water flow in the summer. Water levels have a great impact on water management in terms of both flooding and droughts. Summer droughts are projected to be more frequent. More info on freshwater availability in Canada can be found in chapter 6 of the report.
Canada has approximately 7 percent of the world’s renewable fresh water supply, which is a generous supply for a country that contains less than 0.5% of the world’s population. The figure is sometimes referred to as 20% but this figure includes non-renewable water sources called fossil water. Fossil water is water that is retained in glaciers, lakes, and underground aquifers.
Water security for Canadians is one of the main goals of the GWF, but science-backed policy developments can be used to encourage other countries to participate in future proofing their access to fresh water. A group of Indian and Australian research institutions have already launched a new research centre, The Australia India Water Centre, to focus on water scarcity and sanitation challenges around the world. The project includes 15 Indian and nine Australian institutions. Both countries have seen first hand impact of drought, flash floods and a changing climate.
“History Does Not Repeat Itself, But it Rhymes.” - Mark Twain
This quote, often attributed to Mark Twain best describes the events making their splash on Wall Street.
After the 1973 Oil Crisis, oil was top of mind. Oil shortages caused massive effects on economies and ways of life. In the late 1970’s the cult-classic Mad Max followed this trend and portrayed an apocalyptic future where oil and resource shortages led to a collapsed civilization; those who controlled oil, had all the power.
This year, Dune, a sci-fi movie is set for release. Dune is about a desert planet, where water is scarce, and water is power.
Water is essential, and no number of financial mechanisms can create more water out of a dwindling supply. The water crisis needs to be handled by managing our resources, not betting on them. Wall Street will not save us, but Canada might.
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Nathan Cohen - March 2021
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