As a source and sustainer of life, water is invaluable. However, in the face of growing water scarcity, assessing its economic value is essential to managing a finite resource that, for many, is already in short supply. In this Viewpoint, we explore how countries around the world are adopting economic valuation methodologies as part of their broader water management strategies to ensure lasting access for generations to come.
The value of water cannot be overstated. It is the very reason that life exists. As nature’s finest architect, it has been shaping shorelines, valleys, and human settlements for millennia while quenching the thirst of populations across the globe. Water is also indispensable in protecting the environment and driving industry — powering automotive production, enhancing manufacturing, and even enabling advanced technology. As for agriculture, without a reliable water supply, crops can fail, impacting livelihoods and food security.
This centrality of water to every ecosystem on Earth is what makes it so precious — yet so problematic. Water is finite, and as the planet heaves under the pressure of growing populations and climate change, the burden is mounting on this most valuable resource and on the governments tasked with ensuring it continues to flow.
In addition to being a critical resource, water is also highly complex. More than 70% of the Earth’s surface is covered by water yet only about 3% is fresh, and much of that is hidden deep underground or locked in frozen glaciers, making it hard to tap. Pollution is rising and impacting the small accessible percentage, and distribution is both uneven and increasingly extreme as the climate emergency intensifies. Some corners of the world struggle with too much water, but many more face the challenge of managing with far too little.
Globally, nearly two-thirds of the population experience severe water scarcity for at least one month a year while, regionally, the Middle East and North Africa (MENA) experiences extreme water stress — the inability to meet societal demand for water. MENA is home to less than 1% of the world’s renewable water resources, but 6% of its population. This discrepancy is what makes effective water management so important, not just in MENA, but across the globe.
To varying degrees, water scarcity is compelling countries across continents to take a proactive and progressive approach to water management. To succeed in their efforts, however, they must overcome a series of challenges to secure the fresh water needed for future generations:
Addressing the challenges of water management requires effective governance, infrastructure investment, and sustainable practices. In this context, the economic valuation of water has emerged as a critical tool to support decision-making on each of these fronts. Assigning monetary value to water resources helps policymakers prioritize water use in the context of competing demands, which includes guiding infrastructure investments, establishing fair water pricing to encourage conservation, and informing sustainable water-use policies.
The total economic value of water assigns a monetary value to water resources by considering the economic, environmental, and social attributes associated with water resources for sustainable sector management:
More than a theoretical exercise, use cases relating to the economic value of water are now emerging and countries are increasingly adopting economic valuation methodologies as part of their broader water management strategies.
Various methodologies can help establish the economic value of water. The findings can assist in making policy decisions, such as evaluating the feasibility of replenishing aquifers, informing agricultural water allocation, adjusting industrial water tariffs, assessing the economic impact on national GDP, and preserving groundwater. These diverse approaches and their application in countries around the world highlight the importance of understanding water’s full economic value for sustainable management, as explored below:
Assessing the economic value of water in terms of its direct use in the cultivation of various crops can help determine how best to allocate water resources.
In Jordan, water scarcity is a critical challenge, particularly in agriculture, which consumes nearly 60% of the country’s water resources (see Figure 1). The country conducted a comprehensive valuation study using the residual value method to assess the direct use economic value of water for agricultural usage. The study found that some crops, such as cucumbers and strawberries, produced higher returns per cubic meter of water compared to water-intensive crops like alfalfa. These findings supported a shift in water allocation policies and encouraged farmers to stop producing alfalfa.
A cost-benefit analysis that compares the economic value of a water source with the costs involved in replenishing it can help determine the viability of any related plans ahead of implementation.
In Cyprus, the Akrotiri aquifer is a critical water resource, yet it faces significant challenges related to both water quality and quantity (see Figure 2). To address these challenges, a proposed project replenished the aquifer with treated wastewater. The economic viability and sustainability of the replenishment plan were assessed through a comprehensive cost-benefit analysis.
This analysis compared the economic value of the groundwater against the projected capital and operational costs over a 200-year period. The net present value (NPV) was calculated and compared against the total financial costs of the aquifer replenishment project over the same period. The cost-benefit analysis revealed that the replenishment plan was economically viable, with the benefits outweighing the costs.
Comparison of the economic value of water for industrial users with existing tariffs can reveal opportunities to increase tariffs and boost the efficiency and sustainability of water consumption.
In a move to promote more efficient water use, South Africa looked at the economic value of water for industrial users to assess the feasibility of increasing water tariffs (see Figure 3). Using the production function method, the study calculated the direct use economic value of water for industrial users, which was then compared against current water tariffs. The price elasticity of water demand for each industry category was also calculated to predict how changes in water tariffs might affect usage. The analysis revealed that the direct use value of water was higher than the current tariffs, suggesting room for an increase in tariffs to reflect the true economic value of water and to promote more efficient and sustainable consumption.
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