The essence of life: Unveiling water’s economic value

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.

A NECESSARY BUT FINITE RESOURCE

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.

KEY CHALLENGES

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:

1. Water scarcity. A combination of limited reserves, lax regulation, and overextraction of nonrenewable groundwater resources can contribute to water scarcity.
2. Increased water demand. Demand for water is growing significantly to accommodate rapid socioeconomic development in countries worldwide.
3. Aging water infrastructure. Many countries are home to an aging water infrastructure that often covers extensive distances to reach demand areas, leading to a reduction in efficiency.
4. Water management and allocation. Decision makers often have low visibility into the economic benefits and proper decision-making mechanisms that support effective water management and allocation.
5. Limitations of alternative sources of water. Alternatives like desalination and treated wastewater are part of the solution, but they can only be scaled so far. For instance, increasing the adoption of desalinated water may have a detrimental impact on marine life and ecosystems.

INTRODUCING THE ECONOMIC VALUE OF WATER

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:

1. Water as a driver of economic activities — a key input for various industries, including manufacturing and tourism, driving economic growth and creating employment opportunities
2. Water as a supporter of ecosystems — vital for maintaining diverse ecosystems, providing habitat for wildlife, supporting biodiversity, and regulating ecological processes
3. Water as a tool for meeting societal needs — indispensable for meeting basic human needs (e.g., drinking, food security, sanitation, and hygiene), ensuring public health, and enhancing overall quality of life

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.

GLOBAL TRENDS & APPLICATIONS

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:

Agricultural water allocation

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.

Jordan

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.

Economic feasibility of replenishing aquifers

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.

Cyprus

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.

Identifying improvement opportunities for industrial water use

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.

South Africa

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.

Assessing the impact of water usage on national GDP

Calculating the direct, indirect, and induced water contribution to the GDP can highlight the importance of various water sources to a national economy and inform related policies and investment decisions.

Australia

Australia is heavily reliant on groundwater and used the economic value of water (direct use) to assess its economic impact on national GDP (see Figure 4). It employed the replacement cost method to calculate the direct use value of groundwater. The national input-output table was then leveraged to find each water user’s economic multipliers to calculate the direct, indirect, and induced water contribution to GDP. The outcomes of this valuation highlighted the crucial role of groundwater in the overall economy, supporting investment measures in water preservation policies. This study emphasized the importance of groundwater to national economies, encouraging investments in sustainable water management practices.

Taking a holistic valuation approach

Enabling the economic valuation of all water sources across their different usages can lead to better-informed decision-making, help overcome key challenges relating to sustainability and demand, and ensure long-term viability of water resources.

Kingdom of Saudi Arabia

The use cases explored above from Australia, South Africa, Cyprus, and Jordan each focused on a particular region, water source, or industry. Going a step further, the Kingdom of Saudi Arabia (KSA) has developed a national water valuation study that enables economic valuation of all water sources across their different usages.

Execution of the study demands a tailored strategy that factors in environmental, social, and economic aspects across all water sources and uses a comprehensive tailored framework to calculate the economic value of water, consisting of use values (i.e., the benefits derived from actual water use) and non-use values, which include the benefits stemming from the knowledge that water resources are maintained for future generations:

1. Use values — come from tangible and intangible uses of water and can be divided into direct, indirect, and option values:
   • Direct use values — capture the value of benefits derived from the direct consumption of water (e.g., agricultural irrigation, domestic use, and industrial processes).
   • Indirect use values — reflect the value of ecosystem services provided by water resources without direct engagement (e.g., flood protection, habitats for biodiversity, and the regulation of ecological processes). For example, water bodies help control floods, reducing damage to properties and loss of life while also supporting ecosystems that maintain biodiversity and ecological balance.
   • Option values — represent the value of preserving water resources for potential future use, whether direct or indirect. Ensuring the future availability of groundwater by securing alternative sources like desalinated water and treated wastewater highlights the significance of option values in water management.
2. Non-use values — reflect the intrinsic value of water, independent of its current or future use. These values include:
   • Bequest value — placed on preserving water resources for future generations. This underscores the importance of sustainable water conservation strategies that ensure long-term resource availability.
   • Existence value — captures the importance of maintaining water resources even if they are not currently used or intended for use. This value emphasizes the preservation of water environments for their own sake.

An in-depth examination of the extensive use and non-use values of water in KSA has yielded actionable insights for each of its water sources at the regional and national levels (see Figure 5).

Using this model and assessing the water values in the KSA context revealed a total of 12 use and non-use values relevant to KSA. Once identified, they were mapped with their respective applicable water sources, as illustrated in Figure 6.

Assessing the differing values of water across each of these sources paves the way for better informed decision-making (see Figure 7). In KSA, this enhanced knowledge helps address key challenges relating to water sustainability and demand. Sustainable water resource management is critical to ensure the long-term viability of water resources. In this manner, establishing the economic value of each source can support investment decisions in water supply and influence conservation initiatives and also aid the prioritization and implementation of preservation projects. On the demand side, the economic valuation of water can support strategic allocation of limited water resources to maximize socioeconomic benefits, improve water efficiency, and provide direction of possible schemes for key sectors or regions to increase water-efficient practices.

ECONOMICS IN ACTION

From KSA to South Africa, the economic valuation of water is not a silver bullet. However, it marks a crucial step forward in overcoming some of the world’s greatest water challenges and must be treated as an integral part of any broader national strategy covering numerous important considerations. The following six examples demonstrate how factoring in the economic value of water can lead to tangible action on the ground:

1. Water allocation among different user subcategories. Establishing the direct value for agricultural usage supports water allocation toward crops with the highest value in terms of currency/m³, both regionally and nationally.
2. Water-efficiency improvement. Comparing the direct value (currency/m³) for industrial usage across categories and regions identifies areas/industries that could benefit from water-efficiency improvement.
3. Water source conservation. Conducting a cost-benefit analysis that compares the economic value in monetary terms of a specific water source in a region against the cost of preservation can support investment decisions for water conservation.
4. Regional agricultural planning. Identifying the direct value for agricultural usage highlights crops and locations most suitable for long-term agricultural planning.
5. Environmental protection investment. A cost-benefit analysis comparing the indirect use value in a given currency of eliminating discharge pollutants against investment cost supports investment decisions about wastewater treatment infrastructure.
6. Water tariff at source setting. The economic value of water supports tariff setting by accounting for scarcity/resource costs of raw water at the source. This can be partially recovered through tariffs at the source, alongside the financial costs associated with maintaining and monitoring the resources.

Conclusion

SECURING FRESH WATER FOR THE FUTURE

Water security has risen to the top of national agendas worldwide. Some countries face the harsh realities of water scarcity and uncertainty of supply. Embracing the economic value of water by using these strategies can help guarantee lasting access to the fresh water needed to sustain industries, economies, and entire populations:

1. Develop and implement comprehensive valuation frameworks and models to capture water’s value; enable data-driven decision-making; and include economic, environmental, and social factors in water management.
2. Infuse the economic value of water into water management decisions, including investment planning, tariff setting, and resource allocation — at both national and local levels — to ensure sustainable and efficient use.
3. Foster public understanding and support through awareness campaigns that highlight the importance of water conservation and fair pricing, targeting both the general public and public andprivate sector entities.

By integrating these strategies, nations can protect their water resources, maximize the value of using their water resources, ensure equitable access, and build resilience against the challenges that arelikely to intensify over time.

By Adnan Merhaba, Carlo Stella, Eddy Ghanem, Nick Strange, Fouad Saba

• By Arthur D. Little
• 03/10/2025
• water’s economic value