Water is Today's Risky Business
Recently, a bi-partisan group of political and business leaders including Henry Paulson, Tom Steyer, Michael Bloomberg, Robert Rubin, and Olympia Snowe issued a call to arms regarding a growing threat to America's prosperity. Their report, entitled "Risky Business: The Economic Risks of Climate Change in the United States" made clear that human-induced climate change leads to rising temperatures that will directly and indirectly cost the country hundreds of billions of dollars by the end of the century."
The report found that each region of the country faces different types of risks and concluded some regions are more vulnerable than others. Overall, though, the report states that all regions will suffer from the effects of climate change. The report maintained that companies have a responsibility to determine the risks posed by climate-related threats and to factor in these risks when making critical business decisions.
I applaud this report; however, I am concerned that by focusing on the long-term economic impact, the report inadvertently signals that the U.S. has a few decades to come to grips with this monumental challenge.
We don't have that much time. Drought is already a major problem in California, Texas and some other regions of the country. Evidence indicates that the problem is only going to worsen, even as temperatures rise from coast to coast. Two weeks ago, the U.S. National Oceanic and Atmospheric Administration issued data indicating temperatures this year are at the highest reported levels since record-keeping began in 1880.
Water is a Business Risk Today
Nearly every impact cited in the new report -- sea level rise, property loss, extreme heat, storm surges, energy demands and declining crop yields -- comes back to water in one way or another. It is important to recognize the current and compounding price of water-related risks. Bad circumstances today will be dire tomorrow. For example, the likelihood that heat will put strains on energy systems as the demand for air conditioning soars means water will become even more important to keep cooling systems running and generators working. The surge in food prices is a result of severe droughts over the past few years and the associated cost the agricultural sector has had to bear to cover future crop losses due to prolonged drought. California's farmers are leaving hundreds of thousands of acres unplanted because of the drought, and the situation would be far worse if deep wells weren't drawing on underground water supplies. But what will happen if the water runs out?
Let's look at the energy sector. The country is beginning to lessen its reliance on imported oil in large part due to advances in technology that make it economically feasible to tap into the significant amount of oil shale across the country by means of fracking. This technology, however, uses a significant amount of water -- nearly 100 billion gallons of water over the past three years. There is growing opposition to fracking based, in part, on water scarcity. Additionally, the lack of water is impacting the generation of hydroelectric power, contributing to rising utility bills; in California alone, residential electricity prices shot up 30 percent between 2006 and 2012, and are expected to jump an additional 47 percent over the next 15 years.
A study conducted by my firm, VOX Global, and the Pacific Institute found that water scarcity, already impacting a wide range of businesses, will worsen as a threat over the next four years. More than half of the companies' participating in our survey state that access to water is already impacting their decision on where to locate facilities in the U.S. By 2018, nearly 90 percent of companies state it will be impacting their decision on where to locate. Similarly, nearly 60 percent of companies expect that water will impact both their business growth and profitability by 2018.
Competition for water between states, between communities and between industries is going to become more heated. As water supplies dwindle, agricultural interests, utilities, manufacturing and recreational interests will increasingly find themselves pitted against each other. In California, the tough choices are now evident. Who has the right to sufficient water, a farmer in Salinas or a car wash in Los Angeles? A fisherman along the Sacramento River or a garden nursery in Lompico?
Another problem that must be addressed is the country's crumbling water infrastructure. It is estimated that U.S. cities and municipalities will need $2 trillion to fix all of the pipes in the U.S. that carry drinking and wastewater. As political support increases to address this issue, where are legislators going to find the money? Since raising taxes is unlikely, politicians will probably seek to draw from flat budgets intended for other infrastructure projects like transportation or perhaps even from education. The resulting political battles will be intense as water constituencies go up against well entrenched and established lobbies in these other sectors.
A National Focus on Water is Needed
If any component of the Risky Business report calls for immediate action, it's water. Americans face complex and localized water issues that have widespread impacts. What's needed is a national focus and a concentrated effort involving all levels of government, businesses, nonprofits and the investment community. Unfortunately, we cannot look to Washington for leadership, given the gridlock and clashing ideologies. Immediate action is going to have to take place at the state and industry level.
My firm has been in conversations with organizations and state leaders, and we're seeing water-related activity picking up across the country -- not just in states like California and Texas that are in a severe drought. More importantly, states with relatively minor water problems that nonetheless see the looming threat and are beginning to develop strategies either to address their weaknesses or take advantage of their strengths. For some, water will be an economic driver that they will use to draw business expansion to their states.
Our study makes clear that smart, responsible leaders should take action now. At a minimum, executives in the private sector and in governments should conduct an audit and identify the economic risks and opportunities posed by water. They should develop sound policies, identify competing interests, agree on the hydrological facts and begin conversations now with competing interests rather than waiting until heated conflicts arise.
One heartening sign is that specific industries, like the agricultural and beverage sectors, are beginning to take appropriate action. The best place for industries to begin is to identify the specific risks and opportunities water will pose to specific companies. As a first step, companies need to know the true cost of water for their business. Companies that factor in the embedded costs find that water typically costs four to five times more than what their utility bill indicates. Once industries have conducted this kind of impact analysis and established public positions on water, they can then start a dialogue regarding the trade-offs that competing interests are going to face.
Another hopeful sign is that global companies like Coca Cola and SAB Miller are facilitating and financing innovation in water technologies. Admittedly, these companies are responding directly to a business need, but nonetheless, they are driving innovative solutions to protect their interests by working with local communities where water is shared. As such, they are providing commercial insights into how best to address this issue, and their efforts should be a part of any national effort.