12 July 2011

Why does Orszag care about water in China?

Peter Orszag writes that China should use more "smart pricing" for its water.

Orszag is vice chairman of global banking at Citigroup and a former director of the Office of Management and Budget in the Obama administration. His money-to-power-to-money profile is common in Washington, but why is he interested in water in China?

His first suggested responses (lower pollution, use more desal and canals to increase supplies) are, respectfully, wishful and stupid.

His third suggested "solution" to water scarcity is to increase prices and market allocations. Yay! I say.

But what's in it for Citigroup? Here's the key quotation:
If China moved more aggressively to price water in a manner that reflected demand and supply, it could teach the U.S. a lesson in using market economics to address environmental issues. As a colleague of mine at Citigroup Inc., the analyst Deane Dray, has written, “water has never been priced efficiently.” In the U.S., water is generally heavily subsidized, and prices aren't adequately linked to usage levels.

Just as we need to price carbon in order to avoid a climate crisis, we need to price water to avoid a water crisis. Market forces can work wonders for the environment, but only if we have the political courage to create them.
And that's the end of his column, no China in sight.

So Orszag is actually talking about more prices and markets in the US. Why does he take the indirect route?
  1. Americans do not want to be directly told they're doing it wrong;
  2. Americans who admire China may think that we should do it if they do; and
  3. Americans who fear China will want to make sure we "stay competitive."
Although I have my doubts about the means, I agree with Orszag on the ends -- and there is absolutely a need for more market mechanisms:

Example 1: Some Central Valley farmers wrote this:
Current attacks on the Valley’s water [include] the view that water is nothing but a commodity and must be sold to the highest bidder. This is a foolhardy concept which, if followed, will condemn the United States to depend upon foreign sources with unreliable health protections for its food supply.
Besides their incorrect conclusion (water prices in markets will not rise by that much for CA farmers), they appear to see the glass as half-empty (farmers will have to pay more for water) when it's really half-full: farmers, as net sellers, will gain a lot from markets. [oh, and I LOVE their "foreign terrorist food" claim!]

Example 2: The California Roundtable on Water and Food Supply (CRWFS):
calls on decision-makers to employ agricultural water stewardship as a guiding framework to inform agricultural water management in California... Water stewardship practices include water efficiency measures, groundwater recharge and conjunctive management, soil moisture retention and soil health improvements, on-farm storm water and rainwater storage, and much more... The recommendations seek actions to build a stronger knowledge base to support decision-making, strengthen the technical support system for farmers, and build more effective policy that produces tangible results.
CRWFS members include the Pacific Institute and California Farm Bureau Federation, two organizations that favor engineering and informational fixes over market and price incentives. Their call for more knowledge, regulation and aid for farmers will probably produce very little improvement in water management or efficiency in California (which is the way some farmers want it -- "just give us the info booklet and let us get back to draining those rivers").

Bottom Line: Americans should use price and market signals to allocate water volumes and improve quality.

H/Ts to DL, TM and a little birdie.

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