Global Affairs

Trading Rainwater: China’s potential solution to water inequality

In the midst of a water-shortage crisis, Chinese towns traded rainwater on a state-run exchange this week. What could this tell us about the economics of climate change & sustainability?

Chinese towns traded rainwater for the first time on a state-run exchange this week before being quickly resold at a 450% increase in price. Arriving in the midst of a water crisis in North China, could this be the start of a market model that climate change will force upon us all in the coming years? 

China is host to around 20 percent of the world’s population, but only 6 percent of its freshwater resources. In addition, its per capita water availability is just one quarter  of the world average. To make matters worse, 80% of China’s water is concentrated in the South, resulting in an estimated minimum of a dozen northern provinces experiencing water scarcity.

To combat this, the Chinese Government has been actively introducing policies since 2014 to better redistribute water. One such policy involved introducing the China Water Exchange in 2016, in which water rights could be sold and bought. The theory behind this is that areas where water is abundant would then trade with areas in need, so that waste would be avoided. In practice, the initiative has been attacked for not being market-driven enough, with critics arguing that it only survives due to government mandates and subsidies.

Yet, critics or no, midway through December 2020, the market saw its first trade of rainwater. The deal was for 20,000 cubic metres of rainwater to be traded to a Protection Engineering Company over the next three years, at a price of 0.7 yuan (US$0.11) per cubic metre. The firm then sold 12,000 cubic metres of that rainwater to an urban landscaping company affiliated with the city government at a price of 3.85 yuan (US$0.60) per cubic metre for three years to replace the use of tap water for urban greenery and street cleaning.  

The 450% mark-up that this represents is shocking enough itself, but when it is considered that the second sale price of 3.85 yuan per cubic meter is still below the price of tap water in the region, it really speaks to the severity of the inequality in water distribution at present.

Looking forward, the issue of water scarcity will only become more of a priority. According to the UN Agricultural Agency, available freshwater resources have declined globally by more than 20% per person over the past two decades. In a report, the Agency’s chief calls for water scarcity to be addressed “immediately and boldly”

Water demand globally is projected to increase by 55% between 2000 and 2050. Meanwhile, according to a NASA-led study, many of the world’s freshwater sources are being drained faster than they are being replenished. Add to the pot water pollution, and fertiliser that leaks nitrates, and the whole thing begins to seem rather cataclysmic (if you will excuse the etymological pun).

Joking aside, if and when water scarcity becomes a bigger problem, the world will have to look for solutions. Some suggest the beginnings of ‘water wars’… I tend to be more optimistic. In the search for more peaceful solutions, one of the first places to start will be redistribution.

So what can we learn from China? Has the market’s lack of historic success crossed water trade off as an option permanently? Or does this new development point to a future where water is a precious resource to be hoarded and traded across regions?  

On the surface, China’s water market seems like a good method. It would allow for countries to trade water so that those who value it more end up with ownership of it, in a mutually beneficial trade. But would it work?

At present, despite severe risk of drought and water shortages in the North, the market hasn’t been very popular. From 2014 to 2019, the market has only traded a total of 2.8 billion cubic metres of water, and most of the trades have not been public. 

Chen Jinmu and Wang Junjie, two researchers who are affiliated with the Ministry of Water Resources, said in an article: “[in the] southern provinces that have relatively abundant water resources… the enthusiasm for trading water rights is not high, with low willingness to purchase water rights and a reluctance to sell them. So, the water-rights trading market is generally inactive.”

Seemingly, this issue could be resolved if the market model was applied on a larger scale and when it is needed. In fact, the rainwater that has just been sold could even be seen as a start to this. Where there are profits to be made, it is unlikely that the market would remain unfulfilled. 

On the other hand, if China has been worried about water scarcity since 2014, why is the redistributive function of the market not working? Some say that there is too much government interference, and so the market forces are unable to function normally. However, as far as it is possible to tell, the government is only interfering through subsidies and other methods to keep the market alive.

The main difficulty with the market as China uses it runs deeper than this. It is a difficulty regarding the nature of the product. Even in China, where the state officially owns all of the water, the rights are unclear surrounding it. If you want to sell rights to rainwater, these rights must be clearly established. It functions fine for those who wish to buy a permit and use the water they have thus gained from trade, but the situation for those without a permit is even more complicated. How much water are they allowed to use, and how are they allowed to use it?

Moreover, selling rights across multiple years for something unpredictable like rainwater could pose some challenges too. At present, no one is fully sure of the effect climate change will have on the weather system, and so if the market was expanding to incorporate even larger trades, ensuring that the trades are fulfilled could also be problematic. 

Selling promises for things you can’t control seems incredibly unwise, but, in a changing meteorological world, could this be the method governments choose to find some certainty that their resources won’t run out?