The Economics of Water: Valuing the Hydrological Cycle as a Global Common Good

On the 17th of October, the Global Commission on the Economics of Water published its 2024 report entitled ‘The Economics of Water: Valuing the Hydrological Cycle as a Global Common Good’. The report commences with a stark warning that for the first time in history, the hydrological cycle is out of balance, undermining the prospect of an equitable and sustainable future for all. The world is facing a water crisis as a combination of increasing global water demand, the impacts of climate change and the depletion of the world’s biodiversity interact with each other in a negative, self-reinforcing loop that is placing increasing pressure on our water resources. In essence, the report states, we have put the hydrological cycle itself under unprecedented stress, with growing consequences for communities and countries everywhere.

From the point of view of direct human experience, the report states, there are already existing challenges to which the world needs to respond: almost half of the world's population faces some degree of water scarcity, and freshwater underlies the achievement of most if not all of the Sustainable Development Goals (SDGs). This is in essence a challenge related to equity - allocating freshwater fairly – and of efficiency – ensuring that water governance systems are effective and that our technology delivers water services without undue water losses while maintaining good water quality. However, this is not the only challenge: science points to two additional threats to human development.

The first is that we are currently pushing the water cycle out of balance, which means that the stability in weather and precipitation patters that we have experienced over the last 12,000 years is making place for instability and changing precipitation patterns. Ultimately, precipitation is the source of all freshwater, and currently the combined forces of climate change, deforestation, and loss of biodiversity are driving these changes, which is affecting the stability of freshwater runoff and atmospheric vapour fluxes, which in turn determine rainfall.

The second is that freshwater supports ecosystems and the economy. Water ensures the stability of environmental systems on land: without water, plants cannot grow, and the production of food and fibre is undermined. When landscapes dry up, they are prone to the spread of fires and increase greenhouse gas emissions.

In part, these changes have been brought about by focusing our attention on the local level, managing surface and groundwater water resources as if they are not part of a much larger system, and basing our planning on historical records of water availability. The deeper truth is that water is a connector: countries and communities are interdependent through the dynamics of the hydrological cycle at different scales. Water travels long distances: atmospheric moisture flows connect regions across borders, continents, and oceans in patterns that shift with the prevailing winds.

In addition, current water management practices have quite logically focused attention and interventions on ‘blue water ‘- the water stored in rivers, lakes, and aquifers. This focus is actually not on the main water flows in the hydrological cycle, because about 40% of precipitation on land is converted to blue water. What tends to be overlooked is green water – the water in the soil, in plants, and in forests. About 60% of precipitation on land is converted to green water. This is crucial because the water in our soils, in plants and in forests evaporates and transpires into the air and recycles through the atmosphere, generating around half of all rainfall on land.

Decades of collective mismanagement and undervaluation of water around the world, the report states, have damaged our freshwater and land ecosystems and have allowed for the continuing contamination of water resources. Therefore, restoring the stability of the water cycle is critical as an aim in itself, but also as an opportunity for collective action in the context of climate change, to ensure that we safeguard the earth’s ecosystems, and to support the achievement of each of the Sustainable Development Goals (SDGs). Stabilising the water cycle is essential to preserve food security, keep economies and job opportunities growing, and ensure a just and liveable future for everyone.

What is needed as a response to these challenges, the report states, is more ambition: we need bolder and more integrated thinking as well as a recasting of policy frameworks. The Commission calls for a ‘new economics’ of water.

This new economics needs at a fundamental level to recognise the hydrological cycle as a global common good: this requires an understanding that water connects countries and regions and that our water resources are deeply interconnected with climate change and the loss of biodiversity in a mutually reinforcing system. These interconnections underlie human development and impacts on virtually all the SDGs.

Secondly, a vision of water governance is needed that transforms water governance at every scale, from local to river basin to global, to ensure it is governed more effectively and efficiently, delivers access and justice for all, and sustains the earth’s ecosystems. To do this, we need to relook at our economic concepts and tools in such a way that water is valued properly, reflecting both its increasing scarcity and the multiple benefits it provides as the Earth’s most precious resource. Rather than allowing the negative impacts that our actions have on our water systems to be passed on to other water users and ecosystems, the misuse and pollution of water should not be ‘fixed after the fact’, but rather economies should be reshaped in such a way that water is used efficiently, equitably, and sustainably from the start. In this perspective, innovation, capacity-building and investments in the water sector are crucial, however they need to be evaluated not in terms of short-run costs and benefits but for how they can catalyse long-run, economy wide benefits. These measures will certainly entail costs, but in economic terms the costs entailed in these actions are very small in comparison to the harm that continued inaction will inflict on economies and on humanity.