Freshwater Scarcity Poses Growing Risk in U.S.

March 14, 2022

The scarcity of fresh water is increasing because of climate change and the misallocation and overuse of this resource, which was once seen as limitless, according to a Regional Economist article published in July 2021.

In the article, St. Louis Fed Senior Policy Analyst Suzanne Jenkins wrote the risk that such scarcity poses shows the need for more optimal mechanisms for allocating water. She noted that this resource has been undervalued, which has led to misallocation and overuse.

Jenkins also pointed out that the misallocation of water has led to a lack of investment in water infrastructure.

“Leaks alone cause 2.1 trillion gallons of water to be lost each year, according to the U.S. Water Alliance,” she wrote. “Misallocation has also hindered the development of new water technologies and led to an increasing number of water-rights lawsuits before the U.S. Supreme Court.”

Pricing Water

A recent effort to better gauge the value of water was the 2020 launch of the first futures contract for water by the CME Group and the Nasdaq stock exchange, the author noted.

“The contract represents the first regulated, exchanged-traded risk management tool for water,” she wrote. “It allows participants from the agricultural, commercial, municipal water and insurance industries to hedge their future price risk by buying or selling water contracts based on the Nasdaq Veles California Water Index (NQH20).”

But the interest isn’t just in California, which has experienced severe droughts in recent years. Jenkins noted that more corporations and investors are considering water scarcity when assessing the risks facing their portfolios.

“For example, the BlackRock Investment Institute found that close to 60% of the global real estate investment trust (REIT) properties it was able to examine will experience high water stress by 2030,” she wrote. “That’s more than double today’s number.”

Water Stress

As seen in the map below, water stress can be found throughout the U.S. The water stress scale shows those parts of the U.S. getting close to draining annual water stores in a typical year.

As a result of water stress, states are fighting over the resource, and the number of legal fights is expected to grow, the author noted. Recent examples include Mississippi’s failed lawsuit against Tennessee over Memphis’ heavy use of the Sparta-Memphis Sand Aquifer and Florida’s failed lawsuit to limit Georgia’s use of the Chattahoochee River.

Conclusion

As the risk of freshwater scarcity increases, there has been an increasing focus on conservation and water recycling methods, Jenkins noted.

“Scientists and ag-tech startups are developing crops that are less water-dependent, and farmers are using methods to help soil retain more moisture and nutrients,” she wrote. “Desalination companies are developing better technologies to generate sources of fresh water from salt water, while others are generating fresh water from the air.”

Congress has recently been receptive to investing in the country’s aging water infrastructure, the author noted. Still, the estimated price tag of fully funding U.S. water infrastructure is more than $3 trillion over the next 20 years, she added.

“From conservation, to innovative technology, to fixing leaky pipes, all are growing more essential to ensuring a robust water supply for generations to come,” Jenkins concluded.

This blog offers relevant commentary, analysis, research and data from our economists and other St. Louis Fed experts. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.


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