banyan water wharton field application class

Christina Hung, Jayson Remmelts and Karen Tien The Wharton School, University of Pennsylvania

Spring 2012 Field Application Project

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The Banyan Water Field Application Project was made possible due to the generous support of the Initiative for Global Environmental Leadership (IGEL) at the Wharton School of the University of Pennsylvania. Research is a main driver to our knowledge for action plans for life-long learning at Wharton. IGEL’s business and faculty advisors collaborated to identify solution-oriented, world-class research topics in the value of water and its relationship to social impact and world economy. The Banyan Water Field Application Project is a reflection of this mission.

Key Findings: Water Trading Platform Success Factors

International Water Conflict Cases

Domestic Water Trading Cases

Cap-and-Trade Water Platforms

Opportunities for Banyan Water

Appendix

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• Water trading platforms have been tested in varying degrees across the world and in the US • Market-based approaches to sustainable management of water resources have

potential to reduce water use in water-stressed regions

• However, privatization of water resources has been highly contested on several dimensions, of which the most fundamental is captured by: • “The human right to drinking water is fundamental to life and health. Sufficient

and safe drinking water is a precondition for the realization of human rights.” – General Comment adopted by ECOSOC Committee of the UN 11/27/2002

• Water trading platforms have seen political, legal and activist challenges

which a broader US Water Trading Platform needs to address

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International Water Conflict Cases

• Chile’s Atacama desert is one of driest places on the planet • Mining companies have grown their footprint in the area and

have bought significant water rights due to the water-intense nature

• High commodities prices have buoyed the value of copper mines leading to poor farmers selling their water rights for short term gain

• Down stream agriculture and towns have suffered tremendously

• Mining may limit future ability to sustain certain industries (agriculture) which may impact future economic growth

Mining v. Agriculture

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Long term industry viability needs to be considered

R. Quentin Grafton, Clay Landry, Gary D. Libecap, Sam McGlennon, Robert O'Brien AN INTEGRATED ASSESSMENT OF WATER MARKETS: AUSTRALIA, CHILE, CHINA, SOUTH AFRICA AND THE USA; Working Paper 16203, http://www.nber.org/papers/w16203

• Chile’s Water Code passed in 1981 and amended in 2005: currently one of the more developed platforms though relatively small in size

• Limited resources available for legal and regulatory oversight: DGA (overseas and grants new rights) has little power over private water use and cannot cancel or restrict use after the rights are granted

• 2005 reform allowed President to exclude certain water resources to protect public interest. • DGA to consider environmental aspects in the process of

establishing new water rights • Charging a license fee for unused water rights and limiting

requests for water use rights to genuine needs, as a deterrent against hoarding and speculation

Chile’s Resolution: Reform and Legislation

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Rights cannot be irrevocable and need to be have ability to sustain long-term sustainability objectives

• Turkey’s arid climate (1,830 cubic meters of water per capita vs. 10,000+ in the US) means they are naturally facing deficits

• Hydroelectric power is 40% of generation & growing as Turkey does not produce oil or natural gas and relies on hydroelectric

• Turkey controls the Tigris & Euphrates rivers (1/3 of Turkey’s potential water supply) also flow through Syria and Iraq

• Due to deepening water shortages, political tensions continue to rise in an already charged region

Turkey v. Downstream

Neighbors

• Southeast Anatolia Project (GAP) is a regional sustainability project that would harness the water for these projects for agriculture consumption & ensure water is used sufficiently.

• Turkey has currently proposed a Peace Pipeline Project, where Turkey will send both tankers of water to Israel as well as create two large pipelines to Syria, Jordan, Palestine, and Saudi Arabia.

• Turkey then will provide hydroelectric power to Iraq • This solution has several political hurdles

Turkey’s Resolution:

Water Rationing

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Political history is important for instituting water rights; rationing results in too many interested and conflicted parties

• Bechtel signed contract to privatize water supply in Bolivia's 3rd-largest city, Cochabamba: 40-year lease to run the water system – stemmed from pressure from the World Bank

• Bechtel paid $30M and committed to constructing Misicuni dam

• Water rates increased as much as 50%, 25% of families’ income • Created a social dilemma borne by the regressive nature of

raising water prices

Bechtel v. Bolivia

• Cochabamba protests shut down the city and martial law was declared; Bechtel lost the concession

• In 2001, Bechtel sued Bolivia for a portion of lost profits , $25M • Bechtel eventually won the suit based on corruption in the

government was the true cause of rate hikes

Bolivia’s Solution

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Revenue-neutral water-pricing model to distribute revenue gained from rising water prices to entities faced with financial difficulties

Domestic Water Trading Cases

• Significant allocation problems exist between water bottlers and local, agriculture communities

• $10B US bottled water industry has witnessed double-digit growth over the past decade with 50M bottles of spring water consumed

• Nestle had 35% share of US bottled water industry: planned to pump 700K gal. per day in rural farming community (Big Rapids)

• Bottled water only accounts for 1% of total ground water; but can be detrimental to local water sources: lowering of water table, increased contaminant concentration, and potentially salt water intrusion

Big Rapids Farming v.

Water Bottlers

• Nestle could tap a fraction of proposal; met strong activists • Argued that withdrawals within the Great Lakes basin are subject to

1986 Water Resources Development Act: No water shall be diverted or exported from any portion of the Great Lakes …for use outside unless … approved by each Great Lakes State Governor

• Not yet settled whether ban on diversions applies to bottled water • Law does not provide private right of action to enforce compliance

MI Resolution

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Watershed impacts must be monitored; rights cannot be irrevocable if damage is assessed

http://www.greatlakeslaw.org/blog/files/Noah_Hall_Bottled_Water_Testimony.pdf

• Alaska Water Exports specializes in bulk water export: shipping water in 80-million-gallon tankers, typically designed for oil

• Withdraw water from the Albion and Gualala Rivers along northern California coast, pumped offshore and loaded into bladders

• Pulled by tugboats for San Diego

Alaska Water Exports Inc.

• California Coastal Commission voted unanimously on Dec. 13, 2002 to oppose the projects

• Alaska Water Exports withdrew applications • However, a pipeline in Sitka, Alaska is potentially going to be

shipping water to India and Asia

CA Resolution

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High transaction costs and infrastructure / transportation constraints may limit the ability to trade water freely


• Colorado River Compact signed in 1922 between the upper basin (CO, WY, UT, NM) and lower basin (CA, NV, AZ) and further amended to include an allocation for Mexico – each state was allocated a specific number of MAFs

• State population has grown/water needs changed leading to rising contention on apportionment, particularly lower states

• Persistent drought and damming have impacted watershed; states are hitting their allocation

Colorado River

Compact

• Most of the upper states shy away from touching the agreement despite lower state pressure as they believe they will be the “losers”

• Implementation Agreement signed in 2002 as lower states apportioned water was exceeded (particularly CA)

• New category of water: Intentionally Created Surplus (ICS): generated through conservation measures or the funding of system efficiency improvements and the recognition of water exchanges

Resolution

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True value of water needs to be transparent and available as thinly traded markets create inefficiencies; states also need to accept reallocation


Cap-and-Trade Water Platforms: Australia

Environmental Impact

Water-stress

Accountability

Expansion

Market Improvement

Urban Community

Needs

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• Developing strategies that

consider environmental impact • Easing water stressed systems • Creating a system of

“accounting” for water distribution and rights

• Expanding the water trade market

• Improving water storage and delivery systems

• Meeting all the water needs of urban communities

http://web.mit.edu/12.000/www/m2012/finalwebsite/solution/econ.shtml#Economics-capandtrade

16 http://web.mit.edu/12.000/www/m2012/finalwebsite/solution/econ.shtml#Economics-capandtrade

Cap-and-Trade Water Platforms: US

Prior Approp.

Cap-and-Trade Rationing

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Long term industry viability considered

Rights cannot be irrevocable

Water rights should minimize political pressures

Revenue –neutral water pricing model to distribute revenue to entities faced with financial difficulties

Watershed impacts must be monitored

True value of water needs to be transparent and available

Pros Cons

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• Cost of water will reflect true economic value

• Individuals and businesses will (likely) adjust use practices to reflect new economics of water supply, conservation and efficiency

• In the long term, water costs for consumers may potentially decrease

• Economic disruption will (likely) occur immediately after implementation

• In the short term, consumers may expect to pay more for water

• Lack of economic incentives for water sustainability will diminish effectiveness of sector-specific policy proposals

Revenue neutrality of market-based initiatives will mitigate potential negative ramifications for economic welfare


Monitoring

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• NAWTA, USEPA, USDOI* & Environment Canada will monitor abstractions from watersheds and watersheds’ hydrological processes for the three-year period from 2009-2011

• Data from initial monitoring period will be used in allocating allowances for first five years of the cap-and-trade program

• Participating in monitoring stages as well as the cap-and-trade program is mandatory for all firms withdrawing water from any watershed

Participation

• Firms not currently abstracting water but planning to do so must also participate in the cap-and-trade program

• Non-participating firms will be ineligible for allowances and thus may not withdraw water

• Native American reservations will receive an exemption, up to an abstraction limit of 150 liters per capita per day

• Public emergency services will receive an exemption, with no abstraction limits if limits would impede their response ability

* North American Water Trading Authority, US Environmental Protection Agency, US Department of the Interior


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NAWTA distributes allowances at beginning of each year via competitive auctions

Auctions consist of open bidding in which bid prices are accessible to all participating firms

Highest-bidding firms receive allowances up to the limit during monitoring period

Impartially conducted auctions provide equal access to allowances within each watershed zone, ensuring competitive pricing

All transfer payments from firms to governments via auction will be used for R&D


Options Trading

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• Options permitted to mitigate price volatility of allowances, with trading limited to allowances valid for current year of trade

• Allows water suppliers to secure in advance of predicated water shortages allowances sold by other participants

• If allowances are acquired at lower prices than spot price during drought, firms would be able to supply lower-cost water

Options-Use Rationale

• Implementation of derivatives trading for water abstraction allowance market reduces demand for unused allowances sold at spot prices during periods of water scarcity

• During drought periods, water is more affordable when participants can trade abstraction allowance backed derivatives


Firms exceeding their abstraction limits with obtaining necessary

allowances face fines triple uncapped cost of allowances

necessary to cover firms’ deficit

Local and regional authorities reserve right to penalize firms whose

excess withdrawals cause environmental harm

Firms withdrawing less than their allowable limit may sell their surplus

allowances to other firms

Firms wishing to exceed their annual abstraction limit will need to

purchase additional allowances

Firms can withdraw as much water as allowance permits and are entitled to the water they abstract, thus water already withdrawn via allowances

are considered firms’ property & not subject to NAWTA regulation

23 http://web.mit.edu/12.000/www/m2012/finalwebsite/solution/econ.shtml#Economics-capandtrade

Price ceiling for water ($2.352T) based on calculation that average residential end-user in each state will spend 5% of income on supplied water assuming current levels of consumption are maintained

Price floor for water ($528B) utilizes an allowance price of $1 per m3 in addition to price of purified effluent water delivered via mains

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Annual abstraction rate of 1,680 m3 per capita is used as baseline for calculating projected revenues


Cap-and-Trade Water Platforms: US Estimates

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0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

* Data adapted from reporting by US Geological Survey, US Census Bureau and US Department of Commerce


Percent of Total (in millions of gallons) Per Capita (in gallons)

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All Other States 49%

California 14%

Florida 6%

Illinois 4%

Michigan 3%

New Jersey 2%

New York 6%

Ohio 3%

Pennsylvania 3% Texas 10%


0

50

100

150

200

250


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$388,983

$529,214

$300,000

$350,000

$400,000

$450,000

$500,000

$550,000

$600,000

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032


Opportunities for Banyan Water

• Under a Cap-and-Trade Platform, Banyan Water may be able to: ◦ Provide more precise water cost forecasts to more accurately cater to clients’

water needs ◦ Invest in shares of water ◦ Act as a market-maker by providing constant liquidity and real-time water

pricing ◦ Provide clearing services to the market

• These areas may be opportunities for Banyan Water and could warrant

further analysis regarding their viability

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Appendix

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Platform Prior Appropriation

Water rights transferrable? Yes

Water rights considered real property?

Yes

Water rights conveyed as part of property or separate?

Both

Conflict Resolution Mechanism

1. Application for new appropriation or change in existing water right must be advertised once a week for three consecutive weeks in local newspaper

2. Protest must be filed within ten days of the last publication notice of the application

3. If settlement cannot be reached, applicant can request a hearing before the State Engineer or appointed hearing examiner

4. Burden of proof in hearing rests with applicant 5. Appeals go to district court

www.blm.gov/nstc/WaterLaws/pdf/NewMexico.pdf

Western Provinces

North Ontario Quebec

Platform Prior Approp.

Public Authority

Riparian Rights

Civil Code

Water rights transferrable? Only Alberta*

Yes No No


Yes


Both

Durability of rights Aboriginal or treaty rights to water “could govern water uses & take priority over all other uses (after ecological needs are met)”.

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* Alberta is the only province with prior allocation to have incorporated water transfers into its water use legislation

http://www.watergovernance.ca/factsheets/pdf/FS_Water_Rights.pdf

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Yes


Both


With a temporary transfer, the transferred allocation reverts to the original licensee after a specified time period. The government's holdback of up to 10 per cent of the water in an allocation transfer can remain in the natural water body or be held in a Water Conservation Objective license and will not be available for reallocation for other uses. This holdback applies to permanent and temporary transfers of allocations.

http://www.albertawater.com/index.php?option=com_content&view=article&id=299&Itemid=60

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Yes


Separate

Durability of rights DGA which overseas and grants new rights generally has little power over private water use and cannot cancel or restrict use after the rights have been granted; once granted, they are difficult to change


While it is possible to resolve disputes in court, the DGA and the court system are not necessarily coordinated which adds an additional complication with regards to water conflicts

Pros Cons

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• In addition to anti-waste and anti-speculative rules, limits use individual use and produces broad and stable distribution of water use opportunities

• Criticized for being over-regulated

• Encourages excess consumption of water to retain rights

• Environmental values of water (e.g. instream flows, recreational values, etc…) are not represented

• Less relevant today, as platform originally constructed to support local individual and cooperative irrigated agriculture

Pros Cons

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• Easy to implement • Has been used successfully when

there is anticipated drought or timing can easily be controlled

• Can be used to keep the peace as long as everyone is getting sufficient supplies of water

• Allows owners to use their portion as they see fit

• When costs do not fluctuate, it causes people to use water irrationally

• Quotas / rations are often given improper values, and is difficult to simply turn on and off the appropriate allocation

• Corruption prevalent • Does not work in times of

drought, especially when one party controls the supply

banyan water wharton field application class

Documents

bottled water industry

water trading platforms

trade water platforms

water rights conveyed

banyan water

water resources

shipping water

private water