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Christina Hung, Jayson Remmelts and Karen Tien The Wharton School, University of Pennsylvania Spring 2012 Field

Application Project

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. IGELs business and faculty advisors collaborated to identify solutionoriented, 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.
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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

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

International Water Conflict Cases

Mining v. Agriculture

Chiles 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

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

Chiles Resolution: Reform and Legislation

Chiles 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

Rights cannot be irrevocable and need to be have ability to sustain longterm sustainability objectives
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Turkey v. Downstream Neighbors

Turkeys 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 Turkeys potential water supply) also flow through Syria and Iraq Due to deepening water shortages, political tensions continue to rise in an already charged region 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

Turkeys Resolution: Water Rationing

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

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 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

Bolivias Solution

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

Big Rapids Farming v. Water Bottlers

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 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

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

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Alaska Water Exports Inc.

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

CA Resolution

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

High transaction costs and infrastructure / transportation constraints may limit the ability to trade water freely
http://www.greatlakeslaw.org/blog/files/Noah_Hall_Bottled_Water_Testimony.pdf

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Colorado River Compact

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 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

True value of water needs to be transparent and available as thinly traded markets create inefficiencies; states also need to accept reallocation
http://www.greatlakeslaw.org/blog/files/Noah_Hall_Bottled_Water_Testimony.pdf

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Cap-and-Trade Water Platforms: Australia

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

Environmental Impact

Urban Community Needs

Water-stress

Market Improvement

Accountability

Expansion

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

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

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Cap-and-Trade Water Platforms: US

Prior Approp. 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

Cap-andTrade

Rationing

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Pros

Cons

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

Participation

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

Firms not currently abstracting water but planning to do so must also participate in the cap-andtrade 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
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* North American Water Trading Authority, US Environmental Protection Agency, US Department of the Interior http://web.mit.edu/12.000/www/m2012/finalwebsite/solution/econ.shtml#Economics-capandtrade

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

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Options Trading

Options-Use Rationale

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

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

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

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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 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

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

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

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

Price floor for water ($528B) utilizes an allowance price of $1 per m3 in addition to price of purified effluent water delivered via mains
http://web.mit.edu/12.000/www/m2012/finalwebsite/solution/econ.shtml#Economics-capandtrade

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Cap-and-Trade Water Platforms: US Estimates

140,000 120,000 100,000 80,000 60,000 40,000 20,000 0

* Data adapted from reporting by US Geological Survey, US Census Bureau and US Department of Commerce http://web.mit.edu/12.000/www/m2012/finalwebsite/solution/econ.shtml#Economics-capandtrade

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Percent of Total (in millions of gallons)


250
Pennsylvania 3% Ohio 3% Texas 10%

Per Capita (in gallons)


200

150
New York 6% New Jersey 2% Michigan 3% Illinois 4% Florida 6% All Other States 49%

100

50

California 14%

* Data adapted from reporting by US Geological Survey, US Census Bureau and US Department of Commerce http://web.mit.edu/12.000/www/m2012/finalwebsite/solution/econ.shtml#Economics-capandtrade

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$600,000

$550,000

$529,214

$500,000

$450,000

$400,000 $388,983 $350,000

$300,000 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

* Data adapted from reporting by US Geological Survey, US Census Bureau and US Department of Commerce http://web.mit.edu/12.000/www/m2012/finalwebsite/solution/econ.shtml#Economics-capandtrade

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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

Platform Water rights transferrable? Water rights considered real property?

Prior Appropriation Yes Yes

Water rights conveyed as part Both of property or separate? 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

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Western North Provinces


Platform Water rights transferrable? Water rights considered real property? Water rights conveyed as part of property or separate? Durability of rights Prior Approp. Only Alberta* Yes Both Public Authority Yes

Ontario
Riparian Rights No

Quebec
Civil Code No

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

* 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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Platform Water rights transferrable? Water rights considered real property?

Prior Appropriation Yes Yes

Water rights conveyed as part Both of property or separate? Conflict Resolution Mechanism
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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Platform Water rights transferrable? Water rights considered real property?

Prior Appropriation Yes Yes

Water rights conveyed as part Separate of property or 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

Conflict Resolution Mechanism

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Pros

Cons

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 overregulated 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

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Pros

Cons

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

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