Price of Water in China Drives Up Diesel Prices

peter orszag china waterChina’s economy is large enough that it can affect life here in the United States in indirect and surprising ways.  In an article for Bloomberg View, Peter Orszag illustrates this with the way the price of water in China is driving up gas prices at home.  The water shortages in 2011 China was causing an increased use of generators running on diesel fuel to bring electricity to citizens.  This caused diesel prices to rise in the US.  The shortage of water in China was due to mispricing.  An easy fix could help allocate water sources, thereby mitigating the effects on the rest of the world.

We hear more and more about China’s dependence on coal power for the bulk of its electricity production, but the second-largest source is hydropower.  The fact is, water is important in producing both types of electricity…and a lot of it is needed.  Water is essential to hydropower in obvious ways.  With coal, water is needed for mining, processing, and cooling the plants while they burn coal.  Four years ago the Chinese were using over thirty trillion gallons of water annually just for coal production.  That accounts for a fifth of the country’s overall consumption.  Unfortunately, the need for water in coal plants has only grown since then.  China consumes over 15% of all water consumed on the planet.

It can be hard to come by all that water.  Supplies are dwindling, and pollution limits further.  Eighty percent of usable fresh water is south of the Yangtze, where only fifty percent of the population lives, making water very precious in the north, indeed.  In the North China plain, the water per capita is only one fourth the amount which is generally considered the minimum for people to live.

Many solutions were offered to remedy the situation, but one stands above the rest.  Water resources need to be repriced.  Water is too often treated as if it had no value at all.  Many developing countries, or countries near the equator, know just how precious water is.  Farmers use water for trade in Oman, thereby setting a reasonable value for the essential commodity.  This creates an incentive to be more efficient in water use and consumption.  Studies have found that price-linked programs designed to conserve water use tend to work better than those that are divorced from price, such as specific water restrictions or subsidizing more efficient tools or hardware.

Peter Orszag suggests allotting a certain amount of water for daily use.  This would ensure that poorer households and communities would always have access to water of necessity.  Any water used above that level would be charged, with rising rates as the amount of water use increase.  Studies find that the Chinese are happy to pay for water, as long as it is reliable and high-quality.  The low prices ensured neither.

from Economist Peter Orszag


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