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VALUING WATER – THE BASICS

The basic concepts of water valuation as an ecosystem service are presented in this article. Water valuation can fulfill the need for a Natural Capital Accounting method for the private sector. This short article, although quite technical, provides the overview of the concepts and methods to value water. 

 

 

 

Water is undervalued, although water is key in our lives, as it is needed everyday to grow the food we eat, produce the energy we use, fulfill our basic needs, and even for many recreational activities. Competition over resources and its impact on our economy is already well known and experienced. Valuing water might change the way we perceive water, generate new insights and open new doors to innovative solutions to better manage it.

 

So how do we measure the value of water for an organization? How do we account for our reliance or impact on water resources? I present here the basic concept of water valuation as an ecosystem service, which can fulfill the need for a Natural Capital Accounting method for the private sector.

 

The value of water can take many forms within the ecosystem services concept, as a provisioning service (e.g. drinking water), regulating (e.g. waste assimilation within an ecosystem) or supporting service (e.g. typically within wetlands). The following four-step approach guides you to identify the value of water:

  1. Identify stakeholders who benefit from water (e.g. your organization, but also communities, the agriculture sector, other companies, etc.) and the types of benefits (e.g. direct supply of water, input for production/activity, etc.)

  2. Identify the ecosystem(s) that provide or influence the service (it can be a forest, agricultural landscape, wetland, etc.)

  3. Quantify qualitatively or quantitatively the relationship between the ecosystem(s) and the stakeholder(s). Here methods such as the water footprinting might be useful.

  4. Calculate the value of water by selecting the most adequate valuation technique (see list and description below). 

The valuation step is not always necessary, as in many situations the first three steps will be enough to derive a valuable insight. However, in some cases understanding the value of water in economic units is of great help to engage with stakeholders.

 

A table is presented below with the main families of techniques that we will further detail in the following section:

 

 

A wide variety of literature exists with regard to each of those techniques. It is not my objective to reproduce it here. The selection of a valuation technique depends on the type of stakeholders, the ecosystem service, the available data, the objective of the study, as well as others constraints.  To facilitate the selection of techniques and better understand when they apply, the table below summarizes the following elements: the question answered by each technique, the typical data required, the main stakeholders for which the technique is easily deployed and the favored type of values measured by each technique. 

 

 

 

The first two techniques (market and cost based) usually require less effort to deploy than the revealed and stated preferences. The benefits transfer method is probably the easiest method to use for screening studies, although it might lead to high uncertainty. An example of the market based (production function) approach is presented in this article.

 

The type of value you would like to measure is also important to consider. The type of value is typically separated into “use” (whether direct use as a provisioning service or indirect use as supporting and regulating services, including potential future value) and “non-used” values (such as existence or cultural values). Those types of values are summarized in the standard concept of the total economic value. Just keep in mind that this expresses your relation type with the ecosystem service, whether you:

 

1. Use it directly; 

2. Use it indirectly (through another ecosystem service that require water); 

3. Might use it in the future; and/or

 4. Think it is important to exist (for various reasons: cultural, religion, future generations, etc).

 

There is no current standard regarding the preferred technique to value water, and it is unlikely that one will be recommended over another in the near future, for example within the Natural Capital Coalition work.

 

As different techniques provide different results, there is no single value for a specific water resource. Some of those calculated values can even be added together. The key is to present the results as transparently as possible to allow a sound interpretation of the results and inform well the decision-making process.

 

A typical value of water ranges between 0-2 USD/m3, although it can be as high as 10-15 USD/m3 in some extreme cases. The unit to measure the value of water is not necessarily $/m3, it can be $/ha or /unit of production for instance. Using USD/m3 tends to lower the value of water in stressed area in some cases, as the calculated cost or value is divided by a large amount of water that is lacking, reducing the overall relative value although the total value is very large if it were measured per capita, ha or region.

 

Lastly, we should mention that the value of water can be approached from two distinct perspectives: 

  1. Reliance: you want to assess how much you benefit from water resources

  2. Externalities: you want to assess the impact on other stakeholders arising from your water use (i.e. impact which is not addressed currently by your organization). 

These two perspectives are addressed in the Natural Capital Protocol development. Sectorial or regional analyses tend to look at reliance. But most published corporate case studies (such as the Kering one) look in priority at externalities rather than reliance. Externalities linked to water resources use can be measured easily thanks to Life Cycle Impact Assessment methods such as the one used by Pfister et al. 2009 and Boulay et al. 2011.

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