Water Is Being Traded on the Stock Market for the First Time
Some say trading water as a commodity could help mitigate future water crises, but others are highly skeptical
This is The Color of Climate, a weekly column from Future Human exploring how climate change and other environmental issues uniquely impact the future of communities of color.
In 2016, California experienced one of the worst droughts in the history of the state. Over 100 million trees died and billions of dollars in agriculture were lost. Farmers across the state were stuck between a rock and dry place: They needed more water for their crops, but the price of water was higher and more uncertain because of the drought.
Now, despite a powerful recent winter storm that brought rain and snow to California, the state is once again experiencing some form of drought. This is a recurring and growing problem for local farmers, especially in Southern California, as the historically dry state becomes even drier as a result of climate change. And in December 2020, to address the dire need for water, the Chicago Mercantile Exchange recently made a historical move: For the first time, it allowed investors to trade water as a commodity on the stock market. Some say trading water as a commodity will partially help improve California’s water crisis, but others are highly skeptical of the move.
The Chicago Mercantile Exchange partnered with two companies — WestWater Research, a consulting firm that generates the pricing data used for the market, and Nasdaq — to make this possible. These companies say the move will help farmers and water districts in Southern California have more price certainty during dry periods and could help mitigate the state’s water scarcity problem.
“This isn’t going to solve any water problems. This isn’t going to produce more water.”
California previously divided its water supply through “water rights.” Whoever holds the rights to the water in a certain location can pump it from the state’s ground and reservoirs. Districts with surplus water supply can sell their water rights to other districts in need. The problem is that during dry years, water is more expensive for the farmers who need it the most, and there is uncertainty in terms of the supply of water in the state at any given time (and how much it will cost) because of how dry the state gets.
The creators of the new exchange hope that it will bring more price transparency to the state’s water market by creating price points in the future that investors can bet on.
Now, with the new exchange, districts that are paying for extra water in a dry year can bet on futures contracts — agreements between buyers and sellers to trade something at a predetermined price and at a specific time — to offset the price of water rights in the future.
“We’re bringing first and foremost more marketing information or price transparency into the market that alone should help drive a lot of efficiency around how people make decisions about how much water they need, or how much water they may make available for others to use,” Clay Landry, managing director at WestWater Research, tells Future Human.
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The futures contracts will help Californians “manage the financial risk of droughts,” wrote Ellen Hanak, an economist and director of the Public Policy Institute of California’s Water Policy Center, in a guest commentary for the Sacramento-based nonprofit newsroom CalMatters.
“By compensating those with long-standing water rights for moving water to activities and places where the lack of water will be more costly, trading encourages partnerships and cooperation in the sustainable management of this vital resource,” she wrote.
Others have mixed feelings about the exchange. Peter Gleick, president emeritus of the Pacific Institute, a water research institute based in Oakland, California, tells Future Human he’s “concerned” about the possibility of investors betting on the scarcity of water in an already dry state.
“This isn’t going to solve any water problems. This isn’t going to produce more water,” Gleick says. “It’s a financial tool to hedge changes in the price of water, which might provide a little bit of an economic benefit to certain well-water users.”
Basav Sen, climate justice project director at the Institute for Policy Studies, a progressive think tank, told Earther that he was “horrified” when he first read about the exchange.
“What this represents is a cynical attempt at setting up what’s almost like a betting casino so some people can make money from others suffering,” Sen told Earther.
Landry, however, says that a “people versus the market” narrative is false. “I don’t think anyone wants people in our society to go without water,” he says.
In her guest commentary for CalMatters, Hanak acknowledged and addressed the fear that many Californians have about the new exchange but said investor involvement in the state’s water market won’t change the amount of water that’s available in California or its price. “Crucially,” she wrote, “the futures market won’t disrupt protections already in place to ensure actual water trades are done responsibly.”
Although there is a lot of disagreement about the potential benefits and perils of the exchange, there is agreement that the immediate impact of it will be small. On the day Landry spoke to Future Human, he said there had been seven trades on the exchange, and that it hasn’t been very active since its inception. Still, with California looking like it’s headed for another drought, it should be interesting to see how activity on the exchange picks up.
California isn’t the only state experiencing water scarcity that could end up trying this strategy to help with the issue. Landry says WestWater is looking at areas with “similar geographies” to California, like Arizona, Colorado, and Washington, to set up potential exchanges in the future.
The fear of commoditizing water has been covered for decades now in documentaries, by environmental justice activists, and even through films like Mad Max. As Landry tells Future Human, It’s a “messy and complicated situation” about a resource that everyone needs, which warrants innovations like water futures. But we should keep an eye on this going forward to make sure investors aren’t taking advantage of the system.