The boisterous COP26, the 26th Conference of Parties under the?UN Framework Convention on Climate Change, finally came to an end last month. This event, which was supposed to take place in 2020, was late for entirely 12 months because?of the?Covid pandemic. Yet, this was also an event which the world was placing a lot of hope on — because it’s 10 years away from 2030, and actions to cut carbon emissions and realising carbon neutrality will determine whether the world could make the goal set in the?Paris Agreement, which is to limit global warming preferably by 1.5°C at the end of this century. Moreover, economies are slowly recovering after the extensive lockdowns caused by Covid, which opens up a window of opportunity for global economies to take a ‘green’ turn. Two weeks’ time was short enough to pass quickly and the boot is now on the floor. What COP26 has achieved and what had it left behind?
Emission cuts
There is no alternative to cutting the emission of greenhouse gases to address the challenge of global warming. According to?the study?of the Intergovernmental Panel on Climate Change, to limit global warming by 1.5°C by 2100, the world needs to lower its emission to 55% of 2010 level before 2030?[1]. Though governments have submitted or updated their Nationally Determined Contributions (NDCs) ahead of COP26, this has only closed the emission gap by 15-17%, which is far from enough to meet the 1.5°C goal set by the?Paris Agreement.?Estimations?based on current emission cuts expect the temperature rise by 2100 to be around 2.4°C, which is almost one degree higher than the 1.5°C goal?[2]. As?each 0.1°C warming is crucial?[3],?it would be irresponsible for the future to allow the current situation to continue given the huge consequences of the warming. Furthermore, all these estimations are based on the assumption that the pledges of governments are going to be implemented fully without any discount.
Deforestation
The forests are important carbon sinks of the earth. Around 20% of GHG emissions is absorbed by the biosphere of the earth, and?the majority is taken by the forests?[4].?According to?FAO, 178 million hectares of forest disappeared between 1990 and 2020, which is somewhat equivalent to the size of Libya. Deforestation mainly took place in Africa and South America?[5]. A typical example is?the Amazon?of Brazil, which has witnessed a 17% decrease in size so far, and the ecological services of the Amazon would reach?a tipping?point when the decrease reaches 20-25%?[6]. Stopping deforestation and protecting forests around the globe are crucial for adapting to climate change and maintaining healthy ecosystems.
The Glasgow Leaders’ Declaration on Forests and Land Use?was reached on November 2 at COP26. Leaders of the signatory countries agree to “[r]eaffirm our respective commitments to sustainable land use, and to the conservation, protection, sustainable management and restoration of forests, and other terrestrial??ecosystems”, and “halt and reverse forest loss and land degradation by 2030”?[7]. The agreement has been endorsed by 141 countries, including countries like Russia, Canada, China and Brazil, who have large areas of forests, and the endorsers now cover more than 90% of global forests. However, as the warming continues, forests will?become less efficient?in storing carbon?[3]. Therefore, it is insufficient to rely simply on protecting forests.
Methane
Methane takes up a major proportion of human emitted Greenhouse Gases, second only to carbon dioxide (CO?), and accounted for?13%?of 2019 GHG emission (CO? shared 76%)?[8]. However, methane is far more efficient in retaining heat. It could be?80 times?more powerful than that of CO? in the first 20 years after release?[9]. It is estimated that methane emission has caused a 0.5°C temperature rise since the industrial revolution, which is again second only to that caused by CO?. Of the global methane emission, 60% comes from human activities, with the?main contributors?being agriculture, coal mining, landfill, oil and gas, and wastewater treatment?[10].
Initiated by the United States and European Union, more than 100 countries (regions) launched the?Global Methane Pledge, which aims to lower global methane emission to 70% of 2020 level. Countries (regions) who have joined the Pledge account for 70% of global economy and their methane emission takes up half of global total. If the Pledge is fully implemented, global temperature rise by 2050 is expected to be lowered by 0.2°C?[11]. According to the?studies of IPCC,?sustained and rapid reduction of methane emission not only help slowing down warming, but could also improve air quality?[3]. However, as methane breaks down (around ten years) much faster than CO? (centuries), slowing down the global warming would still need more ambitious reductions in emission.
Climate financing
As we have?said?before COP26, restructuring energy portfolio, reducing GHG emissions and improving social resilience all require huge amounts of investment. Since the 18th century,?less than one fifth of the countries are responsible for more than 80% of global CO? emissions?[12].?However, regions such as Africa and small island countries, who had far less emissions historically, are hit by climate change disproportionately hard. A common point is that those major emitters should share more responsibility for climate change adaptation, including providing?financial support?for less developed countries and regions?[13]. In 2009, at COP15 held in Copenhagen, developed nations promised that, starting from 2020, a total of 100 billion USD will be provided to less developed countries to help them adapt to climate change.
One year later, even before the start of COP26, the promise was announced broken and had to be?delayed to 2023. Alok Sharma, COP26 President, criticised the delay as “a source of deep frustration for developing countries”?[14]. People all know that in a Prisoner’s Dilemma, building trust is the key to reaching the optimal outcome. In this game of cutting emissions, the failed promise in providing climate financing is for sure to have a blow on the mutual trust between nations and cast shadow on emission cuts and carbon neutrality.
Geopolitics
Geopolitics, as?Prof Klaus Doods of Royal Holloway, University of London?puts it, is “concerned with questions of influence and power over space and territory” and “uses geographical frames to make sense of world affairs”?[15].??However, in the face of a common challenge like the warming climate, geopolitics for many a time hinder a united action plan. The world needs more nations to get above the narrow-minded geopolitical framings and synthesise efforts around the globe to address this existential crisis.
China and the United States surprisingly unveiled at COP26 their?Joint Declaration on Enhancing Climate Action, and “are committed to tackling it through their respective accelerated actions in the critical decade of the 2020s, as well as through cooperation in multilateral processes, including the UNFCCC process, to avoid catastrophic impacts”?[16]. As world’s major economies and political powers, the Joint Declaration is highly important for a global united plan for climate actions. However, there are also many comprises at COP26 to geopolitical considerations. For example, in the final text of the?Glasgow Climate Pact, the phrasing around coal was changed at the last minute?from “phase out” to “phase down”?[17].
Water
Climate change impacts the world mainly through the hydrosphere. Under continued warming, the global water cycle is?becoming more active and variable. Each 0.5°C warming will see significantly increase of droughts and more frequent impacts on agriculture. Each 1°C warming will increase extreme rainfall events by 7%, and raise risks of flooding. Additionally, the rising sea level adds further risks of coastal flooding for communities in those areas?[3]. So far, around?two thirds of global population?undergoes water shortage for at least one month in a year?[18], and that number is expected to?increase by one fold?by 2050?[19]. During the Covid-19 pandemic, the importance of water and sanitation for public health is further highlighted. As WMO?says, ” management, monitoring, forecasting and early warnings are fragmented and inadequate”. For many countries, in particular African nations, water shortage is an ongoing pain?[20].
COP26 has attracted much discussion around carbon, yet to better mitigate and adapt to climate change, we need to pay more attention to water. Because regardless of 1.5 or 2°C, the global water cycle has been fundamentally changed. For universal and fair access to clean water and sanitation, and sufficient water to maintain healthy ecosystem services around the globe, water would be an imperative topic.
Beyond Glasgow
Climate change is the most challenging existential crisis that the human kind faces in the 21st century. In terms of pathways, there are two that must be taken, one about mitigation and the other about adaptation. To mitigate climate change, we must think about reaching net zero as soon as possible, or even reaching negative emissions. Yet given the progress in Glasgow, there is still a very long and difficult way ahead. Adaptation means improving our own capacity and resilience under growing uncertainties and hazard risks. In this regard, standing to the test are not only our technologies but also our capabilities of integrated management.
References
1. IPCC. (2018). Summary for Policymakers. In?Global warming of 1.5°C. An IPCC Special Report on the impacts of global warming of 1.5°Cabove pre-industrial levels and related global greenhouse gas emission pathways,in the context of strengthening the global response to the threat of climate change,sustainable development, and efforts to eradicate poverty?(pp. 3–24). IPCC. https://www.ipcc.ch/sr15/download/
2. Climate Action Tracker. (2021).?Warming Projections Global Update: November 2021. Climate Action Tracker. https://climateactiontracker.org/documents/997/CAT_2021-11-09_Briefing_Global-Update_Glasgow2030CredibilityGap.pdf
3. IPCC. (2021). Summary for Policymakers. In?AR6 Climate Change 2021:The Physical Science Basis. IPCC. https://www.ipcc.ch/report/ar6/wg1
4. Pugh, T. A. M., Lindeskog, M., Smith, B., Poulter, B., Arneth, A., Haverd, V., & Calle, L. (2019). Role of forest regrowth in global carbon sink dynamics.?Proceedings of the National Academy of Sciences of the United States of America,?116(10), 4382–4387. https://doi.org/10.1073/pnas.1810512116
5. Wilkie, M. L., Pekkarinen, A., Rametsteiner, E., Taber, A., Wertz-Kanounnikoff, S., & Simonson, W. (2020).?The state of the world’s forests 2020: Vol. Online Report?(pp. 1–214). FAO and UNEP. https://doi.org/10.4060/ca8642en
6. Amazon Conservation Association. (n.d.).?Deforestation in the Amazon. Retrieved December 20, 2021, from https://www.amazonconservation.org/the-challenge/threats/
7. UN Climate Change Conference (COP26). (2021, November).?Glasgow Leaders’ Declaration on Forests and Land Use. https://ukcop26.org/glasgow-leaders-declaration-on-forests-and-land-use/
8. Yoro, K. O., & Daramola, M. O. (2020). CO2 emission sources, greenhouse gases, and the global warming effect. In?Advances in carbon capture?(pp. 3–28). Elsevier. https://doi.org/10.1016/B978-0-12-819657-1.00001-3
9. Control methane to slow global warming — fast. (2021).?Nature,?596(7873), 461–461. https://doi.org/10.1038/d41586-021-02287-y
10. Global Methane Initiative. (2020).?Global Methane Emissionsand Mitigation Opportunities. Global Methane Initiative. https://www.globalmethane.org/documents/analysis_fs_en.pdf
11. European Union. (2021).?Launch by United States, the European Union, and Partners of the Global Methane Pledge to Keep 1.5C Within Reach. https://ec.europa.eu/commission/presscorner/detail/en/statement_21_5766
12. Project, G. C. (2021). Supplemental data of Global Carbon Project 2021.?Global Carbon Project. https://doi.org/10.18160/gcp-2021
13. Timperley, J. (2021). The broken $100-billion promise of climate finance – and how to fix it.?Nature,?598(7881), 400–402. https://doi.org/10.1038/d41586-021-02846-3
14. Ljunggren, D. (2021, October 26).?Developed nations to deliver climate fund 3 years late, hope to rebuild trust. Reuters. https://www.reuters.com/business/cop/developed-nations-say-they-can-deliver-100-bln-climate-change-fund-by-2023-three-2021-10-25/
15. Dodds, K. (2019).?Geopolitics: A very short introduction. Oxford University Press. https://doi.org/10.1093/actrade/9780198830764.001.0001
16. United States Department of State. (2021, November 10).?U.S.-China Joint Glasgow Declaration on Enhancing Climate Action in the 2020s. United States Department of State. https://www.state.gov/u-s-china-joint-glasgow-declaration-on-enhancing-climate-action-in-the-2020s/
17. Volcovici, V. (2021, November 15).?How a dispute over coal nearly sank the Glasgow Climate Pact. Reuters. https://www.reuters.com/business/cop/how-dispute-over-coal-nearly-sank-glasgow-climate-pact-2021-11-14/
18. Mekonnen, M. M., & Hoekstra, A. Y. (2016). Four billion people facing severe water scarcity.?Science Advances,?2(2), e1500323. https://doi.org/10.1126/sciadv.1500323
19. Munia, H. A., Guillaume, J. H. A., Wada, Y., Veldkamp, T., Virkki, V., & Kummu, M. (2020). Future transboundary water stress and its drivers under climate change: A global study.?Earth’s Future,?8(7), e2019EF001321. https://doi.org/10.1029/2019EF001321
20. World Meteorological Organization. (2021, October 5).?Wake up to the looming water crisis, report warns. https://public.wmo.int/en/media/press-release/wake-looming-water-crisis-report-warns
]]>At the end of this month, the city is going to attract global attention again, but this time not for its humour. COP26, the 26th Conference of Parties under the UN Convention of Climate Change, will be held in this city. This is yet another important event on climate change after the last COP held in Madrid, Spain 2019. It is also the third Conference of Parties to the Paris Agreement.
According to latest authoritative reports, the concentration of atmospheric green-house gas has continued growingthroughout 2020 and so far in 2021. The global mean surface temperature between 2011 and 2020 has been 1.09 (0.95-1.20) °C higher than the average between 1850 and 1900. The future trend of climate change would largely depend on the actions taken around the globe. Therefore, many updates and outcomes from COP26 are worth of the attention of everyone of us.
Nationally Determined Contribution
In 2015, the Paris Agreement made a goal to keep the rise in mean global temperature to well below 2 °C above pre-industrial levels, and preferably limit the increase to 1.5 °C by the end of this century. To realise that goal, Parties need to submit, at a 5 year interval, their Nationally Determined Contribution, which is their voluntary pledge and plans to reduce their greenhouse gas emissions, and keep raising the contribution. COP26 will be the deadline for submitting the first round of the NDCs. However, according to the latest report of the UNFCCC secretariat, the NDCs submitted or updated by Parties are far from enough for the Paris Agreement. To realise the 2 degree goal would require an additional 30% emission cut, and the 1.5 degree goal would require 55%.
The progress so far is driving the world towards a future with a 2.7 degree warming. It would be tightly hinged on our efficiency in emission cuts that we could avoid a disastrous future climate. However, emission cuts are clearly a prisoner dilemma for the Parties. Because emission reductions are to a very large extend the restructuring of the energy portfolio, which in turn would mean impacts or even harms to the structure of economy. During COP26, the debate around NDCs of the Parties would be in the focus of the world.
Money, money, money
Each of the actions, be it restructuring energy portfolio, reducing greenhouse gas emissions or improving resilience of the society, cannot go without huge investments. The impact of climate change is not evenly distributed around the world. The most disadvantaged communities are usually hit the hardest, for example, small island countries, less developed regions, aboriginal people and ethnic minorities. However, more than 60% of cumulative greenhouse gas emission since 1751 is from the United States (25%), European Union (22%) and China (15%). Though the former two have been reducing their emissions in recent years, emissions from emerging economies such as China and India are picking up quickly by emission surges. China surpassed the US to become world’s largest emitter in 2006, and its emission accounted for around 28% of world’s total in 2019.
This is clearly unfair for the most impacted communities. Therefore, at COP15 in Copenhagen in 2009, to help less developed regions for climate mitigation and adaptation, rich countries pledged an annual fund of 100 billion US dollars for five years starting 2020. But so far the promise has not been cashed. Among the NDCs of many developing countries, many are still conditional and depend on sufficient funding. Therefore, climate financing would be another heated topic at COP26.
Water and Climate
There is a vivid analogy which says “if climate change is a shark, then water is its teeth.” This is true because the shark is harming the prey fish through its teeth. Similarly, many of the impacts of climate change are made through the water system of the earth. According to the latest report of IPCC, as warming continues, the global water cycle is going to be further intensified with bigger variations. Each 0.5 degree warming would result in evident increase in the intensity of droughts. Every 1 degree warming is going to increase the possibility of extreme precipitations by 7%. These extreme events will keep challenging our capacity in mitigation and adaptation. Water is also a necessity for life, for many ecosystem functions, and for productivity in many sectors.
Yet this analogy is not perfect as changes in the hydrosphere are going to feedback into the climate system, and therefore, amplify the impacts. The discussion of climate change could not be full without attention to water. Apart from governments, COP26 is going to attract many stakeholders including the private sector. This is an excellent opportunity for drawing attention and starting discussions for water management, including for the integration of multiple institutions and multiple sectors.
Let’s hope our joint climate ambition will not be late. Let’s also hope, after 100 years, when we revisit the memory of this city, we could still recall her humour, instead of the grudge or regret of climate inaction.
COP26 was originally scheduled for 2020. It was late for entirely 12 months because of the pandemic. But let’s hope our joint climate ambition will not be late. Let’s also hope, after 100 years, when we revisit the memory of this city, we could still recall her humour, instead of the grudge or regret of climate inaction.
]]>Wading a river by feeling the stones?
For China’s Reform and Opening, Chinese people would often metaphorically compare it to ‘wading a river by feeling the stones’. This is a valuable and scientific way, which is a philosophical process that extracts knowledge from past experiences to guide further practices. It is also the same case with our science of climate and hydrology. The understanding of the past plays a fundamental role in our current research and future practice.
Therefore, our science of climate and hydrology relies heavily on observations of the past. Complete sets of long-term observation of climate and hydrology is the indispensable ingredient to improvements in climatic and hydrological studies. However, Chinese scientists are practically disadvantaged in this regard?out of historical reasons. Let’s take rainfall for example. China’s longest and most complete set of rainfall data could?date back to 1870?(Beijing). But that time would be pushed to much sooner time?in the 1950s?if we look at that at country scale. To the contrast, a complete rainfall record could be traced back to?as early as 1767?(Oxford) in the UK.
Once in a hundred or thousand years
In the field of climate and hydrology, we often hear people say something is ‘once in a hundred or thousand years’. Many people understand this as something that is going to happen every one hundred or thousand years. In fact, this is the recurrence period of a event, which means the probability of that. Events of?a hundred or thousand year recurrence time means it has a 1/100 or 1/1000 probability of happening in a year. For example, a?thousand year heatwave means that there is a 1/1000 probability for the temperature to reach a certain level.
How do scientists come up with the probabilities? This actually is similar to ‘wading a river by feeling the stones’. Historical observations could allow scientists to make an estimation of the recurrence time. Let’s still exemplify this with rainfall. The probability of rainstorms of a certain intensity could be estimated with the times that it happened in history.
This seems a pretty easy job, but there is something tricky here for the scientists — How do we measure the probability of events whose?recurrence time is longer than the records that are available? Scientists often use a method called?extrapolation?in mathematics for that. It is a method where the unknown is estimated based on understanding of the known range of samples. Such an estimation is risky as its accuracy largely depends on the correctness of the method and representativeness of the samples, and therefore, it is a field where scientists are still exploring tirelessly.
From 1.5 to 2.0 degrees?
Planet Earth receives a huge amount of energy from the radiation from the Sun, and its surface reflects excessive energy back into space. The existence of the atmosphere is like a huge blanket which stops the earth from cooling down too quickly and therefore keeps it at a suitable temperature. However, since the industrial revolution, as humans consume more fossil fuels including coal and petroleum, more greenhouse gas including carbon dioxide and methane is produced and emitted into the?atmosphere. The more greenhouse gas there is, the more efficient the ‘blanket’ becomes in retaining heat, and therefore warms up the whole planet.
The warming has profound implications for the earth system. It could lead to?many problems?including food insecurity, water shortage, poverty, flood, drought, extinction of species, public health threats or even violence. Therefore, the?Paris Agreement?which came into force in 2016 set a target to limit global warming by 2 degrees, preferably 1.5 degrees, by the end of this century. Though there is only a 0.5 degree difference, the former has a much more significant impact. Some studies find, for instance, heatwaves would be 2.6 times more likely under 2.0 degree warming than 1.5 degree.
The Intergovernmental Panel on Climate Change (IPCC), UN’s intergovernmental body of climate science, released a?Special Report on?Global Warming of 1.5 oC?in October 2018. It warns that we must limit global warming by 1.5 degrees by the end of this century, or else we will facing devastating extreme events around 2030 at huge costs of human society and earth ecosystem. Though lockdowns out of the pandemic reduced global carbon emission in 2020, the concentration of carbon dioxide in the atmosphere was still increasing. Global mean temperature has been?1.2 (±0.1) oC higher?than the 1850-1990 average.
Wading today’s river by feeling yesterday’s stones?
What has the warming earth to do with the extreme events we have talked about? There are two aspects that need to be considered. On one hand, warmer temperatures make the atmosphere less stable but more capable of holding vapour, and therefore make it easier to form extreme precipitation and subsequent hazards. On the other, global warming brings more uncertainties to the earth’s spheres including atmosphere, hydrosphere etc. In other words, the stone we have felt might no longer be the same as today’s.
We have mentioned in the above that our science of climate and hydrology relies on past observations. For the studies of our scientists, one important assumption is that the earth?systems “fluctuate within an unchanging envelope of variability”. Climate change, together with other global changes such as population growth and changes of land use, breaks such ‘stationarity‘. Therefore, the knowledge system we have established might no longer be able to perfectly explain the situation we are facing. In figurative words, the stones we have felt yesterday may no longer help us wading the river today.
What we need to do?
In face of this new river of higher risks of natural hazards, we need to do a lot. In simple words, we need to improve the ‘resilience’ of the entire society, so that when disruptions out of natural hazards take place, the social system could return to a stable state faster and better.
In flood risk management, risk equals the probability of flood events times losses caused by flooding. In this perspective, we could see that to lower the risks of disasters, we could rely not only on infrastructures that lower the probability of hazards, including those for flood control, drainage, observation, etc, but also proper institutions of the society that reduces losses, which would cover, for example, forecasting and warning, infrastructure operation,??disaster relief and asset management. The realisation of these two aspects would also require a solid basis of knowledge, which comes only from basic research and information management.
What we could do as ordinary people?
Many may think that the above seems rather distant from our daily life, but in fact not. While individuals could do little to reduce the probability of natural hazards, we could do much in reducing the subsequent loss by, for example, paying attention to weather forecasts and warning, purchasing insurance, familiarising ourselves with knowledge of helping ourselves and each other in case disasters take place. These would all contribute to the resilience of individuals and families.
For climate adaptation, while national energy and decarbonisation policies and programmes are indeed crucial, it is not to be neglected that individual contributions could also be huge. All our behaviours may cause carbon emissions, also known as the ‘carbon footprint’. Though it is completely impossible to ask everyone to be absolutely carbon?neutral, we could easily adopt?tiny habits?that could help lower it. For example, we could start by using less disposable items, buying one less piece of garment, making one less road trip, taking one less flight, having one more vegetarian meal, or drinking one less cup of coffee. China made a solemn commitment at the UN General Assembly in September 2020 that it is going to reach peak carbon emission by 2030 and become carbon neutral by 2060. However, fossil fuels still make up a major share in its current energy portfolio, and China?is still the biggest carbon emitter of the world. We need everyone onboard to become?carbon neutral.
No man ever steps in the same river twice.
Heraclitus, Geek philosopher
“No man ever steps in the same river twice.” Said Geek philosopher Heraclitus. Under a warming climate, the environment we rely on is no longer the river we were familiar with. We must adapt to the changes, so that we could still go across this new river in success.
]]>Limiting the global temperature rise below 1.5°C to slow the increasing variability in storm and drought behavior, ensuring reliable water supplies, improving the quality of life within a healthy earth system will require a similar but more sustained international response. Agency leaders face a daunting challenge – how to manage large river basins for the benefit of communities and the environment when these systems are changing rapidly due to climate, population growth and landuse change. Agriculture, urban growth, water quality, environmental sustainability, economic growth, invasive species, resilience to flood and drought are interconnected with responsibilities spread across multiple agencies. These leaders are also confronted with a deluge of data – often at the terabyte or petabyte scale from multiple sources including climate, hydrology, hydraulic, water quality, ecology, economic, demography, agricultural, and human health. Technology to develop interoperability between models and data sources combined by sustained research can develop the knowledge base on which to inform these river basin scale decisions that often need to be made on a close to real-time basis. Research institutes (such as NHRI, IWHR and State Key Engineering Research Centers) and universities are working with experts in government agencies to harness these diverse data sources and build the predictive inter-operable and inter-disciplinary systems models to articulate alternative futures based on management actions that could be taken. These predictions, sometimes captured by visualization and virtualization technologies comprise ‘augmented environmental intelligence’ to assist decisions taken by leaders and communicate these benefits and consequences to the communities most impacted within the river and coastal ecosystems.
]]>Water is the source of life, necessity of production, and base of ecosystems. The importance and preciousness of water resources is self-evident, but why is water still wasted extensively? To answer the question in a simplest way, the scarcity of water resources is not valued as it should be, and water is undervalued. These are the crucial reasons for the extensive waste and pollution of water.
I. Relative abundance and absolute scarcity
People might argue, we are not in short of water in the south, and therefore its scarcity does not have to be valued. Indeed, the heterogeneity of water in spatial and temporal distribution is one of the most important characteristics of water. The reality that water is abundant in the south China and scarcity in the north forms this illusion that it’s only necessary to talk about its scarcity where water is in shortage. Therefore, in water-rich areas, people have a low awareness of water shortage. However, in face of people’s infinite demand for water for life and production, water is in scarcity in an absolute term. Even though water may be relatively abundant locally, the capacity of aquatic ecosystems is always limited, and more consumption means more sewage discharge, which is also an important reason that south China is in no water shortage, but lacks quality water. Therefore, water-rich areas must give up the false idea that water is inexhaustible, and raise their awareness that water is a scarce resource of natural, economic and social values, with which we could sustain the “three red lines” in water quantity, quality and consumption efficiency.
In drier areas, water is of course more precious. Water availability often becomes the missing crucial piece of the puzzle for many high-quality industrial projects. Meanwhile, the shortage of high-quality water sources also threatens drinking water safety of the local communities, and the sustainability of ecosystems in arid areas. Since water is indispensable, water may even be more precious than “diamond” under certain circumstances. Compared to costs for residential, industrial and other water uses, the scarcity of water in water-deficient areas is greatly underestimated under most circumstances.
II. Value discovery via the market
Accurate valuation of water might be the most difficult task compared to other natural resources. This is because water has the most complicated natural, economic and social attributes. Water sustains life. While the value of life is immeasurable, water is priceless in this regard. Water is of different quality, usage, and locations, which leads to different values, like mineral water versus tap water. Water in another form, flood for example, could even have negative values. Therefore, there is still no ideal model to value such a complicated resource.
Market is known as the invisible hand, which is good at discovering the real value of goods. As a form of market mechanism, auctions often conclude the transaction of goods at a price closest to their intrinsic value. So, can market mechanism be applied to the realisation of water value? Water agencies and researchers of the country have been actively exploring the reform in this field. Around 2000, Wang Shucheng, former Minister of Water Resources, proposed the development water right market in China. His efforts successfully promoted water right transfers in the Yellow River Basin. Irrigated farms got the incentive to save water and transfer the saved water intake to industrial enterprises, which not only made the farms a considerable economic return, but more importantly, solved the urgent needs of industrial enterprises. Because of different rates of return, the same resource produced greater economic benefits after water was transferred to sectors with higher rates of return, which improved the overall well-being of the society.
The Third Plenary Session of the 18th CPC Central Committee decided to “allow the market a decisive role in allocating resources”, which gave a new boost to water market. The establishment of the water market was marked by three landmark events. First, piloting of water right was launched in 7 provinces nationwide. Second, China Water Exchange was established. Third, the Interim Regulations for the Administration of Water Right Transactions was put into effect, which is the first special administrative regulations for water right trading. Under the market mechanism, sellers and buyers decide prices on a voluntary basis through negotiation under the regulatory framework. Through market competition, water realizes its true value.
However, some people are afraid of the market. They believe that the marketisation of water as a crucial resource risks malicious hoarding and price jacking. Therefore, some concerns remained about the use of market as a means in China’s water governance. But we must point out that, water market does not mean that the market is in charge completely, and instead, China’s unique institution can effectively make up the inherent defects and avoid market failures. The establishment of a trading market of water rights, with China’s unique characteristics of “active government” and “effective market”, is the must-go road for practicing the idea of “allowing both roles of the government and market in water governance” in the future.
III. Valuation as the premise of water market
Water market helps set up water price, but markets fail. Marxist political economy holds that the price fluctuates around its value. So, effective valuation of water is crucial to the healthy and prosperous development of water markets, and valuation is the premise and foundation of the pricing of tradable water rights. As Parker (2006) and Claydon et al (2009) argue, pricing of tradable water rights need to ensure that parties involved in the trade are economically incentivised to do so. That is to say, water right prices shall at least reflect its value. These transactions are divided by Eyal Brill (1997) into “active trades” and “passive trades”, and the average costs determine prices. Therefore, costs are the most important aspect of valuation.
At present, the most used valuation methods include: full costing, shadow pricing, and marginal utility approach, etc. Wherein, full costing is to determine the value of water right finally by calculating various cost inputs and compensations of transactions. The costs involved in general transactions mainly include the cost of resources consumed, the cost of project, the cost of risk compensation, the cost of ecological compensation, and the cost of economic compensation. The advantage of this method is that, it considers all the costs of water right transaction, the scarcity of water resources, and also the costs of water right transferor, and meanwhile, it interiorizes the cost of ecological environment damage, so it is a relatively complete pricing model. It also has a remarkable disadvantage, that is, the content and method involved in the calculation of various costs are different, so the fairness of value assessment is affected.
Shadow pricing reflects the scarcity of water, and its theoretical basis is marginal utility. The marginal benefit of each incremental unit of water is its shadow price. This reflects the relationship between the scarcity and value of water. Positive shadow price indicates scarcity. The greater the scarcity is, the higher the shadow price will be. Zero shadow price indicates surplus of the resource, and the increase in its supply will not bring about economic benefits. The advantage of shadow pricing is that it reflects the relationship between supply and demand in the market and the scarcity degree of the resource. Its disadvantages are that this method requires a large amount of data, and it is difficult to set the model parameters.
The theory of marginal utility believes that the value of water rights lies in two parts. First, water rights are in scarcity. In a local area, water availability is limited, while the demand for water keeps increasing. When the actual exploitation exceeds the renewal of local water resources, shortage or depletion of water resources will occur. Because of the scarcity of water, water rights are tradeable. Second, water rights create utility. Water is a basic natural resource which is indispensable from life, economy and the environment. Water has many functions, including water supply, irrigation, power generation, shipping, aquaculture, and tourism. Therefore, the right to use water, that is, the water right, forms utilities. Water rights have different marginal utilities, namely values, among different sectors or water users, and this drives the transaction of water right. The scarcity and utility of water therefore meet the conditions for the realization of value. This method, for its compressive consideration of scarcity and utility, is advantageous since it is in line with traditional economic principles. However, since different water right trading has different utilities, it is very difficult to be adapted for universal assessment of water value.
To sum up, the existing methods for assessment of water value aim to consider and discuss the value of water comprehensively and objectively from different dimensions and perspectives, and reflect the value of water to a certain extent. However, because of the uniqueness of water as a resource, the above-mentioned methods all have their own disadvantages and limitations, among which the greatest common disadvantage lies in that they only assess the current value of water resources, which is the existing value of water for life, production and ecology. Due to the uncertainty of water availability, the uncertainties in its value out of future fluctuations are not sufficiently considered. For example, because of climatic changes and human activities, possible future risk of water shortage could raise the value of water. Therefore, it’s necessary to treat the uncertainty in values of water from a financial perspective.
IV. Financialization as leverage to value enhancement
Financialization is the advanced form of the market. Financing is no stranger to us all, and various financial products are around us, including banking, insurance, funds, and securities. But do you know that water can also be financialized?
Yes, the natural scarcity and uncertainty of water resources make it possible to capitalize and financialize water resources. Generally speaking, water finance refers to various financial transactions and institutional arrangements related to water resources transactions, including the trading of water rights, the development, utilization, protection and financing of water resources, the investment and financing of water conservancy projects, and other relevant financial intermediary activities. At present, the uneven spatial and temporal distribution of water resources, the frequent occurrence of floods, droughts and water shortage, the serious waste of water, and other water problems in China have severely hindered the high-quality development of Chinese economy and society. Whether it is possible to find a way which can effectively realize the cross-regional and cross-temporal allocation of water resources using financing tools has gradually become a frontier issue attracting greater attention from the green financing field. Since traditional measures for management of water resources can no longer adapt to the present chain problems in flood and drought, agricultural production, energy structure, ecological health and water ecosystem safety, etc., water banks, water bonds, water futures, water options etc. are becoming bright spots in green financing of the field.
Water bank are enterprise-like entities similar to commercial banks. They are established under the macro-control of the national administration in charge of water, and take water as its service. It mainly refers to a mechanism which promotes the legal transfer and market transaction of the right to surface water, groundwater, and water stored in other forms. Through deposit and loan business like a commercial bank, the water loans and deposits by the water bank can be regarded as assets and liabilities respectively, and therefore a balance sheet can be drawn. Through the water deposits, water loans and water interests, farmers, factories, water service companies with water right can sell surplus water to the water bank. Acquiring parties that need water for production, life and ecology can obtain water right by payments, so that water could be transferred from water-rich areas to water-scarce ones, or from high-availability seasons to low-availabilityseasons. Meanwhile, water interests, divided into current or fixed rates, short-term or long-term rates, could also adapt to and regulate the demand-supply relation between water deposits and loans.
Similarly, various financing instruments with investment value, transaction demand and fluidity, such as water right mortgage, water right pledge, water right bond, water right repurchase, water right option, water right futures, water right insurance, water right “insurance + futures” and other diverse forms of investments, play important roles in the optimal allocation of water resources. For example, in 2005, a bank loan of RMB48.8 billion was obtained from 7 banks including the China Development Bank, the Industrial and Commercial Bank of China with a collateral of the water charges from the east and middle routes of the South-to-North Water Transfer Project; in 2012, Glacier Water Investment Co., Ltd. obtained a general fixed asset investment loan of RMB200 million specially for reservoir construction from Agricultural Bank of China with the right to operate water resources; in 2018, Ezhou Water Group Co., Ltd., with the right of reservoir irrigation as pledge, obtained a loan of RMB20 million from China Development Bank Hubei Branch. The above cases not only sufficiently prove the financial attributes of water resources, but also build a bridge between water resources market and capital market, and realize the transformation of water rights from commodity to finances.
With the implementation of water financial transactions, more people are re-thinking about their understandings of water, and start to consider means of saving water resources as well, so as to make the most out of this limited resource for local economy and society. Promoting the development of water finance and developing the asset based securitization of tradable water rights can sufficiently explore the inherent value of water, effectively activate such assets, lower the costs of search and information in transactions, optimize the structure of water allocation, and transfer water from low efficiency sectors to higher ones, and realize the full value of water. Meanwhile, the price discovery, risk management, financing adjustment, and other functions of the market can also effectively measure and manage risks of fluctuation, guide reasonable flows of fund, so as to further serve and support the high-quality development of the water market.
— And the realization of all these depends on our better understanding and valuation of water.
References
- Claydon, G. K. &Onta, P. S. (2009) Smart water planning in Queensland, Australia, paper presented at OzWater’09 Conference, Melbourne, Australia, 16–18 March 2009.