Trucost Blog / 04 Apr 2013

Valuing water to make the best of capital

Our White Paper for Yarra Valley Water calls for industry and regulators to integrate the total economic value of water into decision-making to help deliver water infrastructure with environmental outcomes that benefit communities.

Running down resources carries a high price tag. Four of the 10 cities with the highest water tariffs globally are in water-scarce Australia. Among them is Adelaide, which taps water from the River Murray. The Murray-Darling Basin includes half of Victoria and generates one-third of Australia’s food and 39% of agricultural income.

But removing too much water from the Basin’s rivers has damaged crop production and caused environmental damage, with big economic costs. A plan is now being actioned for environmental improvements that are expected to deliver AUD100 million in economic benefits annually.

Across Australia, a National Water Initiative aims to increase water efficiency and safeguard water resources by returning over-allocated and over-used water systems to sustainable levels of extraction and increasing the quantity of water for the environment. To help deliver this, states agreed to manage environmental externalities linked to water use – damage costs often picked up by communities. States are supposed to look into using market-based tools such as pricing to account for environmental externalities. But the National Water Commission says it is frustrated at the lack of progress, and found that arrangements to manage externalities are still needed to “determine whether they are optimal”.

Yarra Valley Water hopes to spark action in Victoria by commissioning Trucost to estimate the “value of water”. A better understanding of the costs and benefits of water management should help inform thinking on options to deliver measurable, sustainable outcomes. Trucost found that each cubic metre of water used in Melbourne costs society almost AUD6 (USD6) on average. Each m3 of water saved therefore delivers a gain of AUD6 through avoided damages to water’s ecosystem functions. The value of water fluctuated with levels of water scarcity. However, it was higher than the average price paid by customers of Yarra Valley Water (AUD1.90 per m3) throughout the eight-year period analyzed. Traditional decision-making, which externalizes the costs of impacts such as depleted groundwater, undervalues water.

Companies can value the benefits of water and other natural capital “sources” and “sinks” to improve decisions. They can include the value of natural resources in business risk and opportunity management. Accounting for the true costs of resource use and pollution can reveal opportunities to optimize operations, products and supply chains. It can provide decision-makers with a more complete picture of the most effective ways to allocate resources.

Our White Paper for Yarra Valley Water calls for industry and regulators to integrate the total economic value of water into decision-making to help deliver water infrastructure with environmental outcomes that benefit communities. The goal is to allocate resources to manage water in a way that avoids or limits environmental degradation, rather than incurring the costs of damages later.

The project is pioneering for a water company, and forms part of a growing global trend in corporate valuations of natural capital. 90 companies are joining WAVES Partnership talks in the U.S. this month to explore natural capital accounting in decision-making. Sportlifestyle company PUMA launched the first-ever environmental profit & loss account in 2010, and has since used insight from valuations to start reducing risk from the impacts of operations and suppliers, as well as to develop more sustainable products.

Our valuations of natural capital use by Consumer Goods companies providing products such as food have revealed options to minimize risk from water scarcity linked to commodity price rises in supply chains, and to develop brands with smaller footprints. To “optimize” is “to make as effective or useful as possible”, or “to make the best of”. Valuing and managing natural capital costs can help keep control of price tags and profit margins.

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