The Ethics and Economics of Water Futures Trading

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Ninety percent of North America’s fresh surface water is found in the Great Lakes. Thus, from time to time, the Great Lakes are proposed as a solution to the drought in the American West. There have been speculation about getting water to Idaho, Phoenix or Las Vegas.

But some say the most immediate danger is the commodification of water, including trading water in a futures market.

“I think water is a human right, and I don’t think we should speculate or negotiate human rights,” said Dave Dempsey, author of “Great Lakes for Sale.”

Dempsey has over 35 years of experience as an environmental policy analyst, working for the Michigan Environmental Council, the Great Lakes Fishery Commission and the International Joint Commission.

Dempsey published “Great Lakes for Sale” in 2009, but published an updated edition last year in response to recent Great Lakes water diversions in Wisconsin.

“It’s a taste of what’s to come,” Dempsey said. “And these diversions are legal under the pact if they are in the Great Lakes states,” adding that these legal diversions are a concerning loophole in the Great Lakes Compact.

Dempsey said a new market to trade California water futures through the Chicago Mercantile Exchange Group is another troubling development that prompted updates to the book.

But some economists say trading in water futures is nothing to fear.

“My perspective isn’t necessarily that they’re good or bad,” said Heidi Schweizer, assistant professor of agricultural and resource economics at North Carolina State University. “It’s a financial instrument with a purpose, and people will only use it if they think it could help them manage risk in some way.”

Schweizer co-wrote a article on the subject with Ellen Bruno, assistant professor in the same field at the University of California at Berkeley. According to Bruno and Schweizer, water futures contracts act more as a form of insurance for water users than as an actual water exchange market.

“In the California context, we often think of farmers,” Bruno said. “Given the uncertainty associated with California’s water supply, there is a natural risk associated with the price of water.”

Bruno said participating in a water futures market could help farmers, municipalities and other water users manage this risk, especially as rainfall becomes more variable due to climate change.

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“Locking in the price of water eliminates future uncertainty and helps farmers make planting decisions,” Bruno said.

Dave Dempsey said he agrees the new market is not a cause for panic, but sets an ethically questionable precedent.

“I see this as part of a trend to treat water as a commodity — as something that has a market value that can be quantified and turned into profit or loss,” Dempsey said. “I totally disagree with that premise.”

Schwiezer and Bruno said that despite what people think of water futures trading, it seems unlikely to take off anytime soon due to a lack of investors in the first year of the market. market.

But Bruno said that – if properly implemented – a water futures market could be a useful tool.

“If the price of water as an input for production and agriculture is not correct, it will lead to misuse of this resource and exacerbate water scarcity problems,” Bruno said. “There are ways to use market instruments to improve the price and allocation of water.”

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