The western half of the United States just endured another year of severe drought — water levels in the Colorado River Basin had not been so low since the 1930s. Water, in fact, is short everywhere: Drought conditions are present on every continent except Antarctica.
Increasing demand — the world’s population has increased from 2 billion to 8 billion in the past 100 years — is meeting decreasing cheap supply: Gravitational data from NASA show that more than half of the world’s largest aquifers are having more water pumped out of them than is being naturally replaced.
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So, yes, the world needs more water. But the most immediate problem is that water is not available where and when it is needed most. Even where abundant, it can be unavailable. Rights to water are often based on century-old practices, while the places and times where and when water is most valuable have shifted. Climate change is intensifying the crisis, as we’re seeing drier dries and wetter wets. Last summer, water-scarce Pakistan saw one-third of its land under water due to historic flooding.
Yesterday’s solutions aren’t going to cut it: The world needs legal, economic, and technological innovation. With standardized water rights, good incentives, and increasingly precise measurements of existing and prospective supply, financiers and entrepreneurs will more readily invest in advanced water technologies that make water more abundant water, while governments will have better ways to ensure fair and affordable distribution.
The combination of market design and deep tech — the application of cutting-edge AI against big, real-world problems — is already helping solve other environmental challenges. Applications include changes to carbon crediting, where misaligned incentives are generating enormous inefficiencies, and energy generation, where the accommodation of growing consumption will require mixing different technologies and developing the infrastructure — both physical and economic — to readily switch between them.
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A few years ago, one of this piece’s authors, Paul Milgrom, helped liberate the market for broadband spectrum licenses, which saw inefficiencies similar to what we see with water today. Working with the Federal Communications Commission, he designed the Broadcast Incentive Auction, which redefined and relocated TV broadcast licenses, making the same spectrum available to wireless companies for cellphone applications — and raising $7 billion of new government revenues in the process.
The lesson: Market design greatly affects the price, abundance, and accessibility of given goods. In a functioning market for water, sellers with surpluses would be free to trade their allotments to buyers with deficits. Trades of water rights could be decentralized and fully voluntary.
The need for improvement in the water market is widely recognized by regulators, farmers, municipalities, and industrial users because critical pieces of infrastructure are missing.
Chief among them: standardized rights and regulations. Current rights often remain unique to the land on which a given supply of water rests or on past use, making it challenging for prospective buyers and sellers to identify one another and propose contracts. For markets to facilitate reallocation, rights must share common definitions of the quantity and kinds of withdrawals allowed.
A second missing piece: uniform incentives. Many water rights in the Colorado River Basin, for example, contain “use-it-or-lose-it” clauses, which cap future withdrawals at the present level of consumption. This encourages landowners to use their full allotment of water to retain their rights, even if doing so is clearly wasteful, and gives rightsholders a disincentive to adopt water-saving technologies.
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Third — and here is where deep tech comes in — is the precise measurement of both tapped and untapped water. Many holders of water rights have only recently been required to report their withdrawals at all, and those reports can be imprecise and costly. It can be difficult to determine how water withdrawals at one location will affect availability at another and more challenging still to assess how different uses affect the levels of groundwater reservoirs.
Exceptional new products are poised to thrive in a healthier market for water: deep-tech startups are creating a wave of innovation in three critical areas. A first set of companies is improving the sourcing of fresh water, whether from the earth, the air, or the ocean. A second is bringing deep-tech tools like synthetic aperture radar and quantum sensors to the measurement of water. A third is using novel science and engineering to bring radically improved filtration of wastewater. Fortunes will be made by companies able to give the world more of what it needs.
But no matter how much water we have, we’ve got to use it wisely and fairly. To increase access to clean, affordable water in the face of climate change, we need a market design for water as sound as this imperative is grave.
Paul Milgrom, a 2020 recipient of the Nobel Prize in Economic Sciences, is a professor of economics at Stanford University and cofounder of Auctionomics. Zachary Bogue is cofounder and a managing partner of DCVC. Silvia Console Battilana is the CEO and co-founder of Auctionomics.
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