Bangladesh Government has set shadow price of water across industries in an effort to ensure its sustainable use
In the words of Leonardo da Vinci, Water is the driving force of all nature. Unfortunately for our planet, supplies are running dry by the minute. The world population continues to soar, but the rise in numbers has not been accompanied by a steady increase in the resources we are bestowed with. In the name of development, we have progressed a lot for sure, but did we take the time to think about the cost?
With around 8 billion mouths to feed, food production has been putting a lot of pressure on both surface and groundwater. Irrigated agriculture in areas with limited precipitation and surface water during the growing season has increased groundwater use. However, the withdrawal rate far outpaces its time to replenish them naturally.
Globally, agriculture makes up around 80% of freshwater use, but most farmers barely pay the actual costs associated with this usage. A socially appropriate price of water should include the cost of precluding other profitable services, environmental externalities, and factors such as increased extraction cost for future generations. However, in Bangladesh, policies to institutionalise the price of water are either insufficient or absent altogether. In most instances, groundwater is completely free beyond the cost of pump installation. As such, other users only bear the cost of extraction and transportation, and the least heed is paid to the needs of future generations.
Do We Sit Back and Let It Run Out?
In light of this, putting a price tag on water may be a solution to prevent its excessive use. However, the economic scarcity of water is rarely reflected by a functioning market with competitive water pricing due to various disturbances associated with insufficient property rights, externalities, governmental price control, monopoly of water supply, and so forth. Consequently, there is, to some extent, inefficiency in the allocation of groundwater and the aquifers are depleting at a rate faster than ever. An alternative way to assess the perceived value of water is by calculating its shadow price for different sectors reflecting the marginal value of production of the scarce resource.
Bangladesh Has Taken Its First Step
Recently, the water resource ministry of Bangladesh has estimated water prices for different sectors in line with the stated solution. For instance, the hidden cost of water in the agriculture sector in BDT is 2.5, which means the marginal unit of groundwater used will produce BDT 2.5 worth of crops, given the quantity of other inputs (labour, fertiliser etc.). So, if the costs estimated for industries are BDT 1800, it implies industries manufacture BDT 1800 worth of products with the last water unit. By this definition, a low shadow price entails a low revenue per cubic metre of water consumed and reveals wasteful use of the nonrenewable resource. Application of nonrenewable groundwater can generate higher revenue if used in sectors with a higher shadow price.
Producers will employ water as long as the price equals the additional value generated, aiding an equitable natural resource distribution. Nevertheless, sub sectors under a sector may exhibit different shadow prices. For example, although under agriculture, the shadow price for the Muhuri Irrigation Project can go as high as BDT 18.78. The cost of water varies in the industrial sector, too, reporting per cubic-metre cost of BDT 600 to 1800 for gas-based power generation. Other sectors report per cubic-metre cost much less than industries. The construction sector only costs BDT 169 per cubic metre, while the food and beverage sector price varies across types. Among industries, the apparel business has reported a lower shadow price of BDT 77.85, mainly due to efforts in conserving and recycling. The facts and figures expose our country’s vulnerability to environmental changes that might severely hamper water security in future.
A socially appropriate price of water should include the cost of precluding other profitable services, environmental externalities, and factors such as increased extraction cost for future generations.
Change Maybe Unwelcomed
So, incorporating water prices is a need of time to align ourselves with sustainable development goals and ensure a secured world for our future generations. But the change may not be welcomed by all because we are used to taking water for free. We will need a thorough cost-benefit analysis of using the shadow price of water in projects to have enough facts to convince the sceptics.
The Way Forward
Water is a limited resource. If the externality generated by the user does not get incorporated into the pricing of the input, people will keep misusing it. That is why we require a concerted effort from multiple stakeholders to reduce waste and ensure efficient practises in the household, irrigation, or industrial purposes. A few industries in Bangladesh have taken up waste management and water recycling measures to align with the world’s need for more green sectors. But it can be said for sure that with a proper incentive structure, the government can push more industries to adopt the practises. The government can also consider incorporating shadow prices in future prospective plans for Bangladesh accompanied by a proper motivation structure to really consider the matter.
Although this may push industries to opt for the best, the change may be too drastic. Capital investment is a long process and may take months for the industries, if not years, to fully adapt to the change. Thus, experts suggest that the government focus on awareness building before fully incorporating the new price structure into the system. Already, some apparel makers have been paying water prices to the government, while setting up tube-wells in Narayanganj and Gazipur requires payment of some fees. Shadow prices, if levied on entrepreneurs, will ultimately raise prices for buyers who will find alternative sources to get their hands on the product at a cheaper rate. This may also encourage unhealthy competition among makers to appropriate profit. So, instead of just jumping into any change, we should consider all pros and cons of putting a price tag on water.
