Processes such as oil extraction from sources such as tar sands and deep-water offshore oil wells, as well as the expansion of first-generation biofuels such as corn-based ethanol are setting the stage for a “water/energy collision” of resource management policies. “With increasing frequency,” write the Pacific Institute researchers, “we value energy production over water production.”

Citing a study by Danish water consultancy DHI Group as well as one from the University of Texas (earlier link), the researchers point out that the water footprint of renewable energy sources varies widely, and is particularly intense for first-generation biofuels made from sugar, starch, vegetable oils, animal fats, or other food-source feedstocks, rather than non-food sources such as cellulose.

Climate change. The report “Water Scarcity and Climate Change: Growing Risks for Businesses and Investors” notes that drought conditions are currently causing water shortages in Australia, Asia, Africa, and the United States, and that drought patterns are in many cases mirroring previously predicted effects of climate change. While climate change is projected to increase precipitation in some areas, it is also likely to destabilize freshwater supply in other areas by compressing precipitation and snowmelt into shorter and more intense periods, overwhelming existing catchment infrastructure and creating longer periods of drought.

The percentage of the world’s population living in water-stressed regions—currently one out of every three—is expected to double to two of every three by 2025 as declining water supplies are further stressed by increased water demand for irrigation, hydration, and industrial cooling in warming regions. Although desalination has the potential to reduce freshwater demand in relatively affluent coastal urban areas by providing an alternative source for drinking water, it remains the most expensive demand-management option due to its energy-intensive processes, and is particularly vulnerable to rising energy prices.

Last year, a special report by the Intergovernmental Panel on Climate Change (IPCC) forecast that the effects of rising temperatures would lead to “changes in all components of the [global] freshwater system” in the 21^st century. The IPCC’s Fourth Assessment Report, released in 2007, had also forecast that “climate change will challenge the traditional assumption that past hydrological experience provides a good guide to future conditions.”

However, the authors of the Ceres report note that “businesses and investors are largely unaware of water-related risks or how climate change will likely exacerbate them.” Industries which face the greatest risks include the agriculture, beverage, electronics, energy, apparel, pharmaceutical, forest products, and mining sectors.

Sectoral Water Risks

20th century world water withdrawals by sector, in cubic kilometers. Source: UNESCO. Click to enlarge.

Apparel. Cotton production, which requires 25 cubic meters of water for every 250 grams of finished product—the approximate weight of a T-shirt—is both water-intensive and highly vulnerable to risk. Cotton is typically grown in arid regions converted to farmland; in Uzbekistan, for example, which is one of the world’s largest exporters of cotton, the extraction of water from rivers that supply the Aral Sea is a key contributor to its deterioration and desertification. Wastewater from cotton production degrades local water supplies, but many countries which export cotton have relatively weak wastewater regulations

Electronics. Semiconductor wafer production is extremely water-intensive: in 2007, Intel and Texas Instruments used a total of 11 billion gallons of ultra-pure water (UPW), which requires significant amounts of energy to purify. Eleven of the world’s fourteen largest semiconductor factories are located in Pacific Rim regions which are already water-stressed.

Food Production. The largest and fastest-growing use of water is embedded in modern food production. Although livestock production requires many times the amount of water per calorie of plant-based food production, agricultural water requirements have also intensified as a result of the conversion over the past century of many naturally arid regions, such as California’s San Joaquin Valley, Texas, and parts of Egypt and Pakistan, to high-volume farming regions.

Drought is expected to become more common in many of these areas, as well as higher surface temperatures, which dry out soils, evaporate snowmelt, and require accelerated water inflows. Beverage manufacturers also face direct competition with local communities for affordable drinking water, and bottled water sales are beginning to decline in some developed countries because of environmental concerns.

Biotechnology. Chemicals and microorganisms in biotech wastewater present a particular threat to local ecosystems. Synthetic chemicals are typically developed for persistence, and do not readily break down in nature when discharged by pharmaceutical manufacturers.

Forestry. Pulp and paper manufacturing is the third largest consumer of water as well as fossil-based energy in the United States. While the sector is at particular risk from climate change, forests are also key components of watersheds, influencing water availability, transport, and quality.

Metals and Mining. The mining sector is restricted by the location of ore, and water must be imported to support mining operations. Development of new sites may also face local opposition; Canadian mining company Barrick Gold, for example, plans to mine gold from beneath glaciers in Chile; Andean farming communities which rely on the glaciers for their water supply oppose the project.

Electric Power. The electric power industry accounts for more than a third of all freshwater withdrawals in the United States, with nuclear power plants requiring about 40% more water per kilowatt-hour produced than fossil-fuel power plants. Declining levels and/or warmer temperatures of cooling water supplies during periods of extreme heat and/or drought have triggered nuclear plant shutdowns in the US and Europe in the past five years. Hydropower-based generation is also at risk, particularly in the Western United States, due to drought.

The Ceres report poses five primary questions as discussion points for exploring the level of risk that a company’s water policy might pose to its own long-term economic health:

• Does the company know and measure its water footprint, including wastewater discharges, and understand the relationship between its energy and water use?

• Has the company assessed business risks associated with its water footprint, including both direct and indirect risks (e.g. supply chain), and developed contingency plans for potential future risks such as those associated with climate change?

• Is the company engaged with key stakeholders, including consultation and collaboration with affected communities, government entities, and NGOs?

• Has the company integrated ongoing assessments of water risk into its business planning, governance, and risk management structures?

• Does the company disclose and communicate its water performance and associated risks, using comprehensible and broadly accepted metrics?

The report concludes by pointing out several cross-sectoral trends in water risk for businesses:

• Typically, water risk is embedded more in the value chain, especially of raw material production, than in operations or assembly of final product. This risk is rarely reflected in corporate sustainability reports or security filings.

• Industries that require large amounts of water withdrawals, ultra-pure water, or both face increased risk of competing directly with local populations for water access. Fallout ranges from reputational damage to shutdown or relocation of facilities.

• Wastewater discharges for industries with large gray water footprints are an increasing problem as developing countries adopt environmental regulations.

• Fragmented information about corporate water risk as well as underlying supply conditions often make it extremely difficult for investors to assess the true magnitude of the risk.

• As water supply declines, the quality of available water also typically declines, requiring more treatment and increasing the amount of energy embedded in the delivery of adequate water supplies.

Resources

• Water Scarcity and Climate Change: Growing Risks for Businesses and Investors