Water and the High Price of Bad Economics

Dec 1, 2023MARIANA MAZZUCATO, PARTHA DASGUPTA, NICHOLAS STERN, and JOHAN ROCKSTRÖM

increasingly well-documented links between climate change, biodiversity loss, and water insecurity point to a fundamental issue: our economic systems are based on flawed thinking. We are forever reacting to market failures when we should be pursuing proactive strategies to shape the economy for the common good.

LONDON – Nearly 30 years into global negotiations to address climate change, efforts to control the problem are lagging, reflecting stalled progress toward creating a sustainable trajectory more broadly. Each year of delay adds to the urgency of the problem, and of the need to maintain Earth’s resilience against the most severe effects of global warming. 

It has been 17 years since the Stern Review alerted the world to the costs of inaction on climate change, and two years since the Dasgupta Reviewdid the same for biodiversity and the ecological underpinnings of our economies. Now, a similar expert consensus is emerging around water security. But most countries still do not seem to understand that neglecting water could undo the progress made on other fronts. We are facing a global water crisis that warrants the same level of attention, ambition, and action as the climate and biodiversity crises. 

The links between the climate, biodiversity, and water crises point to a fundamental issue: our economies are based on flawed economics. Current economic thinking leads us to consider only the proceeds of pillaging of the planet, while ignoring externalities such as environmental damage and the liabilities they imply. This bad accounting makes us look wealthier when we are actually becoming poorer, depleting the sources of our well-being at the cost of future generations.

It has been 17 years since the Stern Review alerted the world to the costs of inaction on climate change, and two years since the Dasgupta Reviewdid the same for biodiversity and the ecological underpinnings of our economies. Now, a similar expert consensus is emerging around water security. But most countries still do not seem to understand that neglecting water could undo the progress made on other fronts. We are facing a global water crisis that warrants the same level of attention, ambition, and action as the climate and biodiversity crises. 

The links between the climate, biodiversity, and water crises point to a fundamental issue: our economies are based on flawed economics. Current economic thinking leads us to consider only the proceeds of pillaging of the planet, while ignoring externalities such as environmental damage and the liabilities they imply. This bad accounting makes us look wealthier when we are actually becoming poorer, depleting the sources of our well-being at the cost of future generations. 

Worse, the same thinking results in inadequate policies. We are forever reacting to market failures and struggling to fill financing gaps, when we should be pursuing proactive strategies to shape the economy for the common good

The myopic view of the world reflected in current economic thinking – and in our overexploitation of natural resources on a global scale – now risks destabilizing the entire planet. We have already perturbed six of the “nine processes that are critical for maintaining the stability and resilience of Earth system as a whole.” The boundaries we are breaching– which include climate change, biodiversity loss, and freshwater change – define a safe operating space for humanity. By ignoring them, we have increased the risk of large-scale abrupt or irreversible environmental changes that would gravely threaten human civilization. 

The Dasgupta Review called for a fundamental shift in economic thinking based on strong sustainability principles, envisioning an economy that operates – at all scales – within scientifically defined boundaries. We have a finite budget when it comes to environmental systems like water, biodiversity, carbon, nitrogen, phosphorus, pollutants, and soils. We need an economy that operates within these budgets in an efficient and socially responsible manner.

Without urgent, systemic, collective attention on the inextricable links between climate change, water crises, and biodiversity loss, there can be no sustainable future, because inaction in one area invariably ripples across the others. Wetlands and forests are the world’s largest carbon stores, and they depend on a stable water cycle and thriving biodiversity. Terrestrial carbon sinks absorb about 25% of our carbon dioxide emissions. Without them, atmospheric CO2 would stand at 500 parts per million instead of the current 420 ppm. 

Urgently phasing out fossil fuels is necessary but not sufficient. Even if we could decarbonize the economy tomorrow, we still would not have a sustainable future until we take steps to maintain water systems and natural habitats. The science now shows that nature loss on its own can send us crashing through the Paris climate agreement’s target of limiting global warming to 1.5°C above pre-industrial levels, ushering in a world where millions of people in vulnerable environments would no longer be able to adapt. 

Safeguarding water resources and biodiversity must be prioritized alongside decarbonization as we make the transition to an economy that operates within safe planetary boundaries. Following in the footsteps of the Stern Review on the Economics of Climate Change and the Dasgupta Review on the Economics of Biodiversity, the Global Commission on the Economics of Water is urginga similar shift on the issue of water. 

This new thinking is based on three pillars. First, we need to treat the global water cycle as a common good that is governed collectively and in the interests of all. Not only is water increasingly intertwined with climate change and the depletion of the planet’s natural capital; it is also a major, but underappreciated, source of interdependence between countries. 

Second, we must move beyond a reactive market-fixing approach, and toward a proactive market-shaping one that catalyzes investment in water and prices negative externalities appropriately. Only with a new economic mindset can governments value, govern, and finance water in a way that drives the transformation we need. 

Third, addressing our interlinked challenges requires holistic, cross-sectoral, and outcomes-oriented “policy mixes,” rather than the isolated and siloed interventions that have characterized economic policymaking until now. Mission-oriented economic strategies can mobilize all relevant ministries, sectors, and stakeholders around specific water-related goals, and outcomes-oriented instruments and institutions can help us achieve them. 

The United Nations Climate Change Conference (COP28) in Dubai offers an opportunity for a significant breakthrough. Mounting scientific evidence that we have destabilized the global water cycle on which we all depend is a stark indication that our collective efforts have fallen short, even after three decades of UN climate negotiations, and a decade after the founding of the Intergovernmental Platform on Biodiversity and Ecosystem Services. 

Water-related issues can no longer be ignored. If we do not urgently address them alongside our other interlinked challenges, the progress that we make in other areas will be for naught.

Mariana Mazzucato

MARIANA MAZZUCATO

Writing for PS since 2015 
60 Commentaries

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Mariana Mazzucato, Professor in the Economics of Innovation and Public Value at University College London, is Founding Director of the UCL Institute for Innovation and Public Purpose, Chair of the World Health Organization’s Council on the Economics of Health For All, and a co-chair of the Global Commission on the Economics of Water. She is the author of The Value of Everything: Making and Taking in the Global Economy (Penguin Books, 2019), Mission Economy: A Moonshot Guide to Changing Capitalism (Penguin Books, 2022), and, most recently, The Big Con: How the Consulting Industry Weakens Our Businesses, Infantilizes Our Governments and Warps Our Economies(Penguin Press, 2023). A tenth anniversary edition of her book The Entrepreneurial State: Debunking Public vs. Private Sector Myths was published by Penguin in September.

Partha Dasgupta

PARTHA DASGUPTA

Writing for PS since 2005 
3 Commentaries

Partha Dasgupta, Emeritus Professor of Economics at the University of Cambridge, is Chair of the Dasgupta Review on the Economics of Biodiversity.

Nicholas Stern

NICHOLAS STERN

Writing for PS since 2009 
12 Commentaries

Nicholas Stern, a former chief economist of the World Bank (2000-03) and co-chair of the international High-Level Commission on Carbon Prices, is Professor of Economics and Government and Chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science. He is a former chair of the Stern Review on the Economics of Climate Change.

Johan Rockström

JOHAN ROCKSTRÖM

Writing for PS since 2015 
18 Commentaries

Johan Rockström is Director of the Potsdam Institute for Climate Impact Research and Professor of Earth System Science at the University of Potsdam.

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