Sandor predicts a U.S. water futures market

By Lucy Ren

Known for his invention of  financial futures and carbon trading, environmental economist Richard Sandor predicted on Tuesday that Western drought will lead to the launch of a U.S. water futures market as soon as the next year.

Scarce resources like water and air will replace crude oil as the most important commodities of the 21st century, Sandor said at the University of Chicago’s Gleacher Center in downtown Chicago, during a presentation about his new book, Sustainable Investing and Environmental Markets: Opportunities in a New Asset Class.

Sandor said he has been “encouraging the coming of the water market,” and that the Commodities Futures Trading Commission is developing an algorithm to separate the price of water as a life necessity from the price of the water as a commodity.

“We are on the verge of breaking into water markets in the world,” Sandor said.

Sandor has been a leading advocate of “putting a price on nature,” specifically as a way to assure sustainable uses of natural resources.

He stated that water trading in the U.S. is currently disguised in the form of commodities trading, for livestock and crops require large amounts of water. For example, he said, a pound of corn requires 55 gallons of water, and a pound of wheat, 156 gallons.

Sandor said that California, now facing one of the most severe droughts in its history, has drawn great attention to the problem of water resources and the possibility of water trading in the U.S.

On a related note, Sandor said a looming shortage of water in China, which is home to 20 percent of the world’s population but only 7 percent of its water, also calls for the commoditization of water.

“I think water quantity and water quality trading will go on and will emerge out of the drought in California,” Sandor said. He hopes the innovation would then spread to China, where the greater water deficit exists. “I want to go over there and educate,” he said during an interview after his talk.

“I would put forward the hypothesis that California and China will lead the way in climate change policies and legislations,” Sandor added.

Sandor said the recent evolution in wealth creation, which was guided by fundamental structural and technological changes, could be summarized by different “eras of commoditization,” ranging from the invention of financial instruments like the interest rate futures contract in the 1970s and 1980s, to the “commodification of data” since the mid 1990s, led by the birth of the Internet and booming of technology companies.

Calling it “a field of dreams,” Sandor said commodities trading in Chicago can send signals regarding “when and where to build a grain elevator in North Carolina.”

“The history of the grain markets was,” Sandor said, “pricing first, and then infrastructure investments will follow,” rather than the reverse. He asserted that market signals from water trading would provide similar cost-effective solutions to water shortages and pollution.

During a Q&A session, Sandor responded to a listener’s concern regarding trading basic life necessities like water, by stressing that the discussion of pricing applies only to water consumption above and beyond the needed amount for basic hydration and hygiene purposes.

“It’s interesting to learn that one solution to the environmental problem is financial markets,” said Jeffrey Jahns, an attorney who attended the event. “There is a lot of work, and I think it’s important to have people like Richard who are always putting in front of policy makers opportunities for solutions to environmental problems.”

The meeting was sponsored by the University of Chicago Law School, where Sandor is a part-time lecturer in the  law and economics program.

Photo at top: Trading innovator Richard Sandor predicted creation of a U.S. market in water derivatives. (Lucy Ren/MEDILL)