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Water credits (II): A project-based approach

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Laith K. Al-Yacoub
Eng. Laith Al-Yacoub (M.Sc.) is a Water and Environment Consultant. He is passionate about water management associated with social and economic development
  • Water credits (II): project-based approach

Following my first article Water credits: Efficient or burden, and after speaking with several experts on the matter, I realized that a project-based approach for a water credit system is the best starting point. Projects can be tailored to meet certain criteria, especially for water-related issues in comparison with creating systems for whole areas, regions, and countries. The latter suffers from what is known as transboundary water issues related to geopolitics and economics, not to mention creating a system that complies with different water regulations for each water-related sector. Therefore, I present this new article to view what a water credit system on a project level might look like.

First of all, in this system water credits will be defined as permits that represent a volume of water with specific quality accounted for a certain project/program, and certified by a water credit provider. This “provider” would typically be a private organization that sets rules and regulations to guide project implementers in the design of their activities, to reduce water consumption with standardized water quality.

To specify the value of the permit we have to take inspiration from the carbon credit system, where 1 carbon credit = 1 ton of CO2 reduced, thus the water credit model can adopt this concept to trade 1 water credit for 1000 m3 of water (as a preliminary example), with defined water quality. This “defined water quality” is the first obstacle that needs solving, logically speaking it should be tailored based on the host country’s water quality regulation, sector (industrial, agriculture, etc.), and specific project requirements.

In the business model, the water credit provider will act as a regulatory platform between big companies that want to purchase high-quality water credits to offset water consumption and smaller companies (project implementers) that will be incentivized to save water in their projects, while gaining water credits along the process, and selling them.

Unlike the carbon credits where all CO2 emissions go to the atmosphere, water is extracted from different water bodies across the globe that are shared through borders, so this will be a very big critique of the water credit system. Nevertheless, we have to remember that the credit system's main aim is to incentivize both parties to manage their natural resources with economic efficiency. Therefore, the model can start between highly water-regulated regions that aim to reach their climate goals, and poor water-regulated regions that are encouraged to become more water efficient but lack the financial incentives. This will ensure that big companies operating in highly regulated regions continue to comply with the area regulation to reach higher sustainable goals while helping smaller companies in poorly regulated areas to offset their water consumption profitably. The water credit model will inevitably suffer from the problems that the carbon credit system suffers from in terms of oligopoly between the rich and the poor. Therefore, the water credit provider should ensure both market efficiency and a tangible water reduction plan, for both parties trading water credits.

A major problem that companies suffer from is the initial capital needed to reduce water consumption associated with technology adoption, labor, and other costs

To clarify, the categorization of good water regulation vs. poor water regulation could mean anything from two areas in the same country (e.g. two states in the US), or two different countries in different regions, as long as the necessary ad-hoc assumptions on water-related issues and markets conditions are taken into consideration during the design phase of the project.

Therefore, for each project, the project implementer should create a standard approved methodology for a certain project that includes project design, activities, and certification to reduce water consumption, with a defined water quality output. Furthermore, there should be a tangible monitoring and evaluation scheme to monitor water reduction and associated quality, for the assessment of both the implementer and the credit provider. Also, there should be external audits on the project's progress to ensure that the project is within the tailored plan.

A major problem that companies suffer from is the initial capital needed to reduce water consumption associated with technology adoption, labor, and other costs. A normal approach such as obtaining sustainability or climate investment could solve the problem. However, if we want to set boundaries for the credit provider to provide initial finance for a certain project, we have to look again at the carbon credit system mechanism. Two interesting points were presented (Swiss Climate, 2023):

  •  The project could NOT have happened without credit revenue;
  •  The project doesn’t go beyond the climate objective of the host country.

This will ensure that the cash flow is solely directed towards water credit creation, while also setting activities for this particular target and accounting for water credits to cover the financial gap in the project. The project should not exceed the host country's climate objective and regulation to protect all relevant parties from "green washing" accusations.

To conclude, the water credit system includes small companies that create tailored projects intending to obtain water credits from the water credit provider, and on the other end, there are big companies that want to purchase water credits to offset their water consumption. The water credit provider is the main focal point in this system, they are the ones that issue water credits and regulate projects from design, finance, and implementation, while also facilitating market conditions for the trading of water credits between big and small companies.

Approaching water credits through projects is more tangible in terms of setting scientific variables, and less risky in terms of business. One big observation that can be noticed in any financial credit system, is that it learns from each project and continuously re-develops the system to reach success. Therefore, it is encouraged to use this agile management as the ultimate means to develop the system bottom-up before thinking of transforming it into a regional system.

Eng. Laith Al-Yacoub (M.Sc.) is a private consultant, in Amman, Jordan, and may be reached at laith.alyacoub91@gmail.com. He writes in his capacity.

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