For most businesses, water is a peculiar input. It can be essential to production and yet barely register in the cost base.
That is partly because the price paid for water often says little about its scarcity. A factory drawing from a stressed catchment may face a charge that bears only a weak relationship to the pressure on the local resource.
In England, policymakers are beginning to question whether that should continue. Ministers have asked the Environment Agency to examine industrial water pricing and abstraction charges, as climate change, population growth and environmental constraints widen the gap between water supply and demand.
The question is no longer simply where more water will come from. It is whether prices should do more to influence how existing supplies are used.
Businesses in England that abstract water directly from rivers or groundwater generally pay charges to the Environment Agency. Those charges are primarily part of the system for funding water-resource management and regulation, rather than a market price for the scarcity of the water itself.
The result is a weak scarcity signal. Water can be plentiful in one catchment and under much greater pressure in another without that difference being fully reflected in what users pay. The Environment Agency itself has identified the current pricing structure as a barrier to stronger water-efficiency incentives for businesses.
If scarcity is not reflected in price, it has to be managed elsewhere — through tighter licences, restrictions during drought or choices over who gets access to scarce water. Other water-stressed economies have made very different choices.
There is no standard model for putting a value on water.
Singapore uses pricing explicitly to encourage conservation. Its Water Conservation Tax is intended to reflect water's scarcity value, alongside charges for supplying and treating water.
That approach reflects Singapore's limited natural freshwater resources and the high cost of maintaining water security through local catchments, imported water, NEWater and desalination. Scarcity is therefore built directly into the price signal.
Parts of Australia go further. In the Murray-Darling Basin, water entitlements establish rights to a share of the resource, while annual allocations rise and fall with availability. Those allocations can then be traded.
When water is plentiful, prices tend to be lower. When supplies tighten, prices can rise sharply. The system is complex and contested, but it makes water's opportunity cost unusually visible: users must decide whether another unit of water is worth more in their own operations than it is to someone else.
In the Colorado River Basin, scarcity is managed primarily through allocation rather than price.
After more than two decades of drought and historically low reservoir levels, legal rights, negotiated reductions and cuts to allocations have done most of the work of determining who gets less water.
Pricing then operates further downstream. Las Vegas, for example, uses tiered tariffs that make marginal water consumption progressively more expensive.
Singapore puts scarcity into the tariff. Australia allows scarcity to influence a traded market price. The Colorado River Basin primarily manages scarcity by limiting allocations, with pricing used locally to reinforce conservation.
England's review is therefore not simply about whether industrial users should pay more. It is about where scarcity should show up in the system.
For some businesses, the immediate effect of reform would be straightforward: higher operating costs.
But the more important effect may be on investment and location decisions. A higher water price can make recycling or closed-loop systems more attractive. A price that varies with scarcity could also change where companies choose to put factories, data centres or processing facilities in the first place.
A long-lived asset looks rather different if it depends on cheap water in a catchment where demand already presses against supply.
The same applies to supply chains. A company may use little water itself while relying on suppliers in regions where water is scarce and difficult to substitute.
Water risk is therefore not proportional to water use. A large user in a secure basin may face less risk than a smaller operation in an overstretched one.
A litre abstracted from a well-supplied catchment is not equivalent to one taken from a stressed aquifer during a dry summer. If pricing is to provide a useful signal, it needs to reflect those differences in place, source and scarcity.
Changing the price of water does not create water risk. It changes how that risk reaches the financial statements.
A company in a stressed catchment is already exposed to drought, abstraction restrictions and supplier disruption. Pricing creates another route by which scarcity affects margins, investment decisions and asset values.
For many companies, water has long been treated as an operational input. As governments look for ways to allocate an increasingly constrained resource, it may become a financial one too.