What is Water Scarcity?

What is Water Scarcity?

Water scarcity occurs when freshwater demand exceeds available supply in a given area, or when poor water quality restricts its use. Physical scarcity means insufficient water resources exist to meet demand. Economic scarcity means water exists but infrastructure to access, treat, or distribute it is inadequate. The UN defines water stress as annual freshwater supply below 1,700 m³ per capita and absolute scarcity below 500 m³ per capita. Currently, over 2 billion people live in water-stressed countries, with projections indicating 5.7 billion could face scarcity for at least one month per year by 2050.

Why It Matters

Water scarcity is simultaneously an environmental, economic, and security crisis. Agriculture accounts for 70% of global freshwater withdrawals and faces devastating impacts from scarcity—the World Bank estimates that water scarcity could reduce GDP growth by up to 6% in some regions by 2050. The semiconductor industry requires ultra-pure water; textile manufacturing is water-intensive; food processing depends on reliable supply. Supply chain disruptions from water scarcity are already affecting companies globally.

Climate change is intensifying water scarcity through altered precipitation patterns, glacial melt (which initially increases then dramatically reduces river flows), and increased evapotranspiration from higher temperatures. Regions already facing scarcity—the Middle East, North Africa, Central Asia, parts of India and China—face compounding stress. But water scarcity also affects historically water-rich regions: California, the UK, and Northern Europe have all experienced unprecedented droughts in recent years.

Financial markets are beginning to price water risk. In December 2020, water futures began trading on the Chicago Mercantile Exchange, using the Nasdaq Veles California Water Index. Investors increasingly use water stress screening in portfolio construction. Credit rating agencies incorporate water risk into sovereign and corporate assessments. Companies in water-stressed regions face higher insurance premiums, operating costs, and regulatory constraints.

Competition for scarce water creates conflict. Disputes between agricultural, industrial, municipal, and environmental water users escalate as supply tightens. Companies perceived as contributing to water scarcity face loss of social license, regulatory restrictions, and community opposition. Proactive engagement with water allocation challenges—through stewardship and collective action—is essential for maintaining operational continuity.

How It Works / Key Components

Water scarcity drivers include population growth (increasing demand), urbanization (concentrating demand), agricultural intensification (increasing irrigation), industrial growth, and climate change (altering supply). These pressures interact: a growing city diverts water from agriculture, which intensifies groundwater pumping, which depletes aquifers, which reduces baseflow to rivers, which affects downstream ecosystems and users.

Measurement uses several indicators. The Water Stress Index compares total withdrawals to available renewable supply. The Falkenmark Indicator uses per capita water availability. WRI's Aqueduct tool maps water stress at sub-basin level, combining quantity, quality, and regulatory risk. The Water Scarcity Footprint (ISO 14046) accounts for both volume and local stress context.

Response strategies span demand management (efficiency, recycling, pricing reform), supply augmentation (desalination, water harvesting, aquifer recharge), allocation reform (water rights, trading systems, regulatory caps), and nature-based solutions (watershed protection, wetland restoration, soil health). The most effective approaches combine multiple strategies within integrated water resource management (IWRM) frameworks.

Corporate water risk management follows a hierarchy: assess (map water risks across operations and supply chains), reduce (improve efficiency, implement recycling), engage (participate in watershed governance and collective action), and disclose (report water performance through CDP, SASB, TNFD). Companies with significant water exposure increasingly set context-based water targets that reflect local watershed conditions rather than applying uniform reduction percentages.

Council Fire's Approach

Council Fire helps clients assess water scarcity exposure across operations and supply chains, develop context-based water strategies that address local watershed realities, and build resilience through efficiency improvements, supply diversification, and stakeholder engagement in water governance.

Frequently Asked Questions

Which regions face the most severe water scarcity?

The Middle East and North Africa region is the most water-stressed, with 12 of the 17 most water-stressed countries. Parts of India, Pakistan, Central Asia, and sub-Saharan Africa also face extreme scarcity. However, seasonal scarcity affects regions globally—including California, southeastern Australia, and southern Europe.

How does water scarcity affect food prices?

Directly and significantly. When drought reduces crop yields, food prices increase—the 2012 US drought contributed to global corn price spikes of 25%+. Water scarcity also drives long-term shifts in agricultural geography, as production moves from water-scarce to water-abundant regions, disrupting established supply chains.

Can technology solve water scarcity?

Technology helps but cannot solve scarcity alone. Desalination, precision irrigation, water recycling, and leak detection all improve water availability and efficiency. However, desalination is energy-intensive and expensive; technology cannot create water where none exists. Demand management, allocation reform, and watershed protection remain essential complements.