The drought this year has reduced China's normal rainfall by 40 to 60 percent. Photo: otrocalpe (flickr)

Crisis is lurking on the world's most valuable commodity: water. The answer, a former U.S. official says, is raising its price.

Peter Orszag, President Barack Obama's former budget czar, tells the story in a Bloomberg View column by looking closely at China. That nation's water goes mainly to its coal and hydroelectric power plants. As China’s Ministry of Water Resources says, "In 2010, coal-fired electricity in China used more than 30 trillion gallons of water, or about 20 percent of the country’s total consumption." The problem with this is that water sources are limited. While China is using its available water for electricity, climates are changing and reducing the amount of available fresh water. The drought this year has reduced China's normal rainfall by 40 to 60 percent, and the water that's left is going to crops and people, not coal plants. This, in turn, has rattled global diesel markets as China has grasped for alternatives to coal energy by relying more on diesel powered generators. Disturbances in the water market ripple throughout the world economy.

To fix this, Orszag suggests a three-step process for China and the rest of the world to follow when thinking about the way we use our water.

First, China needs to do a better job blocking pollution and expanding awareness of the dangers of climate change. According to the World Bank, "about 90 percent of the aquifers underneath major cities in China are polluted. More than 300 million Chinese lack access to safe drinking water." The first step to using water more efficiently is making sure the water we have is water we can use.

Second, China needs to allocate its water more productively. Currently, the water in China is not evenly divided between regions. Orszag explains that 80 percent of the country's water supply is south of the Yangtze River, though only about half the population lives there. The rest live in the North China plain, which encompasses Shanghai, Beijing, and less than 15 percent of the nation’s water. With such an imbalance, the per-capita amount in the North evens out to only about one-quarter the level considered to be the minimum amount to live on. Plans are underway to balance this with a desalination plant in the Tianhin-Binhai development zone and a re-routing plan to channel more water from the South to the North, according to The Guardian.

Third, China and other nations need to raise their water prices. At a first glance, this seems impractical. Reactions from comments on Orszag’s article were primarily negative. They argued that water is not a commodity, but a natural right for each person, and therefore shouldn’t be marked with a price. Orszag, anticipating this, suggests giving everyone a set amount of free, fresh water for basic necessities. Any water desired beyond that point would come with a tariff. This way, people will use water carefully, avoiding waste.

Orszag finds that this three-step strategy can be applied to almost any nation. The strategy could be used in the U.S. where water is heavily subsidized and in Europe where water pricing systems vary between countries that lack water and those that have an abundance.

"Just as we need to price carbon in order to avoid a climate crisis, we need to price water to avoid a water crisis," Orszag writes.