The Price of Water That Nobody Charges

The intervention moves the price of lithium in one direction, upward, because the world’s governments have declared that the motor car shall run on batteries and have legislated, subsidised and cajoled accordingly. But supply will respond by drawing harder on the cheapest deposits first, and demand will respond by hardly flinching at all, and the new equilibrium will not be the one the planners expected. It never is. Here the reason is unusually plain: one of the inputs to Atacama lithium carries no price, and an input with no price is always used as though it were free.

Consider how the metal is got. In the salt flats of the Atacama desert in northern Chile, brine is pumped from beneath the crust and left in great evaporation ponds for the sun to do the refining. It is the lowest-cost method of production in the world, and that is precisely the difficulty. The cost is low partly because the sun is free, which is a blessing, and partly because the water is treated as free, which is an accounting fiction. In the driest inhabited desert on earth, the brine and the fresh water that moves with it are the same water the Lickanantay communities have used for their herds and fields for centuries. They also feed the lagoons where flamingos stand on one leg looking faintly offended by the whole business.

On the demand side, the short-run curve is steep. A carmaker with a factory tooled for a particular battery chemistry, and a government with a dated emissions target, will not buy much less lithium because the price rises somewhat. On the supply side, the Atacama producers can expand cheaply because a large share of their true cost is borne by people who are not party to the transaction. The supply curve the market sees therefore sits below the supply curve society bears. The gap between those two curves is the farmer’s dry irrigation channel, entered in no ledger, while the climate ministries of distant capitals book the lithium as pure virtue.

The strongest objection deserves to be stated at full strength. Anything that raises the cost of lithium slows the electric car, prolongs the burning of petrol and harms the climate, and the climate harms the poor of every continent, the Atacama included. On this view a few drained lagoons are the price of a habitable planet, and fastidiousness about them is a luxury the poor cannot afford.

I take this seriously, and I find that it rests on a confusion between whether a cost exists and who pays it. The water is consumed whether or not anyone charges for it. Charging for it, through a royalty on water drawn, a binding allocation negotiated with the communities, or a share of rents paid to them directly, shifts the burden from those least able to bear it to the buyers who chose to buy. And because Atacama brine is so cheap to work, a proper water charge would raise its cost without pushing it above the costlier hard-rock mines of Australia. The marginal supplier sets the world price, so the Atacama would likely keep its customers. Most of the charge would come out of producer surplus that is already unusually fat, and very little would reach the price of a battery. The climate would hardly notice. The village would.

Now the long run, which is where my argument turns. Demand is inelastic today because the technologies are fixed today. Given a decade, supply elsewhere will respond as new brines are tapped by direct extraction, clays are worked in Nevada, and old batteries are recycled. Demand will respond as well, as sodium chemistries take over the cheaper end of the market. The Atacama’s advantage is a rent, and rents of this kind erode. Chile, which has already pressed its national copper company Codelco into a partnership with the producer SQM, is in a strong position, but only temporarily. The moment to make lithium pay for its water is while buyers have nowhere else to go. If the state waits until the world needs it less, it will find that the water was spent cheaply in the years when it was worth the most.

So it depends, as these things do, on the elasticities. But the facts here are not evenly balanced. Short-run demand is steep, the Atacama’s costs are low, and the external cost falls on a small population with little bargaining power. Together they mean that pricing the water costs the climate little and returns a great deal to the people who live beside the ponds. I am confident of the direction and modest about the magnitude.

One should picture the transaction as it truly stands. A buyer in a showroom in Munich pays for an electric car and is thanked for saving the planet. Some way south of the Tropic of Capricorn, a woman stands at a dry well, holding the receipt.