Water Foresight Podcast
Water Foresight Podcast
The Future of Carbon Emissions and Water
Welcome to an enlightening installment of the Water Foresight Podcast, where we venture into the complex world of non-revenue water, carbon emissions and carbon leakage credits. We're honored to have water industry veteran, Steve Cavanaugh, join us as we decode this labyrinth of issues. As the CEO of Cavanaugh & Associates and the chair of the International Water Association's (IWA) Leakage Emissions Initiative (LEI), Steve offers an invaluable depth of understanding on the subjects at hand.
We kick off our conversation unwrapping the concept of non-revenue water - a pivotal issue for utilities. The financial implications of unbilled water set the backdrop for our discussion on the water energy nexus and the novel domain of carbon emissions and carbon leakage credits. With Steve's expert insights, we delve into the compelling topic of carbon credits and their potential monetization, a burgeoning interest area for investors and companies alike. The ripple effects of this monetization could trigger a funding wave for leakage reduction projects and nudge major water utilities towards a carbon-neutral future.
Our dialogue takes us further into the roles of various sectors in mitigating greenhouse emissions. We examine the influence of the government, financial institutions, and rating agencies in steering this change. We conclude by shedding light on the LEI and the range of resources it offers, including how to become part of this significant initiative. As we navigate these waters together, we hope you find this conversation as thought-provoking and enlightening as we do.
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Aqualars. This is the Water Foresight podcast powered by the Aqualars group, where we anticipate, frame and shape the future of water through strategic foresight. Today's guest is Steve Kavanaugh, who is the president and CEO of Kavanaugh Associates. Steve is the chair of the International Water Association's Leakage Emissions Initiative. Steve has a bachelor's degree in civil engineering from NC State University and is a licensed professional engineer. Steve, welcome to the Water Foresight podcast.
Speaker 2:Hey, good to be here. Thank you, Matt.
Speaker 1:Now, steve, you and I have known each other for quite a while and you have a tremendous role, responsibility and influence in the world of water. When it comes to the water energy nexus in particular, this idea, this notion, this program called Non-Revenue Water. I think that's going to be helpful to talk about that as a foundation for where we want to go today. Can you just tell us a little bit about what in the world is non-revenue water and what's the significance to water utilities and perhaps other people? We use that as a springboard to get into this idea of carbon leakage. Credits and the future of water Make sense.
Speaker 2:It does.
Speaker 2:Certainly, non-revenue water is a term that actually was developed through the International Water Association and also the American Water Works Association to really characterize all of that water that goes into a distribution system but for one reason or another, the water utility does not recognize revenue on that water.
Speaker 2:And there have been, over the course of the ages, numerous ways in which water utilities actually account for their water. The most typical way, which is not really that helpful, is to actually take the amount of water that is supplied into the distribution system minus the amount of water that they bill from that distribution system for their customers, and take that difference between those and then describe that as, quote, the unaccounted for water. And so what we saw over many years of multiple ways that utilities have been sort of tracking this slippage, if you will, this water, is that there was a better way. There was a better way to actually characterize all of that use and loss in a way that was helpful, where you actually have a total end of the distribution or the system input volume, whether that's from the utilities own sources, like a water treatment plant, like a well filled and then any water that they import and that may be an adjacent utility, that they get their water from Well.
Speaker 2:That total those sources actually is the system input volume. And then they subtract off and this again is a systematic way of doing that the billed water that's exported, any water that is exported out of the distribution system. And then they then are taking away the authorized consumption and that can be both billed authorized consumption, which is typically the largest component, that's that's metered consumption, and then there's also billed unmetered consumption and this could be flat rates or anything like that, so that authorized consumption billed. You also have the unbilled authorized consumption, which is what's needed for system flushing operations, things like that, to keep the distribution system operating. So that's the really the first component of non revenue water. And then of course you have your water losses. So how much goes into distribution system minus our authorized consumption? But building unbilled, then that equals water losses.
Speaker 2:But you then go further to break it down into commercial losses or apparent losses, which is things like metering inaccuracies, data handling errors. Those commercial losses are really the water that gets to a customer but it's not properly measured or billed and its impact on the utilities is pretty high from a cost standpoint because they could be selling that water and then, of course, the remainder in that water balance approach is leakage or real losses, and that's things like leakage on the mains, the services, the overflows at tanks and that's water that is never reaching a customer. So it's important you brought up non revenue water and I appreciate you doing that, because that's the basis for this non revenue water. That definition is that unbilled but authorized consumption, as I mentioned examples or flushing of the system, etc. Apparent losses and also leakage. So that's what makes up our non revenue water.
Speaker 1:And really customers sometimes don't appreciate water. Customers don't appreciate that Every unit of water has value and it takes money to go find the water, whether it's in a river or underground, and to move or pump that water to go then treat it. That takes money. And then you got to pump it to the customer and that takes money and if you're not getting the value, you're not billing the customer receiving the value for every unit of water. You're losing money as a utility. Is that fair?
Speaker 2:That's right, that's right.
Speaker 1:I think you clearly gave us the two big buckets where those kind of challenges occur. One is the real losses, which is the. You know everyone, everyone in their mind, can picture the big blowout in the street when a main breaks and there's water going everywhere. Sometimes you see the fire truck in the hole right in the street. I'm sure you got pictures of that. You got pictures of that, right. And then you also said the apparent losses, which a lot of people don't think about, but that's the most valuable, where you may treat water and send it to the customer and guess what? They're not in your billing system, right, or you're not collecting that bill and so you're losing that money. All of that being said, how does that connect to this water energy nexus idea that people have been talking to and this new facet that you and I are going to talk about, which is the carbon emissions and the carbon leakage credits? Tell us how we make that jump and what's significant about that.
Speaker 2:Yeah, it's actually very exciting my professional career. This is the fastest moving initiative that I've ever seen. The short history of it is the International Water Association has a water loss conference every other year. The last conference was in Prague in 2022, so last year. One of the things that came up at this conference was how the attention on international funding to actually pay for non-revenue water projects is just really off the radar. Those just don't get quite the attention. The excitement what we are seeing is we're seeing everything that is related to greenhouse gas emissions reduction is being funded. There is a significant global push on GHGs. It really came from the Paris Accords and the strategies and goals that were out there. What we said in that conference and a loose work session with several of the Water Oil Specialist Group members talking about it is there's got to be a way to tie carbon emissions and leakage, tie those two together, and the concept would be as you reduce leakage from your water distribution system, which the utilities?
Speaker 2:should be doing anyway, you also are reducing CO2 that's embedded in the energy that the utility is using to pump tree transfer that water. That's where the idea came from. It was like let's see if we can come together as the global water professionals and come up with a methodology that can be published, peer reviewed and published out there. That's what we'll talk about.
Speaker 1:Yeah, again, you're tying it to the real losses, what people typically think of as the pipes leaking. Is that fair?
Speaker 2:That's correct, that's correct.
Speaker 1:So how do we begin? You've got this idea, you have a meeting and people say, hey, this is pretty interesting. Where do you start?
Speaker 2:Yeah. So what we did was pretty exciting in that we did an open initiative, so you don't have to be a member of the International Water Association or the American Water Works Association. But it was everyone who had an interest in really putting forth the methodology. We said we know the math that's out there. We know water utilities use energy and they pump, treat, transport that water and we know how much water they actually are producing. So we can understand basically how dirty the energy that they're buying the coal, natural gas, if there are renewable resources in there so many grams of CO2 per kilowatt hour that that energy unit that the utility is buying, and be able to translate that to what does that mean in terms of grams of CO2 for every cubic meter or a million gallons of water that they actually produce.
Speaker 2:And so we started with a meeting, a series of meetings we had these through teams, calls, zoom calls of where we got the water professionals together and started to propose the methodology. And again, around those variables, every water utilities have that has those three variables. We said we wanted it to be simple and a defensible methodology and we wanted to stay focused on leakage. And that's exactly what we did. So we put it together I guess it was in first meeting was in August or so, and it was very, very quick that there was a consensus opinion on those variables which is what produced the draft white paper which then formally was published in February of 2023 and then peer reviewed and published final in early April. So that's sort of the methodology, but it was a series there were 22 nations, 55 water professionals that came to unanimous opinion and decision to approve the methodology which has now been published.
Speaker 1:It seems to me that the reason for a methodology that is, I'll say, consensus based is that you might have a utility that says, hey, I had some leaking pipes and I called a consultant to help me repair them, replace them, and now I would like to get some credit for that. And someone would say, well, how'd you do it? Show me how many. I've got 10 tons of CO2 that I reduced. Well, people are going to say, well, show me the evidence of that. And I think you have wisely taken the first step in developing a methodology that enables utilities to accurately, consistently and predictably measure these carbon credits or capture them Right. So they can then and we'll get into this but they can use them. Is that fair? That's right.
Speaker 2:That's right. It needed to be something that you could. There's got to be a verification step Right. And when we talk a little further about the carbon leakage credits, those actually are not generated until the leakage is physically reduced. So it's a post. Look back, we did the project. It reduced this many cubic meters or million gallons of water that had a relational tonnage of CO2 associated with it. Then we can actually do the transaction. So it looks it's rear view mirror. The project has to happen, you have to look back and then you get reimbursed for the carbon leakage credit.
Speaker 1:And what some of the listeners may not know, but implied in your commitment to methodology, is your longstanding work on with IWA and A-W-A on the M36 manual on water losses, how you have developed a methodology, a consensus based on how do you identify and measure real and apparent losses. And in my mind it seemed to be a pretty simple step to then go over here and say now we're going to be able to measure the carbon emissions because you have other folks in this world let's call it the environmental world who have been working on CO2 reductions and you're able to take some terminology, some methodologies and deploy them through the lens of water. Is that fair? That's right.
Speaker 2:That's right. I think that the way that carbon is verified, documented, those are things exactly as you just said, that we basically replicated that there were very standard ways in which you index what the carbon intensity of the energy source is as an example, and there are ways that you calculate, obviously through the methodology of the M36 that you describe, the leakage reduction and documenting that. So just really marrying those two together in a way that we can account for this carbon leakage.
Speaker 1:Yeah, it just seemed interesting as I was reading some of the papers. How really I'll use the word granular, but you were able to measure things like energy intensity. A minute ago you mentioned how energy sources for a particular water, wastewater utility it may not be 100% coal fired, it may be a mixture of solar, wind, coal, gas, nuclear, and you have the methodology to really figure that out and to calculate that. Am I in the right ballpark?
Speaker 2:That's right, and there's actually a really good argument to be made, matt, that even if you've got a blend so coal fired energy, natural gas, wind, solar, as you've just described if you're using some of that green energy, of that mix on leakage, then the argument could be made that that is green energy that's available for another functional source. And so some in the group, when we were going through this, argued that you should actually even be using the dirtiest power component because you're using that to actually public itch, and so there were some in the group that contended that. But generally, the way that this is at least being calculated is what is the verifiable energy provider, whatever that energy provider and whatever region of the world, what is their carbon footprint in terms of the grams of CO2 per kilowatt hour, and utilize that number to multiply that through to get the actual carbon intensity for that utility.
Speaker 1:It seems to me, and I want to talk about going a little bit here on the future of this whole effort. But the energy nerds among us might look at this and say this is a fascinating new world of what they call scope to emissions. And it's not scope one which I believe would be the energy source itself, but when you have companies like utilities using the energy to make water or treat wastewater, those emissions are scoped to emissions and there's a whole host of other things we could talk about related to that. But effectively there is now, based on your work, an opportunity for utilities, specifically water utilities, to identify, measure, verify their carbon emissions, get a certificate and then use that, monetize it, sell it. What do you see these utilities doing with the carbon credits if I can call it that, that they've generated and earned? What's going to happen with that over the next 10 to 20 years? Where are we today and where do you see that going in the next 10 to 20 years?
Speaker 2:Yeah, it's a great question. It's really the catalyst and I want to go back for just a moment and sort of tie this together. In the agricultural sector and this is related to the California Air Resources Board, carb, and what CARB was doing and what they are doing is they are trying to displace fossil fuel, derived diesel fuel, in their transportation market and so what they established was a CI score, carbon intensity score, for fuel sources that could be mapped, that theoretically they could get to California market. And so what's happened in the agricultural sector, in swine, dairy poultry is you have these huge farms, you have these huge farms out there and farmers that had a manure disposal problem and they had methane emissions from their digester lagoon or their anaerobic digester lagoon, their farm systems. What was a problem? Now, by technology and creating a digester to actually capture that gas, that methane, and scrub that and be able to inject it into the natural gas pipeline that has what's called book and claim the theoretical opportunity for those molecules of gas to get to California, they were able to capture the low carbon fuel standard LCFS credit associated with that. And that's where the light bulb really turned on for me, in that we started seeing these huge farms which had manure problems, which had methane problems, and now you've got investors coming and buying the manure rights so that they can actually build the projects, do an environmental great thing by capturing this methane, keeping it out of the atmosphere and actually being able to monetize this through the credits that they would get in the low carbon fuel standards, the attributes.
Speaker 2:So this carbon leakage credit.
Speaker 2:That's where the aha moment came from me, and that is, if we can tie this leakage to carbon which we've done now with the methodology, we have a verification step on this then that can be monetized and that carbon leakage credit can be purchased by a multinational, many companies out there BP, shell, nestle, others who are trying to get to carbon neutrality, and they do that by investing in these carbon reduction projects, projects that are taking carbon out of the atmosphere.
Speaker 2:And so that's where the funding would come from, those carbon leakage credits. A city if it's Sacramento or Atlanta, georgia or whoever has the opportunity to actually propose a leakage reduction project that says this project is going to reduce this many millions of gallons of water, which equals this many millions of tons or 1000 tons of carbon, and that tonnage of carbon when it's reduced, then there's a buyer for those carbon credits. So that's the sort of the how it gets financed and how the utilities can utilize the new source of income, which is carbon leakage credit funding to basically reimburse, if you will, or those instruments can be sold forward by the way. In other words, you get a contract. If we reduce this leakage, we could we have a buyer on the hook.
Speaker 1:And in a broad sense, there are voluntary efforts and there are perhaps maybe legally mandated efforts to identify and capture and reduce CO2 emissions. And there could be voluntary measures where financial institutions are now looking for ways to acquire these carbon credits. There could be companies that have a commitment to ESG sustainability and they want to commit to being net zero and they may have carbon emissions, but they're going to go and call you and say, steve, can I find, can I work with you to find some of these credits to offset my company's emissions? That's what's occurring today. Is that fair?
Speaker 2:It is. It is. You have companies that are doing that, and I would also say we're starting to see major water utilities that are getting to some carbon neutrality goals, and so they themselves are interested in the carbon credits associated with this. The monetization of it is the most exciting thing. There are 55 or 52,000 water utilities in the United States, and if this is a way to get additional funding in to drive leakage reduction projects, then to me that's the game changer, because water utilities are strapped. There's so many things they have to do regulatory, pfos and lead and copper and other things and this could be just that special sauce to get it over the hump and get a leak reduction project done which frees up the commodity of water, which is a whole another discussion on how we monetize the commodity of water and the water that is saved as a result of this.
Speaker 1:Now, if I'm correct, it may be today that the focal point is on our traditional drinking water systems. But is this methodology available to other organizations, even wastewater utilities, reclaimed water, industrial facilities? What is, what's the opportunity there?
Speaker 2:Man, the opportunity is huge. We had many meetings of the leakage of missions initiative where there was a push to to move into the build authorized consumption. Because if you, if you show a reduction on the demand side, obviously that also has a bearing on how much water is pumped through the distribution system. So if you flip it over to wastewater, now think about this you have extraneous water that comes in through inflow and infiltration into a sanitary sewer system. Yeah, so you're having to pump that that water, treat that wastewater Prior to discharge or reuse.
Speaker 2:So that's, that's X number of million gallons, and there is an energy cost associated with that too. So that's a perfect example of how this methodology, these three elements, how dirty is the energy that the utility is is importing to do. And then what's that utility, specific energy, cis score or carbon intensity associated with their utility on the wastewater side is there. You mentioned reclaimed water. It's also there from a pumping. If there's a loss side of it on the reclaimed system, many, many different opportunities, industrial for sure, because again they're using energy to move that water that's lost through their distribution system.
Speaker 1:Let's talk about the future of this. I know Much is happening right now and I'm sure you're trying to just keep up with with all the opportunities when we think out 10 to 20 years. First, let's talk about the government. Right, the government is pervasive. You have been working within the, the European Union, you've been working in the United States. Where do you think the government will be on this issue in the next 10 to 20 years? I mean, when you think about your work over the last 15, 20 years on non-revenue water, there used to be nothing, and now we have policies, we have rules, there are even statutory provisions to identify and reduce non-revenue water in many states. Do you see the same kind of Program rolling out in different jurisdictions around the world?
Speaker 2:your thoughts I Think, I think, possibly, I think that a major driver in this is going to be certainly through the voluntary markets out of this, where, where private Industry or industry is driving this because of their, if it's, if it's a publicly traded company, the shareholders that are pushing for carbon neutrality, the consumers are pushing for carbon neutrality.
Speaker 2:So I think that we could get enough of a catalyst and a push, but where government does play a role in this, without regulation but with it, where government does play a role in this is in In the, the funding of this, in the Catalization of greenhouse gas reduction, and that's to me, the biggest bank for the buck now is through education, of being able to provide technical assistance, understanding, education on this methodology, on how this can be incorporated into the water balance to now create the carbon water balance.
Speaker 2:I think that's the starting point. I also think that and this is where we are with the initiative we need strong case studies, we need success stories of where utilities have reduced leakage and they're equating that to the tons of carbon that have been reduced. So you know they're. There may be mandates. You know certainly states like Georgia, california, indiana, hawaii is an example that have mandates on Water laws that are now moving towards performance standards or leakage reduction targets and standards, so they're very well could be a mandate, yeah, but I think education is the is certainly the first and most important step at this point.
Speaker 1:Yeah, one of the things that comes to mind is is how states are often incubators of what some people may call innovation or perhaps regulatory pain. But I think there are some states perhaps California and others that have commitments to you know, climate change or CO2 reductions, and is it possible that there could be apart from education may be permitting Requirements? Where to get a permit for your drinking water wastewater facility? You now have to adopt this Methodology that you've just described as part of your permit. It's not a voluntary matter. It's now part of Getting this permit from the regulator. Do you see that being a possibility in 10 or 20 years?
Speaker 2:I see certainly reporting on carbon and carbon emissions. Certainly, I could see that. Yeah, that that's something that's a part of it of looking at what is the, the carbon footprint of the water utility is applying for the for this permit. Yeah, yeah, okay.
Speaker 1:Another big category of perhaps interested parties would be financial institutions, and that's a that's a big, broad category. It could be private equity firms, banks, you know we have pension funds. How are these financial institutions In your mind going to address this, if at all, over the next 10 to 20 years? Where, where will they be and what will they be doing on this, on this matter?
Speaker 2:So already I'm super excited that we have seen the Asian Development Bank, the World Bank, starting to point to this methodology. It seems as if, globally, we have a. It seems as if, globally, we were, we were star for this to codify, to describe the methodology. So they're pointing to it and in a great way, I think that that's going to to draw the right attention to it. You already I'm speaking at an event in Chicago next week investment brokers, bankers, about this.
Speaker 2:There are many that are obviously thinking about this from a trading, in a market standpoint. So I think that that's a natural place, just like you see someone you know establishing the, the actual transaction or the trade itself, and they're being you know, something to gain through that, through that trade. So I could see that there's interest there. Probably the most exciting thing that that we have seen so far is the global finance and global institutional finance really picking up on it and and starting to comment and pointing to it and starting to reference it in some of their, some of their tender documentations the terms of reference, if you will.
Speaker 1:Interesting. I know that you had a presentation, I think, called Outside Investors paying for a leakage. So I know that you have been acutely aware of how financial institutions are beginning to give this a hard look. And certainly your response ties back to the governmental question, which will we see carbon markets and will they be voluntary, will they be regulated by different bodies and it kind of you know? We'll be interested to see how that unfolds and I know you'll be right in the middle of it.
Speaker 1:How about rating agencies? Now, you probably know why I'm asking this question because probably 10 years ago I think, you and I had a brief conversation about how rating agencies Moody's and the others were beginning to look at non-revenue water as an indicator of a utility's management performance. If I recall correctly, and I think if I'm correct, non-revenue water has become an element of how they look at utilities. And, by analogy, do you see this whole program of carbon leakage credits and being able to address and reduce CO2? Do you think that will be somehow addressed by these rating agencies in the next 10 to 20 years?
Speaker 2:I really do, matt. I think that you're seeing standard and poor, for sure, moody's and others that have changed their dialogue. They're looking at best run, performing best run and positive performing water utilities and seeing how they have gotten their hands around non-revenue water. That's starting to be documented in the actual ratings themselves. I think that climate change is such a big deal and the market is moving it, so I see that also of what is your climate policy? What's your carbon emissions policy? Those will be some of the things that are going to start to gain some staining relative to the rating agencies. There are a number of utilities, for sure, that have had their attention to leakage cited as a positive bulk in the rating Interesting.
Speaker 1:Which is huge relative to their ability to capture funding.
Speaker 1:That's interesting, and so the way it would work is if you want to go borrow money, how you are rated may influence the cost of your debt, and if you are really bad at non-revenue water and you're just not very good at your CO2 emissions, it's going to cost you more to borrow money, which means that that flows to the ratepayers, and the ratepayers may end up paying more to fund that new $50 million water plant or all the piping you want to replace. And so utilities will begin to read these white papers documents by the rating agencies and say we need to start addressing these things so that when we get rated we're AAA or A+ and when we go borrow money we're going to get a better rate. I think that's kind of how this plays out in the future there.
Speaker 2:Exactly, exactly.
Speaker 1:Well, what? When you think about how this is moving? It seems to me it's moving rapidly and influencing a lot of different sectors that are uniquely tied to the world of water. But what, in your mind, in the next 10 to 20 years, is the best case scenario? Maybe a transformational scenario where this is just going far beyond anything you could imagine? What does that look like in your mind?
Speaker 2:So there are several verification bodies that are out there globally there's gold standard, there's Vera, others that are out there. So the best case scenario is we have the methodology which is now peer review and published, and we get that rating or that verification body to endorse the methodology. That then gives the green light for a higher value on the carbon leakage credit. So then we just simply start to put together these projects where the identified need that there's leakage and but for the financial component we would reduce that leakage. And now this would be where there's a potential buyer that would purchase those carbon credits because it's got a verification methodology approval on that. Then that's going to elevate that forward contract in price and so that's then going to mean more potential revenue.
Speaker 2:That's going back to the water utility. They can take that guarantee of purchasing the carbon leakage credits and monetize that over a period of time. Because leaks that are not intervened with, there is a natural rate of rise of leakage. So if you don't go in and reduce your leakage, it's going to continue to leak forever and ever until you interact with it. But it's also going to get worse because these systems are operating under pressure. So that's why and we're pushing for a monetization period of 10 to 15 years. So basically that carbon leakage credit. Ideally we monetize over that 10 to 15 year window, which is could be substantial as far as the income back to that water utility.
Speaker 1:So is it a bit of a net present value of that leakage.
Speaker 2:If you will. It's assuring that the leakage did not occur. Resurface, if you will. So there'd be a verification every year, but you'd also be getting paid for that reduction that you did in year one every year through that term. So, it's just a period at which you can account for that carbon leakage.
Speaker 1:Right, and all this has to be verified. If I have a pipe that's leaking, I need to get to it before it becomes a bigger problem. And maybe I bought a mile of ductile iron pipe and I fixed it and I can verify that and I've reduced that group of emissions, if you will, for that section of pipe. Okay, what do you think happens? Let me take the opposite tack. What happens if this world of climate change and all the gloom and doom? What happens if that falls apart and there's just an effort that comes against it and says you know it's important, but it's not that critical? We're going to focus on many other things in life and we're not going to really emphasize this aggressive push to reduce CO2. And what would happen in that scenario to this type of initiative?
Speaker 2:Yeah. So we'd really be right where we are, and that is that utilities want to reduce their leakage but they have either a financial constraint or they have some other higher priority constraint, and so they would just continue to stay in the state that they are. They get. The leaks would get reduced when it became a bigger problem when there was a catalyst to do that. So what this is doing is it's capitalizing on the real impact of reducing CO2.
Speaker 2:First of all, I don't believe that's going to happen, and the reason I say that is the carbon attention and the greenhouse gas attention. It's here to stay. It's gotten to the level that you know at your local communities, everyone is now aware, keenly aware, asking questions about. You know, when you hear customers asking about what is our carbon footprint to a water utility, that's gone pretty far, and so utilities are now paying attention. They're doing the math, you know. So that's why I think it's here to stay. But anyway, we would just revert back to where we sit now, and that is whenever the utility can get around to reducing their leakage. That's when they'll do it, and the higher the pain, the faster they'll move.
Speaker 1:Is there a parallel to the idea of economic level of leakage? You know we talk about that term. It's, as you know, it's my favorite term right In non-revenue water economic level of leakage. Is there a parallel to that when it comes to carbon leakage?
Speaker 2:I think the case can be made and I would call it the cost of carbon. So the cost of carbon could be added to that cost of leakage. And so typically when we're calculating the value of leakage, we're looking at the variable production cost, the cost that it takes to make that next unit of water. Now, in certain cases where you don't have any more water to sell, then the cost of that next unit of water is the cost that takes to dig another well, the cost to expand a water treatment plan or to raise a reservoir level, which can be pretty expensive. So in this case the carbon cost of the emissions that certainly could be added, which then just really factors into the total economic level of that leakage.
Speaker 1:Yeah, and that's kind of where I'm going is and I'm not going to use the right economic term but does this new feature of carbon emissions, carbon leakage and getting a carbon credit does that shift the idea of economic level of leakage where you have ELL sub W and ELL sub C for carbon? When you put it together, what may have been a challenging project on the water side now becomes more viable because you have greater value now when you add the value of non revenue water with the value of the carbon credit. Did I make sense?
Speaker 2:Yeah, it does, it does and again, I think every, every situation where there's a constrained resource, when you add to your base level cost, I mean it's going to elevate it. Already in Europe, and I'm sure you're probably aware of this in the UK, they're moving beyond the quote financial, economic level. They're looking at the political, the economic, the social, the technical, the legal, you know, and the economic levels to sort of give more credence to the scarcity of the supply and the social aspects of continuous leakage. So we're already seeing other nations start to move beyond, you know, simple economics of how much it costs to reduce their leakage.
Speaker 1:And that kind of ties back to my one of my earlier questions about the government. Let's bring environmental justice, the paradigm of environmental justice, in a discussion. Let's say your water plant is in an environmental justice community and the economic level of leakage would otherwise say this probably isn't a very valuable project and we're not going to replace the the mile of pipe and therefore we're not going to get the carbon leakage credits. But, as you point out, maybe there's a government mandate that in environmental justice areas that changes the calculation and you're going to do it. Now you have a mandate to do it and reduce not just the non-revenue water but also capture those CO2 credits and reduce CO2 in those environmental justice areas. Is that a scenario that is possible or plausible?
Speaker 2:Potentially, I think the probably more probable play in a distressed community is as it relates to the fairness of the rates. In many cases these small and many times impoverished communities, they have some of the highest water rates and this in many cases because of the leakage and of covering the base level cost. So this can help by bringing additional revenue in to reduce that leakage. Then that certainly is going to have a direct impact on the rate payer. So I see maybe it's more of a carrot than a stick. In this case we can capture the revenue associated with the carbon to help keep those rates down. As to where the leakage reduction project, that's a new input and we're really only capturing the value of that water that's valued at the variable production cost. So this could be a much higher value back to the utility.
Speaker 1:Wonderful. My final question is in 20 years you pick up a newspaper and what is the headline that you see related to this carbon leakage credit program. That just kind of makes you smile. What is the headline that you see if you could pick one?
Speaker 2:I would say that it's some percentage of global water utilities that are operating in a carbon neutral environment, so they have been able to reduce leakage and to capture the value of the carbon associated with that.
Speaker 2:They have been able to entice their downstream vendors, so these are those who come in to make the repairs on carbon neutral resources, things like that that they're driving that.
Speaker 2:But I would say that the attention in a water utility to get the carbon neutrality that that has really the needle has moved, and so to me that'd be a successful one, matt, the other thing is that you and I have talked about this for many, many years, and that is water utilities should be reducing leakage. It should be something that they are out there doing, but the reality is there are other items that have got to get done in front of this, unless it's an emergency situation, and in this case, this allows those leakage reduction projects to move up the line, and I think, as we do, that, especially in third world countries where water utilities are only delivering 30% of the water and they're not getting water 24 hours a day, they're paying an absorbent amount for the energy of wasted water. So if we're able to stop the waste, then they can supply more water, and so that's a major, major pivot. It's like solving water crisis and delivery out there, so to me that's a headline too.
Speaker 1:Yeah, 30% of American community water systems are carbon neutral.
Speaker 2:Yeah, that'd be a great headline.
Speaker 1:That'd be a great headline yeah, fascinating. Steve, I want to thank you for being a guest today on the WaterForce site podcast. I'm a member of the WaterForce Foundation. I look forward to seeing where this goes into the future. Tell us where we can contact you, steve, if we have questions about the carbon leakage credit activity that you are involved in.
Speaker 2:Thank you. There are a number of ways. If you want to learn more about the global initiative, the leakage emissions initiative, there's a specific website that is hosted LeakageEmissionsInitiative L-E-I group dot o-r-g. Encourage you to go to that site. You can click on the resources tab. There are several, several important, informative resources there that describe how we got there. There's a leakage emissions calculator. There's the white paper that's been published and peer reviewed out there. You can also click on the Meet the Team and you can see the global leadership that actually has been instrumental on pushing this forward. Certainly, everyone is welcome to reach out to me directly. That's Steve dot Kavanaugh, C-A-V-A-N-A-U-G-H at KavanaughSolutionsWithan-Scom, and I'd be happy to connect with you. And we need case studies. We need folks to become interested in this, learn more and continue to help propel the methodology forward.
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