Water security is one of the defining challenges of our time. By the middle of the next century, over 40% of the global population will live under severe water stress. As global population increases, so will tensions among different water uses.

Water security is a major policy challenge confronting governments around the world. In the absence of significant reforms of water and water-related policies, the outlook for water is pessimistic. Water security in many regions will continue to deteriorate due to increasing water demand, water stress and water pollution. Governments need to speed up efforts to enhance efficiency and effectiveness in water management to better manage the risks of potential water shortages (including droughts), water excess (including floods), inadequate water quality, as well as the risk of undermining the resilience of freshwater systems (rivers, lakes, aquifers). By taking a broad, long-term vision that emphasises the explicit management of water-related risks and trade-offs between these risks, governments are more likely to meet their water-related economic, environmental and social objectives.

Water security is about managing water risks, including risks of water shortage, excess, pollution, and risks of undermining the resilience of freshwater systems. This chapter provides the rationale and conceptual basis for a risk-based approach to water security. It argues that a risk-based approach has many advantages over current policies to manage water security and could be applied more systematically to improve water security cost-effectively.

This chapter provides guidance on how to apply a risk-based approach to water security through a three-step process: know the risks, target the risks and manage the risks. The chapter also provides insights on ways to adapt water risk management to the level of risk. By way of illustration, country cases of water risk management in selected OECD countries are included.

Once set, water security targets should be achieved at least possible economic cost (i.e. cost-effectiveness should be pursued). This chapter suggests how market-based instruments can be used to promote more effective water management. Using theory, examples and case studies, a description is given as to how economic approaches may be used, particularly in OECD countries, to manage water risks.

Water security should be pursued taking account of complex links with economic and sectoral policies. Setting acceptable levels of water risks among stakeholders should be the result of well-informed trade-offs between water security and other policy objectives. Meeting the coherence challenge also requires a coherent approach between water and other (sectoral, environmental) policies.