The Environment Agency yesterday warned that businesses and householders must do more to save water or face "severe shortages" over the coming years as a result of climate change and population growth.

Releasing its new Water Resources Strategy for England and Wales, the Environment Agency recommended the roll out of a wide range of water saving measures, including universal installation of domestic water meters, a formal review of the UK water industry, and a new strategy to cut carbon emissions through reductions in water use and improvements to the UK's water infrastructure.

It also recommended measures to better incentivise water companies to encourage customers to cut water use and impose a higher financial burden on customers who waste water.

"People and businesses need to use less water and wasting water needs to cost a lot more," argued the Environment Agency's chief executive, Dr Paul Leinster. "The proposals in our new strategy cover actions that need to be taken by water companies, Government, regulators, businesses and the public, and we need a joined up approach to this problem to prevent it becoming a crisis."

The report warns that 25m people in the UK, primarily in the south east, already live in areas where there is less available water per person than Spain or Morocco.

It predicts this scenario will worsen over the next 40 years as climate change leads to a net reduction in the amount of water available in rivers and demand for water increases in line with projected population growth.

In addition to more widespread metering and a tighter regulatory regime for water companies, the report also recommends incentives to promote adoption of water saving technologies, including a possible reduction in VAT on water efficient products and the extension of labelling schemes that promote water efficient products.