Water Markets’ Potential for Addressing Drought, Water Availability

As climate change increases the likelihood of a mismatch in the timing of when water is needed and when it is available, policymakers, water managers, and water users are exploring water markets as one potential tool to move water between uses. Water markets facilitate the voluntary transfer of water between sellers and buyers, on either a temporary (lease) or permanent (sale) basis. To some this has meant water is accessible for crops during drought or for new housing developments. For fish, it may mean more water instream that enhances survival.

And yet, water markets are not quite as simple as other markets (say, the grocery store).  There are lots of features of water that make purchasing it different than buying a loaf of bread. Water flows downhill and requires natural and manmade infrastructure to contain, measure, and divert it. Water’s availability is highly variable across the landscape and from season to season. And water is a public resource that can be held as a private property right, with regulatory oversight intended to ensure water withdrawn upstream does not impact downstream water users. For more information on water rights, click here.

The term “water markets” is a broad concept that can include different types of transactions, such as those between a single buyer and seller, a private or public seller who is subdividing their right into small pieces to sell to buyers, between irrigators inside the same irrigation district, and so on. As future improvements decrease the transactional costs of trades, new types of markets may emerge. This is a changing landscape!

Although water markets have the potential to move water across the landscape for multiple uses and to help reduce or mitigate climate-related impacts, there are a multitude of informational, economic, legal and social barriers to wider adoption of such markets. These barriers occur at multiple levels including the individual and aggregate, or societal, scales. At the individual scale, there are a number of factors that may deter potential buyers and sellers from participating in water markets:

• Information-related constraints create uncertainty over seasonal water availability and consumptive use. This uncertainty may affect irrigation planning decisions which limit water leasing options.
• Given that each water right is unique and water right lease or sale price is not always public information, it can be difficult for water right holders and farmers in irrigation districts to know what a “fair” price is for their water.
• Transaction costs of trades, such as a buyer and seller that fit all the requirements for a legal trade (such as meeting state regulations, water right validity checks) finding each other on their own is hard and may require substantial time and effort.

At an aggregate-scale, policymakers and regulators are navigating potential market implications such as:

• When water is purchased from agricultural users, water is moved to another use – sometimes also agricultural, most often municipal. The original land may then be taken out of agricultural production. This type of water transaction (sometimes called ‘buy and dry’) may have adverse public and private economic losses, contribute to social fracturing, and ecological challenges on dried-up farmlands in rural agricultural communities.
• Whether water markets allow for speculation in water. Speculation would occur when buyers (often assumed to be private companies from outside of the community that relies on the water) purchase water in hopes that its value would increase over time. Speculation tends to be a concern out of worry that it will increase the price of water beyond what those in the community can pay.
• Questions about whether there are social and environmental values that cannot be addressed through a market-based allocation system in which water goes to the purchaser who can offer the highest price.

Markets raise difficult questions that we need to wrestle with—individually, and as a society—if we are to find an economically viable and socially acceptable method to allocate water under increasing scarcity. Our colleagues are trying to better understand the relative importance of these challenges for irrigators throughout eastern Washington and exploring technologies that could help overcome some of these challenges. Stay tuned for upcoming articles that explore survey results sharing how irrigators across Washington feel about price disclosure, water as a public and privately help resource and split-season leases as a potential way to keep water in agriculture while also allocating to other uses.

The work that resulted in this post is part of “Technology for Trade: New Tools and New Rules for Water Use and Allocation in Agriculture and Beyond,” supported by USDA National Institute of Food and Agriculture, project #1016467.