Water trading


Water trading is the process of buying and selling water access entitlements, also often called water rights. The terms of the trade can be either permanent or temporary, depending on the legal status of the water rights. Some of the western states of the United States, Chile, South Africa, Australia, Iran and Spain's Canary Islands have water trading schemes. Some consider Australia's to be the most sophisticated and effective in the world. Some other countries, especially in South Asia, also have informal water trading schemes. Water markets tend to be local and informal, as opposed to more formal schemes.
Some economists argue that water trading can promote more efficient water allocation because a market based price acts as an incentive for users to allocate resources from low value activities to high value activities. There are debates about the extent to which water markets operate efficiently in practice, what the social and environmental outcomes of water trading schemes are, and the ethics of applying economic principles to a resource such as water.
In the United States, water trading takes on several forms that differ from project to project, and are dependent upon the history, geography, and other factors of the area. Water law in many western U.S. states is based in the doctrine of "prior appropriation," or "first in time, first in use." Economists argue that this has created inefficiency in the way water is allocated, especially as urban populations increase and in times of drought. Water markets are promoted as a way to correct these inefficiencies.
In addition to the supply of tap water, many local water resources are also being acquired by private companies, most notably Nestlé Waters with its numerous brands, in order to provide commodity for the bottled water industry. This industrywhich often bottles common ground water and sells it as spring watercompetes with local communities for access to their water supplies, and is accused of reselling the water at drastically higher prices compared to what citizens pay for tap water.

Water trading markets

Water trading is a voluntary exchange or transfer of a quantifiable water allocation between a willing buyer and seller. In a water trading market, the seller holds a water right or entitlement that is surplus to its current water demand, and the buyer faces a water deficit and is willing to pay to meet its water demand. Local exchanges that occur for short durations between neighbors are considered "spot markets" and may operate under rules different from water rights trading markets.

Economic theory

Economic theory suggests that trade in water rights is a way to reallocate water from less to more economically productive activities. Water rights based on prior appropriation – first in time, first in right – led to inefficient water allocation and other inefficiencies, like overuse of land and less adoption of water conservation technologies. For example, it has been observed that urban users can pay up to 10 times more for water than agricultural users. Alternatively, water markets should provide a clear measure of the value of water and encourage conservation. Water trading can be a solution because marginal prices for users will be equalized and one price would allocate water according to each users demand curve; additionally information about the value of water in different uses will result, and compatible incentives will be created. Studies have shown that only modest transfers of water from agriculture to urban areas would be needed to bring allocation of developed uses into economic balance. Potential environmental benefits of trading can also include improved instream water quality, because water will not be diverted to the least economically productive users. Trading also re-allocates risk, whereas the prior appropriation system inefficiently and unequally allocates water and risk among similar users.
Water trading should be Pareto efficient, which means that the socially optimal water allocation is an allocation such that no person can be made better off without making someone worse off, and includes compensating transfers of money to losers. The socially optimum level is where water is allocated to those who value it most, though this can be contingent on reallocation in drought years. However, it is frequently not practicable to compensate losers from water transfers because of the difficulty of identifying them, or they may be located in different legal jurisdictions. Economists acknowledge that the final results of a water trading market and how they are achieved are important policy questions.

Conditions for a water trading market

The aforementioned benefits of water trading are improved as the following conditions are met:
  • Voluntary buyers and sellers: Parties interested in buying must have access to water rights and those interested in selling their entitlements must be allowed to do so.
  • Allocation of vested rights: In order to achieve efficiency in the distribution and use of water rights, available sources must be allotted to specific parties. While owners do not own the water itself, they do own the right to use the water. These property rights are established by a governing body and in many cases are available for sale or for lease.
  • Information: In order to function efficiently in a market, participants must know their own estimated costs. One who owns the water rights of a specific area must know the quantity of water needed, the value of that water, and the point at which additional consumption of water is no longer beneficial.
  • Clear definition of rights: This refers to measurement of bodies of water accessible by the rights’ holders. Bodies of water must be consistently identified, including the source of water body as well as measurement of "right to use." Lack of clarity on permits or water rights allocation may lead to lost, null, or void transactions.
  • Transferable from land rights: In reference to water ranching, water trading will be most efficient when access to water is independent of the land. Buying and selling of rights becomes less complicated when one is not considering the sale or lease of water and land.
  • Changeable types of water use: As agricultural users of water rights are electing to sell or lease these allotments, the destination of the water will vary. It is necessary that transferred rights may be redeemed for whatever agricultural, municipal, industrial, or residential purpose it is assigned.

    Types of trades

Several types of stakeholders are recognized as potential participants in a water market, including agricultural users, industrial, and urban, as well as those who value in stream uses for recreation, habitat preservation, or other environmental benefits. Water rights holdersparticularly agricultural userscan make water available for trade by employing water conservation technology, through permanent fallowing, seasonal fallowing, shifts in crop choice, or voluntary water conservation. Trades can then be long-term leases, permanent transfers, short-term leases, or a callable transfer, which is the ability of a city to lease water under specified drought conditions. There are other flexible trade tools used by urban areas, such as water leasebacks, wherein the municipality purchases the water right from agricultural users and then can lease it back to those users in non-drought years, as a way to ensure the urban water supply. Banking water is a related tool, wherein water is stored underground in non-drought years to be used in drought years, though this is not to be confused with water banks, which are brokering institutions. Water ranching is a method of accessing unclaimed water rights that are legally bound to land rights. While many areas have detached these two types of rights from one another, some still prohibit the severing of rights and thus continue to promote water ranching. In the event of water ranching, the groundwater removed from the property is often much greater than that which would be used for average agricultural use, which can be harmful to the ecosystems which rely on it. This practice also creates inefficiency in the dispersal of land and water access ownership, as non-agricultural parties, such as municipalities, may purchase a plot of land simply for its water.
Water credits: The idea is to have a tradable certificate which notifies the quantity of water saved by an institution, organization or an individual this would help in maximum utilization of every available drop of water. It may be defined as a permit that allows the holder to trade the conserved water in the international market at their current market price.

Justification for water trading markets

Establishing a water market may be an appropriate solution for the problem of distributing scarce water resources among increasing demand, depending on the historical, political, legal, and economic context of a community. For example, where prior-appropriation water rights dictate freshwater allocation, such as in the Western United States, new consumers may have little recourse to obtain sufficient water quantities to meet their demands without the use of water markets. Thus, historical appropriative rights might neglect consumers willing to pay more than current consumers. Water trading serves as a mechanism to promote the distribution of rights to those who value them most. Also, instream demands might be ignored in an appropriative system. For example, institutions governing water resources in the US have historically favored water allocation to uses that stimulate the economy, such as agricultural, hydroelectric, or municipal application. Correspondingly, western water law evolved to encourage water diversion offstream; water left instream was considered "wasteful" and so instream water demand was ignored.
There are multiple manifestations of water rights. Most commonly, water rights fall into the categories of prior-appropriation water rights and riparian water rights. Prior appropriation dictates that the first party to use the water for beneficial use maintains right to continue using it in this manner, unless they elect to sell or lease these rights. Riparian water rights are allocated to parties in ownership of land adjacent to a body of water. Frequently with riparian rights, the water rights cannot be severed from the land rights, and the water found within may not be transferred outside the watershed of origin. Both of these types of water rights are divided into "senior" and "junior" rights, appointed by the order in which they were allocated. The senior rights holders receive their water first, to be followed by the junior rights holders, and ideally there would be sufficient water for each party to redeem their allotments. In the absence of water trading, a drought may cause rights holders to lose their full access. In these drier seasons, it is possible for governing authorities to curtail junior water rights for a period of time to allow senior rights holders to redeem their full quantities through a process called priority administration.
Where water is scarce, tradable water rights may incentivize water conservation and make more water available for trading. Using the western appropriative rights system as an example, water rights are usufruct, indefinite, and senior or junior rights holders may forfeit their rights if they do not use their full water allocation for beneficial use. Because rights holders do not "own" water rights, but merely consume water, they bear no cost for overconsumption, and may consume more water than needed to avoid forfeiture. Agricultural water users may intentionally apply water to low-value crops or water-intensive crops to justify and maintain their current water allocation. Thus, tradable rights may also encourage agricultural production of more high-value crops and/or less water-intensive crops. In the case of the western United States, as of 2006, irrigators typically consume more than 80% of freshwater, and so water trading markets could reallocate water to urban, environmental, and higher-value crop uses, where water is valued greater at the margin.
Water markets may be appropriate where there are no or inefficient rules established to govern groundwater use. Because groundwater is generally available to anyone who sinks a well and pumps, water tables worldwide have fallen precipitously in the last several decades. Diminishing aquifers and lower water tables are a concern because aquifers are relatively slow to recharge, and lower water tables can lead to salt intrusion and make freshwater unfit for consumption.
Generally, water markets are considered flexible instruments that, in theory, should adjust for changing prices, and respond to changing markets conditions. Historically, certain communities, such as those in the western United States, may have responded to water shortage and increasing demand through supply-side solutions, like increased storage capacity and transportation infrastructure. Due to higher capital costs, decreasing sites for dam construction, and increasing awareness of environmental damage from dam construction , water markets may be preferable to supply-side solutions that are not viable or sustainable in the long-run. For the water storage and transportation infrastructure that still exists, water markets may shift the financial burden of maintenance from government agencies to private sellers and buyers that participate in water markets.