Sign in Article Navigation
Show Summary Details

Page of

Printed from Oxford Research Encyclopedias, Environmental Science. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice).

date: 30 March 2023

Rethinking Water Marketsfree

Rethinking Water Marketsfree

  • Rupert Quentin Grafton, Rupert Quentin GraftonAustralian National University
  • James HorneJames HorneJames Horne and Associates
  •  and Sarah A. WheelerSarah A. WheelerUniversity of Adelaide

Summary

Global water extractions from streams, rivers, lakes, and aquifers are continuously increasing, yet some four billion people already face severe water scarcity for at least one month per year. Deteriorating water security will, in the absence in how water is governed, get worse with climate change, as modeling projections indicate that much of the world’s arid and semiarid locations will receive less rainfall into the future. Concomitant with climate change is a growing world population, expected to be about 10 billion by 2050, that will greatly increase the global food demand, but this demand cannot be met without increased food production that depends on an adequate supply of water for agriculture. This poses a global challenge: How to ensure immediate and priority needs (such as safe drinking water) are satisfied without compromising future water security and the long-term sustainability of freshwater ecosystems? An effective and sustainable response must resolve the “who gets what water and when” water allocation problem and promote water justice. Many decision makers, however, act as if gross inequities in water access can be managed by “business as usual” and upgrades in water infrastructure alone. But much more is needed if the world is to achieve its Sustainable Development Goal of “water and sanitation for all” by 2030. Transformational change is required such that the price paid for water by users includes the economic costs of supply and use and the multiple values of water. Water markets in relation to physical volumes of water offer one approach, among others, that can potentially deliver transformational change by: (a) providing economic incentives to promote water conservation and (b) allowing water to be voluntarily transferred among competing users and uses (including non-uses for the environment and uses that support cultural values) to increase the total economic value from water. Realizing the full potential of water markets, however, is a challenge, and formal water markets require adequate regulatory oversight. Such oversight, at a minimum, must ensure: (a) the metering, monitoring, and compliance of water users and catchment-scale water auditing; (b) active compliance to protect both buyers and sellers from market manipulations; and (c) a judiciary system that supports the regulatory rules and punishes noncompliance. In many countries, the institutional and water governance framework is not yet sufficiently developed for water markets. In some countries, such as Australia, China, Spain, and the United States, the conditions do exist for successful water markets, but ongoing improvements are still needed as circumstances change in relation to water users and uses, institutions, and the environment. Importantly, into the future, water markets must be designed and redesigned to promote both water security and water justice. Without a paradigm shift in how water is governed, and that includes rethinking water markets to support efficiency and equitable access, billions of people will face increasing risks to their livelihoods and lives and many fresh-water environments will face the risk of catastrophic decline.

Keywords

Subjects

  • Policy, Governance, and Law
  • Management and Planning

Why Water Markets?

Global water extractions from blue water sources (Hoekstra et al., 2012) are growing (Wada & Bierkins, 2014), yet some four billion people already face severe water scarcity at least one month per year (Mekonnen & Hoekstra, 2016). This increasing physical water scarcity will worsen because climate change projections indicate that much of the world’s arid and semiarid locations will likely get less rainfall (Haddeland et al., 2014; Intergovernmental Panel on Climate Change [IPCC], 2021). Even in locations where average rainfall is expected to rise, changes in seasonal precipitation, increased frequency of high-intensity precipitation events, and an expected increase in evaporative demand, attributable to rising surface temperatures (McEvoy et al., 2020), may cause increased water scarcity for some parts of the year.

Concomitant with climate change is a growing world population, expected to be about 10 billion by 2050 (United Nations, 2019). Much of the world’s population growth will occur in locations expected to have a drier climate. Reduced streamflow in semiarid and arid areas will exacerbate an already ongoing crisis of over-extractions from streams and rivers that degrades aquatic ecosystems, especially in parts of South and Central Asia where deficits in environmental flow requirements may exceed mean annual discharge (Jägermeyr et al., 2017). For many terrestrial locations, especially in the mid-latitudes, there will be increasing prevalence of agricultural and ecological droughts (Dai, 2013; IPCC, 2021), and these droughts will affect a larger number of people either directly (e.g., reduced crop yields for farmers) or indirectly (e.g., reduced regional incomes).

Droughts are not only caused by natural drivers but are also influenced by human actions and how water is managed (Aghkouchak et al., 2021). At a global scale, this means ensuring that immediate water needs are met without compromising future water security and the long-term sustainability of freshwater ecosystems (Grafton et al., 2012; Vörösmarty et al., 2010). Indeed, conflict over water is on the rise, with a significant increase in world water conflict events from 2015 onward (Pacific Institute, 2019). These multiple and growing risks to water insecurity (Hall & Borgomeo, 2013) are some of humanity’s greatest challenges.

The typical response to increasing water scarcity has been to build infrastructure to inter-temporally store and distribute water from wetter to drier periods or to transfer water from relatively abundant locations to areas of relative water scarcity. This is a “build better” and a “hard” infrastructure and a supply management approach to water insecurity (Grafton, 2017) that has been successful in many countries, especially in middle- and high-income nations, in mitigating the consequences of meteorological droughts (Hall et al., 2014). In addition to infrastructure, there are complementary “soft” approaches to promote water security that include improving institutions, or water governance, which includes economic instruments (Organization for Economic Cooperation and Development [OECD], 2011; Wheeler & Garrick, 2020), and information and reporting, the Three I’s (Hall et al., 2014).

A key challenge of water governance is “who gets water, and when.” Resolving this allocation problem becomes more difficult whenever the total demand for water exceeds the available supply. This is because in water-scarce regions those who get priority or first access are, typically, upstream water users for surface water or those with the largest groundwater pumps for groundwater. Consequently, those who may have high-priority water needs (such as for safe drinking water) may fail to get their needs satisfied, and there may be insufficient water left in rivers, lakes, or aquifers to maintain important ecosystem services (Vörösmarty et al., 2010).

While it is possible to develop regulations to decide who gets priority access, this requires information on who is accessing water and effective monitoring of access rules to ensure that those with priority get access first. While many would agree that access to ensure safe drinking water for all is a top priority, it is much less clear “who should get what” for other water demands. For example, should a rice grower get priority water access over a dairy farmer? An alternative to having a regulator, catchment authority, or government decide who gets access to water, and who does not, is to allocate physical volumes of water via a market mechanism whereby buyers and sellers, through their transactions, determine who gets the water (Grafton et al., 2016).

This article shows where and when markets for physical volumes of water have been helpful in reallocating water and what the factors are that support their success or failures over other approaches. Water markets are not always an appropriate way to allocate water volumes, and there is no single panacea, including water markets, to the world’s water crises (Meinzen-Dick, 2007; Wheeler, 2021a).

Part One provides an economic framework around water markets to understand how they have the potential to promote water security (Grey et al., 2013; Wheeler et al., 2017). The difference between the water market price and the value of water, how the water supply (along with water demand) determines a market price, the institution and transaction costs of trading water and water rights, the broader issues of water justice, and efficiency and market failures are explained.

Part Two describes water markets in multiple countries with a focus on formal water markets in the Murray-Darling Basin of Australia, China, and the western United States and on urban water with reference to informal water markets. An evidence-based narrative offers a response to: Why water markets?

Part One: Understanding Water Markets

Markets are places (including virtual locations) where buyers and sellers come together to trade goods and services and where payment is accepted by an agreed on medium of exchange. Water markets can be established formally (i.e., through official government legislation and sanctioned rules, processes, catchment areas) or informally. Formal markets have evolved within a framework of legislation, regulation, and rules that emerge over time. Established and extensive formal water markets exist in only a few countries, such as Spain, Chile, the United States, China, and Australia, where water is traded through brokers/intermediaries or via formal exchanges (Griffin, 2006; Schwabe et al., 2020; Wheeler, 2021a).

In all formal water markets, trading of physical volumes of water involves the exchange of water rights, permanent and/or temporary, in a market framework between willing sellers and buyers. Informal water trading can include arrangements between neighbors or between users in particular locations sharing the resource (e.g., Maestu, 2013), and generally involve temporary transfers of water. Individual transactions in many informal water markets are, typically, small and not recorded (Bjornlund & McKay, 2002; Wheeler, 2021a). Historically, informal arrangements between rural neighbors or users in particular locations sharing the resource have been in place prior to the establishing of formal markets (Maestu, 2013; Wheeler, 2021a).

Informal water markets have become a feature of many growing cities in developing countries (e.g., Ahlers et al., 2014; Cain, 2018; Raina et al., 2019; Venkatachalam, 2015, Vij et al., 2019; Zuin et al., 2014). Here, in favelas and informal settlements, water products in various sizes (bottles, barrels, tankers) and related services (water delivery to household tanks) provide access to water of varying quality and price in regions beyond the footprint of established water service providers. These markets are often competitive, reflect the circumstances of the communities where the markets are established, and, typically, lack formal legislative and regulatory oversight (Horne et al., 2018).

A foundation for understanding water markets using key economic concepts of price, economic value, demand and supply, institution costs, water justice, and market failures is presented here.

Price and Value of Water

An agreed to market price in a voluntary water market transaction must be equal to or less than the buyer’s marginal willingness to pay for an additional unit of water—and must be equal to or greater than the seller’s marginal willingness to accept payment for the sale of an additional unit of water. In a formal established water exchange, or via a broker or market intermediary, buyers and sellers before entering into a transaction generally have the opportunity to undertake “price discovery” about the market price(s) of water in previous transactions. This does not necessarily mean that all parties have the same information but helps to “level the playing field” in reducing information gaps between buyers and sellers.

A formal water market is illustrated schematically in table 1 with a market price per liter where, from the individual buyer’s perspective, the market price is given and cannot be influenced by the buyer’s decisions. Nevertheless, the market price does change depending on the actions of the many buyers and sellers in the water market.

The buyer’s marginal willingness to pay for water is akin to the marginal value of water to the buyer. In Figure 1, this marginal value curve slopes downward because the marginal value of each additional unit of water is less than the previous unit of water used by the buyer. This is because the highest priority uses of water (such as drinking water) give a higher marginal value and these uses are satisfied before lower priority uses (such as washing a car) that generate a lower marginal value to a water user.

In Figure 1, the sum of the difference between the marginal willingness to pay for each unit of water and the actual price paid by the buyer is called the consumer surplus. An equivalent concept, not shown in Figure 1, also exists for sellers and is called the producer surplus, or the difference between the amount received for the sale of each unit of water and the minimum payment for water sold that the seller would be willing to accept. In Figure 1, the consumer surplus is represented by the gray area and is the willingness to pay for water for each unit of water until K units are consumed less the price (and which is the same for all units consumed) paid for all K units.

Open in new tab

Figure 1. Willingness to pay for water and consumer surplus.

Source: Grafton et al. (2020, p. 89)

Figure 1 shows that the price of water does not equal the value of water. Frequently, the total value of water, as measured by consumer surplus, is much greater than the total expenditure (price X units purchased).

There are good reasons why the value of water is not the same as its price. In formal established water markets the price is determined by the buy and sell decisions of many individuals and companies. These buyers and sellers, typically, use water as an intermediate input to produce something else rather than for the intrinsic value of water itself. For example, an irrigator may buy water to irrigate a crop to increase the yield per hectare. In this case, the demand for water is an intermediate demand to produce a profitable crop. Typically, an irrigator would consider only the private marginal value of water when buying or selling water and not the public or social benefits that water might provide, such as maintaining streamflows in a river to support fish and birdlife. These public or social benefits of water are not directly included in market transactions and are called non-market values.

Figure 2 summarizes the multiple values that, collectively, sum to the total economic value of water. Market values for water are predominantly direct use values or benefits such as the water used by households for drinking, or the water used to grow crops. Direct use values may also include non-market values, such as the value of a lake for swimming, that would not typically be considered in a water market. An indirect water use value could be watering of urban parks to keep the grass and trees alive in a drought. While there is no direct use by a resident living nearby such a park, such water use does provide an indirect benefit such as through a reduced temperature from a mitigated urban heat effect. An option use value is the value from ensuring that water will continue to be available, for either direct or indirect uses, into the future. For example, in some cities, the town water supply regularly gets interrupted, sometimes by as much as several hours per day (Adane et al., 2017). Having the option to use water whenever households wish, rather than be constrained to using water when there are no interruptions, has a value. Water storage tanks would provide an option value for households able to afford it.

Open in new tab

Figure 2. Total economic value of water.

Source: Adapted from Grafton and Wheeler (2015, p. 409)

Non-use values of water are, typically, not bought or sold in markets. While many non-use values are not “priced” or traded in markets these values are no less real or less important than market values. For instance, water left in-stream may be more valuable to society than if it were extracted and consumed (Creel & John, 1992), even if there is no “market” to ensure adequate streamflow. Non-use values represent the benefits that are obtained from the water use of others, such as current (altruism) and future generations (bequest). These benefits might include, for example, ensuring that Indigenous communities’ cultural practices are maintained by ensuring an acceptable quality of wetland habitats (Carson et al., 2020). Non-use values may also include the continued existence of an endangered fish species that is highly dependent on river streamflow for its survival (Koehn, 2004).

Economists have developed techniques to estimate non-market values to help ensure that such values are also considered in public decision-making. These techniques include “stated preferences” whereby people are surveyed about their preferences among different possible states or conditions of the world, including the current state, and are asked to provide their willingness to pay for alternative states (Gregg & Wheeler, 2018; Olmstead, 2010).

Water markets, typically, do not directly account for non-market values but can do so indirectly (Grafton et al., 2016). For example, the regulated cap on the level of water extractions or water rights can account for the requirements of water for ecosystem services and cultural values. Thus, if there is inadequate streamflow to ensure the survival of fish species, the cap, or the overall limit on water extractions, can be reduced to provide sufficient streamflow. Allowing water to be traded for non-market purposes, not just for direct use, such as by allowing community and environmental groups to buy water from water users to increase streamflow, is another way to include non-use values within water markets (Grafton & Wheeler, 2018).

Price Determination: Supply and Demand

Whenever water trades at a positive price it is relatively scarce and imposes a cost on those who buy water. This is a cost that is borne even by water users who have received water allocations for free. Such water users face an opportunity cost for the water they use because they could have sold what they used at the market price. Consequently, all water users need to receive a value at least equal to the market value of water to make it financially worthwhile to use water.

How much is paid by buyers for water, or how large is the opportunity cost of water use, depends as much on the water supply as it does on water demand or the aggregate marginal willingness to pay over all buyers. This is illustrated in Figure 3 for a given water demand, defined by D1, that is declining in the water consumed as the price of water rises and three possible water supplies (S1, S2, and S3). In this example, it is assumed that the available water is stored in a dam, and how full the dam is, determines the water supply. When storage is at full or over-full capacity, such as during periods of high inflows, water must be spilled or released. By contrast, during periods of extended low inflows and with a high demand for water, the volume of water in the dam will be at less than full capacity.

At S1, all the uses of water can be satisfied at the current supply. In other words, if there were to be additional water available there would still be no additional uses for that extra water. Additional water, in excess of S1, would result in a net negative benefit, given by the marginal cost A, because there would be too much water, such as when the dam is forced to release excess water during a flooding event. At S2, there is less water supply than at S1 and the market price is given by B. At S3, a water supply less than S2, the market price is correspondingly even higher, given by C. Figure 3 also shows another water demand, given by D2, that is further out from the origin. At D2, the market price will be greater than that at D1 for a given water supply.

Open in new tab

Figure 3. Shifts in water supply and demand and the market price.

Source: Grafton (2017, p. 3028)

As Figure 3 illustrates, shifts in both demand and supply should, in a well-functioning water market, change the price of water. Thus, in a drought when there is less water available in storages or streams and rivers, and a greater demand for water for agriculture, the water market price should be expected to increase. How large the price increase is from, say, a reduction in water supply depends on how responsive or “elastic” the demand for water is to a change in price (Wheeler et al., 2008). Typically, the more important water is for a particular demand, such as the water demand to keep fruit trees alive during a severe drought, the less price elastic will be the demand and the bigger will be the price increase from any given decrease in the available water supply.

Institution and Transaction Costs

Water markets are devised ways to transact or exchange water between potential buyers and sellers. The structure of these markets, formal or otherwise, is not independent from the institutions, such as the legal system and how the law is enforced (North, 1991). Here, institutions are defined as the “rules of the game,” consisting of both the formal legal rules and the informal social norms that govern individual behavior and structure social interactions (institutional frameworks) (Wheeler, 2014). In this context, Williamson (2000) has defined four levels of institution: (a) society embeddedness: informal norms, (b) environment: formal rules, (c) governance: how rules are employed and enforced, and (d) resource allocation and employment: prices, incentives, and quantities.

With informal water markets the buy/sell/barter transaction is, typically, done face to face between parties who know each other or at least have common connections. This greatly minimizes the costs of exchange because of mutual trust and common community obligations. However, informality comes at the cost of scale in that mutually beneficial water transactions that might have occurred do not because of a lack of trust and/or enforcement mechanisms should a party to an exchange fail to deliver on what was mutually agreed.

In all markets, formal and informal, the costs to facilitate exchange and the exclusivity of the water that is bought and sold are called transaction costs. In formal water markets, transaction costs, at a minimum, involve the formal registration of the buyers and sellers, an agreed to record of the transaction, and written contractual obligations by each party enforceable in law. The provision of information by brokers or regulators, if viewed as disinterested and independent to both buyers and sellers, also reduces the information costs to participate in a formal water market. In formal water markets, there may also be a guarantee by a third party (such as water broker) to enforce, and if necessary to stand by, the obligations of each transacting party should one party fail to meet its agreed-to obligations.

Transactions costs are a necessary cost of exchange but impose an additional cost burden on buyers and sellers. Consequently, all else equal, the higher the transaction costs, the smaller the net value from the water exchanged in a water market. In addition to transaction costs, there are other governance institutional costs of collective action (Garrick et al., 2013) that include monitoring and enforcing water rights and water use. The costs of collective action, transaction costs, and the information costs of buyers and sellers constitute the ongoing institution costs of water markets. This is in addition to the transformation costs of establishing or improving the institutional environment (Marshall, 2013) and which may be so large that water markets may never be established.

In many locations, the initial and ongoing institution costs of water markets are too large to incentivize buyers and sellers to come together in a formal water market. To understand whether and when water markets are appropriate, Wheeler et al. (2017) developed a water market readiness framework that detailed three crucial stages in the progressive development to formal water markets. The first stage, step one, involves establishing enabling institutions (e.g., having available information on current and sustainable [capped] water extractions, hydrology factors, regulations, legislation, monitoring, etc.) to monitor and govern water markets. The second step involves facilitating trade, which involves assessing benefits of trade, developing water registers, reducing transaction costs, and so forth. The third stage involves regions that have had water markets in place for some time whose markets are in the process of being improved. This process includes scoping of concerns and problems and, in response, instituting reforms.

An evaluation and comparison across water markets in terms of their features and outcomes is complicated by the fact that every market is different, with its own history, regulations, location, and so forth. Evaluations in Part Two are based in part on the framework developed in Wheeler et al. (2017), but also on the institutional analysis and development framework in Ostrom (2009).

Water Justice

Water justice focuses on the needs and rights of people that are “essential for the full enjoyment of life and all human rights” (United Nations, 2010, p. 1/6) unconstrained by a lack of accessibility to water of adequate quality. In this context, water justice calls for actions (Sultana, 2018) that support: “the progressive realization of the human rights to safe drinking water and sanitation for all in a non-discriminatory manner while eliminating inequalities in access, . . .with a view to progressively eliminating inequalities” (United Nations, 2015, 5(a)).

Much of the focus of water justice at a multilateral level is about achieving the Sustainable Development Goals Targets 6.1 and 6.2—to achieve, by 2030, universal and equitable access to safe and affordable drinking water (6.1) and access to adequate and equitable sanitation and hygiene for all (6.2) (United Nations Regional Information Centre for Western Europe [UNRIC], 2021). Water justice, however, is about not only direct use values to people but also explicit consideration of ecosystems and their services. This explicit centering of people as part of the landscape is a long-standing tradition among many Indigenous Peoples that is “framed around values and ethics of co-management and co-existence which continue to facilitate inter-generational relationships between the shared boundaries of all the river nations through ancient song lines, contemporary customs and practices” (Martuwarra RiverOfLife et al., 2021, p. 40). In this perspective, water has a “life-force” and rivers have a right to life that goes beyond their value to people.

Actions in support of water justice begin with a set of critical questions: Who gets access to water? Who gets to make decisions about water? What level of water reliability and quality is available, accessible, and affordable to both people and ecosystems? When is water accessible? Why do some water users have greater access than others? How are decisions made? How is water availability and accessibility supported? (Grafton et al., 2022). These questions need to be complemented by a broader understanding of social justice, an awareness of history (especially historical injustices), an appreciation of the way knowledge is acquired and shared matters, and a recognition of power imbalances (Neal et al., 2014).

Critical justice questions provide a framework to review the concepts of markets, privatization, and appropriation, which have been linked by some researchers (Barlow, 2007). When markets operate within institutional settings that are unjust then markets, in the absence of proactive water justice actions, will perpetuate injustices even if the market itself is not the primary cause of the injustice. For example, if the initial allocation of water rights were unjust then, in the absence of a reallocation, water markets will perpetuate this injustice. Furthermore, if selected water users are given privileged access to water previously held in common that generated external public benefits for all, such as the ecosystem services from wetlands, then a water reallocation that benefits one group at the expense of the public good, and without compensation, is unjust.

If a water justice lens is applied to water markets, the question needs to be asked: Who gets the water or water rights and how are they initially allocated? In one of the world’s largest formal water markets, the Murray-Darling Basin, Australia, the Indigenous Nations own or control less than 0.2% of the available surface water rights (Hartwig, Jackson, et al., 2021). This is a direct result of dispossession of their lands and waters, despite multiple wars of resistance in the 19th century against colonial settlement and occupation of their “Country” (Beresford, 2021). Unfortunately, this dispossession is not only a historical phenomenon (Hartwig, Markham, et al., 2021). In 2015, the Indigenous Barkindji People, whose country includes the Lower Darling River (known as the Barka to the Barkindji), were provided with a land settlement of 128,000 km2 that included the western and eastern banks of the Lower Darling-Barka River. Yet this settlement provided them with no water rights.

Efficiency and Market Failures

Efficiency has multiple meanings, but in the content of water markets it, typically, refers to a situation where there are unrealized “gains from trade.” In other words, putting aside the institution and transaction costs of water trading, an inefficient water allocation exists when heterogeneous water users have a different marginal willingness to pay for an extra unit of water. These differences in the marginal values for water mean that there is potential for a mutually beneficial reallocation of water among water uses and water users that could make everyone better off.

Water markets offer the possibility of a water reallocation among buyers and sellers so that the marginal value of water is equalized among competing uses and users. In a competitive water market, and under certain conditions, such transactions between buyers and sellers can promote efficiency-improving water reallocations at a given point in time (static efficiency). If the market price for water also provides incentives for water users to consider water scarcity and value to others, then markets may also provide efficiency gains over time (dynamic efficiency).

While water markets can promote efficiency by supporting mutual gains from trade, whether markets result in an efficient outcome depends on market failures, or impediments or deficiencies in markets that prevent an efficient water allocation. One possible market failure is the determination of the “cap” or overall limit of water extraction. Setting the overall cap is important because for water markets that include only direct water users the market price will provide only the marginal value of water in use, such as for irrigation. But water, typically, also has an economic value in non-use, such as the values from streamflows that generate ecosystem services. Consequently, if the cap is set at too high a level in relation to a market for riparian surface water, the market price of water will not be high enough to provide a market price signal to water users. In other words, too much water will be used, and the total economic value of water across all uses, and non-uses, will not be maximized, a necessary condition for efficiency.

Another factor that may contribute to market failures and reduced efficiency is market power whereby particular buyers or sellers have sufficiently large transactions to affect the market price. If the market power resides with the seller (buyer) then their transactions can increase (decrease) the price that they would otherwise receive (pay) to their advantage but at the expense of other market participants. Separate from the issue of market power, a market failure can also arise when there is asymmetric information such that some market participants are much better informed about the current or expected prices than others and can use this privileged information for their benefit at the expense of others.

With an understanding of water markets (formal and informal), water values (marginal and total economic value), price determination (demand and supply), institution costs (transaction costs, costs of collective action, and information costs), water justice (the “who gets what, how, and when” of water), and efficiency and market failures, the practices and outcomes of water markets can be assessed.

Part Two: Review of Water Markets

In their simplest form, water markets are one framework to facilitate the transfer of water from one user or use to another. Such reallocation of water may enhance both static and dynamic efficiency (Grafton et al., 2012; Howe et al., 1986). Markets can emerge in multiple ways, reflecting the property rights associated with water ownership and the legal, cultural, and social history of a region, and the institutional barriers to change. Examples of water markets can be found in surface water and groundwater systems in many countries around the world, and in many cities that draw on outside water sources to provide their businesses and inhabitants with access to ongoing water supplies. Most formal water markets have predominantly rural agricultural participants. Figure 4 provides examples, while Table 1 describes some of the characteristics of the major types of water markets.

Open in new tab

Figure 4. Selected world water markets.

Table 1. Water Market Framework

Open in new tab

Type of market

Formal market

Informal market

Formal broadly based water market

Formal agricultural water market

Formal ag to urban water market

Formal urban water market

Informal ag water market

Informal urban water market

Description

Permits trading of water rights and annual allocations between entities covering all water users and investors. Where infrastructure permits, allows intersectoral trade. Requires strong legal framework and institutions, good information flows, and effective compliance. May apply to both groundwater and surface water systems.

A subset of a broadly based water market but limited to agricultural trade.

Similar to formal agricultural water markets, except that purchaser will be an urban water utility or user.

Market structure developed to address long held concerns with anti-competitive aspects of monopoly service provision. Operate in very few countries.

Irregular arrangements without regulatory oversight.

Commonly seen in rapidly growing cities in emerging country. Water vendors provide enhanced access to clean water supplies, where the public water utility has been unable to meet demand. Some markets involve private business while others dominated by communities.

Transaction size

Surface water trading tends to be large (tens of megaliters). Groundwater trading tends to be more geographically confined and in smaller trades.

As for broadly based water market.

Trades tend to be large to very large, depending on size of receiving community or user.

From small (kiloliters) to large (megaliters).

Large (tens of megaliters).

From small containers (under a liter) to water tankers (many kiloliters), depending on community and consumer needs.

Infrastructure requirements

Headwater dam required for regulated system. Rivers, pipes, pumps, and meters are key tools. Accurate information and effective compliance are keys for unregulated systems, where metering is critical.

As for broadly based water market.

As for broadly based water market.

As for broadly based water market.

Utilizing existing immediate area irrigation infrastructure.

Require initial access to supply (for example, may draw on public water supply or groundwater from peri-urban areas). Otherwise, vary greatly, according to characteristics of the market.

Examples

Southern MDB connected system (Australia); Rio Grande (United States).

Segura River Basin (Spain).

Western United States, China (see China Water Exchange).

UK water utility to business market.

Early trading in the southern MDB.

See Table 4.

Effects

Facilitates movement of water from low to higher value uses.

Provides better balance sheet use; improves resiliency; improves competitiveness.

Provides urban areas with lower cost access to additional supply. Improves resiliency in face of climate change.

Increases efficiency, driving cost savings.

Improved efficiency among small number of parties.

Promotes access to clean water, providing a potential vehicle to address SDG 6 challenges.

References

Debaere and Li (2020), Grafton and Horne (2014), and Wheeler (2021a).

Calatrava and Martínez-Granados (2018).

China Water Exchange (2021), Schwabe et al. (2020), and Zuo et al. (2021).

Black (2017) and Ofwat (2020).

Connell (2007) and Wheeler et al. (2009).

Cain (2018), Raina et al. (2019), and Venkatachalam (2015).
Open in new tab

The development of a water market reflects a degree of scarcity. Where scarcity is intermittent or at a low level, two parties may agree on informal arrangements to trade water. If scarcity is more prevalent, water trading may become regularized among multiple buyers and sellers. With the appropriate rules and regulations and infrastructure, a market can provide a water user ready access to buy more water or the means to sell water surplus to meet requirements.

While the needs of irrigators and agriculture is a central part of the story around water markets in many countries, the needs of other water users are also important. For example, expanding cities may need new water sources to meet growing demand. In a world grappling with climate change, traditional supply sources may be adversely affected by a drying climate or less reliable rainfall, requiring water service providers or water users to look to new sources of supply. From a water demand perspective, mining, manufacturing, and urban residential demand may change over time. When these changes cannot be met by existing institutions, an informal or formal water market may provide a low-cost way to achieve an economically preferred reallocation of water (Grafton et al., 2017).

Water Rights

A permanent transfer of a water right, which in some countries is called a water entitlement or a water share, commonly involves the trade of an ongoing property right to access water, either as a proportion or as a fixed quantity of the available water at a given source (Wheeler et al., 2017). Permanent water trading is associated with long-term structural and demand factors. For example, a town may purchase additional water entitlements to increase the reliability of future supply, or a mine owner may do the same to ensure that its water needs are met over the life of the mine. As agricultural production shifts within and between regions with changes in the competitiveness of crops grown, specific irrigators may wish to buy or to sell their water rights to match their long-term needs with their water portfolio that may change with, say, farm expansion, farm exit, or farm succession. Similarly, an environmental water manager may choose to adjust their portfolio of water rights over time to prioritize a particular wetland depending on the differential impacts of a hydrological drought on streamflows across a catchment.

By contrast, a temporary transfer of water, which is often known as water allocation trading, involves short-term or temporary transfers of actual water from the rights holder to another party for a specified period. Water leases, futures contracts, and water options are all temporary trade products. Trading of actual water allocations, typically, may reflect short-term considerations such as water availability, to manage risk and uncertainty within and between seasons, to optimize farm profitability (Zuo et al., 2019).

Selected Formal Water Markets

Formal water markets exist primarily in high-income countries, although China is a notable and recent exception, that have relatively well-developed institutions for oversight. Most formal water markets are heavily constrained by historical traditions and laws. The water markets of the western United States, Australia, Spain, and Chile all have been operating for decades. Experiences from these countries provide insights on the role water markets can play in reallocating available water (Breviglieri et al., 2018; Calatrava & Martínez-Granados, 2018; Donoso et al., 2021; Garrick et al., 2018; Grafton et al., 2017; Horne & Grafton, 2019; Wheeler, 2021b).

Many formal water markets reallocate water among water users both within and between irrigation districts or regions. Some are “deep” markets that operate throughout the year and year in and year out, such as the markets of the southern Murray-Darling Basin (MDB). In other water markets, such as those in the Segura valley of Spain (Calatrava & Martínez-Granados, 2018) or the Rio Grande in the western United States (Debaere & Li, 2020), trades may occur only in years or seasons of drought and involve only a small percentage of water users. Formal water markets also provide for reallocation of water from agricultural to urban areas, illustrated best in the role of water markets in servicing some cities in California.

The literature on water markets is extensive, with dozens of regions in dozens of countries being examined (e.g., see Maestu, 2013 and Wheeler, 2021a). An overwhelming conclusion from examining this literature is that while the shared characteristics of each market are many, difference is equally important, often reflecting history, culture, and complex interaction between legislation, rules, administrative capability, institutions, and politics. Economic issues are sometimes at the forefront of how the markets have been designed, but this is rarely the case, with many barriers to reallocating available water undermining efficient use (Grafton et al., 2017).

The Murray-Darling Basin (MDB), Australia

Australia’s MDB water markets are a rich example of formal, extensively adopted water markets, with relatively few restrictions outside of those dictated by hydrology. These markets have grown significantly in complexity and the value of the water traded since the turn of the 21st century such that they have become the world’s preeminent water markets (Wheeler, 2021a). Table 2 provides a short history of its development.

Table 2. Chronology of Water Markets in the MDB, Australia

Open in new tab

Date

Event

1914

River Murray Waters Agreement of 1914.

1983

South Australia is the first state to officially introduce temporary and permanent trade between private diverters.

1985

MDB Ministerial Council (MDBMC) created.

1987

Introduction of the MDB Initiative, a partnership between the Commonwealth, New South Wales, Victorian, South Australian, Queensland, and Australian Capital Territory governments. The objectives of the Initiative are to promote and coordinate effective planning and management for the equitable, efficient, and sustainable use of the water, land, and other environmental resources of the Murray-Darling Basin.

1989

Trade within irrigation areas introduced.

1992

A new MDB Agreement replacing River Murray Waters Agreement of 1914 provided the basis for measures to advance management of land, water, and environmental resources on a basin-wide scale via market-based instruments.

1993

The Murray-Darling Basin Commission (MDBC) established to serve as the executive staff of MDBMC.

1994

The Council of Australian Governments (COAG) introduces several water reforms that include separating water rights from land ownership, allowing for more trading flexibility.

1995

COAG introduces an interim cap on MDB surface water diversions, made permanent in 1997.

2004

COAG agrees on the National Water Initiative (NWI) to promote more efficient use of water and expansion of water trading. The NWI extends the 1994 reforms, seeking to further expand water trading by providing institutional support to extend markets across regions and Australian states. COAG also establishes the National Water Commission.

2007

Barriers to trade (such as interstate trade restrictions) were mitigated to improve competition within water markets and provide better information to buyers and sellers.

2008

The Murray-Darling Basin Authority (MDBA) established under the national Water Act of 2007.

Governments commence purchase of water rights (entitlements) to increase streamflow.

2010

Individual irrigators can sell entitlements outside of the irrigation district without paying an arbitrary termination fee.

2012

MDB Plan becomes law.

2014

National Water Market System established to convey timely and accurate market information to market participants.
Open in new tab

Source: Adapted from Grafton and Wheeler (2018, Table 1).

The water resources of the MDB support: broad acre and irrigated agricultural production; a variety of urban areas within and outside the Basin; diverse ecology, including many internationally recognized Ramsar wetlands; tourism and recreation; and Indigenous cultural values. Substantial trading occurs between agricultural users across the MDB, by both landholders and non-landholders (e.g., environmental water managers, water utilities, and investors), in both surface and groundwater systems.

MDB water markets permit the trading of a variety of water rights within and between water systems. Key water products include: water access entitlements, which are a perpetual or ongoing entitlement to exclusive access to a share of water from a specified consumptive pool as defined in the relevant water resource plan; water licenses, which are an ongoing right to take or hold water from a water resource; and annual water allocations, which are the specific volume of water allocated to water access entitlements in a given water year or allocated as specified within a water resource plan (Grafton et al., 2016; Wheeler, 2014).

Trading is fundamentally different between the southern MDB and the northern MDB, with the southern MDB having over 80% of the trades. Wheeler and Garrick (2020) summarized the reasons why formal markets have developed much more in the southern than in the northern MDB. Compared with the northern MDB, the southern MDB has: far greater hydrological connectivity and public dam storage capacity, a much larger amount of regulated water entitlements, less reliance on groundwater and floodplain harvesting, higher water usage charges, more irrigators, smaller irrigated area per business, higher monitoring of water, and less water use homogeneity. These factors reduce transactions costs and support greater water trading in the southern MDB.

Increasing water scarcity and quality problems in the 1980s gradually resulted in more formal water markets in the MDB. Some states in the MDB started trading of annual water allocations across irrigation districts in 1983 that had existed informally since the 1940s. A cap on overall water extraction in 1995 ultimately led to much greater water trading. Much of the water trade is predominantly surface water, but following reforms since 2004 there has been growing groundwater trade, and farmers are increasingly substituting between the two resources (Wheeler et al., 2020).

The separation of land from water during the 1990s allowed new market participants, such as environmental groups and non-landholder financial investors (e.g., superannuation companies and trade speculators), to own and trade water. It also permitted urban water authorities to purchase water entitlements from the irrigation sector and allowed manufacturing industries or mines needing additional access to water to do the same (Grafton & Wheeler, 2018; Seidl et al., 2020). Water market reforms have also allowed water specific financial funds to be established, which in some cases have driven product innovation in key parts of the MDB (e.g., see Argyle Capital, 2021).

In the 2000s, a period that coincided with one of southeast Australia’s worst recorded droughts, state and national governments began to use water markets as a major vehicle to reallocate water to the environment, buying water entitlements from willing sellers (mainly irrigators) and using them to further environmental objectives. Over time, these reforms, including the unbundling of water from land, removal of trade restrictions on both water entitlements and allocation water, and the increasing use of markets for environmental purposes, have resulted in much greater trading (Bjornlund, 2002; Horne & Grafton, 2019; National Water Commission [NWC], 2011). For example, in 2019–2020, the value of the water allocation trade was around AUD $2 billion (over 99% of Australia’s allocation trade by volume is in the MDB) and the value of the water entitlement trade was around $4.2 billion (around 85% of Australia’s entitlement trade is in the MDB) (Australian Competition and Consumer Commission [ACCC], 2021; Bureau of Meteorology [BOM], 2021).

Water market infrastructure in the MDB is decentralized, with a basin-wide overlay. All states in the MDB have their own water registers, where water market trades are reported. Water market intermediaries include water brokers and water exchanges, and water trading in the southern MDB is arranged within and between water trading zones, with varying rules applying to carryover of unused water allocations, tagged trade, inter-valley trade restrictions. The Murray-Darling Basin Authority (MDBA) is a national government basin-wide authority responsible for administering the Basin Plan that determines basin-wide water extractions (MDBA, 2021). The MDBA certifies state-based water resource plans, sets water market rules, and is responsible for compliance and enforcement.

The debate on structure, efficiency, and overall benefits delivered by the water markets remains ongoing. A 2021 report by the national economic regulator, the Australian Competition and Consumer Commission (ACCC), concluded that MDB water markets provide net benefits to the community but that further developments in the market infrastructure are required across a broad front (ACCC, 2021). The ACCC key recommendations for further water market reform include: improved market integrity and conduct especially by market intermediaries (recommendation 2); improved market information with a Water Markets Data Standards for more consistent reporting (recommendation 7); Water Market Information Platform (recommendation 12); strengthened water metering and monitoring of water extractions (recommendation 17); and the establishment of an independent Water Markets Agency (recommendation 26) to undertake market surveillance, enforcement, and reporting (ACCC, 2021).

Agriculture to Urban Water Trading—Western United States

Like Australia’s MDB, markets play an established role in reallocating water resources in parts of the United States, predominately in its 17 western states (including California, Arizona, Texas, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, and Washington). Water trades are of prior appropriation rights, based on historical use, and are not tied to the ownership of land (Leonard et al., 2019). Water trading occurs in relatively small markets that are governed by diverse rules that dictate whether water can be traded based on the use of no injury rules (Breviglieri et al., 2018), case law, and irrigation district rules (Leonard et al., 2019).

Like the MDB, many of these western U.S. markets are broadly based, that is, trade can move from any willing seller to a willing buyer. The states with the largest water markets are California, Arizona, Texas, and Colorado, with most trades being leased water. Permanent water rights are also traded but in much smaller quantities. Trading in California, Arizona, and Texas has been a small 2%–4% of available supplies, but in years of scarcity traded water is an important source of water (Schwabe et al., 2020).

About three quarters of water traded in the western United States is transferred from the agricultural sector to urban areas, reflecting ongoing urban population growth and a decline in groundwater availability, and the high willingness to pay for water by urban households. Trading has also been supported by a net movement of water to the environment (particularly in California), in part funded by NGOs to respond to growing environmental concerns (Schwabe et al., 2020).

All catchments in the western United States are fully allocated, if not overallocated. Climate change is projected to further reduce water availability. Nevertheless, there has been little growth in these markets since about 2010, reflecting in large part legal constraints and a capacity burden of monitoring and enforcement (Gilson & Garrick, 2021). Water recycling in urban areas may also play an increasing role in meeting new demands and may become a new focal point in water markets over the coming decade (Simon, 2021; Udasin, 2021).

China’s Water Markets—Small in Relative Terms but Driving Reform?

Much of China is confronted by water scarcity. Sustained and rapid economic development combined with a massive population have underpinned a burgeoning demand for water. Water stress is most apparent in the north, which has nearly half of China’s population but only 20% of its water resources. Historically, the nation’s water resources, which are owned by the state, have been allocated and reallocated within an administrative framework, implemented by regional governments. Typically, water prices were kept low, reducing the incentives to conserve water use (Jiang et al., 2021; Moore, 2014; Wang et al., 2018).

Since 2000, formal water trading has grown rapidly, first utilizing regional trading platforms and then through the establishment of the centralized China Water Exchange in 2016. Government bodies from the top down (through many levels of government) are involved in driving reform. Pre-2015 research pointed to pitfalls facing water market development in China (Zuo et al., 2021), but more recently there has been an upsurge in trading activity on the China Water Exchange (2021).

Combined with ongoing political support for more efficient use of available water, water trading is gradually driving innovation and water use in irrigation and industrial enterprises, as water scarcity has increased in economic significance. Table 3 provides a short, selected history. While major and costly infrastructure projects like the South-North Water Transfer Project provide one approach to mitigating northern China’s water insecurity, water markets may also drive change through repricing and valuing water. Nevertheless, ongoing work will be required to upgrade institutions, and the measurement and compliance functions of Chinese water markets (Zuo et al., 2021).

Table 3. Chronology of Development of Water Markets and Trading Platforms in China

Open in new tab

Date

Event

2000

First water trade involving an intercity transfer of 50 GL water between two cities, Dongyang and Yiwu in Zhejiang Province. Yiwu, the downstream city, invested in upstream Dongyang’s dam and various conservation projects, resulting in increased supply capacity to both cities. At the time there was no legal framework for water rights trading.

2001

Experimental “water bank” established in Henan and Shandong provinces, lower Yellow River Basin for later trade.

2003–2008

Yellow River Conservancy Commission, which oversees transfers within the Yellow River Basin, approves 26 water right transfers, some 20 in Inner Mongolia. These involve a range of water conservation projects in agriculture, with the water saved moving to industrial and urban uses. Water required for irrigation has been reduced, lowering farmer input costs. These are regions of overallocation and extreme water stress.

2013

First provincial-level water trading platform, the Inner Mongolia Water Rights Storage and Transfer Center. Established to facilitate inter-prefecture water trading within Inner Mongolia.

2014

Chinese Ministry of Water Resources announces three-year plans to pilot water rights schemes in seven provinces/autonomous regions. Three provinces—Gansu, Guangdong, and Henan—begin to explore various trading platforms.

2016

Chinese Ministry of Water Resources issues provisional measures on the administration of water rights trading, giving many levels of government the right to trade water across regions.

Chinese Ministry of Water Resources launches first national water rights trading platform, China Water Exchange. By early May 2018, a total of 53 trades were completed on China Water Exchange, of which 40 transactions were regional or inter-sectoral water rights trades; the remaining 13 were transactions between irrigators.

2020

Total water rights trading reaches 2800 GL, or around 0.5% of withdrawals, still small in overall impact but growing in significance.

2020

China Water Exchange records first rainwater trade.

2021

During the 2 years to October 2021, over 450 trades were listed on the China Water Exchange. Parties involved included water service providers, industrial companies, and irrigation districts.

Ongoing efforts to promote comprehensive reform of agricultural water prices.
Open in new tab

Sources: China Water Exchange (2021), Jiang (2018), Jiang et al. (2021), Moore (2014), and Wang et al. (2018).

Urban Water Markets

Formal water markets play only a minor role in provision of water services in the vast majority of urban areas throughout the world. These cities, large and small alike, are generally serviced by area monopolies, often owned by a tier of government. Thus, water consumers in urban areas around the world have, to varying degrees, access to a reliable supply of safe water through public water utilities. This model has been of enduring value, underpinned by economies of scale and technology that have delivered safe and reliable water supplies to thousands of cities and townships over a lengthy period.

As traditional urban supply sources are being challenged by growth in demand from rising incomes and population, or as a response to climate change, an increasing number of countries have introduced a mixture of demand and supply management approaches to reduce per capita water consumption and increase resilience of water supply. While economic tools, notably higher prices, are playing a prominent role in some countries, formal water markets have rarely been used within cities in the way electricity markets have, reflecting complexity, societal and political sensitivities, and genuine difficulty in establishing an economic case. Nevertheless, formal water markets are being increasingly used to provide urban areas with access to additional water supplies as cities grow, such as in China, the United States, parts of the European Union, Latin America, and Australia (Wheeler & Xu, 2021).

In a major break with tradition, a formal business wholesaler-retailer water market has also been introduced in parts of the United Kingdom for business consumers. In its first three years of operation, it has had only a small impact, with just a small number of larger businesses choosing to switch supply sources or renegotiate terms of supply. Efficiency gains have been small. This experience suggests that further work is required on market structure and that market data are inadequate, interactions between wholesaler and retailer are cumbersome, and that wholesaler performance is inadequate (Ofwat, 2020).

Informal Water Markets in Urban Areas—A Pathway to Progressing Toward Sustainable Development Goal 6?

Informal water markets are a feature of many urban areas, large and small, throughout low-income countries. Since the late 1970s, governments have had, under the auspices of the UN, aspirational targets of providing everyone with an adequate supply of safe water and diffusion of sewerage services. Sustainable Development Goal 6 (introduced in 2015) is the latest of these aspirational targets, with the aim of introducing universal access to safe water and sewerage to all by 2030 (Horne et al., 2018). The shortfall is most noticeable in cities of all sizes throughout Africa, the Indian subcontinent, and Asia, where internal population growth and migration from rural areas has seen an explosion of city populations. The key problem is well known; local water utilities have been unable to grow water supply and sewerage networks to meet local demand.

As a minimum, access to water is essential to all; the gap between needs and supply has been at least partly filled by informal water markets, in the form of many alternative private-sector water vendors and water products. In some cities, there is competition between the established water service provider and water vendors. For example, private vendors may offer high-quality water not provided by the network service provider. There is also competition between water vendors, but the extent and impact of competition varies from place to place (Garrick et al., 2019; OECD, 2021; Raina et al., 2019; Venkatachalam, 2015).

In some cities, private vendors may offer services that are effectively an extension of the network, with competition between private vendors. Table 4 provides some examples of the types of services in a number of rapidly growing cities with large informal water markets.

Table 4. Informal Urban Water Markets—Examples From Developing Countries

Open in new tab

Urban Area

Issue

Response

Conclusion

Urban areas of the developing South

(Ahlers et al., 2014; Raina et al., 2019; Zuin et al., 2014)

Limited coverage of population (40–70%) by water service provider leaves large population without reliable, safe water supply.

Highly diverse, often informal, for profit and philanthropic service providers deliver needed services using diverse operational and service models.

Mining of ground water for carting to slums and informal settlements creating new problems.

Policymakers should examine role for regulations that could improve consumer outcomes. Actions are likely to be market specific.

Kathmandu, Nepal

(Raina et al., 2019)

Inadequate public water supply.

Two upstream markets (between water source owners and tanker trucks, and between bottled water vendors and distributing vendors) and two consumer markets (between tanker truck vendors and consumers and a second between distributing vendors and consumers).

Research did not find issues that required immediate attention.

Chennai

(Venkatachalam, 2015)

Large number of households are not supplied by the public water service provider.

Informal providers play important role in fulfilling poor households’ drinking water requirements. Shortfall serviced by tankers and smaller suppliers delivering water in plastic cans, bottles, and sachets, at considerable cost.

In absence of significantly improved public provision, better regulation of informal providers required to ensure that low-income households have access toimproved safe drinking water.

Luanda, Angola

(Cain, 2018)

Rapid growth of the city has resulted in large number of households not supplied by public water service provider.

Informal market emerged (river pumpers, tankers to transport the water, household storage tanks), but water quality poor and expensive, not necessarily reflecting price gouging. Government enacted low-level regulation (including fees and taxes) as a means of improving quality. An alternative approach of community-based stations established with Water Service Providers involved that exist side by side with informal market.

Halfway houses involving some regulation can begin to address quality issues.
Open in new tab

A critical question to answer is: How well do these disparate water markets perform and do they offer a medium-term alternative to an eventual expansion of public utility water services (Garrick et al., 2019)? Informal markets have arisen because the incumbent monopoly water service providers have failed to fully deliver safe water at an affordable price to all. This demand for water services is being met by water vendors who provide access to water that otherwise would not be available at the level of quality and reliability needed. Multiple case studies indicate that these informal water markets can add significant value to water consumers but are not without challenges.

Conclusion

This article highlights that both informal and formal water markets, under the appropriate circumstances, offer the opportunity to promote efficiency in how water is used and allocated. Whether this potential is realized or not depends on institutions, market failures, and whether full consideration is given to the critical questions of water justice.

The biggest challenge to establishing successful water markets are high institution costs and transactions costs. Formal water markets cannot operate in a vacuum, nor can they successfully operate in the absence of adequate regulatory oversight. Such oversight includes, for instance: the metering, monitoring, and compliance of water users; active compliance to the rules to protect both buyers and sellers from market manipulations; and a judiciary system that can support the regulatory rules and punish noncompliance. In many countries, the institutional and water governance framework is not adequate to satisfy these criteria. Further, even where adequate institutional support exists for water markets, the net benefits of allocating water via markets also depends on the type and extent of market failures. For example, if the overall cap on extraction is set too high, water markets may compromise the total economic values (use and non-use) from water.

Wheeler (2021) assessed 28 regions, 20 countries, and six continents as to whether formal water markets were an appropriate response to water insecurity. Insights from this assessment highlight four key considerations in relation to the establishment of water markets.

1.

Establishing sustainable (and adaptable) water extraction caps: The importance of establishing sustainable water extraction (groundwater and surface-water) caps is critical.

2.

Water accounting: Basic hydrological information such as sound measurement of all inflows; water consumption; recoverable return flows; and flows to sinks return flows need to be included in a water accounting framework. Water accounting can also help to identify subsidies (in either resource use or for irrigation infrastructure provision) that are present in regions that distort both decision-making and efficient water extraction.

3.

Measuring and monitoring extractions and enforcing extraction limits: The continual development of satellite and thermal technology in measuring water extraction and consumption may provide one of the most cost-effective measures for countries to adopt in the future and is being used in a few countries currently (such as New South Wales and some limited use in the Mekong region).

4.

Cultural values: The cultural values of rivers of Indigenous owners in various countries will need much greater attention going forward, in terms of initial distribution of property rights in some areas and reallocation in other areas.

The evolution of water markets represents a continuing journey of adaptation as circumstances change in relation to water users, institutions, and the environment. While formal water markets may deliver substantial benefits to some water users, they need careful implementation and ongoing improvement, as attested to by reviews of the most sophisticated water markets in the world in the MDB in 2020–2021 (ACCC, 2021; Productivity Commission, 2021; Seidl et al., 2020; Wheeler & Garrick, 2020). Continual regulatory oversight is required for formal, widespread markets. Nevertheless, for informal water markets less regulation that inhibits trade and mutually beneficial gains may be needed.

There is likely to be an increasingly important role for both formal and informal water markets. Relatively simple “water trade” exchanges and simple “swapping” of water should be encouraged to realize the potential gains from trade, as well as a transformation toward more encompassing, regulated water markets where appropriate. Such water trading, informal or formal, however, should not occur if it perpetuates water injustice.

Further Reading

  • Easter, K., & Huang, Q. (Ed.). (2014). Water markets for the 21st century. Springer.
  • Easter, K., Rosegrant, M., & Dinar, A. (Ed.). (1998). Markets for water: Potential and performance. Natural Resource Management and Policy. Kluwer Academic.
  • Grafton, R. Q., & Horne, J. (2014). Water markets in the Murray-Darling Basin. Agricultural Water Management, 145, 61–71.
  • Grafton, R. Q., Horne, J., & Wheeler, S. A. (2016). On the marketisation of water: Evidence from the Murray-Darling Basin, Australia. Water Resources Management, 30(3), 913–926.
  • Grafton, R. Q., Libecap, G., McGlennon, S., Landry, C., & O’Brien, B. (2011). An integrated assessment of water markets: A cross-country comparison. Review of Environmental Economics and Policy, 5(2), 219–239.
  • Horne, J., & Grafton, R. Q. (2019). The Australian water markets story: Incremental transformation. In J. Luetjens, M. Minstrom, & P. t’Hart (Eds.), Successful public policy lessons from Australia and New Zealand (pp. 165–190). ANU Press.
  • Maestu, J. (Ed.). (2013). Water trading and global water scarcity: International experiences. RFF Press.
  • Rosegrant, M. W., & Binswanger, H. P. (1994). Markets in tradable water rights: Potential for efficiency gains in developing country water resource allocation. World Development, 22(11), 1613–1625.
  • Rosegrant, M. W., Schleyer, R. G., & Yadav, S. N. (1995). Water policy for efficient agricultural diversification: Market-based approaches. Food Policy, 20(3), 203–223.
  • Wheeler, S. A. (Ed.). (2021). Water markets: A global assessment. Edward Elgar.
  • Wheeler, S. A., Loch, A., Crase, L., Young, M., & Grafton, R. Q. (2017). Developing a water market readiness assessment framework. Journal of Hydrology, 552, 807–820.
  • Wheeler, S. A., Loch, A., Zuo, A., & Bjornlund, H. (2014). Reviewing the adoption and impact of water markets in the Murray–Darling Basin, Australia. Journal of Hydrology, 518, 28–41.
  • Young, M. (2019). Sharing water: The role of robust water-sharing arrangements in integrated water resources management. Perspectives paper by Global Water Partnership.
  • Zilberman, D., & Schoengold, K. (2005). The use of pricing and markets for water allocation. Canadian Water Resources Journal, 30(1), 47–54.

References