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The Problem of Water Markets  

Michael Hanemann

Water marketing and property right reform are intertwined. Water markets are advocated as a solution for water scarcity, but changes in water rights are often required if the scope of water marketing is to expand. This is true in many countries, including (but not limited to) the United States and Australia. The focus here is on the United States. So far, water marketing in the Western United States is not producing long-run reallocation on the scale expected. The chief impediment is the complexities in existing water rights. An important distinction is between a property right to extract water and put it to use versus a contractual right to receive water from a supply organization. In the United States, the property right to water is a unique form of property. Unlike land, it is a right of use, not ownership; the quantity afforded by the right is incompletely specified; and the ability to transfer it is constrained by the obligation to avoid harm through the externality of return flows and also by unreliable historical records of rights. These constraints are often relaxed for short-term transfers (leases) of a property right lasting only a year or two. Also, these constraints generally do not apply to a contract right to receive water. Thus, most of the surface water transferred in the United States is either contract water moving within supply system boundaries or short-term leases of appropriative rights. These transfers tend to provide short-run flexibility for water users rather than long-run reallocation. For more significant long-run reallocation of water, some modification of the property right to water is essential. Devising a politically acceptable way to make the needed changes is the ultimate constraint on water marketing.


Rethinking Water Markets  

Rupert Quentin Grafton, James Horne, and Sarah A. Wheeler

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.


Global Climate Change and the Reallocation of Water  

Rhett B. Larson

Increased water variability is one of the most pressing challenges presented by global climate change. A warmer atmosphere will hold more water and will result in more frequent and more intense El Niño events. Domestic and international water rights regimes must adapt to the more extreme drought and flood cycles resulting from these phenomena. Laws that allocate rights to water, both at the domestic level between water users and at the international level between nations sharing transboundary water sources, are frequently rigid governance systems ill-suited to adapt to a changing climate. Often, water laws allocate a fixed quantity of water for a certain type of use. At the domestic level, such rights may be considered legally protected private property rights or guaranteed human rights. At the international level, such water allocation regimes may also be dictated by human rights, as well as concerns for national sovereignty. These legal considerations may ossify water governance and inhibit water managers’ abilities to alter water allocations in response to changing water supplies. To respond to water variability arising from climate change, such laws must be reformed or reinterpreted to enhance their adaptive capacity. Such adaptation should consider both intra-generational equity and inter-generational equity. One potential approach to reinterpreting such water rights regimes is a stronger emphasis on the public trust doctrine. In many nations, water is a public trust resource, owned by the state and held in trust for the benefit of all citizens. Rights to water under this doctrine are merely usufructuary—a right to make a limited use of a specified quantity of water subject to governmental approval. The recognition and enforcement of the fiduciary obligation of water governance institutions to equitably manage the resource, and characterization of water rights as usufructuary, could introduce needed adaptive capacity into domestic water allocation laws. The public trust doctrine has been influential even at the international level, and that influence could be enhanced by recognizing a comparable fiduciary obligation for inter-jurisdictional institutions governing international transboundary waters. Legal reforms to facilitate water markets may also introduce greater adaptive capacity into otherwise rigid water allocation regimes. Water markets are frequently inefficient for several reasons, including lack of clarity in water rights, externalities inherent in a resource that ignores political boundaries, high transaction costs arising from differing economic and cultural valuations of water, and limited competition when water utilities are frequently natural monopolies. Legal reforms that clarify property rights in water, specify the minimum quantity, quality, and affordability of water to meet basic human needs and environmental flows, and mandate participatory and transparent water pricing and contracting could allow greater flexibility in water allocations through more efficient and equitable water markets.


The Basic Systems of Surface Water Allocation  

Joseph W. Dellapenna

From earliest times, at least in arid and semi-arid regions, law has been used to allocate water to particular users, at particular locations, and for particular uses, as well as to regulate the uses of water. In the early 21st century, such laws are found everywhere in the world. While the details of such systems of water law are specific to each culture, these systems, in general terms, conform to one of three basic patterns, or to some combination thereof. The three patterns can be understood as a system of common property, a system of private property, or a system of public property. In a common property system, each person is free to use water as he or she chooses so long as the person has lawful access to the water source and does not unreasonably interfere with other lawful users. Such systems were common in humid regions where generally there was enough water available for all uses, but these break down when demand begins to outstrip supply frequently. Private property systems, more common in arid and semi-arid regions, where water is generally not available to meet all demand on the water sources, is a system that allocates specific amounts of water from an identified water source, for a particular water use at a particular location, and with a definite priority relative to other uses. The problem with such private property systems is their rigidity, with transfers of existing water allocations to new uses or new locations proving difficult in practice. In Australia, the specified claim on a water source is defined not as a quantity, but as a percentage of the available flow. Despite the praise heaped upon this system, it has proven difficult to implement without heavy government intervention, benefiting only large irrigators without adequately addressing the public values that water sources must serve. In part, the problems arise because cheating is easier in the absence of clear volumetric entitlements. The public property systems, which has roots dating back centuries but is largely an artifact of the 20th century, treats water as subject to active public management, whether through collaborative decision-making by stakeholders (a situation that is also sometimes called “common property” but is actually very different from the concept of common property used here), or through governmental institutions. Public property systems seek to avoid the deficiencies of the other two systems (particularly by avoiding the incessant conflicts characteristic of common property systems as demand approaches supply and the rigidity characteristics of actual private property systems), but at the cost of introducing bureaucratized decision making. In the late 20th century, many stakeholders, governments, and international institutions turned to market systems—usually linked to a revived or new private property system—as the supposed optimum means to allocate and re-allocate water to particular uses, users, and locations. Before the late 20th century, markets were rare and small, but institutions like the World Bank set about to make them the primary mechanism for water allocation. Markets, however, proved difficult to implement, at least without transferring wealth from relatively poor users to more prosperous users, and therefore produced a backlash in the form of support for a human right to water that would trump the private property claims central to water markets. The protection of public values, such as ecological or navigational flows, also proved difficult to maintain in the face of the demands of the marketplace. Each of these systems has proven useful in particular settings, but none of them can be universally applied.


Challenges to Environmental Valuation of Water in Light of Global Change  

Vic Adamowicz and Diane Dupont

A number of challenges are faced by practitioners seeking to elicit values associated with water in a world of global change. These values are needed to assist in decision-making around the use of water as a country’s key asset. Five different pathways show the complexity of the relationship between global change and environmental valuation of water: a climate change pathway, ecosystem infrastructure pathway, population/demographics pathway, income pathway, and technological change/innovation pathway. The challenges are most acute for water when it is related to ecosystem services since values need to be elicited through the use of non-market survey-based valuation techniques. In addition, environmental valuation will be important to inform the determination of water quality standards associated with different uses of water (drinking, recreation, etc.) and the allocation of resources to provide these different services. Several case studies illustrate issues and solutions. The article concludes with an appreciation of future challenges and opportunities.