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.Little Ego-Gnome: Brand AwarenessJakarta Globe: Nestle Uses Social Media for Bottled Water, Palm Oil Damage ControlICMR India (IBS Centre for Management Research): Nestle's Social Irresponsibility in Developing NationsGlen Arbor Sun: Rumbles on Ice MountainChronicle Extra: Nestle raises stakes in bottled water battle
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.Chong, Howard and Sunding, David. 2006. Water Markets and Trading. Annual Review of Environmental Resources 31: 11.1–11.26. 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 (10%) 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.Howe, Charles W. Protecting Public Values in a Market Setting: Improving Water Markets to Increase Economic Efficiency and Equity. 3 University of Denver Water Law Review. 357. (2000) 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.Johnson, James W. & Lauren J Caster (1997). "Tradability of Water Rights: Experience of the Western United States". pp. 156–157. FAO Study, Issues in Water Law Reform. 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 (ex. Land has been fully irrigated and additional water would be detrimental). 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 (acre/ft) 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.Michelsen, Ari M., & Robert A Young (1993). "Optioning Agricultural Water Rights for Urban Water Supplies during Drought". American Journal of Agricultural Economics, Vol 75, No. 4: 1012. Oxford University. 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 (for example, residential water conservation practices). 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,Texas Water Policy Update, 2001. Water Ranching in the Lone Star State, Texas Center for Policy Studies, Dec 2001. Stable URL: http://www.texaswatermatters.org/pdfs/txwaterpolicydec.pdf 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.Swaney, 1998. Trading Water: Market Extension, Social Improvement, or What? Journal of Economic Issues: Vol. 22, No. 1. p. 35. 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 (alternatives to water markets are discussed below). Thus, historical appropriative rights might neglect consumers willing to pay more than current consumers.Honey-Roses, J. 2009. Reviewing the arguments for market based approaches to water distribution: A critical assessment for sustainable water management in Spain. Sustainable Development 17:357–364. Water trading serves as a mechanism to promote the distribution of rights to those who value them most. Also, instream demands (that reflect the benefits that fisheries and lentic and lotic ecosystems receive from greater water flows, as well as benefits to water-dependent recreational activities or aesthetic appreciation) 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.Scarborough, B. 2010. Environmental water markets: Restoring streams through trade. PERC Policy Series No. 46. Correspondingly, western water law evolved to encourage water diversion offstream; water left instream was considered "wasteful" and so instream water demand was ignored.