Water markets- an institutional perspective

I came across this fascinating paper on the topic by a team of economists, water experts and environment experts.

Many parts of the world’s arid and semi-arid regions face the dilemmas of reduced water supplies (Ludwig and Moench 2009) and an increasing demand for water resources due to population and income growth (Falkenmark 1999). In water scarce and low-income countries, especially those with high population growth rates, the effects on the livelihoods of the poor will be dire without comprehensive efforts to address water scarcity. In rich and dry regions, such as Australia or in the US West, the challenge will be to balance competing demands such as between irrigated agriculture and the environment (Grafton et al 2010).

To address these global water challenges, there is a need for effective institutional arrangements and allocation mechanisms among competing users to mitigate and manage water scarcity. Our contribution is to develop, for the first time, a comprehensive and integrated framework to benchmark water markets, one of the most important allocation mechanisms. The framework is used to identify strengths and limitations in five water markets: Australia’s Murray-Darling Basin, Chile (in particular the Limarí Valley), China (in particular, the North), South Africa, and the western United States. All these locations are semi-arid and face, to a greater or lesser extent, an expectation of reduced water availability associated with climate change. Two are in rich countries (Australia and the United States), two are in low to middle-income countries (Chile and South Africa), and one is in a poor, but rapidly developing country (China).

The paper provides an institutional perspective on water markets. And taking these five regions, it looks at several institutional features in each of them.

What is the broad summary from the five examples?

In closing, we provide ten key insights from the application of the integrated framework to five water markets.

  • First, institutions matter. Thus, what may work in one water market may not necessarily be as successful in another with different institutions. This also implies an important role for water regulators or governments to support water markets to ensure that they are delivering the desired societal benefits.
  • Second, some water markets have developed and evolved for purposes other than economic efficiency. Trade-offs between equity and efficiency exist in water market design and operation, even if these trade-offs are not always as transparent as they are in South Africa.
  • Third, Australia shows that markets can be adapted to account for environmental sustainability without necessarily compromising economic efficiency.
  • Fourth, markets can successfully work in small catchments, such as Chile’s Limarí Valley, as well as in large basins, such as the Murray-Darling in Australia.
  • Fifth, water markets can generate substantial gains for buyers and sellers that would not otherwise occur, and these gains increase as water availability declines.
  • Sixth, there is a need for flexibility in water markets so that they can change as the benefits of water use and in situ use change over time, as has happened in the US West and Australia.
  • Seventh, there must be a close connection between water markets and water planning to provide surety to holders of water rights while also sustaining the public good aspects of water.
  • Eighth, history matters. For instance, the path dependence of the US with its appropriative rights is likely to be different to that of Australia that has statutory rights.
  • Ninth, differences in regulatory capacity (human and financial) to support water markets help to explain some of the variation in the performance of water markets, such as between China and the US.
  • Tenth, performance must match goals. Thus, if equity is the primary goal, such as in South Africa, then water markets should be judged on this priority rather than objectives that may dominate in other jurisdictions, such as economic efficiency.

Excellent stuff. Thinking about water markets and the various institutional features associated with it. It has a decent reference list as well to read up on water markets.

You keep reading about water disputes in India. We lack most of these features but it will be interesting to look up the institutions list and compare what we have and don’t have in India.

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