Assessing water markets around the world
By Sarah Ann Wheeler
Around the world there is growing interest in establishing water markets as a mechanism to share water and to help meet the challenge of water scarcity. But when and where is a region ready to implement a water market? These questions are answered in Water Markets – A Global Assessment, a new book edited by Sarah Ann Wheeler. It brings together an up-to-date overview of water market development around the world and assesses the conditions under which successful markets can emerge. Here Sarah shares some of the book’s key findings.
Water is basic to sustainable development. Water scarcity is central to many of our most pressing issues regarding water security and justice. Given the importance that water has in addressing the United Nations Sustainable Development Goals, and the fact that water is intrinsically linked to many targets and outcomes across most of the goals, understanding the tools available to address both current and future water scarcity is essential. The challenge will involve reconciling water supply and demand as water extractions increase. Water issues are often described as a ‘wicked problem’ because they have multiple, interconnected causes; whilst having many possible solution perspectives (Quiggin 2019).
Turning from supply to demand
Solutions to water scarcity fall broadly into two categories: supply augmentation and demand management. Supply augmentation generally involves infrastructure or engineering solutions to increase water supply (eg, dams, irrigation infrastructure and the construction of weirs) or substitution (eg, desalinated water) – and has traditionally been the most promoted method to address water scarcity. Water demand-side management includes educational measures (eg, information and campaigns), regulatory and/or planning processes (eg, legislation and regulation) and economic incentives (e.g. pricing, subsidies, and/or property right changes that allow water markets) (Wheeler & Garrick, 2020). Ideally both demand and supply responses should be integrated to address water security.
Given that the choice of cost-effective supply augmentation projects is diminishing around the world, increasingly water demand management – and in particular water markets – will need to be further considered. As a water economist, some of the most common questions I am asked include:
– When and where is a region ready to implement water markets? And
– What advice do practitioners need on how suitable their jurisdiction and water situation is for water markets?
Benefits and costs
Water markets are a critical policy tool that can be used for managing scarce supplies. Both informal and formal water markets exist all around the world, but their use and application remain relatively limited in many countries and the creation of water markets is often contested.
Formal water markets involve the transformation of water public property rights to one where some water use rights are divisible, transferable, privately managed that can be bought or sold (in whole or part) (Griffin et al, 2013). Informal water markets involve water users in a particular area sharing a water resource in some form, without regulations governing that sharing.
Economists, in particular, emphasise the power of markets to effectively and efficiently reallocate resources. On the other hand, there are many critics of water markets who argue that ‘water is too different to sell’ and that it is ‘immoral’ to trade water. Often water markets are blamed for every ill possible, and arguments often become mired with other privatisation arguments in general (Grafton et al, 2016). For example, in Australia, water markets have been blamed as the reason why the environment is suffering; why farmers end up leaving farms; for increased corporate ownership and takeover, and for increased immoral behaviour.
Such arguments against water markets are not always grounded in truth and facts, have not read the extensive academic literature that exists and ignore all the many varied benefits that markets provide. In particular, markets have been shown to be a very strong risk management tool for farmers – and in an era of climate change and substantial reductions in water supplies – this can be critical. As it often is, the truth about water markets lies somewhere in the middle of all these arguments – it has both benefits and costs/drawbacks. The question then becomes: Where can water markets be best used and applied, and what is needed for their successful implementation?
Being ready for markets
In previous research, I sought, along with colleagues, to establish a water-market-readiness framework to establish the steps needed for regions to be able to implement water markets (Wheeler et al. 2017). This framework listed three crucial stages for water markets.
Stage I involves establishing enabling institutions. For example, this includes having available information on current and sustainable (capped) water extractions, hydrology, regulations, legislation and monitoring to monitor and govern water markets.
Stage II involves facilitating trade, which includes assessing the benefits of trade, developing water registers and reducing transaction costs.
Stage III of the framework involves regions that have had water markets in place for a considerable amount of time and are now in a loop of reinforcement and improvement. It involves scanning for issues and problems, and implementing reform to address issues, as well as continuing to reduce transaction costs wherever possible.
The southern Murray-Darling Basin in Australia represents a region that is at Stage III of the water-market-readiness framework. It is important to note that water markets take time to get right. It has taken formal water markets in the Murray-Darling Basin decades to reach this point.
Water Markets: A Global Assessment applies a water-market-readiness framework in 28 regions, 20 countries and 6 continents.
Water markets around the world
More widely, how are water markets performing around the world? In my new edited book: Water Markets: A Global Assessment, 41 authors applied this water-market framework in 28 regions, 20 countries and 6 continents (Wheeler, 2021).
Key findings of this assessment included the following:
- Majority of regions/countries in Africa and Asia have very little of the key fundamental market institutional conditions needed to implement water markets successfully. Only case study areas in China and Zimbabwe indicated that they were anywhere close to reaching Stage II of the water market framework
- Europe and South America also do not have many of the fundamental factors needed for successful formal water markets. For example, France, Italy, Spain, UK and Chile need to work on issues such as unbundling of rights; transferable rights; understanding trade impacts; implementing a hard extraction cap (albeit England and Chile have made some progress in this area); monitoring and enforcing water extraction; trustworthy water registers and trade and market information. As such, Europe countries were more likely to be at Stage I of the framework, with Spain, UK and Chile rated at around Stage II (but with significant gaps still remaining).
- North America and Oceania regions represent the most advanced water markets in the world. However, these countries can also show great variety in water market development. For example, regions within the US are at very different stages of water market development, with the same existing for Australia. As such, overall regions within these countries have reached Stages II to III of the water market framework.
Overall, the book’s assessment suggests that the widespread implementation of formal water markets is not yet possible for many countries, as they have not achieved the first steps of establishing property rights, water extraction caps, strong independent water institutions and impartial governance. Without these elements in place formal trade may not only not solve problems of water scarcity, indeed it might even make the situation worse.
Some of the outstanding water issues that countries have to deal with include:
a) Establishing sustainable (and adaptable) water extraction caps: The importance of establishing sustainable water extraction (groundwater and surface-water) caps is critical.
b) 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. Another side of water accounting also involves removing many subsidies (in either resource use or for irrigation infrastructure provision) that are present in regions that distort both decision-making and efficient water extraction.
c) Measuring, monitoring and enforcing extractions: The continual development of satellite and thermal technology in measuring water extraction and consumption may provide one of the most cost-effective measure for countries to adopt in the future, and is being used in a few countries currently.
d) Cultural values: The cultural values of rivers of indigenous owners in various countries will need much greater attention going forward, in terms of both initial distribution of property rights and in reallocation in other areas.
The lessons above apply the most to countries or regions developing water markets, but many elements also apply to regions with the most sophisticated water markets. Water market institutions represent a continual journey of adaptation as external factors change.
Although water markets bring numerous benefits, they need very careful implementation and they only exist within institutions and structures which allow and govern the transfer of water. The most sophisticated water markets in the world in the Murray-Darling Basin in Australia highlight the need for continual adaptation and adjustment of water markets, as has been suggested by the reforms suggested by the ACCC and the Productivity Commission in 2021.
Given that widespread formal trade may not be possible for many countries around the world, there is an important role for increased informal water market trading. Increased promotion of informal markets, and simple ‘swapping’ of water, should be encouraged to promote economic efficiencies. Setting up simple ‘water trade’ exchanges (versus a widespread formal water market) is also important.
In the future, the continual evolution and development of satellite and thermal technology will help in both monitoring and measuring both surface and groundwater extractions, and consumptive use. However, this will need to be coupled with enforcement, physical monitoring checks, unbundled and transferable rights.
Other future developments in the water market space will include further institutional development, consideration of cultural property rights, the interconnectedness of water resources, human behavioural consequences from implementing markets, and better ways of dealing with market failure issues such as externalities.
They are not perfect and they take considerable effort to establish, however, continual adaptation will ensure that water markets, in conjunction with other supply and demand management policy water tools, remain a robust and important tool for policy makers to use to address water scarcity around the world.
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ACCC (2021). Murray-Darling Basin Water Markets Inquiry – Final Report. Canberra.
Grafton RQ, J Horne & SA Wheeler (2016). On the marketisation of water: Evidence from the Murray-Darling Basin, Australia. Water Resources Management 30: 913-926.
Griffin RC, DE Peck & J Maestu (2013). Introduction: Myths, principles and issues in water trading. In J. Maestu (Ed.). Water Trading and Global Water Scarcity: International experiences (pp. 1-14). RFF Press Water Policy Series.
Productivity Commission (2021). Water Trading and Markets: Supporting Paper B, National Water Reform 2020 Inquiry Report no. 96, Canberra.
Quiggin J (2019). Economics in two lessons: why markets work so well, and why they can fail so badly. Princeton, NJ, United States: Princeton University Press.
Wheeler SA, A Loch, L Crase, M Young & R Grafton (2017). Developing a water market readiness assessment framework. Journal of Hydrology, 552: 807-820.
Wheeler SA, & DE Garrick (2020). A tale of two water markets in Australia: lessons for understanding participation in formal water markets. Oxford Review of Economic Policy 36: 132-153.
Wheeler SA (Ed) (2021). Water Markets A Global Assessment. Edward Elgar Publishing, London https://www.e-elgar.com/shop/gbp/water-markets-9781788976923.html
Dr Sarah Ann Wheeler is a Professor of Water Economics with the School of Economics and Public Policy at the University of Adelaide and is the immediate past President for the Australasian Agricultural and Resource Economics Society. Her research interests include water markets; irrigated farming, climate change, Murray-Darling Basin, organic farming, water scarcity and mental health.
The views expressed in this article belong to the individual authors and do not represent the views of the Global Water Forum, the UNESCO Chair in Water Economics and Transboundary Water Governance, UNESCO, the Australian National University, World Bank, Oxford University, or any of the institutions to which the authors are associated. Please see the Global Water Forum terms and conditions here.
This article was originally published in the global water forum on 16 November 2021.