Water markets – Barriers, bright spots and building blocks

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Dustin Garrick
School of Environment, Resources and Sustainability 

Introduction

Water markets have been touted as a potentially important policy approach for allocating water and water rights. While water market proponents emphasize their potential to address diverse policy objectives by allocating water efficiently and enabling adaptation to shifting patterns of supply and demand, critics note how the same markets can cause negative impacts on communities where water is bought and sold. The theoretical advantages and disadvantages of water markets have been debated for decades, leading to a need to focus on empirical evidence in a structured way.

This perspectives paper reviews the past 15 years of research on water markets and identifies “barriers” that have hindered the accumulation of knowledge and policy insights, “bright spots” of progress in overcoming these challenges and “building blocks” for the next generation. The paper argues that a systems perspective on water markets can help scholars and policymakers identify the conditions under which water markets achieve their intended policy and development objectives and how they interact with other policies and incentives.

Outcomes

Key barriers constraining the consolidation of water market theory and practice include no shared definition of water markets and the lack of attention paid to informal markets. Notwithstanding definitional differences, an area of agreement is that markets comprise the decentralized exchange of property rights, both formal and informal, to water-related goods and services within a given social-hydrological system. Water markets often rely on price signals to communicate the scarcity of water and its opportunity costs in competing uses, but may also overlap with other forms of exchange, such as gifts or reciprocal practices. Engineering and economic studies focus on the ability to trade as a defining feature, along with assumptions that agents will maximize the utility or reliability of their water supply. Formal water markets regulated by governments remain rare, while informal markets governed by locally developed rules and norms are widespread. Despite their prevalence, informal water markets remain largely invisible in the literature (Figure 1).

Figure 1. Articles on water markets illustrate that explicit attention to informal water markets and water vending remains rare. Data: Stacked chart of Scopus query on 15 September 2022 (article title, abstract, keywords) using search terms: 'water market' (yellow), 'water market' AND informal (green), 'water market' AND groundwater (blue), and 'water vend* (line).

Bright spots of water market research include measurement and modelling advances that capture complexity, including empirical studies that integrate previously disconnected datasets through interdisciplinary and longitudinal studies. More specifically, several empirical studies trace the effects of differences in institutional and policy approaches on market participation and outcomes over the long-term, while survey and archival data generate original datasets of water transactions. Ethnographic methods generate hard-to-access data on cultural norms and lived experiences, particularly for informal water markets. The most promising bright spots involve bringing together qualitative and quantitative data in a spatially explicit and system-wide way.

Advances in modelling include efforts to assess market potential and design through a suite of theoretical, mathematical and simulation models that increasingly account for complexity, while interdisciplinary frameworks, including hydro-economic and social-hydrological systems, have enabled more complete and realistic models. Creative approaches to causal inference, such as natural experiments or propensity score matching, are being used to assess the effects of policy instruments on investment decisions, water sales, productivity, and equity.

Advances in measurement and modelling have generated new water market design insights. While the conventional focus is on the allocation of rights and the development of trading rules and management of conflicts, a systems perspective focuses attention on basic water accounting and different types of impacts, including spatial and temporal considerations.  In addition to its focus on policies, rules and rights, market design also addresses unaccounted for costs and benefits or externalities. Political and social safeguards include limiting water exports, community monitoring and conflict resolution mechanisms. Such safeguards are increasingly coordinated across sectors and levels of governance as water moves longer distances and growing competition increases the interdependence of different water users.

Conclusions

Decades of research have shown there is no one-size-fits-all solution to water challenges. A systems perspective focuses on the institutions, external factors and historical legacies that together shape the emergence and evolution of water markets. By focusing holistically on the drivers of scarcity, and the characteristics of different water systems, uses, and users, it is possible to distinguish markets based on their functions and fit with local context. Cataloging institutional diversity can identify which approaches are likely to work or not in different contexts, including the policies, incentives and other factors that condition their performance. A systems perspective also requires that researchers move beyond economic efficiency when assessing the potential and performance of water markets.

Using a systems perspective, the first research priority is to better understand water transactions; the amount of water traded, prices, and the types of buyers and sellers participating. Transactions also connect different sub-systems; the source of water, the infrastructure used to deliver it, the drivers of scarcity, the focal participants, the rules and norms that govern trading and the micro-, meso-, and macro-level impacts that connect behavioral changes and system-level outcomes. An agreed common protocol for tracking transactions and trading activity is within reach, and can form the bedrock for a global network of researchers and practitioners. A distributed network of local partnerships, guided by common protocols and standards, can uncover the potential, limits, and pathways for water markets to contribute to more sustainable and inclusive water management (Table 1).

Garrick, Dustin, Balasubramanya, Soumya, Beresford, Melissa, Wutich, Amber, Gilson, Gina G., Jorgensen, Isabel, Brozović, Nicholas, Cox, Michael, Dai, Xiaoping, Erfurth, Sophie, Rimšaitė, Renata, Svensson, Jesper, Jones, Julia Talbot, Unnikrishnan, Hita, Wight, Charles, Villamayor-Tomas, Sergio, Vazquez Mendoza, Karla. A systems perspective on water markets: barriers, bright spots, and building blocks for the next generation. Environmental Research Letters, Volume 18, Number 3, February 2023. DOI 10.1088/1748-9326/acb227

For more information about WaterResearch, contact Julie Grant.

Photo: Water truck in Eastern Africa, courtesy of Gina Gilson.