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 industry – which often bottles common ground water and sells it as spring water – competes 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.
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. 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. 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:
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