The Future of Water Markets

This introduction is part of a volume entitled “The Future of Water Markets: Obstacles and Opportunities,” published by PERC, which addresses timely water policy issues and offers ideas to enhance the future of water markets.

Introduction

In recent decades, the idea of using markets to allocate water has gained traction in the American West. Water markets are now being harnessed in a variety of contexts to allocate water in economically productive and environmentally sensitive ways, encourage conservation, and protect ecosystems. These markets take several forms, including markets for traditional surface water rights, instream flows, groundwater, water quality, stream mitigation banking, and even financial derivatives.

The development of water markets in recent decades is timely given that drought has plagued much of the American West over the same period. The federal government recently declared an unprecedented water shortage in the Colorado River Basin, and many other states face simultaneous challenges of growing populations and dwindling water supplies. Thankfully, markets offer a means to help allocate increasingly scarce water.

The proliferation of water markets has also raised new questions about the determinants of market form and function, relative performance, and future viability. Are water markets living up to their promise of providing “win-win” transfers to sellers and buyers? What lessons can be gleaned from novel groundwater, instream-flow, and water-quality markets? What are the ongoing and future challenges that water markets can address through innovations in property rights, regulation, and market design? With several decades worth of experience with water markets now available, these and other related questions can be addressed.

In the fall of 2021, PERC convened a workshop to address the future of water markets, with an emphasis on the challenges to sustaining and enhancing such markets. The workshop explored a range of topics, including groundwater markets, instream-flow transactions, tribal water leasing, water-quality trading, futures markets, and more. The workshop involved both researchers and practitioners assessing the state of water markets today and the challenges they face moving forward.

The following essays are the result of that workshop, authored by a group of leading water experts. Each addresses a timely water policy topic and provides policy recommendations to enhance the future of water markets. Together, the essays explore how markets can continue to be harnessed to allow competing water users to cooperate rather than fight over scarce water resources, encourage conservation, and alleviate the economic and environmental effects of water scarcity now and in the future.