Water trading is the exchange of a volume of water or the perpetual rights to a share in the system, between a buyer and a seller. In the water market, the seller owns a water right that is larger than what they need and the buyer needs to use more water than they are currently entitled to. Trades that occur for just this water year (in most cases the same as the financial year) are known as temporary trades and trades for a perpetual share in the system are known as permanent trades.
Why We Need Water Trading
We need a way to reallocate water from less productive uses of this limited resource to more productive uses. Increasing the volume available to use is often not an option, so reallocation must occur. Most water rights around the world are based on prior appropriation and just because someone started using water first doesn’t mean they are the most efficient user of water.
Water trading encourages water to go to the most efficient users because those with inefficient technologies will find it more profitable to sell their water than to use it. Also, it encourages irrigators to improve their irrigation infrastructure.
Requirements for a Water Market
- Voluntary buyers and sellers.
- Full information on the prices and costs for water trades. You can find this information through water brokers, such as Water Broking World.
- Clear property rights.
- Water rights are unbundled from land. That is, the water doesn’t have to be used on one specific parcel of land.
- Water use not restricted by the water rights. For example, water isn’t restricted to being used on citrus, it could be used to produce other commodities.
Alternatives to Water Trading
It’s difficult to increase the volume of water available, so the alternatives to water trading involve some other transfers of water use. The only real alternative to trading is if governments reallocate water to different users.
Where Water Markets Are
The two countries with the most developed water markets are Australia and Chile. Australia’s Southern Murray-Darling Basin has the most extensive water market in the world.
Further information on Australia’s water markets can be found here.