Skip to main content

Thank you for visiting nature.com. You are using a browser version with limited support for CSS. To obtain the best experience, we recommend you use a more up to date browser (or turn off compatibility mode in Internet Explorer). In the meantime, to ensure continued support, we are displaying the site without styles and JavaScript.

  • Perspective
  • Published:

Designing water markets for climate change adaptation

Nature Climate Change volume 14, pages 331–339 (2024)Cite this article

Subjects

Abstract

Water markets have the potential to lessen some costs of climate change. However, they need to be designed to address the unique institutional and physical features of water. In this Perspective, we discuss the role water markets could play in adapting to climate change and outline opportunities for moving forward. We draw on the environmental economics literature to highlight past challenges with water markets and environmental markets more generally, and identify opportunities for water-specific market design. We argue that water markets will serve to improve adaptation if they are designed with these key features in mind.

This is a preview of subscription content, access via your institution

Access options

Buy this article

  • Purchase on Springer Link
  • Instant access to full article PDF
Buy now

Prices may be subject to local taxes which are calculated during checkout

Fig. 1: Projected exposure to water stress in 2040.

Similar content being viewed by others

References

  1. Swain, D. L., Langenbrunner, B., Neelin, J. D. & Hall, A. Increasing precipitation volatility in twenty-first-century California. Nat. Clim. Change 8, 427–433 (2018).

    Article  Google Scholar 

  2. Arias, P. et al. in Climate Change 2021: The Physical Science Basis (eds Masson-Delmotte, V. et al.) 33–144 (IPCC, Cambridge Univ. Press, 2021).

  3. State and Trends of Carbon Pricing 2020 (The World Bank, 2020).

  4. Nogrady, B. et al. China launches world’s largest carbon market: but is it ambitious enough? Nature 595, 637 (2021).

    Article  CAS  Google Scholar 

  5. Colmer, J., Martin, R., Muûls, M. & Wagner, U. J. Does pricing carbon mitigate climate change? Firm-level evidence from the European Union Emissions Trading Scheme. SSRN https://ssrn.com/abstract=4026889 (2023).

  6. Costello, C., Gaines, S. D. & Lynham, J. Can catch shares prevent fisheries collapse? Science 321, 1678–1681 (2008).

    Article  CAS  Google Scholar 

  7. Fowlie, M., Holland, S. P. & Mansur, E. T. What do emissions markets deliver and to whom? Evidence from Southern California’s NOx trading program. Am. Econ. Rev. 102, 965–993 (2012).

    Article  Google Scholar 

  8. Shortle, J. & Horan, R. D. Policy instruments for water quality protection. Annu. Rev. Resour. Econ. 5, 111–138 (2013).

    Article  Google Scholar 

  9. Deschenes, O., Greenstone, M. & Shapiro, J. S. Defensive investments and the demand for air quality: evidence from the NOx budget program. Am. Econ. Rev. 107, 2958–2989 (2017).

    Article  Google Scholar 

  10. Aldy, J. E., Auffhammer, M., Cropper, M., Fraas, A. & Morgenstern, R. Looking back at 50 years of the Clean Air Act. J. Econ. Lit. 60, 179–232 (2022).

    Article  Google Scholar 

  11. Archibald, S. O. & Renwick, M. E. in Markets for Water: Potential and Performance (eds Easter, K. W. et al.) 95–117 (Springer, 1998).

  12. Garrick, D. & Aylward, B. Transaction costs and institutional performance in market-based environmental water allocation. Land Econ. 88, 536–560 (2012).

    Article  Google Scholar 

  13. Libecap, G. D. in New Institutional Economics: A Guidebook (eds Brousseau, E. & Glachant, J.-M.) 272–291 (Cambridge Univ. Press, 2008).

  14. Wheeler, S. A. Water Markets: A Global Assessment (Edward Elgar, 2021).

  15. Fowlie, M. & Reguant, M. Challenges in the measurement of leakage risk. Am. Econ. Assoc. Papers Proc. 108, 124–29 (2018).

  16. Muller, N. Z. & Mendelsohn, R. Efficient pollution regulation: getting the prices right. Am. Econ. Rev. 99, 1714–39 (2009).

    Article  Google Scholar 

  17. Baumol, W. J. & Oates, W. The Theory of Environmental Policy (Cambridge Univ. Press, 1988).

  18. Faurès, J.-M., Hoogeveen, J. & Bruinsma, J. The FAO Irrigated Area Forecast for 2030 (FAO, 2002).

  19. Ritchie, H. & Roser, M. Water use and stress. Our World in Data https://ourworldindata.org/water-use-stress (2017).

  20. Molle, F. Water scarcity, prices and quotas: a review of evidence on irrigation volumetric pricing. Irrig. Drain. Syst. 23, 43–58 (2009).

    Article  Google Scholar 

  21. Hagerty, N. What holds back water markets? Transaction costs and the gains from trade. https://hagertynw.github.io/webfiles/Liquid_Constrained_in_California.pdf (2023).

  22. Siebert, S. et al. Groundwater use for irrigation–a global inventory. Hydrol. Earth Syst. Sci. 14, 1863–1880 (2010).

    Article  Google Scholar 

  23. Richey, A. S. et al. Quantifying renewable groundwater stress with grace. Water Resour. Res. 51, 5217–5238 (2015).

    Article  Google Scholar 

  24. Coase, R. H. in Classic Papers in Natural Resource Economics (ed. Gopalakrishnan, C.) 87–137 (Springer, 1960).

  25. Tsur, Y. & Graham-Tomasi, T. The buffer value of groundwater with stochastic surface water supplies. J. Environ. Econ. Manag. 21, 201–224 (1991).

    Article  Google Scholar 

  26. Brill, T. C. & Burness, H. S. Planning versus competitive rates of groundwater pumping. Water Resour. Res. 30, 1873–1880 (1994).

    Article  Google Scholar 

  27. Provencher, B. & Burt, O. The externalities associated with the common property exploitation of groundwater. J. Environ. Econ. Manag. 24, 139–158 (1993).

    Article  Google Scholar 

  28. Brozović, N., Sunding, D. L. & Zilberman, D. On the spatial nature of the groundwater pumping externality. Resour. Energy Econ. 32, 154–164 (2010).

    Article  Google Scholar 

  29. Edwards, E. C. What lies beneath? Aquifer heterogeneity and the economics of groundwater management. J. Assoc. Environ. Resour. Econ. 3, 453–491 (2016).

    Google Scholar 

  30. Birkenbach, A. M., Kaczan, D. J. & Smith, M. D. Catch shares slow the race to fish. Nature 544, 223–226 (2017).

    Article  CAS  Google Scholar 

  31. Ayres, A. B., Edwards, E. C. & Libecap, G. D. How transaction costs obstruct collective action: the case of California’s groundwater. J. Environ. Econ. Manag. 91, 46–65 (2018).

    Article  Google Scholar 

  32. Costello, C. & Grainger, C. A. Property rights, regulatory capture, and exploitation of natural resources. J. Assoc. Environ. Resour. Econ. 5, 441–479 (2018).

    Google Scholar 

  33. Drysdale, K. M. & Hendricks, N. P. Adaptation to an irrigation water restriction imposed through local governance. J. Environ. Econ. Manag. 91, 150–165 (2018).

    Article  Google Scholar 

  34. Hsueh, L. Quasi-experimental evidence on the ‘rights to fish:’ the effects of catch shares on fishermen’s days at sea. J. Assoc. Environ. Resour. Econ. 4, 407–445 (2017).

    Google Scholar 

  35. Barnett, T. P. et al. Human-induced changes in the hydrology of the western United States. Science 319, 1080–1083 (2008).

    Article  CAS  Google Scholar 

  36. Medellín-Azuara, J. et al. Adaptability and adaptations of California’s water supply system to dry climate warming. Climatic Change 87, 75–90 (2008).

    Article  Google Scholar 

  37. Ficklin, D. L., Null, S. E., Abatzoglou, J. T., Novick, K. A. & Myers, D. T. Hydrological intensification will increase the complexity of water resource management. Earths Future 10, e2021EF002487 (2022).

    Article  Google Scholar 

  38. Albano, C. M. et al. A multidataset assessment of climatic drivers and uncertainties of recent trends in evaporative demand across the continental United States. J. Hydrometeorol. 23, 505–519 (2022).

    Article  Google Scholar 

  39. Edwards, E. C., Cristi, O., Edwards, G. & Libecap, G. D. An illiquid market in the desert: estimating the cost of water trade restrictions in northern Chile. Environ. Dev. Econ. 23, 615–634 (2018).

    Article  Google Scholar 

  40. Hanak, E., Sencan, G. & Ayres, A. California’s Water Market: Fact Sheet (Public Policy Institute of California, 2021).

  41. Hughes, N., Gupta, M., Whittle, L. & Westwood, T. An economic model of spatial and temporal water trade in the Australian Southern Murray-Darling Basin. Water Resour. Res. 59, e2022WR032559 (2023).

    Article  Google Scholar 

  42. Grafton, R. Q., Libecap, G., McGlennon, S., Landry, C. & O’Brien, B. An integrated assessment of water markets: a cross-country comparison. Rev. Environ. Econ. Policy 5, 219–239 (2011).

    Article  Google Scholar 

  43. Pannell, D. & Rogers, A. Agriculture and the environment: policy approaches in Australia and New Zealand. Rev. Environ. Econ. Policy 16, 126–145 (2022).

    Article  Google Scholar 

  44. Zheng, H., Liu, Y. & Zhao, J. Understanding water rights and water trading systems in China: a systematic framework. Water Secur. 13, 100094 (2021).

    Article  Google Scholar 

  45. Regnacq, C., Dinar, A. & Hanak, E. The gravity of water: water trade frictions in California. Am. J. Agric. Econ. 98, 1273–1294 (2016).

    Article  Google Scholar 

  46. Siirila-Woodburn, E. R. et al. A low-to-no snow future and its impacts on water resources in the western United States. Nat. Rev. Earth Environ. 2, 800–819 (2021).

    Article  Google Scholar 

  47. Bjornlund, H. Farmer participation in markets for temporary and permanent water in southeastern Australia. Agric. Water Manag. 63, 57–76 (2003).

    Article  Google Scholar 

  48. Hanak, E. & Stryjewski, E. California’s Water Market, By the Numbers: Update 2012 (Public Policy Institute of California, 2012).

  49. Womble, P. & Hanemann, W. M. Water markets, water courts, and transaction costs in Colorado. Water Resour. Res. 56, e2019WR025507 (2020).

    Article  Google Scholar 

  50. Loch, A., Wheeler, S. A. & Settre, C. Private transaction costs of water trade in the Murray–Darling Basin. Ecol. Econ. 146, 560–573 (2018).

    Article  Google Scholar 

  51. Thompson, B. in A Research Agenda for Water Law (eds Casado Pérez, V. & Larson, R.) 237–266 (Edward Elgar Publishing, 2023).

  52. Ayres, A. et al. Improving California’s Water Market: How Water Trading and Banking can Support Groundwater Management (Public Policy Institute of California, 2021); https://www.ppic.org/publication/improving-californias-water-market

  53. Ge, M., Akhundjanov, S., Oladi, R. & Edwards, E. C. Left in the dust? Pecuniary and environmental externalities in water markets. SSRN https://doi.org/10.2139/ssrn.4596591 (2023).

  54. Ayres, A., Adams, T., Carron, J., Cohen, M. & Saracino, A. Potential impacts of reduced inflows to the Salton Sea: forecasting non-market damages. J. Am. Water Resour. Assoc. 58, 1128–1148 (2022).

    Article  Google Scholar 

  55. Rosegrant, M. W. & Ringler, C. Impact on food security and rural development of transferring water out of agriculture. Water Policy 1, 567–586 (2000).

    Article  Google Scholar 

  56. Hanak, E. Who Should be Allowed to Sell Water in California? Third-Party Issues and the Water Market (Public Policy Institute of California, 2003).

  57. Libecap, G. D. Institutional path dependence in climate adaptation: Coman’s ‘some unsettled problems of irrigation’. Am. Econ. Rev. 101, 64–80 (2011).

    Article  Google Scholar 

  58. Wheeler, S. A., Zuo, A. & Kandulu, J. What water are we really pumping? The nature and extent of surface and groundwater substitutability in Australia and implications for water management policies. Appl. Econ. Perspect. Policy 43, 1550–1570 (2021).

    Article  Google Scholar 

  59. Fowlie, M. L. & Reguant, M. Mitigating emissions leakage in incomplete carbon markets. J. Assoc. Environ. Resour. Econ. 9, 307–343 (2022).

    Google Scholar 

  60. Bigelow, D. P., Chaudhry, A. M., Ifft, J. & Wallander, S. Agricultural water trading restrictions and drought resilience. Land Econ. 95, 473–493 (2019).

    Article  Google Scholar 

  61. Meng, K. & Thivierge, V. Do environmental markets improve allocative efficiency? Evidence from U.S. air pollution. https://vthivierge.github.io/files/efficiency.pdf (2022).

  62. Ross, A. Speeding the transition towards integrated groundwater and surface water management in Australia. J. Hydrol. 567, e1–e10 (2018).

    Article  Google Scholar 

  63. Gao, L., Connor, J., Doble, R., Ali, R. & McFarlane, D. Opportunity for peri-urban perth groundwater trade. J. Hydrol. 496, 89–99 (2013).

    Article  Google Scholar 

  64. Kuwayama, Y. & Brozović, N. The regulation of a spatially heterogeneous externality: tradable groundwater permits to protect streams. J. Environ. Econ. Manag. 66, 364–382 (2013).

    Article  Google Scholar 

  65. Palazzo, A. & Brozović, N. The role of groundwater trading in spatial water management. Agric. Water Manag. 145, 50–60 (2014).

    Article  Google Scholar 

  66. Guilfoos, T., Khanna, N. & Peterson, J. M. Efficiency of viable groundwater management policies. Land Econ. 92, 618–640 (2016).

    Article  Google Scholar 

  67. Bruno, E. M. & Sexton, R. J. The gains from agricultural groundwater trade and the potential for market power: theory and application. Am. J. Agric. Econ. 102, 884–910 (2020).

    Article  Google Scholar 

  68. Bruno, E. M. & Jessoe, K. Missing markets: evidence on agricultural groundwater demand from volumetric pricing. J. Public Econ. 196, 104374 (2021).

    Article  Google Scholar 

  69. Fishman, R., Lall, U., Modi, V. & Parekh, N. Can electricity pricing save india’s groundwater? Field evidence from a novel policy mechanism in Gujarat. J. Assoc. Environ. Resour. Econ. 3, 819–855 (2016).

    Google Scholar 

  70. Smith, S. M., Andersson, K., Cody, K. C., Cox, M. & Ficklin, D. Responding to a groundwater crisis: the effects of self-imposed economic incentives. J. Assoc. Environ. Resour. Econ. 4, 985–1023 (2017).

    Google Scholar 

  71. Bruno, E. M., Jessoe, K. K. & Hanemann, M. The dynamic impacts of pricing groundwater. J. Assoc. Environ. Resour. Econ. https://doi.org/10.1086/728988 (2023).

  72. Chakravorty, U., Dar, M. H. & Emerick, K. Inefficient water pricing and incentives for conservation. Am. Econ. J. Appl. Econ. 15, 319–50 (2023).

    Article  Google Scholar 

  73. California’s Cap and Trade Program Step by Step (Environmental Defense Fund, 2020).

  74. Mieno, T. & Brozović, N. Price elasticity of groundwater demand: attenuation and amplification bias due to incomplete information. Am. J. Agric. Econ. 99, 401–426 (2017).

    Article  Google Scholar 

  75. Grafton, R. Q. & Wheeler, S. A. Economics of water recovery in the Murray-Darling Basin, Australia. Annu. Rev. Resour. Econ. 10, 487–510 (2018).

    Article  Google Scholar 

  76. Holland, S. P. & Yates, A. J. Optimal trading ratios for pollution permit markets. J. Public Econ. 125, 16–27 (2015).

    Article  Google Scholar 

  77. Tietenberg, T. H. Transferable discharge permits and the control of stationary source air pollution: a survey and synthesis. Land Econ. 56, 391–416 (1980).

    Article  Google Scholar 

  78. Fisher-Vanden, K. & Olmstead, S. Moving pollution trading from air to water: potential, problems, and prognosis. J. Econ. Perspect. 27, 147–172 (2013).

    Article  Google Scholar 

  79. Bruno, E. M., Hagerty, N. & Wardle, A. R. in American Agriculture, Water Resources, and Climate Change (eds Libecap, G. D. & Dinar, A.) 343–366 (Univ. Chicago Press, 2023).

  80. Costello, C. & Grainger, C. A. Grandfathering with Anticipation (National Bureau of Economic Research, 2022).

  81. Montgomery, W. D. Markets in licenses and efficient pollution control programs. J. Econ. Theory 5, 395–418 (1972).

    Article  Google Scholar 

  82. Grafton, R. Q. & Williams, J. Rent-seeking behaviour and regulatory capture in the Murray–Darling Basin, Australia. Int. J. Water Resour. Dev. 36, 484–504 (2020).

    Article  Google Scholar 

  83. Goulder, L. H. & Parry, I. W. Instrument choice in environmental policy. Rev. Environ. Econ. Policy 2, 152–174 (2008).

    Article  Google Scholar 

  84. Ryan, N. & Sudarshan, A. Rationing the commons. J. Polit. Econ. 130, 210–257 (2022).

    Article  Google Scholar 

  85. Hearne, R. & Donoso, G. in Water Markets for the 21st Century: What Have We Learned? Global Issues in Water Policy Vol. 11 (eds Easter, K. W. & Huang, Q.) 103–126 (Springer, 2014).

  86. Hartwig, L. D., Jackson, S. & Osborne, N. Trends in Aboriginal water ownership in New South Wales, Australia: the continuities between colonial and neoliberal forms of dispossession. Land Use Policy 99, 104869 (2020).

    Article  Google Scholar 

  87. Arellano-Gonzalez, J. et al. The adaptive benefits of agricultural water markets in California. Environ. Res. Lett. 16, 044036 (2021).

    Article  Google Scholar 

  88. Rafey, W. Droughts, deluges, and (river) diversions: valuing market-based water reallocation. Am. Econ. Rev. 113, 430–471 (2023).

    Article  Google Scholar 

  89. Heard, S., Fienup, M. & Remson, E. et al. The first SGMA groundwater market is trading: the importance of good design and the risks of getting it wrong. Calif. Agric. 75, 50–56 (2021).

    Google Scholar 

  90. Kroetz, K., Sanchirico, J. N. & Lew, D. K. Efficiency costs of social objectives in tradable permit programs. J. Assoc. Environ. Resour. Econ. 2, 339–366 (2015).

    Google Scholar 

  91. Sutherland, S. A. & Edwards, E. C. The impact of property rights to fish on remote communities in alaska. Land Econ. 98, 239–253 (2022).

    Article  Google Scholar 

  92. Gassert, F., Luck, M. & Landis, M. Aqueduct Water Stress Projections: Decadal Projections of Water Supply and Demand Using CMIP5 GCMs (World Resources Institute, 2015).

  93. Luo, T., Young, R. S. & Reig, P. Aqueduct Projected Water Stress Country Rankings (World Resources Institute, 2015); https://www.wri.org/data/aqueduct-projected-water-stress-country-rankings

  94. Brooks, R. & Harris, E. Efficiency gains from water markets: empirical analysis of Watermove in Australia. Agric. Water Manag. 95, 391–399 (2008).

    Article  Google Scholar 

  95. Wheeler, S., Bjornlund, H., Shanahan, M. & Zuo, A. Price elasticity of water allocations demand in the Goulburn–Murray Irrigation District. Aust. J. Agric. Resour. Econ. 52, 37–55 (2008).

    Article  Google Scholar 

  96. Ayres, A. B., Meng, K. C. & Plantinga, A. J. Do environmental markets improve on open access? Evidence from California groundwater rights. J. Polit. Econ. 129, 2817–2860 (2021).

    Article  Google Scholar 

Download references

Acknowledgements

We thank L. Hackett, G. Schlauch, A. Wardle and E. Wiseman for helpful comments and research assistance. This work was supported in part by Agriculture and Food Research Initiative Competitive grant numbers 2021-69012-35916 and 2021-68012-35914 from the USDA National Institute of Food and Agriculture.

Author information

Authors and Affiliations

  1. Department of Agricultural and Resource Economics, University of California, Berkeley, Berkeley, CA, USA

    Ellen M. Bruno

  2. Department of Agricultural and Resource Economics, University of California, Davis, Davis, CA, USA

    Katrina Jessoe

Authors
  1. Ellen M. Bruno
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Katrina Jessoe
    View author publications

    You can also search for this author in PubMed Google Scholar

Contributions

E.M.B. and K.J. contributed equally to all aspects of the paper. They jointly conceived, outlined, developed, wrote and revised the paper.

Corresponding author

Correspondence to Katrina Jessoe.

Ethics declarations

Competing interests

The authors declare no competing interests.

Peer review

Peer review information

Nature Climate Change thanks Eric Edwards and the other, anonymous, reviewer(s) for their contribution to the peer review of this work.

Additional information

Publisher’s note Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Bruno, E.M., Jessoe, K. Designing water markets for climate change adaptation. Nat. Clim. Chang. 14, 331–339 (2024). https://doi.org/10.1038/s41558-024-01964-w

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1038/s41558-024-01964-w

Search

Advanced search

Quick links

Nature Briefing Anthropocene

Sign up for the Nature Briefing: Anthropocene newsletter — what matters in anthropocene research, free to your inbox weekly.

Get the most important science stories of the day, free in your inbox. Sign up for Nature Briefing: Anthropocene