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Tim Shah

Evaluating the Merits of Water Markets and Trading


By: Tim Shah, April 6, 2011
PLAN 597

Hey Everyone. Please skim through the reading “Parrying Water Conflicts in the Okanagan”, particularly
the section on water markets. It is attached on the Google website for the class.

Introduction
In the British Columbia Living Water Smart Plan, the government has proposed water markets as a tool to
“promote water use efficiency and conservation among water licensees, especially during times of
drought and scarcity”. They are proposing this tool to be included in the revised Water Act for the
province. Water rights trading and transfers could occur among existing water licensees in areas where
water is in short supply on a short term basis. Trading and transfers could be restricted to a particular sector
where the water conserved could be traded within the sector among existing users (e.g., agriculture). In
another example, other water conserved could be used to improve water flows and protect ecosystems.

The critical elements that make water markets function include water scarcity—without scarcity there is
no “value” in trading as more water can simply be acquired through licensing; water rights should be
separated from land rights to enable trade of the water alone; has to be local or geographically
advantageous (e.g. trading with a basin or trade occurs within 100 KM of buyers and seller); institutional
infrastructure which means a proper governance and enforcement system.

Key features of BC water rights are:


• each water licence is appurtenant to a parcel of land
• transfers of appurtenancy require agreement of the parties involved and of the relevant water
controller
• licence holders must use the water described in their licence or risk having their licence cancelled
(beneficial use or “use it or lose it”
• all licences have a priority date which determines the order in which they are cut off should there
be insufficient water to supply all of them (FITFIR)

Advantages of water markets and trading:


• Placing a value on water
• If water users reap the rewards of their efforts, they will explore more entrepreneurial approaches
to managing the water
• Investing in irrigation technology (drip irrigation) can save water for farmer; they can derive
additional income by selling excess water gained through increased efficiencies (farmers selling
water to cities, for example)
• Giving water back to the environment

Drawbacks:
• Unforeseen risk and dubiety around privatization
• Are First Nations considered a “water user”?
• Without a proper governance structure, there can be socio-economic inequity
Two contrasting opinions on water markets and trading:
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Tim Shah

“Water markets have several significant benefits over the lack of markets or a bureaucratic allocation
mechanism. First, they make it easier to move water to a higher and better use. Second, market exchanges
make it easier to understand the value of water. Third, markets allow reallocation without denying existing
owners the value of their rights. Fourth, they are more transparent and more accurate than political or
bureaucratic allocations. Finally, they are voluntary. Water markets in BC may seem like a crazy idea in a
province with significant water wealth, but they will ensure that BC's water is appropriately valued. They
will also make it easier for environmental groups to redirect water to areas they value. Go markets! “
-David Zetland, Natural Resource Economist

“It is important to note that, while water markets have been used by other jurisdictions, the limited success
that has been achieved is in the context of a robust and up-to-date water governance regime. BC is well
behind many of these jurisdictions regarding basic requirements such as transparency, accountability,
credible monitoring, and effective dispute resolution and decision-making processes – all critical elements
for a viable water market. A water markets based allocation system beyond short-term temporary transfers
of water rights in the face of severe scarcity or the existing appurtenancy based system is simply too
premature in British Columbia. An expanded approach should only be considered after further, substantial
review and the building of significant social and ecological safe guards and basic governance
infrastructure”.
-Oliver Brandes (Polis Project for Ecological Governance)

The Okanagan: A suitable location for a water market?

In the Okanagan, on many streams, the licensed volumes exceed the normal annual discharge. The
Okanagan is a unique geographic region in BC in that it experiences water droughts more frequently than
other places in the province. A modelling exercise by Janmaat (2010), using the FITFIR system, shows that
when water availability falls (due to droughts), there is a reduced share to all users (industry, domestic,
waterworks, other) but a disproportionate increase to agriculture. Thus, under the FITFIR system, with
junior and seniors license holders, there can be inequities in water access. When there is a reduction in
available water in the system, different users “use” is affected differently because of their rights to the
system.

Farmers generally respond well to water pricing in the Okanagan. Most water licences are held in irrigation
districts. In Australia, the irrigation districts’ prime role is to deliver water and farmers hold the water
rights. During the 2003 drought in the Okanagan, there were opportunities for reallocating water,
particularly from grape growers to tree fruit growers. These opportunities existed within the same
distribution systems which means transfers were technically feasible. However, no such system existed for
reallocation to allow the grape farmer to sell his/her excess water to the farmer growing fruit trees
(Janmaat, 2010).

Conclusion:
• Water markets require a strong institutional and enforcement framework
• There must be clear information on how trading will minimize third party effects
• They should only be used in water scarce regions to promote value and discourage overuse
References
Brandes, O.B., Nowlan, L., Paris, K. (2008). Going with the Flow? Evolving Water Allocations and the
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Tim Shah

Potential and Limits for Water Markets in Canada.. The Conference Board of Canada. Accessed
online: http://poliswaterproject.org/sites/default/files/09_going_w_flow_1.pdf

Chong, H & Sunding, D. (2006). Water Markets and Trading. Annual Review of Environment and
Resources, 32, 239-264.

Janmaat, J.A. (2010). Parrying Water Conflicts in the Okanagan. BC Studies, 168, 21-44.

Olmstead, S. (2010). The Economics of Managing Scarce Water Resources. Review of Environmental
Economics and Police, 4(3), 179-198.

Young, M &McColl, J. (2005). Defining Trade Water Entitlements and Allocations: A Robust System,
Canadian Water Resources Journal, 30(1), 65-72.

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Tim Shah

Exercise and Discussion

In the model, could a voluntary trade between the two sectors lead to more economically efficient
use? What are the limitations of this “trade?”

Do water markets as an economic efficiency tool fit with IWRM?

AF stands for acre-foot. 1 AF = 326,000 gallons. 1 gallon = 3.8 litres 1 million AF = 1,238,800 L
A hypothetical river has an average flow of 1 million AF; 850,000 AF of senior water rights are
held by the agricultural (AG) district, and 150,000 AF are held by the urban (URB) district. With
prior appropriation, allocation and pricing are not determined in a market context. Points A and B
represent the marginal value of water, $30 and $180, in each sector at the prior appropriation
quantities. However, actual prices may be lower; prices are often set using the concept of cost
recovery for an agricultural or urban district. Graph provided by Chong & Sunding (2006).