Protecting the flow: Study explores market scenarios for water

Unlike energy and other natural resources, the marketplace does not often govern the distribution and consumption of water. One of the traditional systems for allocating water is volumetric appropriation, which assigns water rights based on assumed flow, existing permitted withdrawals, and other factors. In the western U.S. and parts of England many of the rivers governed by such systems are closed, meaning that they are already over-allocated and there is no water "leftover" for additional withdrawals. Because these systems were largely developed before the idea of environmental flows, appropriation systems rarely include minimum flows for general ecosystem health. Thus, in extreme scenarios a river would run dry from withdrawals. While this is not typical it is also not impossible, as the volumetric permits are often unrelated to the actual flow in the river at a given point in time.
 
In an attempt to remedy this problem, researchers from Manchester and London imagined how a marketplace for water might function in the Great Ouse Basin in eastern England. In a paper published in the journal Hydrology and Earth System Sciences, they compared two market scenarios: one in which withdrawal permits were fixed by volume and where the environmental flow was a static minimum, and the other in which environmental flows and withdrawal permits were scaled to total available flow. The models simulated trade between the water supply, energy, agriculture, and private users in the basin within a set of constraints. Constraints included minimum water supply reservoir levels, withdrawals beyond the Hands-off Flow (HoF) level, and rationing when total flows drop below certain thresholds.Outputs from the model revealed the relative benefits and costs of each permitting regime, which were primarily benefits to the ecosystem and costs to economic output.
 
The dynamic permit scenario was unsurprisingly more advantageous to ecosystem flows, while the static scenario was relatively stronger on economic output. However, both scenarios yielded lower economic output than the control, non-market scenario that currently exists. The opportunity cost, — which is the economic output not produced due to reductions in withdrawals — was 15 percent of GDP in the dynamic scenario. In the static, volumetric scenario, it was 10 percent. In the volumetric scenario, the power station in the basin was by far the largest and most consistent purchaser of water, and the water supply utility was the primary seller. These roles were not consistent in the dynamic model, where the power station acts as a buyer in the first half of the year and a seller in the second half, almost the perfect reverse of the water supply system. Thus, it was easy to identify these two actors as the primary drivers of the market in terms of volume, if not total transactions, the vast majority of which include 90 agricultural water users.
 
Projecting the response of existing water withdrawal systems in a market system is an important but inexact pursuit. It is difficult to change an existing system when there will necessarily be losers. In the system presented here, loss exists because total available water decreases. Water is also dissimilar to energy and other resources in that the transactional costs can be much steeper and require the marketplace to provide efficiencies large enough to absorb these costs.  However, it is clear that the mechanisms that govern environmental flows around the world can be more robust, and this represents one attempt at a societally fair attempt to achieve this important goal.