Water Markets, Environmental Flows, and Adaptation to Climate Change

The possibility of climate change and the effects it will have on global and regional hydrology opens up serious questions about how the affected sectors of the economy and the water-dependent environmental assets can best adapt to the new, harsher climatic conditions. One of the possible approaches toward securing environmental water flows is to hold water rights on behalf of the public, and manage those rights for environmental purposes. This type of policy has been in effect in the Murray-Darling Basin, Australia, where the Commonwealth Environmental Water Holder (CEWH) now has some 20% of all water rights in the basin. Thus far, the use of these water rights has been almost exclusively for environmental purposes, besides the calls for some of the allocations on these water rights to be sold to irrigators. This paper examines whether a change in policy that will allow a more flexible trading behavior of the CEWH so that it can be an active participant in the market for water allocations can help with adaptation to climate change from environmental management perspective, as well as from the perspective of irrigated agriculture industry. This objective is pursued by analyzing the effects of likely hydrological variations under climate change. Key parameters that are taken into account are expected water availability, and the variability in water availability. The discourse is framed within the concept of optimal allocation of water resources so as to maximize overall social benefit from water use. The results indicate that active participation of the CEWH in the water market leads to superior outcomes in terms of both greater overall social benefit, and greater quantity of water being available for environmental purposes under climate change. The key policy implication is that trading rules for CEWH should be relaxed, especially under the projected climate change scenarios.