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What Drives the Value of Water Markets Under Uncertainty? The Economics of Water Supply Forecasts Across Snow and Rain-fed Basins

Author

Listed:
  • Hannah Kamen

    (Department of Economics and Business, Colorado School of Mines)

  • Jared C. Carbone

    (Department of Economics and Business, Colorado School of Mines)

  • Ben Livneh

    (Department of Civil, Environmental and Architectural Engineering, University of Colorado and CIRES, University of Colorado)

  • Parthkumar Modi

    (Alabama Water Institute)

  • Eric Small

    (Department of Geological Sciences, University of Colorado)

  • Bill Szafranski

    (Lynker Corporation)

  • Cameron Wobus

    (CK Blueshift, LLC)

Abstract

Climate change is shifting Western US basins from snow-fed toward rain-fed systems, weakening the precision of water supply forecasts. We investigate the value of water markets in reducing economic damages from supply uncertainty. We produce hydrologic supply forecasts from data across 889 SNOTEL stations and show that forecast uncertainty is higher in rain-fed basins. We embed these empirical uncertainty measures into a water-trade model and find that when some production decisions are irreversible (e.g., planting in agriculture), and made before water availability is realized, trade helps offset losses from sub-optimal investments. We find that gains are 7\% larger in rain-fed basins on average, with offsetting effects increasing in both forecast bias and variance. As rising temperatures are expected to reduce the fraction of precipitation falling as snow, we project that water trade will become a more valuable mechanism for rationing water.

Suggested Citation

  • Hannah Kamen & Jared C. Carbone & Ben Livneh & Parthkumar Modi & Eric Small & Bill Szafranski & Cameron Wobus, 2026. "What Drives the Value of Water Markets Under Uncertainty? The Economics of Water Supply Forecasts Across Snow and Rain-fed Basins," Working Papers 2026-01, Colorado School of Mines, Division of Economics and Business.
    • Handle: RePEc:mns:wpaper:wp202601
    as

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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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