C7.3 Water markets and tradeable permits
Water markets & transferable water rights: these tools allow sales of water allocations from one group to another. The markets can apply to either surface or groundwater, and the transfer of rights may be seasonal or permanent. Such markets can:
- Enable water to be transferred from lower- to higher-value uses
- Overcome the resistance of the entrenched property rights of existing holders
- Be a cheaper way for communities or farmers to obtain their water than the alternatives, which may include creating a new source of supply
- Be used by environmental champions to buy out existing users and preserve the water for habitat or natural amenity.
Water auctions: public authorities make water available to the highest bidders at public auctions. The water lots could be on a daily, weekly, seasonal or even annual basis. Auctions are a useful source of revenue to public authorities, but they can create conflicts of interest if the revenue raising function becomes more important than the issue of efficient water allocation.
Tradeable Pollution Permits: Individual polluters can be allowed the right to buy and sell quotas of emissions subject to an overall upper quota on total emissions. Nutrient trading is a potentially useful instrument to improve water quality.
Certain preconditions are necessary for water markets and auctions to be successful:
- A clear and permissive legal framework, within which individual holders of water rights can transfer their rights, either temporarily or permanently, to other parties (see A2);
- A procedure for considering the impact of these trades on third parties (e.g. downstream users) and, where appropriate, for arranging compensation;
- Recognition of the potential environmental impact of individual trades, and the need to invoke relevant safeguards;
- The physical means of transferring water between potential users;
- Strong provision by Government of the legal, social and economic environment for effective market operation;
- Regulation to avoid build up of monopolies is essential.
- As with charging systems, it is important to ensure that vulnerable groups are protected.
- There is a need for a mechanism for initial allocation of rights (whether for water or pollution discharges) which should be seen to be fair, and be equitable and effective.
- Experience suggests that water auctions can be efficient and effective in some situations.
- Trading schemes can be intensive in terms of information and enforcement, and hence be costly to administer; the high transaction costs of certain markets may outweigh their benefits.
- Markets can help identify the highest value use and assist in conflict resolution (see C5).
- Water auctions may be useful to adjudicate water allocation under competitive conditions, but must be regulated to prevent monopoly build up.
- Markets work best where there are a large number of traders and transactions, so that the risk of build up of monopolistic “market power” is minimised.