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Lessons from Water Trading in the U.S. and Australia

As water insecurities increase globally, there is an increasing emphasis on demand management approaches, which for the most part emphasize market mechanisms as a means to ensure water security for all. Water trading is one of the market-based mechanisms that helps transfer water from one user to another. This approach is gaining ground as climate uncertainties grow, as corporations want to control water for their value chain and as scarcity conditions give rise to the idea of water primarily as an economic good.

This paper focuses on the experiences in the western United States and southeastern Australia, both regions in which sophisticated institutional frameworks have been developed that recognize water as a limited resource and an economic good, and which facilitate the re-allocation of water through market mechanisms such as water trading. It shows that water markets often exacerbate failures in water governance (manifested as economic or physical water scarcity) and that the third-party effects associated with water trading (which have been well documented) are only the most evident symptom of the underlying governance problems.

Instead, the study proposes a holistic framework that considers water as a commons, questions the premise that water trading is a transaction that takes place between only two parties and urges caution to ensure that wider social concerns are not neglected. It suggests the use of the public trust doctrine in order to protect both public use and public interest and that the combined use of the commons principles with public trust principles provides a way forward to resolve the problems that have arisen in the context of water trading in the western United States and southeastern Australia.

The paper concludes by suggesting that:

  1. The allocation of water should not be based on commodification and economic efficiency alone.
  2. National water sector reforms underway in many countries should consider the hidden costs of existing market-based approaches, and should be premised on the notion of water as a commons, available first and foremost for public purposes (including the realization of right to water and right to food). 

In sum, public policy rooted in cooperation and mutual responsibility, instead of competition, would help address the crisis in shared commons such as water.