Water Trading: Liquid Gold

14 Jun

Water scarcity is a definitive global reality — half of the world’s population will suffer from severe water shortages by the year 2050 and over $335 billion in investment over the next twenty years is needed to maintain our current drinking water infrastructure.

The distribution of water throughout the world is inefficient and new market tools are being developed to address the issues revolving around water rights and allocation.  In the United States, water rights and allocation limits are assigned in a “first-in-time, first-in-right” method where property owners are allowed to withdraw a percentage of water each year because they happen to be “the first ones to spot it.” Critics argue that water right allocation laws do not create any incentives for conservation efforts and some still have clauses built in that require holders to withdraw the maximum amount of water allocated or lose their rights entirely.

An alternative to traditional water tariff scheduling is being developed throughout the world to address these issues of inefficiency and is pricing water relative to supply and demand. The most established market exists today (and has so for over 20 years) in the Murray-Darling Basin in Australia. It is here that the country’s National Water Initiative has created permanent and seasonal water allocations that can be traded through water brokers when amounts are in excess of demand. The price at which it can be traded depends, of course, on the demand for the water and relevant market forces. This model places a more desirable price on water and “punishes” major consumers who cannot take the necessary measures to curb consumption. The efficiency of the water trading market is such that the initial price for water will be equalized throughout the community of consumers, but the marginal price for water during the secondary trade will fall along every consumer’s individual demand curve.  This will force users to shift resources from low value activities to high value activities and in turn give a more economically viable price to water.

Read the entire article by Nick Sanderson by clicking here

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Posted by on June 14, 2012 in Wind


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