Market-Based Approach to Conservation
Management of water shortages through water transfer mechanisms
By Nargiza Rakhimova
Large dams and reservoirs built on major rivers to mitigate water shortages are no longer economically or environmentally feasible, however, the competition for water is increasing.
Socioeconomic and political aspects of water conservation are current hot topics, as many people realize the importance and inherent difficulty in allocating this scarce resource among the diverse range of water users. One way to address this issue is to encourage water-users to improve water-use efficiency through a market-based transfer mechanism where price is a result of demand and supply interaction.
A three-year research program to assess the potential for the development of a water market in the Lower Rio Grande Basin of New Mexico and to determine what type of water transfer mechanisms would be most effective in the basin, has been initiated by a team of investigators under the supervision of Ereney Hadjigeorgalis, assistant professor at New Mexico State University.
The program was developed based on a three-stage evaluation aimed to:
- Identify economic disincentives to water trades in the current institutional framework for both short-term trades and permanent transfers of water-use-right titles;
- Determine the factors that influence farmers’ willingness to participate in water markets and the specific type of water transfer mechanism that is most suitable; and
- Design a working draft of a water transfer mechanism that would reduce wasted water and encourage conservation by efficiently allocating scarce water resources among farmers during times of drought, while still protecting third party
interests specific to the basin.
Results obtained from research to date are encouraging. Findings show that while farmers were interested in participating in water markets, they prefer short-term transfer mechanism and spot water markets over water banks, thereby giving them the ability to negotiate price between transacting parties. In addition, there was little interest in ‘option markets’, due to their complexity and institutional constraints, i.e., the water users currently do not have secured water rights and well-defined property rights to water.
This year, the research program is focused on the current institutional framework in the basin such as transaction costs associated with water leasing and sales, and the potential impact on third parties from increased water transfers. These findings will assist the program in determining various aspects and structures of the water markets and find the most appropriate approaches in the Rio Grande Basin case.
