Trading water to improve environmental flow outcomes

As consumptive extractions and water scarcity pressures brought about by climate change increase in many world river basins, so do the risks to water-dependent ecological assets. In response, public or not for profit environmental water holders (EWHs) have been established in many areas and bestowed with endowments of water and mandates to manage water for ecological outcomes. Water scarcity has also increasingly spawned water trade arrangements in many river basins, and in many instances, EWHs are now operating in water markets. A number of EWHs, especially in Australia, begin with an endowment of permanent water entitlements purchased from irrigators. Such water entitlements typically have relatively constant interannual supply profiles that often do not match ecological water demand involving flood pulses and periods of drying. This article develops a hydrologic-economic simulation model of the Murrumbidgee catchment within the Murray-Darling Basin to assess the scope of possibilities to improve environmental outcomes through EWH trading on an annual water lease market. We find that there are some modest opportunities for EWHs to improve environmental outcomes through water trade. The best opportunities occur in periods of drought and for ecological outcomes that benefit from moderately large floods. We also assess the extent to which EWH trading in annual water leases may create pecuniary externalities via bidding up or down the water lease prices faced by irrigators. Environmental water trading is found to have relatively small impacts on water market price outcomes. Overall our results suggest that the benefits of developing EWH trading may well justify the costs.