Role of inter-sectoral water trading in climate change adaptation

Water trading to improve supply reliability under climate change is a promising strategy for regions with several water-using sectors, each of which has varying marginal values for water, costs associated with water shortages, and abilities to adapt to shortfalls in supplies. Trades motivated by supply reliability are likely to involve moving water out of irrigation use, simply because agriculture accounts for the vast majority of consumptive water use in arid regions worldwide. In practice, many water transfers – for example those in the 1991 Californian Drought Bank – are from low-value crops (irrigated with high-priority water allocations) which can be annually fallowed to higher value tree and vine crops (which cannot be annually fallowed) and to environmental and urban users who are willing to pay more for water to avoid the high costs associated with shortages (Howitt, 1994; CDWR, 2000).

Temporary (dry year only) transfers to improve lower priority urban, environmental, and agricultural water supply reliability have key advantages over permanent water rights buy-outs (so-called ‘buy and dry’). Temporary transfers cost less than permanent acquisitions and they engender less heated opposition over potential third-party impacts. While effective in mitigating the costs of drought-induced supply variability, dry year transfers are not suitable for providing long-term supplies to sustain a growing population. Once the dry cycle has ended, dry year transfers cannot be committed for water use in normal years (as that would preclude their use as a buffer supply during droughts).