As cites grow and put more pressure on water sources, scarcity is an increasingly important issue. More than two thirds of the world’s population experience a water shortage every year. Just because water continues to reach your tap does not mean your area isn’t experiencing a shortage. Instead, it could mean your town is forced to tap sources, such as rivers, faster than they can renew. Economists have introduced one solution, water markets, which assign a value to usage under the premise that when something has a dollar value, people are more likely to conserve it.

What are water markets?

When preserving nature for nature’s sake is not enough to get a company’s attention, sometimes the best strategy is through its bottom line.

Related: 7 ways to conserve water and reduce your water footprint

Water markets function similarly to the stock market or carbon trading markets, where water usage rights and quantities can be traded among voluntary stakeholders within a watershed. There are different types of trades and markets can vary based on local legislation, infrastructure and government regulation. Ultimately, one water user sells a portion of its predetermined water allotment to another user, meaning it reduces the quantity of water it uses (in exchange for compensation), while the buyer utilizes the agreed upon amount of water.

Why would the seller engage in a water market?

A farmer, for example, might sell a portion of their water access and use the funding to purchase more efficient irrigation or use it as compensation for reducing their yield.

Why would the buyer engage in a water market?

A metropolitan area, for example, might purchase water from farmers upstream and use it for urban residents. This enables more efficient use of the water available, without forcing the government to tap into reserves or build expensive infrastructure to reach far away sources. Environmental organizations might also purchase water and then not use it, simply to ensure that an optimum amount of water cycles through the watershed to support healthy ecosystems.

Why do we need water markets?

Most people consider water a human right and a shared resource; however, this means that people do not necessarily have tangible incentive to conserve.

Agriculture is the largest water user, with more than 90 percent of all water going to irrigated farms. But nearly 75 percent of all irrigated farms are vulnerable to scarcity, and almost 20 percent of all irrigated crops are produced with nonrenewable groundwater.

This rate is alarmingly unsustainable. As The Nature Conservancy reported, “Nature is the silent and unseen victim of water scarcity.” But with the rise in severe weather, including flooding and drought, those who are paying attention could argue that nature is not so silent. Not to mention the 844 million people living without adequate access to clean water who are also victims in plain sight.

Have water markets been successful?

Australia’s Murray-Darling river has one of the most widely cited examples of a successful water market. Established in response to a seven-year drought, the market provides farmers with an alternate revenue stream that helps them stay in business even during times of water crises. Currently, 40 percent of all water used within the extensive basin in southeastern Australia is traded water.

Another example comes from San Diego, California, where the water authority pays farmers to reduce water and reroute it to urban areas. This traded water covers one third of the city’s water needs.

Reducing water use on large farms — without destroying local economies and food supplies — inevitably has to be a major part of the solution. Unlike carbon trading, which many argue promotes “pay to pollute,” water markets offer “compensation for conservation.”

According to The Nature Conservancy, water markets “offer a powerful mechanism for alleviating water scarcity, restoring ecosystems and driving sustainable water management.” Markets, however, are intended to be one solution within a more comprehensive conservation strategy. Other components include enforcing meaningful reductions in water usage —  forcing businesses to innovate more efficient operations, appliances and products.

The concepts of trading and monetizing water access are complex, abstract and focus on major players. More research is continually needed to ensure that market approaches do not only benefit the loudest and highest bidders, but to ensure the equity of markets for small and nontraditional users.

+ ‘The Nature Conservancy’

Image via Diego Delso