Water Trading Markets: The Key to Solving America’s Water Crisis

A snapshot of Lake Mead, showcasing its “bathtub ring,” a visible reminder of the once higher water levels. Photo courtesy of Kumar Appaiah.

In November 2023, the Biden Administration announced $64 million in new investments to address water shortages in the American Southwest by incentivizing Arizona farmers to use less water from the Colorado River system. This fiscal infusion aims to increase the store of water in Lake Mead, a prominent reservoir fed by the Colorado River. The reservoir, which currently provides water to over 25 million people, will experience greater strains in the coming years, particularly from climate change and global warming. In one U.S. Geological Survey study exploring climate change scenarios, scientists projected that by 2050, warmer temperatures could diminish the Colorado River’s flow by 14-31 percent.

With these continued chronic water shortages in mind, the Biden Administration’s policy utilizes market-based incentives to encourage farmers to voluntarily use less of their water shares. In the policy, the Administration has made deals with seven prominent Arizona contractors, many of which have agreed to multi-year deals, over which they will reduce their water supply. Contractors who have agreed to a three-year deal are paid $400 for every acre-foot of water they leave in the river. Parties that have agreed to two-year deals and one-year deals are paid $365 and $330 per acre-foot, respectively. If all the agreements are met, up to 162,710 acre-feet of water will be kept in Lake Mead through 2026, helping to raise its levels by more than 2 feet.

In light of the Biden Administration’s proposal, several policymakers worry that compensating farmers for conservation efforts isn’t a sustainable remedy for the water crisis. Mark Gold, Director of Water Scarcity Solutions at the Natural Resource Defense Council, argues that the payments are just getting the Colorado River Basin through 2026, when states must negotiate new terms for sharing the water. Katherine Wright, a research fellow at the Property and Environment Research Center, explains how funding used to compensate farmers comes from the 2022 Inflation Reduction Act and that funding from this bill will eventually run out. Without a steady stream of congressional funding, the government would lose the ability to compensate farmers. While the Biden Administration may be able to pursue market based strategies now, it is uncertain whether a large climate bill will be passed in the next few years. It is unlikely then, that future presidents will be able to pursue costly market based programs because congressional funding may be limited. Ultimately, the “market based model” is unreliable for the long term because it requires a constant stream of congressional funding to support it, which is not a guarantee. 

To ensure a sustainable source of funding, the government can establish a water trading market, whereby local entities and farmers can exchange water rights for compensation. Imagine if a farmer in a drought-stricken area could profit by cutting back their water usage and leasing the saved water to a non-government organization (NGO) like the Sierra Club. The farmer voluntarily saves their water and is justly compensated. On the other hand, the Sierra Club keeps more water in the river system to further environmental aims. Currently, only the federal government has the authority to pay farmers to keep water in streams. There are currently no institutional arrangements enabling any states, NGOs, or large water-using entities to trade with one another. This seemingly simple idea—that NGOs that want to conserve water should be able to pay farmers and other water users to voluntarily forgo water use—is one that we must fully harness if we ever intend to solve the water crisis. The Biden Administration should spend more money on setting up institutions and mechanisms that would enable the creation of a water trading market whereby farmers can trade and sell water rights to nongovernmental entities for compensation. 

One might argue that NGOs lack the financial resources required to acquire sufficient water rights from farmers, hindering their ability to generate substantial and noticeable savings for the Colorado River. Last year, however, a report found that the Sierra Club drew more than $200 million in grants and is likely to receive more funding as climate change accelerates. Other environmental groups are likely to command similar figures. While they may not be able to match the billions of dollars in funding that are spent by the federal government, they have the capacity to make large payouts for farmer’s water rights, contributing to noticeable water savings for the Colorado River. 

Additionally, by creating these trading markets, the Biden Administration provides another way of compensating farmers for their water rights. Diversifying funding is crucial as it ensures farmers can receive compensation for their water rights even in scenarios where Congress hasn’t allocated funds for water conservation projects. By establishing water trading markets, the Biden Administration can create a permanent source of funding for farmers to receive compensation in exchange for reducing their water supply. Environmental NGOs and local entities can leverage these trading markets to ensure that water conservation is more readily safeguarded for years to come.

Janak Sekaran is a Staff Writer for the Columbia Political Review and a junior in Columbia College majoring in math and philosophy. He has spent time in the Southwest working for the U.S. Fish and Wildlife Service and is passionate about environmental conservation.