Transforming water scarcity through trading

Water scarcity is widespread and increasing worldwide. Many areas of the UK are increasingly short of water resources. Yet typically only half the available water is abstracted even in dry summers, and much of that is for low value uses. Climate change, population growth and increased water demand require a dynamic reallocation of the water resources that the present water allocation and licensing system in England and Wales cannot provide. More flexibility in transferring and sharing water resources would decrease water scarcity by encouraging the development of the most economical new supply options, and would increase the benefit obtained from the existing water, by encouraging transfers to higher value uses. The potential of water abstraction licence trading to bring about more efficient allocation of water, the development of new resources and environmental improvements in areas of water scarcity has been recognised by government, but so far regulatory problems and environmental constraints have limited progress.

Water markets already exist elsewhere (e.g. Australia, Western USA, Chile) but have often had negative impacts on vulnerable groups and ecosystems. Within England and Wales, trading of water rights has been encouraged by government since 2003, but only about 60 trades have occurred. More flexibility is now being promoted, as a solution to water scarcity and allocation (e.g. OFWAT, 2010). However, it is imperative that the impacts of different market rules and regulation are better undestood.

The objectives of our project are to :
- inform the current move towards water markets;
- show how active markets could transform the current water management system;
- value the available water spatially and dynamically, revealing its opportunity cost;
- identify the economic benefits of trading water licenses at basin scale;
- research the opportunities for novel engineering options for increasing supplies, such as distributed reservoirs, enhanced aquifer recharge, and rainwater harvesting, and how/whether they might be funded by downstream buyers;
- investigate the rules and restrictions necessary to protect the environment and avoid unwanted consequences;
- investigate options for incorporating Payment for Ecosystem Services (PES), to enhance environmental benefit.

The project team brings together a strong set on complementary research skills in water management, from four universities active in water management research, Cranfield, Leeds and Herriot-Watt Universities and University College London.

The project will first review the experiences of water trading systems in other countries, and the experiences of trades that have already occurred in the UK. Alternative methods of sharing water resources, eg through pooling licenses, will also be reviewed.

The core of this project is the development and use of a market simulator, modelling how water suppliers and users behave under various market structures. The novelty in developing the Market Simulator is to study the potential operation of markets and trading at catchment and abstraction licence level. The model will be applied to selected water-scarce catchments in East Anglia, using a weekly time step. Meetings with regulators and water managers will be used to ground and focus the modelling.

Three PhD research projects will supply data for the model and subsequently use the model to investigate specific aspects of the problem. They will look respectively at: the potential for engineering options in the UK; land management options in an international context; and quantification and valuation of ecosystem goods and services for multiple purposes. Co-supervision of the students and regular team meetings and workshops will help reinforce integration of the academic team and the students.

The most immediate users for outputs from this research are the regulators and government departments, including the Environment Agency, Ofwat and Defra. Information on the range of market values of water, the extent of potential economic benefits from water trading and/or abstraction licence trading, the potential environmental disbenefits, and guidance on the impacts of different regulatory frameworks will contribute to the effectiveness with which they manage our national water resources.

The information will similarly be of direct use to existing and potential water users, indicating the value of existing water resources and the costs of additional sources that involve trading, whether by buying existing resources or financing development of alternative sources elsewhere. Any resulting improvements in regulation are also likely to benefit users, particularly potential new users whose development is currently constrained by water scarcity.

Environmentally-concerned individuals, regulatory bodies and non-governmental organisations will benefit from increased clarity in identifying the potential disbenefits and limits of water trading, allowing them to target their concerns about the environmental impacts of over-abstraction more accurately and highlighting the regulatory controls required. The identification of neutral or even positive impacts will be helpful, e.g. for identifying environmentally acceptable water sources for maintaining managed habitats (the RSPB for example is a water abstractor in its own right).

The economy in water- stressed areas will benefit from better use of water resources, enhancing wealth creation and employment. Adequate and reliable water for electricity production and reliable public water supplies are clearly essential for sustainable economic growth. In the East of England, irrigated farming is a significant rural employer, both on-farm and downstream in the packaging and distribution industries. Home-grown irrigated crops contribute to the national balance of payments, and will become increasingly important under climate change as alternative sources such as Spain become hotter and more water scarce. Increasing the proportion of fruit and vegetables in the UK diet is a stated government priority; much of this will have to be home-grown and will require reliable water resources.

The wider public will benefit from gains in economic efficiency from improved use of scarce water resources and the movement of water from low to high value users, and from the better protection of the water environment it rightly values highly.

The international community will benefit from the information obtained from the UK, from the application of the model to a third-country example, and from the potential to adapt the model to other contexts.

The further development of the innovative geo-referenced open-source software platform will be of benefit elsehwere within the water sector; the existing model is already bing used in a joint University-regulator-water company policy simulation platform. The deliberate choice of an open-source platform ensures that this model can be adapted to other UK and international contexts with minimal software licensing constraints.