Sustaining Upper Colorado River flows through optimal environmental water rights marketing

Abstract:

Environmental water rights markets in the western United States are a leading mechanism for restoring streamflows for dewatered ecosystems, with environmental transactions comprising about one-third of the region’s water market by volume. However, these markets remain immature, with opportunistic transactions and major legal barriers to trade. Recently, informal transactions that evade these barriers have become common, but they provide no legal protection for restored flows. Generally, water rights markets do not adhere to economic ideals and instead are thin, with few buyers and sellers; trade heterogeneous commodities with differing legal and physical characteristics; exhibit price dispersion, or different prices for the same commodity; and have large transaction costs.

To advance strategic investing in environmental water markets, this study develops an integrated ecohydrologic-economic-legal simulation-optimization model that identifies portfolios of environmental water rights leases that maximize trout habitat in the Upper Colorado River Basin. The Colorado River is the world’s most overallocated river. Our water marketing simulations are legally and economically realistic, considering limited market participation, transaction costs, price dispersion, heterogeneous commodities, formal and informal transactions, legal trading rules, priority-based water allocation for water rights, and imperfect knowledge of future hydrology. Optimal portfolios evaluate >4,000 monthly leases from >2,000 diversionary water rights and reservoir accounts, with trout habitat gain evaluated on >1,000 river reaches using a statistical model linking flow alteration with habitat.

Results show that optimal portfolios with informal transactions substantially outperform portfolios without them. Also, optimal portfolios take advantage of price dispersion by selecting inexpensive leases, commonly select large reservoir leases, and restore flow in especially dewatered reaches. An optimal portfolio with greater market participation expands cost-effective opportunities to restore dewatered rivers. Because barriers to trade arose in 19th century water law, the results illustrate how path-dependent water rights institutions influence environmental restoration in today’s water markets.