Decoupling environmental water markets from water law

Abstract

Environmental water markets have emerged as a tool for restoring flows in rivers across the world. Prior literature suggests that certain legal conditions are necessary for these markets to function. However, we find substantial market activity has occurred without these legal conditions through market and legal data collected in five core U.S. Colorado River basin states (Arizona, Colorado, New Mexico, Utah, and Wyoming) from 2014 to 2020. Ninety-five percent of the 446 water transactions sidestepped formal legal processes to transfer water rights to the environment. We also find that government regulatory and conservation programs, not private-sector investment, have driven most environmental water market activity. Government spending is the dominant funding source, with 90% of the $53 million spent coming from governments and 68% from the U.S. federal government alone. Finally, our analysis finds that current market activity would be insufficient to stave off future curtailment of critical water users under the Colorado River Compact and that $86–89 million annually in new investment is required to do so. In a basin experiencing a historic megadrought, our analysis suggests prioritizing such new investments over legal reform. Global implications are that such flow restoration is possible where legal regimes for environmental water markets do not already exist.