This paper presents an optimization model to simulate short-term pair-wise spot-market trading of surface water abstraction licenses (water rights). The approach uses a node-arc multicommodity formulation that tracks individual supplier-receiver transactions in a water resource network. This enables accounting for transaction costs between individual buyer-seller pairs and abstractor-specific rules and behaviors using constraints. Trades are driven by economic demand curves that represent each abstractor's time-varying water demand. The purpose of the proposed model is to assess potential hydrologic and economic outcomes of water markets and aid policy makers in designing water market regulations. The model is applied to the Great Ouse River basin in Eastern England. The model assesses the potential weekly water trades and abstractions that could occur in a normal and a dry year. Four sectors (public water supply, energy, agriculture, and industrial) are included in the 94 active licensed water diversions. Each license's unique environmental restrictions are represented and weekly economic water demand curves are estimated. Rules encoded as constraints represent current water management realities and plausible stakeholder-informed water market behaviors. Results show buyers favor sellers who can supply large volumes to minimize transactions. The energy plant cooling and agricultural licenses, often restricted from obtaining water at times when it generates benefits, benefit most from trades. Assumptions and model limitations are discussed.Key PointsTransaction tracking hydro-economic optimization models simulate water marketsProposed model formulation incorporates transaction costs and trading behaviorWater markets benefit users with the most restricted water access
Abstract. To enable economically efficient future adaptation to water scarcity some countries are revising water management institutions such as water rights or licensing systems to more effectively protect ecosystems and their services. However, allocating more flow to the environment can mean less abstraction for economic production, or the inability to accommodate new entrants (diverters). Modern licensing arrangements should simultaneously enhance environmental flows and protect water abstractors who depend on water. Making new licensing regimes compatible with tradable water rights is an important component of water allocation reform. Regulated water markets can help decrease the societal cost of water scarcity whilst enforcing environmental and/or social protections. In this article we simulate water markets under a regime of fixed volumetric water abstraction licenses with fixed minimum flows or under a scalable water license regime (using water "shares") with dynamic environmental minimum flows. Shares allow adapting allocations to available water and dynamic environmental minimum flows vary as a function of ecological requirements. We investigate how a short-term spot market manifests within each licensing regime. We use a river-basin-scale hydroeconomic agent model that represents individual abstractors and can simulate a spot market under both licensing regimes. We apply this model to the Great Ouse River basin in eastern England with public water supply, agricultural, energy and industrial water-using agents. Results show the proposed shares with dynamic environmental flow licensing system protects river flows more effectively than the current static minimum flow requirements during a dry historical year, but that the total opportunity cost to water abstractors of the environmental gains is a 10-15 % loss in economic benefits.
Abstract. To enable economically efficient future adaptation to water scarcity some countries are revising water management institutions such as water rights or licensing systems to more effectively protect ecosystems and their services. Allocating more flow to the environment though can mean less abstraction for economic production, or the inability to accommodate new entrants (diverters). Modern licensing arrangements should simultaneously enhance environmental flows and protect water abstractors who depend on water. Making new licensing regimes compatible with tradable water rights is an important component of water allocation reform. Regulated water markets can help decrease the societal cost of water scarcity whilst enforcing environmental and/or social protections. In this article we simulate water markets under a regime of fixed volumetric water abstraction licenses with fixed minimum flows or under a scalable water license regime (using water "shares") with dynamic environmental minimum flows. Shares allow adapting allocations to available water and dynamic environmental minimum flows can vary as a function of ecological requirements. We investigate how a short-term spot market manifests within each licensing regime. We use a river-basin-scale hydro-economic agent model that represents individual abstractors and can simulate a spot market under both licensing regimes. We apply this model to the Great Ouse river basin in Eastern England with public water supply, agricultural, energy and industrial water using agents. Results show the proposed shares with dynamic environmental flow licensing system protects river flows more effectively than the current static minimum flow requirements during a dry historical year, but that the total opportunity cost to water abstractors of the environmental gains is a 10 to 15% loss in economic benefits.
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