Water Trading: Innovations, Modeling Prices, Data Concerns

Abstract

This article examines policy innovations and data concerns related to water trading in Colorado, and develops econometric models of transactions occurring over two distinct time periods. The Punctuated Equilibrium Theory (PET) of policy adaptation is used to examine shifts in Colorado water trading policy paradigms. Creating better policy frameworks for water trading is a key concern for agricultural, urban, and environmental water interests, given hotter temperatures and more variable precipitation patterns in the western U.S. Contractual arrangements of varying types are being used to engage farmers in providing reliable water supplies for ecosystem and urban needs through changes in farm water use practices. While various pieces of information about changes in water use can be gleaned from public databases, transaction price information is notably lacking. Recent Colorado policy innovations related to water trading emphasize reducing on‐farm consumptive use and making water available for other purposes without permanently drying up irrigated cropland. The use of econometric models analyzing water rights transactions provides insight into how changes in key external factors affect transaction prices. The econometric models developed here focus upon Colorado’s urbanizing Front Range and examine the effect of demographics, housing prices, drought indicators, and agricultural profitability on prices at which water is traded. Volume traded, drought measures, housing prices, alfalfa prices, and water source characteristics are statistically significant in these models. The article concludes by discussing factors that contribute to water trading policy innovations and the broader relevance of Colorado’s innovative trading arrangements to water management challenges in arid regions.

Measuring Trends in Western Water Prices

“…The adjacent‐period models allow us to examine changes in price dispersion across new uses from 2002 to 2019. If the coefficients and t ‐statistics on “buyer_ag” and “buyer_env” approach zero over time, it can be inferred that water markets are maturing (Colby and Isaaks 2018). The evidence from the model shows a lack of price convergence over time.…”

“…Growing scarcity has driven innovations in transactions mechanisms and the necessary enabling water policy. Recent examples include the introduction of temporary water‐sharing agreements among agricultural, environmental, and urban water users, as well as interstate water conservation programs in the Colorado River Basin (Colby and Isaaks 2018). Furthermore, water rights market participation has grown, and uses for transferred water have shifted, most notably with agricultural water users (historically the largest sellers in the market) becoming buyers of water in California to irrigate orchards during recent dry years (Hanak et al 2019).…”

“…Furthermore, water rights market participation has grown, and uses for transferred water have shifted, most notably with agricultural water users (historically the largest sellers in the market) becoming buyers of water in California to irrigate orchards during recent dry years (Hanak et al 2019). Australia has already recognized the importance of transparency in water markets and now requires the reporting of price, volume, and other basic transaction details (Colby and Isaaks 2018). The Australian Bureau of Agricultural and Resource Economics and Sciences (2021) provides weekly reports on water trading in four markets.…”

Water Markets in the Western United States: Trends and Opportunities

“…Given space limitations, we have opted to focus strictly on presenting the most recent data on water demand, supply, and markets but direct the reader to other sources for an in-depth understanding as to how water rights and regulations within each state influence the trends we identify. For example, for California, see Hanak, et al [6]; for Arizona, see Colby and Isaaks [7]; for Texas, see Kaiser [8].…”

“…All of the transactions within Waterlitix TM are geo-referenced within a geospatial searchable data platform. Prior water market studies include comprehensive transactions from 1987 to 2009 in the Western US [7,[9][10][11][12]. Our analysis provides an update to these prior studies.…”