A systems perspective on water markets: barriers, bright spots, and building blocks for the next generation

Water markets are a decentralized approach for allocating water and water rights that have been touted as part of the future of water policy for decades [1–3]. While proponents have lamented their slow uptake and critics have resisted their spread, water markets are neither new nor rare. Water trading in the irrigation systems of Oman and Spain [4, 5], for example, has occurred for hundreds of years, and evidence of trading in Australia and the USA has been traced to the 19th century. Even regions with relatively abundant water rely on tanker water markets and other water entrepreneurs to address shortfalls of labor and infrastructure [6–8]. The diversity of water market activity is illustrated by the nearly $2 billion (Australian Dollar) average annual turnover in Australia's surface water markets [9] or the tanker markets in Kathmandu which deliver approximately 20% of the water used by households in the dry season [10].

Despite growing experience, discussions of water markets are often dominated by myths rather than evidence [11]. Research is splintered by competing definitions and assumptions, constraining the consolidation of theory and practical insights for policymakers [12]. Water market proponents highlight their potential to address diverse policy objectives by allocating water efficiently and enabling adaptation to shifting patterns of supply and demand. Policy objectives range from reducing groundwater overdraft and restoring environmental flows to broader social and development goals, including poverty alleviation, sustainable urbanization, agricultural risk management, and meeting the human right to water. In contrast, critics note how water markets can cause negative impacts on communities where water is bought and sold and can further sideline or exclude Indigenous peoples by reinforcing legacies of colonization and dispossession that have limited formal allocation of rights [13–15].

The theoretical advantages and disadvantages of water markets have been debated for decades, leading to a growing call to 'go beyond blanket statements of whether markets do, or do not 'work', and are or are not exploitative' [16, p.9] by paying attention to the empirical evidence and 'details on the ground' in a structured way. The diversity of water markets, ranging from tanker trucks selling water locally to long-distance rural-to-urban transactions, makes the accumulation of such evidence challenging but also more important.

A systems perspective on water markets can help scholars and policymakers identify the conditions under which water markets achieve their intended policy and development objectives and how they interact with other policies and incentives. In this paper, we bring together anthropology, economics, environmental science, hydrology, and public policy to better understand the diversity of water markets and motivate an interdisciplinary agenda. We focus on drivers of water markets, how they vary, and their dynamics and impacts in the context of broader social-hydrological systems. This fits with recent efforts to apply systems thinking to various forms of markets and value chains from fisheries to food systems, enabling a more holistic view of markets that reveals complex interdependencies and feedbacks, as well as processes and linkages that connect markets with broader systems [17].

A systems perspective can lead to 'more realistic models...[that] increase both the rigor and relevance of future research' [18, p.260]. A systems perspective can draw attention to the focal variables, interactions, and outcomes relevant for different water markets. Instead of imposing a single framework or typology, we contribute a systems perspective which is compatible with multiple existing frameworks and can enrich and strengthen them. Regardless of the framework selected, a systems perspective draws attention to complexity and context in a structured way, breaking water markets into several interacting elements: the sources of water and drivers of scarcity, the goods and services traded, the actors participating, the governance arrangements and property rights for allocating and reallocating water, and the interactions and outcomes at different scales and for different actors.

In the next section, we look back on the past 15 years of interdisciplinary research on water markets with a primary focus on conceptual issues and measurement problems hindering the accumulation of knowledge and policy insights. We then identify bright spots of progress in overcoming these challenges from an interdisciplinary perspective. We conclude with building blocks for the next generation, including priorities for research and practice for the next 15 years and beyond.

Despite differences across disciplines and regions, definitions of water markets converge on the decentralized exchange of property rights, both formal and informal, to water-related goods and services within a given social-hydrological system [12]. Necessary conditions include scarcity, which need not be limited to water scarcity, and differences in the marginal value of water (or labor and capital for delivering it), which makes trade mutually beneficial for the buyer and seller. Water markets often rely on price signals to communicate the scarcity of water and its opportunity costs in competing uses, but may also overlap with other forms of exchange, such as gifts or reciprocal practices [6]. Engineering and economic studies focus on the ability to trade as a defining feature, along with assumptions that agents will maximize the utility or reliability of their water supply [19, 20].

Institutional differences make it difficult to classify water markets across contexts. As recently as 2019, two reviews of water markets reached conflicting conclusions, one noting that water markets are rare [21], while the other noting their proliferation and persistence [22]. Technically, both are right. Formal water markets (regulated by governments) remain rare, while informal markets (governed by locally crafted rules and norms) are widespread. There are increasing examples of overlapping water markets with rules crafted at different levels of governance. Despite their prevalence, informal water markets remain largely invisible (See figure 1). Though their illegibility defies standardized tracking and measurement, efforts are underway to better account for unregulated trading activity in the context of fisheries, land grabbing, and a range of illicit, illegal, and/or informal settings [23]. Not only has there been a failure to recognize and distinguish different types of water markets, but disciplinary studies offer a partial view that may neglect the structural factors, historical legacies, and other antecedent conditions that shape the emergence of water markets, their evolution, and impacts.

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In a 2006 review of water markets and trading, Chong and Sunding [24] argued that 'putting water markets into practice introduces real-world complications' (p.39) that deserve growing scrutiny. Doing so has required advances in measurement, modelling, and management that show promising trends in a vibrant, but uncoordinated, body of scholarship. We focus on bright spots of interdisciplinary research on water markets in the period since their review. A systems perspective can highlight new connections across these bright spots to generate a new interdisciplinary field of research on water markets, with comparable datasets for assessing their evolution and performance, and insights for policy and practice.

3.1. Measurement

3.2. Modelling

3.3. Market design

Despite major strides, research on water markets is struggling to address the most basic and important questions: Why do different types of water markets emerge where they do? How and why do they vary? Do they work? If so, for whom and on what terms? A systems perspective can help to address these questions by bringing multiple disciplinary lenses together to capture different elements of water markets often examined separately, and to track these features of water markets consistently across geographies.

First, what drives the development of water markets? A systems perspective focuses on the institutions, external factors, and historical legacies that together shape the emergence and evolution of water markets. Hydrologists, engineers, and systems modelers assess the potential for markets in the context of different water management problems, while historians and policy scholars trace how markets come into being through case study research that attends to structural conditions whereby markets become the preferred solution. Both offer a partial perspective. By focusing holistically on the drivers of scarcity—and the characteristics of different water systems, uses, and users—it is possible to distinguish markets based on their functions and fit with local context [37]. A systems perspective also highlights the interconnected systems that shape water markets (e.g. agriculture, energy, and urban transitions) and their nested externalities (e.g. third party effects on rural development).

Second, decades of research have shown there is no one-size-fits-all solution to water challenges. There are multiple ways to create and govern water markets, including who can participate, which trades can occur, and how conflicts are resolved. Diagnostic approaches have been used to make sense of this institutional diversity and the recurring patterns. 'Readiness' assessments increasingly track factors expected to facilitate water trading [40]. Such approaches must account for multiple possible configurations of enabling conditions, rather than promote a universal set of necessary conditions. For example, in the case of China's water trading reforms, multiple pathways can lead to trading from agricultural to urban users [41]. Cataloging institutional diversity can identify which different approaches are likely to work or not in different contexts, including the policies, incentives, and other factors that condition their performance.

Finally, a systems perspective requires researchers to move beyond economic efficiency when assessing the potential and performance of water markets. A broader and multi-dimensional perspective on performance pays attention not only to distributional justice and who wins and loses, but also to procedural justice (decision-making processes) and long-term trade-offs. A systems perspective ties performance back to macro-level outcomes, such as economy-wide impacts, resource sustainability, and impacts on pre-existing inequalities.

In this context, our research vision is inspired by the potential for a global network of observatories to examine where and how water markets come into being, what problems they address and create, and how they work. Although observatories are most common in the environmental sciences, they are apt for situations like water markets that cut across social and hydrological systems and depend on field measurements of disconnected datasets covered by different disciplines. In some cases, existing data sources are not being effectively leveraged or harmonized (such as sample surveys conducted by governments, e.g. Demographic and Health Surveys or agricultural censuses). In other cases, new datasets are needed. A code book and metadata can guide data collection, but should draw lessons from existing experiences which note trade-offs between complexity and comparability, and ethical and practical factors which constrain coordinated approaches to data collection, sharing, and management [42].

Where to begin? Put simply, if we want to know a market, start with the transaction (see table 1). We know little about the amount of water traded, prices, and the types of buyers and sellers participating. Transactions also connect different sub-systems—the source of water, the infrastructure used to deliver it, the drivers of scarcity, the focal participants, the rules and norms that govern trading, and the micro-, meso-, and macro-level impacts that connect behavioral changes and system-level outcomes. For decades, research on water markets has relied on grey literature transactions data, even in settings with the most formalized approaches to administrative approval and record keeping. An agreed common protocol for tracking transactions and trading activity is now within reach, and can form the bedrock for a global network of researchers and practitioners. A distributed network of local partnerships, guided by common protocols and standards, can uncover the potential, limits, and pathways for water markets to contribute to more sustainable and inclusive water management.

This work was partially funded by the European Commission (NEWAVE Innovative Training Network—Grant #8615), the National Science Foundation (BCS-1759972, BCS-2143766, GCR 2021147), The Nature Conservancy (Oxford-TNC Partnership), the Philomathia Foundation (Philomathia Award), the Royal Society Te Apārangi (Marsden VUW2006), the US Department of Agriculture (OCE 58-0111-21-007) the University of Waterloo (TD Walter Bean Professorship) the Ramon y Cajal Fellowship (RyC-2017-22782), the 'María de Maeztu Unit of Excellence' (CEX2019-000940-M) of the Spanish Ministry of Science and Innovation, the National Natural Science Foundation of China (51609082), and the Fundamental Research Funds for the Central Universities (B220201019).

The data that support the findings of this study are available upon reasonable request from the authors.