In a landmark report, the Global Commission on the Economics of Water recently identified water markets as a fundamental solution to the world’s escalating climate-driven water crisis. The logic is simple: When something is scarce, it becomes more valuable. By pricing water appropriately and creating markets to allocate water based on demand, we could promote more efficient use and incentivize conservation. However, while the concept of water markets appears promising, Chile, Australia, the US and other countries’ experiences show that implementation could prove challenging.
Water markets have been heralded for their ability to allocate water more efficiently. When individuals or organizations are allowed to trade water rights, water is allocated to those who value it most. In Chile, one of the first countries to implement a national water market, agricultural producers could purchase water from other regions or industries that have a surplus. Owing to this flexibility, the system allows for high-value crops to flourish even during droughts.
By helping to reduce inefficient water use, Chile’s water market boosted agricultural productivity over time. Between 1985 and 2018, water-intensive agriculture in the Atacama and Coquimbo regions grew significantly, as water markets allowed for more flexible allocation to high-demand areas.
Illustration: Constance Chou
The same principle has been applied in Australia’s Murray-Darling Basin, where farmers trade water rights to adapt to fluctuating water availability. As Bloomberg reports, the water trade in Australia is about A$4 billion per year (US$2.7 billion) and has made Australia the ninth-largest food exporter in the world. The same markets could also incentivize water conservation. California’s Central Valley also allows agricultural water trading, enabling farmers to cope with periodic droughts by purchasing water from more resource-rich regions.
MARKET FAILURES
Chile’s experience also highlights the pitfalls of water markets. Far from being a panacea, Chile’s water market has led to significant inequalities. Large agribusinesses have acquired substantial water rights, leaving smaller farmers and communities with little access. With wealthier players dominating the market, marginalized communities are priced out.
Such outcomes raise serious equity concerns. Water is not just an economic commodity; it is a basic human right. A system that allows the wealthiest to buy up the most water risks undermining access for those who need it most. After water rights in northern Chile’s Limari Valley were consolidated among a few large agricultural companies, smallholders lacked sufficient water during dry years. Similar trends have been observed in California, where a small proportion of water-rights holders control a significant amount of available water, disproportionately benefiting large-scale agriculture.
Moreover, water markets could lead to environmental degradation. In Chile, diverting water to agricultural use has at times compromised the ecological health of rivers and wetlands. In Australia, over-extraction of water has led to severe environmental consequences, including the collapse of river ecosystems and the depletion of surface water and groundwater resources, threatening biodiversity.
California has encountered similar challenges. Although water trading has helped balance supply and demand in some regions, it has also exposed deep inequities. The Central Valley’s small-scale farmers struggle to compete with larger agribusinesses for water, while poorer urban communities face higher water prices. In times of drought, the market-driven system tends to favor those who could afford to pay, leaving behind the most vulnerable populations.
Speculative water hoarding is also a growing problem. In California, some entities have withheld water from the market, waiting for prices to rise, effectively turning water — a vital resource — into a financial asset. This has contributed to localized shortages and driven up prices in already water-stressed areas.
Beyond market failures, there are deeper issues of equity and justice to consider. Wealthier entities’ ability to buy up rights means that water markets are prone to monopolization. This has been a persistent issue in Chile, where large agribusinesses and mining companies corner the market, especially in drought-prone areas.
POTENTIAL CONFLICTS
Another challenge is that water markets often clash with traditional or prior water rights, leading to legal and social conflicts. In Chile, prior rights holders, including indigenous communities, have suffered displacement as water rights have been commodified and sold off to larger entities. Such injustices raise fundamental questions about the ethics of commodifying a resource that many communities view as a public good.
More broadly, implementation of water markets is a fraught, complex process. Transboundary water conflicts — in which water sources cross regional or national borders — are a growing concern. Markets that allow one region to trade away water that is needed downstream risk sparking conflict between jurisdictions. For example, the Colorado River Basin, shared by seven US states and Mexico, has become a source of rising tensions as upstream water trading affects downstream users. Strong regulatory frameworks are essential to prevent such conflicts, but creating them requires significant political will and resources.
The promise of water markets lies in their potential to address scarcity by incentivizing conservation and efficiency. However, the risks they pose, especially to equity and environmental sustainability, cannot be ignored. Chile, Australia and California provide valuable lessons on the limits of market-driven water management. Monopolization, speculative hoarding and environmental degradation are all significant risks when water is treated purely as a commodity.
The key is to devise a balanced approach. Water markets must be carefully regulated to ensure fair access, prevent market concentration, and protect ecosystems. Hybrid systems that combine market mechanisms with robust public oversight and community management could offer a more equitable and sustainable solution. Governments should also uphold the rights of vulnerable communities and recognize water as a public good, not just a tradable asset.
Eduardo Araral is an associate professor, former vice dean for research, and former codirector of the Institute of Water Policy at the National University of Singapore’s Lee Kuan Yew School of Public Policy.
Copyright: Project Syndicate
There is much evidence that the Chinese Communist Party (CCP) is sending soldiers from the People’s Liberation Army (PLA) to support Russia’s invasion of Ukraine — and is learning lessons for a future war against Taiwan. Until now, the CCP has claimed that they have not sent PLA personnel to support Russian aggression. On 18 April, Ukrainian President Volodymyr Zelinskiy announced that the CCP is supplying war supplies such as gunpowder, artillery, and weapons subcomponents to Russia. When Zelinskiy announced on 9 April that the Ukrainian Army had captured two Chinese nationals fighting with Russians on the front line with details
Within Taiwan’s education system exists a long-standing and deep-rooted culture of falsification. In the past month, a large number of “ghost signatures” — signatures using the names of deceased people — appeared on recall petitions submitted by the Chinese Nationalist Party (KMT) against Democratic Progressive Party legislators Rosalia Wu (吳思瑤) and Wu Pei-yi (吳沛憶). An investigation revealed a high degree of overlap between the deceased signatories and the KMT’s membership roster. It also showed that documents had been forged. However, that culture of cheating and fabrication did not just appear out of thin air — it is linked to the
The Chinese Nationalist Party (KMT), joined by the Taiwan People’s Party (TPP), held a protest on Saturday on Ketagalan Boulevard in Taipei. They were essentially standing for the Chinese Communist Party (CCP), which is anxious about the mass recall campaign against KMT legislators. President William Lai (賴清德) said that if the opposition parties truly wanted to fight dictatorship, they should do so in Tiananmen Square — and at the very least, refrain from groveling to Chinese officials during their visits to China, alluding to meetings between KMT members and Chinese authorities. Now that China has been defined as a foreign hostile force,
On April 19, former president Chen Shui-bian (陳水扁) gave a public speech, his first in about 17 years. During the address at the Ketagalan Institute in Taipei, Chen’s words were vague and his tone was sour. He said that democracy should not be used as an echo chamber for a single politician, that people must be tolerant of other views, that the president should not act as a dictator and that the judiciary should not get involved in politics. He then went on to say that others with different opinions should not be criticized as “XX fellow travelers,” in reference to
RSS