What is Water Trading?

Jessica Ellis

Water trading refers to the buying and selling of water rights and entitlements. Though long done through informal agreements, water trading has become an actual type of financial market in the 21st century, where buyers are allowed to trade derivatives, buy long or short, and follow other financial trading schemes more common of forex or stock markets. Critics of water trading warn allowing what was once a primary means of ensuring equal water access to become a haven of profits and skyrocketing prices may put low-income families at risk of losing necessary water sources.

Water quality trading provides incentives for businesses to improve water quality.
Water quality trading provides incentives for businesses to improve water quality.

Many experts suggest that Australia has the most advanced water trading system in the world. The scarce water resources of the southern continent led to early private agreements to buy or share water rights throughout the country. If a stream ran through a person's land, neighbors could pay to use the resource, thus ensuring a relatively fair division of resources and allowing the enrichment of whole regions, rather than just the lucky few with direct access. In 1994, water rights were made separate from land rights in order to facilitate trading. Many trades now take place between government and commercial enterprises rather than between private citizens.

Water rights and entitlements can be bought and sold for profit.
Water rights and entitlements can be bought and sold for profit.

In California, water trading in the southern half of the state has always been a controversial issue. Farmers in the broad valleys of central California receive water at a subsidized rate, in order to facilitate the necessary job of providing food and livestock through farming. Southern California, with several large cities and a history of long-lasting drought, has often posed an interesting conundrum for farmers receiving low-price water: In some cases, it is far more profitable for the farmers to sell the water to city providers than to actually grow crops.

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Water trading may also sometimes be related to an environmental concept known as water quality trading. This is a means of incentivizing businesses to improve water quality based on set regulations. Water quality trading refers to the use of quality credits that can be traded between businesses with high pollution reduction costs and others in the same watershed. Businesses that have low-cost means of reducing pollution are paid to do so by companies that have high pollution reduction costs, thus creating revenue for the seller and cost-savings for the buyer.

Water trading, and even water quality trading, remain quite controversial in some areas. While critics of trading suggest that markets should not be allowed to play dice with one of the few things absolutely necessary to human survival, water quality trading critics claim that allowing polluters to pay off smaller businesses is an interim solution at best. Despite these serious critiques, the trading of water rights and pollution credits appears to be gaining in popularity each year.

Contaminated tap water.
Contaminated tap water.

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