Climate Variables and Water Market Prices

Project Dates

In spite of harsh conditions created by persistent drought, populations in southwestern states are growing, placing greater burdens on the water supply. Resource managers and policy-makers face the daunting task of ensuring an adequate water supply for the states’ thirsty residents. There are different water supply options when faced with drought. One method of augmenting the water supply involves voluntary water transfers, negotiated between those who possess secure dry-year supplies and those who want to improve the dry-year reliability of their water. Policy-makers can opt to expand water supply through the use of water banks, spot markets, and dry-year options contracts.

To shed light on the economic behavior of water markets during droughts, CLIMAS researchers sought to identify the effects of drought on water prices in three major western water markets: the Colorado-Big Thompson (CBT) project market, the Arizona Type II water market, and the Central Arizona Project (CAP) market. The CBT project is one of the largest and most complex of the U.S. Bureau of Reclamation water projects, diverting water from the western to the eastern slope of the Rocky Mountains. The Arizona Type II market refers to groundwater rights in central and southern Arizona that can be used for non-irrigation purposes only and can only be transferred within a specified, geographically defined management area (referred to as an Adative Management Area). The Central Arizona Project (CAP) refers to the well-known project that distributes allocations of Colorado River water to Arizona tribes, municipalities, and industrial users. The uses of this water are varied, but unlike the CBT and Arizona Type II markets, prices are not freely negotiated.