A tale of two rivers: hydro-economic modelling for the assessment of trading opportunities and return-flow externalities in inter-basin water markets

16:15 Wednesday 29 May


Room S2


Arthur H. Essenfelder (Italy) 1; C. Dionisio Pérez-Blanco (Spain) 2; Carlos Gutiérrez-Martín (Spain) 3

1 - CMCC@Ca'Foscari; 2 - Universidad de Salamanca; 3 - Universidad de Córdoba

Water markets are instruments for watershed management and climate change adaptation that can support water reallocation from low to high value agricultural uses. When efficiently designed, water markets offer the means to enhance economic growth, improve social welfare, and promote environmental conservation towards sustainable development. However, unless explicit attention is given to non-market uses or reserves for the public good, water markets may fail to promote sustainable development due to trading externalities arising from the reduction of recoverable return flows.

In inter-basin water markets, the reallocation of water withdrawal entitlements also involves the reallocation of return flows along with consumptive uses, which may impair environmental flows and market uses downstream in the selling area. In this context, accurate quantitative information capable of capturing and describing the socio-economic and environmental water flow dynamics and their interconnections and feedbacks is necessary to support the design and implementation of efficient water markets. To this end, this paper couples, using a sequential modular approach, a Positive Multi-Attribute Utility Programming (PMAUP) microeconomic model with the Soil and Water Assessment Tool (SWAT) eco-hydrologic model to: i) assess the economic viability and water reallocation potential of a return flow-neutral inter-basin water market; and ii) explore the trading-return flow trade-offs that stem from relaxing the neutrality principle.

The capabilities of the coupled model are illustrated with an application to the inter-basin market between the highly profitable and water constrained agriculture of the Segura River Basin (SRB) and the low value-added, relatively water abundant agriculture of the Upper Tagus River Basin (UTRB) in Spain. Both basins are connected through the Tagus-Segura Water Transfer (TSWT), the largest water infrastructure in Spain, and the catalyzer of the largest water market in Spain to date. Results suggest that the consideration of the proposed methodological framework can be an important instrument towards the implementation of effective water markets, particularly in capturing important feedback responses between socio-economic and environmental water flow dynamics, and by supporting the identification of potential water reallocation alternatives.