Water markets and freshwater ecosystem services: Policy reform and implementation in the Columbia and Murray-Darling Basins

Heightened competition for freshwater supplies has intensified water scarcity and compromised the ability of freshwater ecosystems to generate goods and services required for human well-being. Water markets and accompanying water rights reforms have featured prominently in the establishment of robust water allocations to restore freshwater ecosystem health. Because many freshwater ecosystems have already experienced severe over-allocation and alteration, institutional frameworks for water allocation have authorized and implemented incentive-based water transfers to restore flow, fisheries, wetlands, and other ecosystem services. This paper develops a conceptual framework to examine policy reform and implementation in two case studies of market-based environmental water allocation. This analysis builds on and distills the findings of a September 2007 workshop in Brisbane, Australia on environmental water transfers by clarifying enabling policy and regulatory reforms and by examining factors that impact implementation effectiveness. Two case studies were selected in water stressed basins – the Columbia (U.S.A) and Murray Darling (Australia) Basins – where transactional approaches to environmental flow allocation first emerged and where shared political economic and physical conditions lend a strong analytical basis for comparison and limited generalization. The case studies draw upon practitioner perspectives and previous policy and economic analysis. A common set of policy and regulatory reforms has occurred in both cases – albeit in different forms and via distinct paths to develop three enabling conditions: (1) establishment of rights to and limits on freshwater extraction and alteration; (2) recognition of the environment as a legitimate water use; and (3) authority to transfer existing water rights to an environmental purpose. However, policy and regulatory reform proves to be necessary but insufficient to catalyze effective implementation. Implementation effectiveness in the Columbia and Murray Darling Basins has been determined by another set of conditions, including driving forces, barriers, and adaptations. These conditions include: factors driving demand for environmental water allocation; administrative procedures, organizational development and institutional capacity to effect transfers; and adaptive mechanisms to overcome a range of legal, cultural, economic, and environmental barriers, such as the need to minimize or offset negative impacts on existing water users and local communities. The case study analysis suggests that environmental water transactions can play an important role in establishing environmental water allocations, although water markets require ongoing institutional capacity and adaptive governance. As market-oriented approaches to freshwater ecosystem services have proliferated beyond these two regions in recent years, a research need has developed to gauge the transferability of these enabling conditions and implementation lessons in disparate physical and political economic settings.