A role for water markets in enhancing water security in the western United States?: Lessons from the Walker River Basin

In many semi-arid, snow-fed river basins around the world, climate change and shifting water use priorities are exacerbating competition for scarce water resources (Barnett et al., 2008; Mankin et al., 2015; Schilling, 2018). These dynamics challenge water security, defined as ‘the availability of an acceptable quantity and quality of water for health, livelihoods, ecosystems and production, coupled with an acceptable level of water-related risks to people, environments and economics’ (Grey & Sadoff, 2007, pp. 547–548).

In the western United States, among other water scarce regions, political actors have begun experimenting with approaches for reallocating water to enhance water security. Among the most prominent of these are water markets, defined as economic instruments that facilitate voluntary transfers of water, typically with the goal of improving water use efficiency (Chong & Sunding, 2006; Marston & Cai, 2016). However, the broad implementation of water markets in the western U.S., like other areas around the world, has been limited (Ghosh, 2019; Schwabe et al., 2020), due in part to uncertainties around their local feasibility and social acceptability (Wheeler, 2021; Zheng et al., 2021). Indeed, without incorporating considerations of regional context into market design, water markets are unlikely to be implemented widely or in ways that impact water security (Gerlak et al., 2018). Governments and other organizations must therefore understand the perceptions of key actors in the water sector in order to assess the practical feasibility, desirability, and impacts of various market designs.

To contribute to this understanding, we analyze diverse actors’ perspectives on water marketing in the empirical context of the Walker River Basin, which spans the California-Nevada border in the western U.S. This basin is characteristic of other regional basins in that its water supply originates as winter snowpack and is used primarily for irrigated agriculture. Additionally, the basin is experiencing shifts in the timing, and potentially volume, of streamflow, as well as growing demand for water uses that were not historically recognized, such as environmental restoration. There are also multiple water markets currently in place in the Walker River Basin, making it an ideal case to explore actors’ perceptions of different market designs.

Through 30 in-depth interviews with actors from key sectors in the Walker River Basin, including agriculture, environment, tribal, government, and research, we assess community perceptions of (i) traditional and alternate water allocation institutions, including water markets; and (ii) different water market designs. We expect that having some level of dissatisfaction with traditional water allocation institutions may make actors more supportive of the establishment of water markets; however, we also expect actors’ preferences for different market designs to vary based on their own values and experiences.

After introducing the practical and theoretical contexts and methods for this study, we present our results and discuss implications for water management in the western U.S. and beyond.

The predominant institutional framework for water allocation in the western U.S. is prior appropriation (PA), a doctrine established in the mid-19th century to encourage economic development and prevent water speculation (Burness & Quirk, 1979; Tarlock, 2000). Under PA, water is allocated based on priority, meaning that those first to establish claims to water have the highest priority rights to use that water. When appropriated rights exceed available water supplies, water deliveries are curtailed based on the priority date of the right, meaning that ‘senior’ right holders with earlier claims are typically more water secure than their ‘junior’ counterparts.¹ A water right also defines the source of water, or the amount that can be legally diverted annually, and the place and purpose of use, which must be deemed ‘beneficial’ (Schilling, 2018). Historically, most beneficial uses were consumptive, meaning that water had to be diverted from a stream and used elsewhere, such as on agricultural lands. PA also dictates that a water right holder must use their full allocation or risk forfeiture. While intended to discourage water speculation, this ‘use it or lose it’ rule has been criticized for incentivizing overuse by individuals seeking to maintain their full water right despite lower water needs (Tarlock, 2001).

While irrigated agriculture has been, and remains, the dominant water use in the western U.S., water is increasingly sought for other uses, including municipal and industrial development and ‘instream flows’ to support environmental preservation and recreation (Smith, 2019; Lane & Rosenberg, 2020). At the same time, climate change is increasing uncertainty around water availability (Dettinger et al., 2015; Li et al., 2017). These dynamics have led scholars and managers alike to investigate ways to more efficiently and equitably manage scarce water supplies. PA allows water rights to be bought and sold as real property, and for the place and purpose of use to be transferred, as long as no harm (i.e. no net loss in water) occurs to other users on the system (MacDonnell, 1999). This characteristic has facilitated the development and use of market-based water reallocation mechanisms to cope with water supply and demand changes (Anderson et al., 2019; Koebele et al., 2021).

Water markets aim to reallocate water via the voluntary trade of water rights. They depend on differences in the marginal value of water across water uses and sectors to incentivize trade, which typically results in the movement of water to its highest valued uses (Schwabe et al., 2020). Water markets have been used in the western U.S. to transfer water among users in the agricultural, municipal, industrial, and environmental sectors, with most water being moved within or out of the agricultural sector in these transactions (Jones & Colby, 2010; Ghosh, 2019; Smith, 2019; Lee et al., 2020). Although PA has historically supported permanent transfers (sales) of water rights, some markets also facilitate temporary water transfers (leases) that allow the water right holder to retain their water right asset despite use elsewhere (Hansen et al., 2014; Colby & Isaaks, 2018).

While some water markets in the western U.S. have seen robust trading activity (Debaere & Li, 2020), water trading generally remains thin. For instance, the volume of trade from 1987 to 2008 in Arizona, California, Colorado, Nevada and Texas annually represented only 5–15% of total diversions (Grafton et al., 2012). Schwabe et al.’s (2020) more recent analysis of trading activity in Texas, California, and Arizona found that the volume of water transferred is only 2–4% of the total water used in each state and that trading activity actually declined during California's most recent drought (2012–2015) despite rising market prices. Factors such as water conveyance infrastructure limitations, difficulties with acquiring information necessary for transfer approvals, and uncertain property rights can also increase the costs of trade and decrease market activity, especially around temporary leases (Jones & Colby, 2010; Womble & Hanemann, 2020). Yet, some studies find leases to be more prominent than sales (Schwabe et al., 2020), and many scholars view leasing as a promising tool for responsive and adaptive water management under changing supply and demand conditions (Libecap, 2018; Anderson et al., 2019).

Much work remains in assessing how water markets can be designed to overcome the challenges described above to enhance water security in the western U.S. A key part of this work includes using participatory and collaborative research methods to understand the perceived opportunities and obstacles associated with water markets by potential actors who are involved in or can influence water trading, as well as their preferences for different market designs, in their local context (Grafton et al., 2020; Singletary et al., 2022).

This study analyzes local actors’ perceptions of the need for alternative water allocation institutions, including water markets, as well as their preferences for different market designs, within the Walker River Basin. We first describe this empirical context, followed by our data collection and analysis methods.

The Walker River Basin is a closed basin that covers roughly 4,270 square miles in California and Nevada (see graphical abstract for a map of the basin). The headwaters are located in eastern California, though approximately 75% of the basin's drainage area is in west-central Nevada. Across these states, the Walker River supplies water for irrigated agriculture, several rural communities, three Native American reservations, state-managed recreational areas, and aquatic and riparian habitat before terminating in Walker Lake.

Water law in the Nevada portion of the basin, the primary focus of this study, is broadly governed under PA by the Nevada Division of Water Resources (Nevada Division of Water Resources, 2021). However, a 1919 federal decree divided the Walker River's surface flow among 151 users and established water rights for the Walker River Paiute Reservation. In the same year, the Walker River Irrigation District (WRID) was formed to oversee 235,000 acres of water-righted lands, including 80,000 irrigated acres, and to manage water delivery infrastructure in the basin's two major agricultural valleys (Bryan, 2018). The Walker River Decree has since been amended to incorporate newly adjudicated rights and establish seniority for the Walker River Paiute Tribe, who continues to engage in litigation to expand their irrigated acreage (DePaoli, 2016; Puglielli, 2019). The amended Decree also created the Walker River Commission and the U.S. Board of Water Commissioners to oversee its administration by an appointed Federal Water Master.

During the 1930s, two reservoirs, Bridgeport and Topaz, were constructed in the upper Walker River Basin to store spring runoff for use later in the irrigation season by non-tribal irrigators who hold ‘storage water rights’ (Horton, 1996). In addition to these reservoirs, the basin contains substantial groundwater resources, including primary groundwater rights that are standalone rights appurtenant to land and supplemental groundwater rights designed to augment Decree rights in water-short years (Carroll et al., 2010).

Critically, over a century of upstream diversions has reduced flows to Walker Lake, shrinking its surface area by half and reducing its volume by 90% (Walker Basin Conservancy, 2022). Walker Lake's ecological health has declined as a result (Sharpe et al., 2008), severely impacting local wildlife, including a fishery that supports a threatened cutthroat trout population and an important migratory bird habitat (Allander et al., 2014). These changes have negatively affected the region's tourism and recreation economy (Eiswerth et al., 2000), causing local governments and environmental advocates alike to demand water be transferred out of irrigated agriculture to maintain and restore Walker Lake. Like other basins in the western U.S., climate change has also exacerbated water management issues in the Walker River Basin, causing more variable snowpack volumes, earlier snowmelt, and higher air temperatures, in addition to extended drought (Barnett et al., 2008).

Several water markets have been implemented in the Walker River Basin to meet agricultural and environmental water management goals under these changing water supply and demand conditions (Table 1). Two of these water markets are well-established and provide opportunities for permanent water transfers and temporary leases, primarily among agricultural uses. First, since water law was first codified in Nevada, permanent transfers (Table 1, Market 1) have been allowed pending no third-party injuries, as determined by the Nevada State Engineer's Office. The Federal Water Master and the U.S. Board of Water Commissioners are also involved in transfer approvals that affect the enforcement of the Walker River Decree. A second market facilitates temporary trading of ‘storage’ rights in the district's two major reservoirs among members of WRID, pending approval of the WRID board at its monthly meetings (Table 1, Market 2).

Recently, two additional water market arrangements have been implemented to increase flows to Walker Lake. These markets are funded by the 2005 U.S. Desert Terminal Lakes Program (Public Law 109-103, 2005), which authorized more than $500 million to the U.S. Bureau of Reclamation to support restoration efforts, including funds for the National Fish and Wildlife Federation's (NFWF) use in the Walker Basin. NFWF created the Walker Basin Conservancy (WBC), a locally based non-profit organization, to implement the two new water markets. In the first, the WBC can purchase water rights from willing sellers and permanently transfer them to enhance environmental flows to Walker Lake, requiring approved changes in place and purpose of use (Table 1, Market 3). The WBC also works to revegetate the land from which the water was removed with native plant species to reduce negative impacts associated with drying historically irrigated lands. Additionally, in collaboration with WRID, the WBC administers a pilot Stored Water Leasing Program (SWP; Table 1, Market 4) in which storage water right holders can lease water to the WBC annually for Walker Lake restoration purposes. The SWP was authorized to run for three non-consecutive years, with the goal of collecting information to investigate the feasibility of a longer-term temporary leasing market for stored water.² As of 2022, the WBC has acquired 53% of the water needed to restore Walker Lake (estimated at 50,000 acre-feet per year of increased flows) through these combined programs (Walker Basin Conservancy, 2022), with a price tag of $76.7 million in federal funding (National Fish & Wildlife Federation, 2022).

As part of a large, interdisciplinary project on western water management under climate change, we conducted 30 in-depth interviews (Dunn, 2005) with actors representing the major water-use sectors in the Walker River Basin – agriculture, environmental, tribal, government, and research – between May and August 2020. We sought to interview individuals who either (i) consume, deliver, protect, or manage a large quantity of water; (ii) may pursue litigation that impacts water management; (iii) possess expertise on issues pertaining to water markets and related water management issues in the basin; or (iv) maintain roles that influence systemic capacity to adapt. We initially identified these actors through a review of the secondary literature and recruited them to participate via an email invitation that included a one-page description of the research, as well as a link to the project website where they could learn more about the project and investigators. We expanded our purposive sample using snowball sampling (Noy, 2008) until reaching a point of information saturation where no major new perspectives were heard and no additional subjects were willing to participate.

Twenty-five interviews were conducted using Zoom video conferencing software, three were conducted by telephone, and two were conducted in-person. Three interviews included two participants from the same organization, for a total of 33 participants.³ The interview procedures were approved by the authors’ Institutional Review Board, and all interviewees consented to participate. The interview questionnaire (Supplementary Appendix A) was drafted by the authors, with input from the broader research team.

All interviews were audio-recorded, transcribed, and coded using NVivo Qualitative Analysis software according to an a priori codebook developed by the research team (see Supplementary Appendix B for codes used in this analysis) based on the research questions and relevant literature. The coding process allows for complex, narrative data to be sorted into thematic categories so they can be analyzed more systematically (Glaser & Strauss, 1999). Three authors collectively coded one interview to ensure reliability and consistency and to reduce bias; then, one author coded the remainder of the interviews. Questions that arose during coding were discussed by all researchers and resolved through consensus. Coded data were analyzed using constant comparative analysis, a technique used to identify themes, patterns, and relationships in qualitative data (Miles et al., 2013), such as patterns in actors’ perceptions within and across sectors.

Here, we analyze coded data from questions about interviewees’ (i) perceptions of current water allocation institutions, including if and where change is needed; and (ii) preferences around existing water markets in the basin. When illustrative quotations from interviews are provided to substantively demonstrate the data associated with detected patterns in our Results and Discussion section, each quotation is marked with an alphanumeric ID that signifies the interviewee's sector (Table 2) and a randomly assigned interview number (i.e. AG_01) to demonstrate that data were derived from different interviews. This approach allows for reporting of de-identified responses in a way that protects subject confidentiality while bringing interviewees’ voices to the fore.

Given the changing water supply and demand dynamics in the Walker River Basin, we asked interviewees for their perspectives on current PA-based water allocation institutions in the basin, including whether they perceive the need for any revisions or changes, at any level, that could help enhance water security. A general theme heard from at least some actors is that PA is outdated, at least in some respects, and may need to be adapted to effectively reallocate water under changing water supply and demand conditions:

At the same time, interviewees from all sectors noted that substantially modifying the PA system of water rights would be exceedingly difficult due to its historical embeddedness and complex evolution, including through contentious litigation spanning decades. This perspective was summarized most vividly by government actors tasked with administering water rights:

Given these challenges, it is unsurprising that interviewees generally focused on potential changes to water allocation institutions at the state or local (basin) level. At the state level, interviews mentioned the desire for improved coordinated management of surface water and groundwater, improved groundwater use monitoring, and increased communication and transparency among water managers and users. At the basin level, interviewees suggested a variety of potential modifications to the Walker River Decree. For instance, some environmental actors suggested that the Decree could be modified to allocate water to environmental flows for the restoration of Walker Lake as a beneficial use, despite its historical exclusion:

However, similar to the above discussion about modifying PA, multiple interviewees reinforced the general political impracticality of ‘re-opening’ the Walker River Decree, primarily because of anticipated resistance from agricultural water users who ‘are really worried about unintentional consequences from opening up those doctrines’ that historically prioritized their water uses (GT_01). However, some agricultural actors still suggested revisions to the Decree, such as increasing their flexibility to irrigate earlier in the season to match changing snowmelt timing and overcome challenges associated with limited water storage capacity:

In addition to potential Decree changes, actors from multiple sectors also emphasized that water trading, including through the types of markets already in place within the Walker River Basin, could be a feasible way to address water security issues under changing needs:

However, interviewees from multiple sectors also noted challenges with water trading broadly, such as difficulties in verifying ‘no third-party injury’ or the potential for permanent degradation of fallowed agricultural lands – an issue particularly salient among tribal actors who participated in a previous experimental water leasing and fallowing program on their reservation that negatively impacted their lands:

In sum, actors across sectors generally perceived the need to modify traditional water allocation institutions to meet changing supply and demand dynamics, but they openly recognized the political obstacles to modifying PA. Many were supportive of changes at the state and local levels, which they perceived to be more feasible, though not free of challenges.

To better understand actors’ perceptions of water markets as a potential solution to water security challenges, as well as to assess their preferences around market design, we asked interviewees about the two newer water markets in the Walker River Basin (Table 1, Markets 3 and 4), which aim to increase flows to Walker Lake. These markets represent the greatest departures from traditional water allocation institutions while operating alongside them; thus, actors often compared traditional with newer water markets in their responses.

Interviewees’ responses were the most detailed – and most conflicting – in their discussions of the WBC permanent acquisition market (Table 1, Market 3). All environmental actors, as well as some tribal and government actors, described this market as a way to balance preserving the basin's historical agricultural economy with new or historically underrecognized demands (i.e. protecting natural resources and cultural values associated with Walker Lake), in turn increasing basin-wide water security. Some environmental and tribal actors also emphasized the WBC's focus on revegetating the agricultural lands from which they purchase and remove water, and converting some of those lands to broader uses, such as a state park. Ideally, this strategy reduces ‘buy and dry’, a term used to capture the negative effects of permanently removing water from irrigated lands via traditional water rights sales (Table 1, Market 1):

However, environmental, tribal, and government actors all noted challenges for administering the permanent acquisition market, such as the extensive time and cost involved in negotiating deals with willing sellers, the legal challenges associated with acquiring the necessary approvals to actually transfer and deliver acquired water to Walker Lake, and the lack of adequate fiscal resources to operate the market at the scale needed for meaningful restoration efforts. Critically, some tribal actors also felt that the Walker River Paiute Tribe was left out of the decision-making and market design process, despite the fact that permanent acquisitions may impact their water rights. These comments suggest that while WBC's permanent acquisitions water market created some benefits for Walker Lake, the feasibility of administering it in the long term may be limited.

Agricultural actors overwhelmingly emphasized the permanent acquisition market's negative impacts to agricultural livelihoods, land productivity, surrounding rural communities, and the basin's pastoral environment. Many of these criticisms also questioned the reality of WBC's revegetation efforts:

Some agricultural actors even argued that Walker Lake is ‘beyond saving’, essentially suggesting that even if the WBC was able to acquire substantial water from willing sellers through the market, they would still be unable to achieve their management goals:

Notably, a minority of agricultural actors expressed positive perceptions of, or at least interest in, the WBC permanent acquisition market. Some opined that generational changes were leading to a moment where a large amount of agricultural land might be retired, causing an increase in water rights available for sale in the basin. In this context, the market provided an opportunity for willing water right sellers to potentially benefit financially to a greater degree than they would by selling their water rights within the agricultural sector. Others focused on how the acquisition market creates options that increase flexibility in water management more broadly:

In contrast to the WBC permanent acquisition market, questions about the SWP (Table 1, Market 4) elicited less criticism from agricultural actors. Although the SWP is also designed to increase environmental flows to Walker Lake, both agricultural and environmental actors highlighted the potential financial benefits of leasing surplus storage water through this market, especially because leasing decisions could be changed annually to reflect water availability and agricultural market conditions:

Critically, environmental actors also described how the SWP, designed as a fairly low-risk ‘demonstration’ program, catalyzed a broader conversation between agricultural and environmental interests about water security solutions that could benefit both parties. However, the pilot market was run for the first time in a very wet year, which may have increased participation simply because individuals had more surplus water:

Criticisms of the SWP from across sectors concerned the challenges with administering the market, including securing a steady stream of public funding necessary to support it; the need to get information on water availability earlier to improve lessor decision making; and the need for a more reliable source of water, other than storage, to restore Walker Lake:

Taken together, these data suggest that diverse actors are generally accepting of changes to water allocation institutions that rely on voluntary, market-based mechanisms to cope with local water security challenges, despite recognized challenges. Regarding market design, markets supporting temporary leases may be more palatable to diverse actors than permanent acquisitions, even if they are not the ideal mechanism for securing reliable water supplies for environmental purposes. Moreover, experimental markets, such as the SWP, can help to increase dialogue about broader water issues in the basin and potentially open the door for the development of more permanent programs in the future.

As water supply and demand dynamics change throughout the western U.S. and other semi-arid regions, many communities will face greater water insecurity. To alleviate this, we must critically assess existing and emerging water allocation institutions for their ability to meet the needs of diverse water users while reducing risk (Grey & Sadoff, 2007). Our analysis of actor perspectives in the Walker River Basin points to two key findings. First, most interviewees identified issues with PA as the dominant water allocation institution. However, interviewees were generally pragmatic: instead of seeking to dismantle and/or replace PA, most suggested that feasible and desirable changes were more likely to occur at the state and local level – such as the development and implementation of voluntary water markets. Second, despite a general acceptance of water markets as a water reallocation tool, actors’ preferences for market designs diverged based on their water use values and experiences.

Agricultural actors in the Walker River Basin generally expressed a desire for more flexibility in water management under changing supply conditions, but they held mixed views on the two newer water market programs as mechanisms for achieving this. While some noted that the WBC permanent acquisition program provides a potentially lucrative means for retirement or exit from the agricultural industry, most agricultural actors expressed concerns about the long-term impacts of permanent transfers on the future of the basin's agricultural-based economy, as well as about the viability of restoring Walker Lake through the permanent acquisition and transfer of water. More agricultural actors preferred the SWP's temporary leasing arrangement, even though its primary goal is also restoring Walker Lake, because it is a pilot program that does not threaten to dry-up agriculture in the long-term while also creating a potentially lucrative opportunity for leasing surplus water.

Environmental actors supported both the permanent acquisition program and the temporary SWP as ways to meet their core goal of restoring Walker Lake. Although temporary storage water leases are comparatively less reliable than permanent acquisitions, many environmental actors expressed high levels of support for the SWP, in part because they recognized the substantial political and legal challenges associated with the permanent transfer of water rights to the environment. Some actors even suggested that the SWP was as much an effort to begin overcoming these hurdles and building trust in the community around the provision of environmental flows as it was a way to actually get water to Walker Lake. Tribal actors were also generally supportive of both of the newer markets, despite irrigated agriculture playing a major role in sustaining their current livelihood, given the historical and cultural importance of Walker Lake. However, the usefulness of the SWP or any other leasing program hinges, to a great extent, on non-tribal agricultural actors’ willingness to lease water in dry years, which are expected to become more frequent as temperatures warm in the region.

These findings affirm that agricultural actors maintain a major – and widely recognized – influence over water management in the Walker River Basin, as is the case in much of the western U.S., due to precedents set by historical PA-based water allocation institutions. They also suggest a firm commitment by actors across sectors to continue to manage water as private property, despite the recognition of interrelated water security challenges. Together, these findings highlight the importance of local input in the design and operation of water markets (Singletary & Narayanan, 2003), especially when long-standing water disputes and litigation are driving factors behind their development, as was the case in the Walker Basin. Developing knowledge and goodwill among competing actors via pilot programs, such as the SWP, may provide a potential path forward toward increased co-development of water market mechanisms.

Highly functioning water markets – in theory, those characterized by a clearly defined set of property rights – can improve information access and transparency around water pricing, while reducing transaction costs associated with water transfer approval processes to mitigate third-party injury (Libecap, 2018; Ghosh, 2019; Lee et al., 2020). Our findings suggest that the markets in the Walker River Basin, based on these principles, may provide a feasible avenue for reallocating water and enhancing water security in the basin. More comprehensive inventories of basin hydrology, basin-scaled climate projections, and water supply forecasts can support the use of markets in places like the Walker River Basin (Carroll et al., 2010) by improving agricultural actors’ decision-making about water conservation and potential trading opportunities.

These findings also highlight the need for more context-sensitive, participatory research on the multiplicity of tradeoffs that agricultural users – as the primary sellers and lessors – must balance when making decisions to participate in different markets, as well as more in-depth studies of how elements of water market design may increase or decrease transaction costs for participants. There are also limitations of this research that should be considered in future studies. To fully understand the extent to which water markets can address challenges associated with water security amidst changing water supply and demand in the western U.S., more research is needed in larger semi-arid, snow-fed river basins that include greater municipal demand. Furthermore, while our sampling strategy aimed to recruit participants representing the primary water interests in the Walker River Basin, our sample may not be fully representative of the views of all actors, a limitation that was exacerbated by the COVID-19 pandemic. Despite these challenges, this study provides important insight into actor perceptions of existing and emergent water allocation institutions. It suggests that changing water supply and demand has the potential to spur changes in water management, such as through the implementation of water markets, that may enhance overall water security if their design is tailored to reflect local needs and preferences.

Data cannot be made publicly available; readers should contact the corresponding author for details.

The authors declare there is no conflict.