Using Financial Contracts to Facilitate Informal Leases Within a Western United States Water Market Based on Prior Appropriation

Author:

Zeff Harrison1ORCID,Hadjimichael Antonia2ORCID,Reed Patrick M.3ORCID,Characklis Gregory W.14ORCID

Affiliation:

1. Center on Financial Risk in Environmental Systems Gillings School of Global Public Health and UNC Institute for the Environment University of North Carolina at Chapel Hill Chapel Hill NC USA

2. Department of Geosciences College of Earth and Mineral Sciences Pennsylvania State University State College PA USA

3. Department of Civil and Environmental Engineering School of Engineering Cornell University Ithaca NY USA

4. Department of Environmental Sciences and Engineering Gillings School of Global Public Health University of North Carolina at Chapel Hill Chapel Hill NC USA

Abstract

AbstractThe ability to reallocate water to higher‐value uses during drought is an increasingly important “soft‐path” tool for managing water resources in an uncertain future. In most of the Western United States, state‐level water market institutions that enable reallocation also impose substantial transaction costs on market participants related to regulatory approval and litigation. These transaction costs can be prohibitive for many participants in terms of both costs and lengthy approval periods, limiting transfers and reducing allocation efficiency, particularly during drought crises periods. This manuscript describes a mechanism to reduce transaction costs by adapting an existing form of informal leases to facilitate quicker and less expensive transfers among market participants. Instead of navigating the formal approval process to lease a water right, informal leases are financial contracts for conservation that enable more junior holders of existing rights to divert water during drought, thereby allowing the formal transfer approval process to be bypassed. The informal leasing approach is tested in the Upper Colorado River Basin, where drought and institutional barriers to transfers lead to frequent shortages for urban rights holders along Colorado's Front Range. Informal leases are facilitated via option contracts that include adaptive triggers and that define volumes of additional, compensatory, releases designed to mitigate impacts to instream flows and third parties. Results suggest that more rapid reallocation of water via informal leases could have resulted in up to $222 million in additional benefits for urban rights holders during the historical period 1950–2013.

Publisher

American Geophysical Union (AGU)

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