Two-way water transfers can ensure reliability, save money for urban and agricultural users during drought in Western U.S.

“Water markets are an important tool for allocating water in the Western U.S., and other water-scarce regions around the world, but they are often slow to respond to drought, preventing re-allocation that can substantially reduce financial impacts,” says Greg Characklis, W.R. Kenan Distinguished Professor of environmental sciences and engineering at the UNC Gillings School of Global Public Health and director of UNC’s newly established Institute for Risk Management and Insurance Innovation (IRMII).

The study, recently published in Earth’s Future, considers the hydrologic, engineered and institutional systems that govern water along the fast-growing Front Range communities in Colorado, testing a two-way option contract for water users that can quickly respond to wet or dry conditions. These contracts are signed in advance of a drought and can provide both cost savings and high water supply reliability for cities, which can use them to quickly acquire water from irrigators during dry periods. This arrangement allows cities to forego developing large and expensive supplies that are rarely used. Agricultural users benefit from annual option payments from urban users, and higher fees in dry years when the water is transferred. In normal and wet years, these two-way option contracts result in excess urban supplies being transferred to irrigators who then benefit from higher levels of agricultural productivity in these years.

Historically, reallocating water via water rights leasing is slow and expensive, especially during drought. Municipalities often resort to purchasing many more permanent water rights than needed to meet average demand and ensure reliable supply even under the driest conditions. After purchasing these infrequently used rights, the slow and expensive leasing process deters cities from leasing surplus rights back to irrigators in normal or wet years, which reduces long-term agricultural productivity. States in the Western U.S. have begun passing laws to make the regulatory approval process for short-term water transfers quicker and less expensive, yet new mechanisms have not been established to take advantage of these new laws. This research suggests that innovative new contract structures may be part of the solution.

“Two-way option contracts can be multi-year, and by seeking approval and working out the details in advance of a drought, transfers between mutually agreeing parties can lead to rapid and efficient reallocation of scarce water in ways that significantly reduces losses,” says Zachary Hirsch, the lead author and former graduate student (MS ’23) in the Environmental Sciences and Engineering Department at the Gillings School of Global Public Health.

The study evaluated the efficacy of the model across a 63-year observed hydrologic record from 1950 to 2012 in the study region of Colorado and found it to be an efficient and cost-saving tool for both municipalities and irrigators to rapidly respond to the changing hydrologic conditions over time as compared to traditional water allocation practices.

“Decades of one-way, permanent water transfers have resulted in significant indirect impacts to agricultural economies and caused tension between urban and agricultural water users. Contracts that ensure transfers are reciprocal and responsive to changing conditions are key to restoring trust at a time when cooperative solutions to drought are desperately needed,” says H.B. Zeff, another contributing author and IRMII’s new director of research.

The research team says this two-way allocation model can be applied to other water markets across the U.S.