THE BREN SCHOOL OF Environmental Science & Management
at the University of California, Santa Barbara

Presents

"Smart Markets for Water Resources"

Hosted by Bren Professor Arturo Keller

Summary

Water resources are difficult to manage because they are dynamic, shared, and subject to the tragedy of the commons. Each user’s impacts on other users and the environment are transitory, hard to measure, often unseen, and cumulative. For example, taking ground water near a stream affects the stream immediately, while abstraction far from the stream affects it later. Thus, managing stream flow requires coordination over time.

Reallocating water is equally complicated. Because different users have different effects, users cannot trade one-to-one. Hence, government requires that allocation and trades follow approval processes, which tend to be long and expensive. The associated transaction costs are so high that trading is thin, when it happens at all. Inefficiencies are therefore entrenched, and the environment suffers the consequences. Even where water is most heavily traded, as in Australia, water markets are nowhere near as efficient as other markets.

With analogies to existing “smart” markets in electricity and natural gas, I will present a general framework for water-related markets. The smart market approach drastically simplifies reallocation of shared hydrological resources, guarantees environmental requirements, nearly eliminates transaction costs, and produces correct price signals. It can be operated much more often than other types of water markets, with the consequent gains. It can work within a broad range of existing legal frameworks. Implementation would establish firm boundaries of sustainability for commerce, lower the cost of trade, improve wealth, and greatly improve environmental outcomes.

I will present case studies for ground water allocation, nutrient runoff, sediment runoff, and impermeability from development. I will describe extensions to ground and surface water, and wetlands management. These revolutionary markets rely on existing hydrology models, so they can use all available relevant scientific data. Further, the price signals precisely direct further scientific study. Politics remain an impediment, especially allaying erroneous fears, but these markets are relatively easy to implement technically. I will discuss institutional arrangements, revenue sufficiency, and, if time is available, setting initial allocations.

This work is in collaboration with Mark Milke, Thomas Cochrane, Antonio Pinto, and Ranga Prabodanie.

Biography

John Raffensperger is a lecturer in management science at the University of Canterbury in Christchurch, New Zealand. He received his MBA and PhD in business from the University of Chicago, and a BA in industrial engineering from Northwestern University. His research interests include the management and allocation of fresh water, market models for sustainable fresh water, and operations research as it applies to public policy. Dr. Raffensperger also runs a blog and writes fiction.

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