Is Water Market a Panacea?

EghtesadOnline: Geological studies show water shortages in Iran will get worse due to waste and rising consumption.

News ID: ۷۵۰۰۹۶

21 May 2020

How to manage the rapidly dwindling resource has become a nightmare for policymakers and urban managers struggling to do more with less.

According to a report by the Majlis Research Center, the research arm of Iran’s Parliament, a plan to deal with the shortages could be setting up water markets where buyers and sellers can trade water both through short- and long-term leases and permanent sale of their water rights, the Persian-language economic newspaper Donya-e-Eqtesad reported.

The report highlighted the pros and cons of the controversial approach.

On the plus side, the system allows farmers to buy and sell water depending on actual need. Water trade has become a vital business tool for farmers in many countries including Australia (in the Murray Darling Basin, the country's largest agricultural region).

Water markets can encourage efficient water use, the report said, adding that well-structured markets will augment water conservation efforts (that so far have made little, if any, progress).

Water markets can also help allocation of more water to economic sectors with high productivity rates. The agricultural sector, for instance (in Iran), uses more water relative to its economic output than other sectors. Small wonder many environmentalists, conservationists and economic experts have openly questioned the policy of successive governments to allow framing water-intensive crops.

Qassem Taqizadeh Khamesi, director of the National Water and Wastewater Engineering Company of Iran (Abfa), says of the total annual consumption (100 billion cubic meters), 90% goes to farming. "Households and industries account for 7% and 3%, respectively."

The government has been mulling over establishing water markets since 2016 and studies have been conducted.

“The first market will soon be piloted in Khorasan Razavi Province and if the desired results are produced, the approach will be extended across the nation."

Hands-on Experience

Referring to hands-on experience in other countries, the research center said in Australia’s Murray Darling Basin, the government had long monitored the distribution of water rights. However, under the controls, a selected few controlled a large share of the water.

To resolve the problem of over allocation, a free market approach was put in place in the early 1990s. Making water rights available in an open market generally had a positive outcome for the region. It ended the dysfunctional state controls that allocated water inefficiently, and created the conditions wherein demand and supply dictate prices, and farmers seem to respond efficiently.

The research center, however, notes that because the mechanism worked in other countries, it does not necessarily mean that it will be effective in Iran. This is because the country has long been suffering from over consumption and waste plus dangerous over-extraction from renewable and underground water resources (largely due to outdated farming practices).

Iran's annual water consumption tops 100 bcm, of which 49 bcm is from underground resources.

Moreover, the free market approach could lead to speculation, in which some people who have little practical use for water rights hoard it to drive up prices, leaving less (and costly) water for others in dire need.

Needless to say, long-term arrangements (leases) can entail risks for buyers if water demand does not match forecast. Furthermore, the practice also requires storage facilities for surplus water during wet years that is very costly.

The MRC concluded that as climate change takes a high toll and threatens to aggravate the mismatch between water need and availability, water markets promise a means of improving the efficiency and sustainability of water use.

The free market approach, with all its pluses and minuses, should be piloted in different regions before a comprehensive roadmap is devised. Failing to do so and  pushing through a half-baked plan can lead to economic, social and ecological challenges of which Iran already has too many.