Hydrology and the Design of Efficient Water Transfer Policy

Abstract

The use of water transfer mechanisms, such as water banks and markets, as a method to promote the efficient use of scarce water resources has become increasingly more common during the last decade. Examples include: agriculture-to-urban transfers in the Colorado Canal, the electronic market, WaterLink, in Westlands Water District, California, and Idaho’s District 1 water bank. The goal of these programs is to allow the transfer of water from low to high value uses, thereby increasing the benefits derived from water use. Unfortunately, the economics literature on water transfers has only given a cursory nod to how the proper design of water policy relates to the hydrology of a water supply system. Return flows are a key hydrologic factor that should be accounted for to avoid third-party impacts associated with water transfers, where return flows are defined as the portion of diversions that are not consumed and return to the hydrologic system. Other diverters and instream water users often depend on return flows for their water supplies. Consequently, transferring water or changing use patterns may disrupt their supply if the transfer policy does not distinguish between diversionary and consumptive use correctly.