Differences in Arid Region Water Values Across Sectors: A Discussion of Potential Water Market Activity and Trading Barriers in South Central Texas

In water-scarce arid regions, water trading is often proposed to increase resource use efficiency. For a potential water market to function effectively, several conditions must be met, including clearly defined and limited water rights, varying water values among users, and the absence of barriers to transfer water. Conceptually, when high-value users face water shortages due to drought or limited water rights, they may purchase or lease water rights from low-value users. In this paper, we examine water use values across users in the arid water-scarce region of South-Central Texas, as a case study, using a mix of market and nonmarket valuation approaches. This mix of methodological approaches provides results based on actual purchases, comparable sales, land rental rates, source replacement, and water-conserving investment. Our results show considerable differences among sectoral water use values, with the lowest in agriculture and the highest for municipalities, and energy fracking. These differences suggest the potential for a broader regional water market that would increase water usage efficiency. We also explore explanations for the differences, including a thorough discussion of issues involved with trading restrictions, industry characteristics, and physical geography.