Managing climate water stress: A multi-year analysis from the American Southwest

Climate-driven water stress and prolonged drought are intensifying competition between agricultural and urban users in arid regions worldwide. Rising populations and economic activity place mounting pressure on traditional water allocation methods, which often struggle to balance efficiency, equity, and sustainability. While prior research has examined future water demand and compared institutional approaches such as proportional shortage sharing and market-based transfers, few studies have designed and validated hydroeconomic models capable of guiding least-cost adaptation strategies at the basin scale under severe competition. Our study develops and applies a novel hydroeconomic optimization model to evaluate two alternative shortage-sharing mechanisms—unrestricted water trading and proportional sharing —using the Rio Grande Basin in the American Southwest as a case study. Simulations over a four-year period show that proportional reductions impose uniform cutbacks of 30%, while unrestricted trading reallocates water from farms to cities with cash compensation, significantly reducing economic damages across sectors. Findings demonstrate the efficiency gains of market-based institutions in reallocating water during shortages and provide actionable policy insights on water market design, investment timing, and institutional reform to enhance resilience in drought-prone basins.