Estimating the Adaptive Benefits of Water Market Reform for Irrigated Agriculture

Climate change is expected to increase the scarcity of water in many areas, threatening the viability of irrigated agriculture which is often a dominant consumer of water. By allocating resources to the highest-value use, water markets can potentially play an important role in limiting the economic losses associated with increasing water scarcity, but the adaptive benefits of water market reforms have rarely been quantified. Here we estimate these benefits for agriculture in California's Central Valley. We use data on the observed water demand of more than 10,000 individual water rights holders and model the supply of water to the Valley over the 21 st century using an ensemble of hydrologic model simulations driven by downscaled climate models under RCP 8.5. Reduced stream flow during the irrigation season imposes binding and increasingly tight constraints on the agricultural water supply, particularly in the San Joaquin basin. We estimate the economic losses of irrigation water curtailments under two allocative mechanisms: California's existing prior appropriation system that allocates water first to most senior rights holders, and an alternative market allocation system that allocates water first to the highest marginal value uses.