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Water trading is the process of buying and selling of water access entitlements, also often called water rights. The terms of the trade can be either permanent or temporary, depending on the legal status of the water rights. Some of the western states of the United States, Chile, South Africa, Australia and Spain's Canary Islands have water trading schemes. Some consider Australia's to be the most sophisticated and effective in the world. Some other countries, especially in South Asia, also have informal water trading schemes.

The first time that water access entitlements were separated from land title in Australia was in 1983, when South Australia introduced a permanent water trading scheme.[1]

Economists argue that water trading can promote economic growth because giving water a price acts as an incentive for users to allocate resources from low value activities to high value activities. There is vigorous discussion about the extent to which these economic mechanisms are actually effective in practice, the possible social outcomes of water trading schemes (especially in terms of monopolisation of water rights by richer water users), and the ethics of applying economic and market principles to such an important resource as water.



Like many other countries, Australia’s irrigation sector was subject to centralised control for more than a century. Many irrigation settlements were placed in inappropriate parts of the landscape where the risks of waterlogging, land salinisation or river salinisation were high and returns from production were low. Farm sizes on irrigated settlements were also initially based on non-commercial criteria like ‘the home maintenance area’ (the maximum area necessary to support one family – as judged by government). Irrigators were in this way condemned to a frugal existence from the start. Changing commodity markets and above all changing irrigation technologies amplified these initial errors and left Australian irrigation with difficult adjustment problems.

Australia’s institutions, and rhetoric, are now geared to the market with the benefits of trade between ‘willing sellers’ and ‘willing buyers’ extolled by policymakers. Irrigators who can generate higher returns are now buying water from those who believe they can make more money by selling their water entitlements rather than using them. Nonetheless, the instinct for central planning lives on and some policy makers are tempted to favour those crops deemed to produce high gross values per megalitre when economics teaches that it is marginal valuations that are important. This distinction is critical because many ostensibly water efficient crops have limited markets. Rather than make judgements about what crops should be grown on farms, economic orthodoxy is to let individual irrigators make their own judgements about whether they can profit from their investment in water entitlements. Australian governments mostly shy away from ‘picking winners’. Nevertheless in popular discussion, there is considerable emphasis on the crops being grown when what matters most for public policy is the amount of water taken from rivers and any externalities associated with irrigation.

Various kinds of market intermediaries facilitate the trade of water, including water brokers, water exchanges and message boards such as It is a decentralized market as one water exchange does not process all trades. A trade may occur between a private buyer and seller, through a broker or through an exchange. Some brokers may use an exchange to locate buyers or sellers.


The Chilean system is characterised by a strongly free-market approach, and has been controversial both in Chile and in international circles. In Chile, under the 1981 Water Code (water law), water rights are private property, separate from land, can be freely traded, are subject to minimal state regulation and are regulated by civil law. During the 1990s, the World Bank and the Inter-American Development Bank actively promoted the Chilean system as an example of effective and efficient water resources management. Although the Chilean model has been recommended for adoption in other Latin American countries, none has yet accepted it in its original form. The proposed transfer of one element of the Chilean model played a role in the 2000 water war in Cochabamba, Bolivia; that which awarded ownership of all water resources to the new concessionaire, International Water. This legal change meant that existing users, which included peasant farmers and small-scale water supply networks, were immediately illegalised, resulting in widespread angry protests.

In Chile, opinion over the effectiveness and the fairness of the water markets model is deeply divided. Specific concerns that have arisen include the hoarding of water rights without using them for speculative purposes and the lack of state regulation to ensure that the market works properly and fairly. Some researchers have argued that the model does deliver economic benefits, but other evidence shows that the system does not work well in practice and that poorer water users (such as peasant farmers) have less access to water rights. Some of these concerns led to the amendment of the Water Code in 2005.

See also




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