Researchers from the University of North Carolina at Chapel Hill have proposed a new solution to address water shortages during droughts in the Western United States, where economic growth, population increases, and climate changes create challenges for water users. Their idea involves two-way leasing contracts that would facilitate the transfer of water from agricultural areas to urban centers in dry spells and vice versa during wetter seasons, creating advantages for both city dwellers and farmers.
Greg Characklis, a W.R. Kenan Distinguished Professor in environmental sciences and engineering at the UNC Gillings School of Global Public Health and director of the newly formed Institute for Risk Management and Insurance Innovation (IRMII), emphasized, “Water markets play a crucial role in distributing water resources in the Western U.S. and other areas facing water shortages. However, they often do not react quickly enough to drought situations, which hampers effective water reallocation that could significantly mitigate financial repercussions.”
The analysis, published in Earth’s Future, examines the systems that regulate water use in the rapidly developing Front Range of Colorado. It tests two-way option contracts designed to allow water users to adapt swiftly to varying weather conditions. These contracts are established before droughts, yielding cost savings and dependable water supplies for municipalities that may need to obtain water from agricultural producers during dry spells. This approach helps cities avoid the costly development of large water supplies that are seldom utilized. Farmers gain through annual option payments from cities and receive higher payments during drought when the water is needed most. During normal or wet years, excess urban water can be allocated to farmers, enhancing agricultural productivity.
Traditionally, reallocating water through leasing is a lengthy and costly process, particularly in drought situations. Cities often buy more permanent water rights than necessary to ensure they can cater to average demand and maintain a reliable supply in extreme conditions. After investing in these seldom-used rights, the cumbersome leasing process dissuades municipalities from leasing surplus rights back to farmers, negatively affecting long-term agricultural yields. While Western U.S. states are moving toward legislation to streamline the short-term water transfer approval process, new methods are needed to leverage these regulations. This research indicates that innovative contract designs could be a crucial aspect of the solution.
Zachary Hirsch, the study’s lead author and a recent graduate (MS ’23) from the Environmental Sciences and Engineering Department at the Gillings School of Global Public Health, noted, “Two-way option contracts can extend over several years. By obtaining necessary approvals and finalizing terms ahead of a drought, participants can quickly and effectively transfer scarce water resources, thereby minimizing losses.”
This study assessed the model’s efficiency using historical hydrologic data spanning 63 years from 1950 to 2012 in Colorado and concluded it provides a cost-effective and speedy response to changing water conditions, unlike traditional water allocation strategies.
H.B. Zeff, another co-author and the new director of research at IRMII, remarked, “Years of unidirectional and permanent water transfers have had considerable indirect effects on agricultural economies and have fueled conflicts between urban and rural water users. Contracts that allow for reciprocal and adaptive transfers are essential to restoring confidence at a time when cooperative drought solutions are urgently required.”
The research team believes this two-way allocation framework could be applied to various water markets around the United States.
