Climate Change and Water Resources: Some Adaptation Tools and Their Limits

Climate change will affect both the long-term availability and the short-term variability of water resources in many regions; these impacts may already be manifest in some places (Solomon et al. 2007). As economists interested in climate change, our research requires understanding not just the physical impacts of climate change on water resource systems, but also how these physical impacts on water resources influence human behavior. The combination of physical and behavioral responses will determine the ultimate economic impact of a changing global climate. Some behavioral responses are potentially adaptive. For example, many cities in the northeast United States are planning and constructing green and gray infrastructure in the aftermath of 2012’s Superstorm Sandy to mitigate the impacts of future strong storms, which are expected to occur with greater frequency. Climate-resilient neighborhoods and city initiatives have been funded by foundations, state agencies, federal agencies, and international institutions worldwide. But what do we really know, empirically, about the degree to which adaptation to a challenging new hydrological regime through infrastructure mitigates its impacts? The state of California has invested billions of dollars in pipelines and other infrastructure since 1960 to buffer the drier south against weather shocks, but during the current extreme drought, that system has delivered little water to southern California farms and cities. Projects like these may also encourage water-intensive agricultural and urban development— economists demonstrated this type of effect more than two decades ago in response to flood control and drainage projects in the Mississippi Delta (Stavins and Jaffe 1990). Thus, infrastructure-related solutions are potentially losing propositions when the distribution of extreme events shifts to the right, and infrastructure based on the old distribution draws additional people and assets into harm’s way. Such behavioral reactions to infrastructure investments must be accounted for when projects are planned. Even if individual regions and countries make optimal decisions about water infrastructure investments, taking expected future climate and behavioral impacts into account, infrastructure investments where countries share water resources are unlikely to be efficient. Recent research suggests that countries may not adequately consider the welfare of downstream riparians when they place dams on international rivers—the ability of countries to partially discount the costs of these large water projects by exporting some negative impacts downstream appears to encourage dam construction upstream of international borders (Olmstead and Sigman 2015). Even if dams reduce vulnerability to weather shocks locally, do they make things worse for residents of countries further downstream? The net welfare impacts of these potentially adaptive investments will depend on the answer to questions like this one. Water prices and markets are additional potential adaptation mechanisms. How well do these institutions currently deal with water scarcity? Unfortunately, marginal water prices in the municipal sector tend to be lower, on average, in the western United States than in humid regions (Bell and Griffin 2011)—when water is scarce, the sympathies of water managers may lean more toward maintaining affordability for existing uses (agricultural, industrial, and residential) than toward recovering the full opportunity cost of water supply, which might prompt locally (and politically) painful changes in existing water uses. If prices are to be used to manage future scarcity or increases in variability, we need a better understanding of how current barriers to inefficient pricing can be overcome. Water markets have emerged in some arid regions—the western United States, Australia, and Chile, for example. Activity in these markets has typically been limited, making it difficult for economists to draw any firm conclusions about how much they have really mitigated the economic impact of water scarcity. Preliminary evidence suggests that U.S. western water markets have moved water from lower-valued agriculture to higher-valued urban uses over the past 20 years, though trading volumes remain low (Brewer et al. 2008). Water rights trades by sector for 12 western states between 1990 and 2010 are described in Fig. 1. The highest volume of trading has occurred in Arizona, California, and Texas, with most demand coming from cities. Fig. 2 shows the variation in prices across trades. Prices tend to be highest for trades from agricultural to urban uses and lowest for trades within the agricultural sector.