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# **Box 3. Water Trading in Colorado's Big Thompson Project**

A notable contrast to the various restricted water right regimes which exist in the western United States is provided by the Big Thompson scheme through which 310,000 acre feet of water have been supplied annually to users in the Northern Colorado Water Conservancy District. The scheme, which brings water from the headwaters of the Colorado River through a tunnel underneath the Rocky Mountains to northeastern Colorado, was partially paid for by subscribers in the water district in return for the right to use the water. Soon after the scheme became fully operational, it became apparent that water demand varied significantly between users and areas within the district. The Northern Colorado Water Conservancy therefore established a system that allowed water rights to be traded on a permanent basis with the only requirements being "beneficial use", no sales outside the District and that users abide by the rules of the Conservancy. A central registry records ownership and ownership transfers. The system has become so refined that a simple postcard is used to notify the Conservancy of a transfer. An important reason for the smooth functioning of this market is that from the inception of this project water users retain rights to any return flows. Therefore while downstream users get the benefit of return flows from water users upstream, they have no rights to them and upstreamn users are free to transfer their rights without the need to compensate downstream users for their loss of water.

An extremely sophisticated market has evolved for this water. Many differen **t** ypes of contracts are used, from straight transfers to the purchase and sale of options to water. Within the Conservancy District all of the complex infrastructure is in private hands. The Conservancy's role is to record transactions and to check that there is no cheating by those taking off water. The system appears to be operating efficiently and although there is undoubtedly an economic cost to owners of water rights not being able to sell their water outside the District, within it water appears to be used at its highest value.

reform are distributed. In addition, the very large number of people affected by any reform make it costly and difficult to reach a solution that is agreeable to most parties. The California case shows that even when institutions are relatively well developed, administrative solutions to apportioning scarce water among different groups can lead to anomalies that defy logic and waste resources.

# _Advantages of Water Markets_

35. Tradable water rights allow the price of water to reflect the value of its alternative uses, which creates incentives to put it to the most productive use. For example, if farmers were able to sell their water rights at freely negotiated prices, some might sell surplus water to a neighboring city where it has a higher value. Often they can generate a surplus by using more efficient irrigation techniques or by switching to less water-intensive crops. In addition, buyers of water rights are likely to conserve water more efficiently. Most new fruit farmers in Chile use water-saving irrigation technologies and when Chile's main water company, EMOS, realized that it could no longer obtain water rights without charge, it invested in a program to significantly reduce physical water losses.