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. An efficient market would facilitate more trades from agriculture to cities and price convergence across all trades.

Further research on the functioning of these water allocation institutions—prices, markets, and infrastructure investments—and their ability to mitigate the impacts of climate change on water resources is sorely needed. Many significant investments in adaptation measures are already underway, with little information on their efficacy.

A better understanding of water institutions will provide enormous public benefit, but challenges will remain. For example, integrated assessment models (IAMs), models that couple the human and natural systems, have been used extensively by the international policy community to assess the impacts of climate change and climate change mitigation policies (e.g., Clarke et al. 2014). Though these modeling efforts may seem to be of limited use to local and regional water managers, they are, in fact, used to capture the broader economic implications of water availability; a recent study by Taheripour et al (2013) develops an IAM that includes irrigation and water usage to measure how irrigation constraints affect United States corn ethanol expansion.

IAMs more broadly, however, have only recently incorporated water sector impacts, and they incorporate little or no information on the effects of water institutions on the reallocation of water supply in response to changes in climate. IAMs will need to incorporate these institutional characteristics and impacts to more accurately estimate the economic impacts of climate change (including mitigation and adaptation). IAMs are already reasonably well-equipped to incorporate passive general market reactions to changes in climate. Water, however, is not typically allocated through markets, prices are generally poor signals of resource scarcity and value in use, and many water quality and scarcity problems result from externalities, open access, and other market failures, some of them transboundary in nature. This is where new research on water allocation, pricing, and infrastructure investment institutions comes in. New innovations in translational tools are needed in order to incorporate the results of this research into IAMs.

The fact that water tends to be managed at the local or regional level adds additional complications. The information required to develop water management data inputs to IAMs seeking to model adaptation lies with local water management institutions—very little such data is collected at the national or international level—posing challenges for thorough and consistent data collection. This is of great practical importance for implementing IAMs that incorporate water resource adaptation. In addition, the downscaling of global and even national climate predictions to the local and regional level has been problematic in the past, though downscaling methods are evolving. The resulting uncertainty suggests that effective water resource adaptation institutions will need to be responsive and flexible.

Further research on the role of water management institutions in adaptation is critical to any comprehensive effort to incorporate adaptation into IAMs. The supply curves for water management policies are poorly understood. How current water prices, conservation policies, infrastructure investment programs, water markets, and other allocation institutions are designed and implemented, and how these institutions might change due to the anticipated or realized impacts of climate change on hydrological regimes are useful opening questions for a comprehensive, inter-disciplinary research effort that will have substantial consequences for how societies will fare as the climate changes.