A new "environmental water market" promises ecological benefits alongside risk-management for farmers

California, with its massively water-intensive agricultural economy, launched the country’s first water futures market in late 2020.  But the move was not without controversy. Treating water as a commodity – something traded like metals or oil – could help big users manage financial risk. A market also increases transparency in water pricing, especially under worsening drought conditions. Scarcity, after all, has been driving huge price swings in California for years. However, critics feared speculative trading could limit access to water for small farmers and vulnerable communities.

In March of 2021, Felicity Barringer published a Q&A with Stanford Law professor and water expert Barton “Buzz” Thompson to dig in to what the new water market might mean for farmers, suppliers and communities. Thompson – who also directs the Bill Lane Center’s Water in the West program – emphasized the potential benefits: a more transparent and responsive system for allocating limited supplies, especially in drought-prone regions like California. Strong regulations would be key, he told Barringer, “to protect the human right to water and the environment. But with appropriate protections in place, water markets are an exceptionally important and valuable tool,” he said.

Four years later, building on the ideas explored in the Q&A, Thompson has co-authored a study in Nature Sustainability that proposes a water market for the Colorado River Basin that both improves water security and actively protects ecosystems. With hydrologist Steven Gorelick and water policy expert Philip Womble, Thompson details a voluntary, compensated water market where farmers, irrigation groups, and cities could lease their older, high-priority water rights to governments or environmental groups. In turn, the rights could be used to reallocate some water to imperiled habitats.

The study integrates hydrology, ecology, economics, and law — offering a science-informed market mechanism that aligns water transactions with environmental goals. By simulating thousands of trade scenarios, the researchers demonstrate that carefully designed markets can direct water to river segments where small increases in flow have large ecological benefits — all while protecting farmers' rights and compensating them for conservation.

This new work builds directly on the principles Thompson articulated in his 2021 Q&A. Then, he emphasized the need for infrastructure and regulation to make markets functional and fair. Today, he and his co-authors offer a blueprint for just that: a regulated, voluntary system that delivers both economic and ecological value.