A market-based approach to managing water in the Colorado River basin could provide more reliable supplies for farmers, communities, and industry amid ongoing drought and excess demand. The right market design and a little extra investment could also help threatened fish species, researchers have found.
The study, published June 20 in Nature Sustainability , details a new system for leasing rights to water from the basin while reallocating some water to imperiled habitats.
Not enough river water to go around
When the seven states of the Colorado River basin first divided water rights in the 1920s, they allocated more than the river could reliably deliver, especially during periods of drought. Today, the basin supplies drinking water to 40 million people and irrigation to 5 million acres of farmland across the southwestern United States, 30 tribal nations, and parts of Mexico.
Climate change has exacerbated shortages, with studies indicating that recent Colorado River flows are near their lowest in at least 2,000 years. "The Colorado River is a marvel in terms of the scale of its impact on ecosystems, agriculture, economies, and people across the western U.S. and Mexico," said Stanford Doerr School of Sustainability hydrologist Steven Gorelick , a senior author of the new study. "Given the overallocation of the river water, we explored how the needs of people and the environment can both be served."
Two decades into a historic megadrought in the U.S. West, the immediate need for effective solutions has grown. Out of 49 fish species native to the Colorado River basin, 44 are already threatened, endangered, or extinct. Standing agreements governing Colorado River management among states and between the U.S. and Mexico are set to expire after 2026.
"By strategically directing river water to the right places, even under drought conditions, fish can be saved with targeted restoration at nominal additional cost," Gorelick said.
Congress allocated more than $4 billion in federal funds under the Inflation Reduction Act of 2022 for drought mitigation, largely through water market transactions that pay farms, cities, and industries in the region to use less water. "Those projects are not sufficient in many cases to meaningfully improve flow conditions for fish and ecosystems," said the study's lead author, water policy expert Philip Womble , who worked on the research as a graduate student and postdoctoral fellow at Stanford and is now an assistant professor at University of Washington.
Voluntary water markets
Under the 1922 Colorado River Compact, states in the river's Upper Basin agreed that they would not cause the river's flow toward the Lower Basin – just below the nation's second largest reservoir, Lake Powell – to be depleted below a 10-year rolling average of 7.5 million acre feet per year.
Legal debates persist around whether the Upper Basin must deliver that amount of water amid climate-driven supply declines, and the possibility of U.S. Supreme Court litigation looms. "Under the interpretation that there's a delivery obligation, the Upper Basin states basically bear the risk of climate change and climate change-driven reductions in water," Womble explained.
In an effort to avoid the risk of sudden cutbacks, water users in the Lower Basin states have created systems for voluntary water market transactions. Upper Basin states including Colorado, New Mexico, Utah, and Wyoming, meanwhile, have explored a water market designed to reduce water consumption and keep water flowing to Lake Powell. But existing programs generally do not prioritize water for critical fish habitats.
Womble, Gorelick, and colleagues including Stanford's Barton "Buzz" Thompson wanted to quantify the extra cost associated with strategically improving fish habitat.
The team developed a model to simulate transactions and ecological impacts in Colorado's headwaters, which contribute nearly a quarter of the river's natural average annual flow into Lake Powell.
In the proposed market model, water sellers – including farmers, irrigation organizations, and cities – would lease senior water rights to governments and nongovernmental environmental organizations to protect threatened fish habitat. Those senior water rights are critical for environmental protection because they are fully allocated before newer, junior water rights receive any water.
"One key characteristic of water law across the western U.S. is our 'use it or lose it' principle," Womble explained. "That can be a disincentive to water conservation."
Modeling future drought scenarios
The team evaluated six scenarios to understand potential outcomes in a future drought year. They compared a "protected" market – where newer water users are legally barred from diverting restored flows – to an unprotected market with no legal flow protections.
Simulations showed that without reductions in water consumption, fish populations could face dire conditions for at least one month of the irrigation season along nearly the full length of the river. In contrast, strategic water transactions that reduce water use would benefit more than 380 miles of restorable river reaches. Hundreds of the most ecologically significant miles could see at least partial restoration of fish habitats.
"Instead of only reducing water consumption, strategic environmental water transactions would simultaneously reduce water consumption and preserve fish habitat at the lowest cost to the buyer," the authors write.
Additional modeling results suggest that moderate cuts to water use could be achieved with $29 million spent in a protected market. Aggressive reductions might cost approximately $120 million. Comparable reductions would cost about 12% more in an unprotected market.
One possible source of the nominal extra funding to strategically benefit fish, Womble said, could be the growing number of technology companies and other corporations seeking to offset water use from their operations, including data centers.
"Spending a little bit more money, especially in headwaters, could have outsized ecological impact," Womble said. The model indicates that the most stringent market design – with aggressive water-use reductions and legal protections for conserved water – is 29% more cost effective than a less formal option. "Although unprotected markets may be well suited for localized environmental flow improvement," the authors write, "our results suggest they impede effective large-scale programs to substantially reduce water consumption."
