Texas water markets: Understanding their trends, drivers, and future potential

Water scarcity and competition between water users in Texas have been driven by shifting demands and variable supplies for decades. Despite water scarcity in many parts of the state, the academic literature focuses primarily on the Rio Grande and Edwards Aquifer markets. With urban water demand projected to outpace agriculture for the first time by 2060, this article examines surface water market activity across Texas to better understand where transactions have occurred, the scale of transactions, and the factors driving transactions. We construct an original transactions database of over 2350 individual surface water transactions between 1987 and 2022, spanning 13 major basins and reallocating over 4 million acre-feet (AF) (4.9 billion m3) of water at a total price of $1.3 billion USD. We test the statistical relationships between different types of variables, such as biophysical factors (e.g., drought, precipitation) economic and social factors (e.g., commodity prices, population growth), with water market activity. Results demonstrate that transactional activity has increased over the past decade, and it has also spread across diverse contexts. We illustrate how different basins have different “signatures” of transactions, namely different mixes of drivers and patterns of trade, which have implications for policy. We find that groundwater levels, temperature, and commodity prices for rice and cotton are significant predictors of water transactions. By examining the diverse water market activity in Texas, this study shows how past investments in water market institutions have enabled the establishment of markets tailored to basin characteristics, while also emphasizing the need for institutions and governance arrangements that fit well with local conditions.