A tale of two rivers: Integrated hydro-economic modeling for the evaluation of trading opportunities and return flow externalities in inter-basin agricultural water markets

Water markets are water management instruments that can support water reallocation from low to high value agricultural uses. However, unless explicit consideration is given to water uses not directly involved in the trading (e.g. environment), water markets may fail to promote sustainable growth. In inter-basin water markets, the reallocation of water withdrawal entitlements from the selling basin typically involves the reallocation of return flows (the surface and subsurface water that leaves the agricultural system following withdrawal of irrigation water) along with consumptive uses, which may impair environmental flows and affect water uses downstream in the selling basin. This paper couples, using a sequential modular approach, a Positive Multi-Attribute Utility Programming (PMAUP) tool that models the behavior of irrigators and the Soil and Water Assessment Tool (SWAT) eco-hydrologic model to: i) assess the economic and water reallocation potential of a return flow-neutral inter-basin water market; and ii) explore the trading-return flow tradeoffs that stem from relaxing the neutrality principle. Methods are applied to the case of agricultural water markets in the Tagus-Segura interconnected basins in Spain. Results show that enforcing a return flow-neutral water market can reduce returns from trade by up to EUR 1.63 per m3 of conserved streamflow.