Market-Based Approach to Managing Colorado River Basin Water Can Provide More Reliable Supplies

A new study, published in Nature Sustainability, has found that a market-based approach to managing water in the Colorado River basin can provide more reliable supplies for farmers, communities, and industry amid ongoing drought and excess demand. The study details a new system for leasing rights to water from the basin while reallocating some water to imperiled habitats.

The Colorado River is a vital source of water for 40 million people, 5 million acres of farmland, and 30 tribal nations across the southwestern United States and parts of Mexico. Climate change has exacerbated shortages, with recent Colorado River flows being near their lowest in at least 2,000 years. The river's overallocation, dating back to the 1920s, means that water rights exceed the river's reliable delivery, especially during drought periods.

Key Takeaways:

• The Colorado River basin is overallocated, with water rights exceeding the river's reliable delivery, especially during drought periods.
• A market-based approach to managing water in the Colorado River basin can provide more reliable supplies for farmers, communities, and industry amid ongoing drought and excess demand.
• The proposed market model involves leasing senior water rights to governments and nongovernmental environmental organizations to protect threatened fish habitat.
• Strategic water transactions that reduce water use could benefit over 380 miles of restorable river reaches and hundreds of the most ecologically significant miles could see at least partial restoration of fish habitats.
• Moderate cuts to water use could be achieved with $29 million spent in a protected market, while aggressive reductions might cost approximately $120 million.
• Comparable reductions would cost about 12% more in an unprotected market.
• 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.
• Existing programs generally do not prioritize water for critical fish habitats and may not be sufficient in many cases to meaningfully improve flow conditions for fish and ecosystems.
• A growing number of technology companies and corporations seeking to offset water use from their operations could provide a source of funding for strategic water transactions.

Statistics:

• 44 of the 49 fish species native to the Colorado River basin are already threatened, endangered, or extinct.
• 40 million people rely on the Colorado River for drinking water.
• 5 million acres of farmland across the southwestern United States and parts of Mexico rely on the Colorado River for irrigation.
• 30 tribal nations rely on the Colorado River for various purposes, including drinking water, irrigation, and cultural preservation.
• The Colorado River Compact requires Upper Basin states to ensure a 10-year rolling average of 7.5 million acre feet per year of water flow into the Lower Basin.
• The Upper Basin states have explored a water market designed to reduce water consumption and keep water flowing to Lake Powell.

Sources:

• Nature Sustainability, "Market-based approaches to managing water in the Colorado River basin can provide more reliable supplies" (June 20, 2025)
• Inflation Reduction Act of 2022, "Drought Mitigation Funding" (2022)
• Colorado River Compact, " Article VIII: Allocation of Waters" (1922)