What Drives the Value of Water Markets Under Uncertainty? The Economics of Water Supply Forecasts Across Snow and Rain-fed Basins

Hannah Kamen (), Jared Carbone (), Ben Livneh, Parthkumar Modi, Eric Small, Bill Szafranski and Cameron Wobus
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Hannah Kamen: Department of Economics and Business, Colorado School of Mines
Jared Carbone: Department of Economics and Business, Colorado School of Mines
Ben Livneh: Department of Civil, Environmental and Architectural Engineering, University of Colorado and CIRES, University of Colorado
Parthkumar Modi: Alabama Water Institute
Eric Small: Department of Geological Sciences, University of Colorado
Bill Szafranski: Lynker Corporation
Cameron Wobus: CK Blueshift, LLC

No 2026-01, Working Papers from Colorado School of Mines, Division of Economics and Business

Abstract: Climate change is shifting Western US basins from snow-fed toward rain-fed systems, weakening the precision of water supply forecasts. We investigate the value of water markets in reducing economic damages from supply uncertainty. We produce hydrologic supply forecasts from data across 889 SNOTEL stations and show that forecast uncertainty is higher in rain-fed basins. We embed these empirical uncertainty measures into a water-trade model and find that when some production decisions are irreversible (e.g., planting in agriculture), and made before water availability is realized, trade helps offset losses from sub-optimal investments. We find that gains are 7\% larger in rain-fed basins on average, with offsetting effects increasing in both forecast bias and variance. As rising temperatures are expected to reduce the fraction of precipitation falling as snow, we project that water trade will become a more valuable mechanism for rationing water.

Keywords: climate change; drought; forecast uncertainty; water trade (search for similar items in EconPapers)
JEL-codes: D81 E27 F17 Q25 Q54 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2026-01
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http://econbus-papers.mines.edu/working-papers/wp202601.pdf First version, 2026 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:mns:wpaper:wp202601

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