If disagreement exists over the allocation of water from shared resources among segments of the population, a potential instrument is the creation of transferable rights to use/pollute water and the creation of efficient markets in which the rights can be traded. Permit holders that gain a lower benefit from using their permits (for example due to higher costs) would have an incentive to trade them to someone who would value them more.
Fields of application:
- Tradable water abstraction rights for quantitative water resource management. These water rights can be permanent and unlimited (property rights to the water resource) or temporary and limited (transferable rights to use water without right of abuse);
- Tradable discharge permits, or tradable water pollution rights, for the protection and management of (surface) water quality. Such pollution rights can relate to point or to non-point sources, and trades can even be arranged among different kinds of sources;
- Tradable permits to use or consume water-borne resources, such as fish or the potential energy of water at height or the kinetic energy of water flowing.
The following prerequisites must be met for the successful implementation of a tradable permit system:
- Property rights must be well defined and specified in the unit of measurement
- Water rights must be enforceable to secure the net benefits flowing from the use of the water rights for the rights holder
- Transferable water rights should be separate from land use in order to create exposure to the opportunity to realize higher valued alternatives
- An efficient administrative system must be in place to ensure market operation
In situations where the conditions may not be adequately met the prerequisites the risks of monopoly market power, high transaction costs as well as insufficient monitoring and enforcement exists.
(Kraemer et al. 2003)