Industrialized watersheds have elevated risk and limited opportunities to mitigate risk through water trading

Businesses are increasingly concerned about water scarcity and its financial impacts, as well as competing needs of other stakeholders and ecosystems. Industrialized watersheds may be at more serious risk from water scarcity than previously understood because industrial and municipal users have inelastic demand and a high value for water. Previous water risk assessments have failed to sufficiently capture these economic aspects of water risk. We illustrate how hydro-economic modeling can be used to improve water risk assessments at a basin scale and we apply the methodology to the industrialized Brazos River Basin (85% municipal and industrial withdrawals) and consider implications for The Dow Chemical Company׳s Freeport Operations in Texas, US. Brazos water right holders pay only operating and maintenance costs for water during normal periods; however, when shortages occur, leasing stored water or reducing production may be the only mitigation option in the short-run. Modeling of water shortages and the theoretical cost of leasing water under nine combined scenarios of demand growth and climate change suggests that water lease prices to industry could increase by 9–13X. At best, a more developed water rights and storage lease market could result in lower lease prices (2–3X); however, given that transactions would be limited it is more likely that prices would still increase by 4–13X. These results suggest that markets are unlikely to be a robust solution for the Brazos because, in contrast to other watersheds in the Western US, there is little reliable water to trade from low value users (agricultural) to high value users (industry and municipalities). Looking at demand trends across the contiguous US as an indicator of water risk, 2% of watersheds have municipal and industrial demands that outstrip total surface and ground water supplies and in these watersheds industry has historically paid higher lease prices for water. This study provides new ways for businesses to characterize water risk and forecast water prices that uncovers hidden water risk and highlights the positive but diminished mitigating effects of water markets in a highly industrialized basin.