Modeling water scarcity and droughts for policy adaptation to climate change in arid and semiarid regions

•A hydro-economic model is developed for policy adaptation to climate change.•Policies based on stakeholders' cooperation and water markets are evaluated.•Pure water market shows modest gains compared to the current institutional setting.

SummaryGrowing water extractions combined with emerging demands for environment protection increase competition for scarce water resources worldwide, especially in arid and semiarid regions. In those regions, climate change is projected to exacerbate water scarcity and increase the recurrence and intensity of droughts. These circumstances call for methodologies that can support the design of sustainable water management. This paper presents a hydro-economic model that links a reduced form hydrological component, with economic and environmental components. The model is applied to an arid and semiarid basin in Southeastern Spain to analyze the effects of droughts and to assess alternative adaptation policies. Results indicate that drought events have large impacts on social welfare, with the main adjustments sustained by irrigation and the environment. The water market policy seems to be a suitable option to overcome the negative economic effects of droughts, although the environmental effects may weaken its advantages for society. The environmental water market policy, where water is acquired for the environment, is an appealing policy to reap the private benefits of markets while protecting ecosystems. The current water management approach in Spain, based on stakeholders' cooperation, achieves almost the same economic outcomes and better environmental outcomes compared to a pure water market. These findings call for a reconsideration of the current management in arid and semiarid basins around the world. The paper illustrates the potential of hydro-economic modeling for integrating the multiple dimensions of water resources, becoming a valuable tool in the advancement of sustainable water management policies.