Emerging water and carbon market opportunities for environmental water and climate regulation ecosystem service provision

Markets are increasingly part of government, non-government, and private business provision of public environmental interests. Key examples include carbon credit markets and environmental water markets. Market demand for carbon credits from sequestration are expected to expand in size and geographic scope as a result of climate action obligations and increased carbon credit tradability provisions in the Paris Agreement on climate change. Market based reallocations of water are also increasingly common. The increased use of markets for multiple and related environmental good provision will inevitably introduce synergies and risks in joint ecosystem service provision. This study assesses water and carbon ecosystem service supply potential for a joint carbon and water market participation strategy using a case study of the lower Murrumbidgee, in the Murray-Darling Basin. The methodology is a dynamic hydro-economic simulation of river flows, floodplain inundation, forest carbon dynamics, carbon credit value, and water opportunity cost. The study results indicate possible synergies in joint provision of carbon sequestration and environmental flow benefits through a carbon-water trading strategy. This involves funds for environmental water purchases generated through sale of carbon credits from improved floodplain conditions. Results identify limited trading opportunities at the current carbon price (AU$13/tCO₂), resulting in an economically viable re-allocation of 2.31 GL/year (0.1% of water currently diverted for irrigation) to the environment with frequent years of zero re-allocation. At prices above AU$20/tCO₂, there may be additional trading opportunities and as much as 5% of current irrigation diversion was predicted to be reallocated at AU$100/tCO₂. While the results are particular to the case study, the conclusions discussing policy design challenges related to realizing effective environmental improvements in interacting carbon and water markets are relevant to many water catchments globally.