During a recent intergovernmental dialogue on addressing water scarcity in Iran there was great interest in water markets. Like Australia, Iran uses a substantial proportion of its water resources in agriculture, and similar to Australia’s past experience, Iran is now facing an existential threat associated with overallocation and use of water resources, with some even suggesting it could be a driver of conflict there. Key to addressing this threat is the need to transition to more efficient, productive, and sustainable irrigated agriculture.

Many important questions were raised during the dialogue on pathways to implementing broader water reform under the six main elements of WaterGuide. This included significant interest in how to implement water markets, and the main elements that contributed to the success of Australia’s water markets.

The more conditions in Iran were discussed, the more it became apparent that water markets have great potential to address water management challenges there. But equally, the more the current institutional arrangements were discussed, the more it became apparent that there are significant risks in moving too quickly without the correct settings in place to ensure success.

For water markets to be of benefit in Iran, or indeed anywhere else in the world, certain pre-conditions need to be met. These include there being a scarcity constraint; variability in water supply; connectivity (in hydrology, or via infrastructure); a sufficiently large base of water users; heterogeneous water uses and users; and changing, or increasing water demand. There can be variation in the degree to which these conditions are met, with the greatest benefits likely to occur where they are all met to a significant extent.

For successful water market implementation and ongoing integrity and operation, several fundamental elements also need to be present or established. These include a clearly defined and enforced cap; clear and secure property rights; sound governance and regulatory arrangements; transparent trade rules; water trading registers; effective monitoring and enforcement; and market information and education. Some of these can be addressed and improved progressively, while others are prerequisites.

Of most significance in Iran is the need to set sustainable and enforceable caps on total water extractions, and consistently monitor, meter and enforce water use to ensure extractions do not exceed these caps. While this is obvious to many, and a key element of water management in Australia, many countries are still wrestling with this challenge. Its importance to water markets and broader water management cannot be overstated.

If sustainable levels of extraction can be determined and caps set and enforced consistent with this, followed by progressive implementation of other elements, water markets have great potential to deliver benefits in Iran and many other countries facing water scarcity challenges. Critically, this includes providing the correct incentives for water use efficiency and productivity improvements that are required to ensure sustainable ongoing agriculture in a water constrained future.