Cap and trade systems are becoming increasingly common in water resources management as a mechanism to allow water to move to its highest value use. China too is taking steps down this path with the development of a 'water rights transfer system'. While this system is still in an embryonic stage, a number of government-facilitated projects have already demonstrated its likely form. These projects include the sale of long-term water access rights from one regional government to another, as well as water savings projects in large irrigation districts, with rights to the 'saved' water transferred to industry.
These transactions are often occurring in a regulatory environment where water rights and the rules governing them are not clearly defined, and in the absence of a strong framework for managing water transfers. This can create ambiguity over the nature of the right being transferred. There is also significant risk of unintended, adverse impacts -- to other water users and the environment -- if water is reallocated between users in the absence of defined entitlements to water.