The role of valuation and bargaining in optimising transboundary watercourse treaty regimes

International Environmental Agreements: Politics, Law and Economics, Apr 2018

In the face of water scarcity, growing water demands, population increase, ecosystem degradation, or climate change, transboundary watercourse states inevitably have to make difficult decisions on how finite quantities of water are distributed. Such waters, and their associated ecosystem services, offer multiple benefits. Valuation and bargaining can play a key role in the sharing of these ecosystems services and their associated benefits across sovereign borders. Ecosystem services in transboundary watercourses essentially constitute a portfolio of assets. While challenging, their commodification, which creates property rights, supports trading. Such trading offers a means by which to resolve conflicts over competing uses and allows states to optimise their ‘portfolios’. However, despite this potential, adoption of appropriate treaty frameworks that might facilitate a market-based approach to the discovery and allocation of water-related ecosystem services at the transboundary level remains both a challenge and a topic worthy of further study. Drawing upon concepts in law and economics, this paper therefore seeks to advance the study of how treaty frameworks might be developed in a way that supports such a market-based approach to ecosystem services and transboundary waters.

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The role of valuation and bargaining in optimising transboundary watercourse treaty regimes

The role of valuation and bargaining in optimising transboundary watercourse treaty regimes Rafael Emmanuel Macatangay 0 1 Alistair Rieu‑Clarke 0 1 0 Law School, Northumbria University , Newcastle upon Tyne NE1 8ST, Scotland , UK 1 Centre for Energy, Petroleum and Mineral Law and Policy, School of Social Sciences, University of Dundee , Dundee DD1 4HN, Scotland , UK In the face of water scarcity, growing water demands, population increase, ecosystem degradation, or climate change, transboundary watercourse states inevitably have to make difficult decisions on how finite quantities of water are distributed. Such waters, and their associated ecosystem services, offer multiple benefits. Valuation and bargaining can play a key role in the sharing of these ecosystems services and their associated benefits across sovereign borders. Ecosystem services in transboundary watercourses essentially constitute a portfolio of assets. While challenging, their commodification, which creates property rights, supports trading. Such trading offers a means by which to resolve conflicts over competing uses and allows states to optimise their 'portfolios'. However, despite this potential, adoption of appropriate treaty frameworks that might facilitate a marketbased approach to the discovery and allocation of water-related ecosystem services at the transboundary level remains both a challenge and a topic worthy of further study. Drawing upon concepts in law and economics, this paper therefore seeks to advance the study of how treaty frameworks might be developed in a way that supports such a market-based approach to ecosystem services and transboundary waters. Transboundary watercourses; Treaty regimes; Law and economics; Portfolio optimisation; Asset management; Ecosystem services; Market-based approaches 1 Introduction Transboundary watercourses, and their associated ecosystem services, offer multiple benefits. The disciplines of law and economics have advanced our understanding of how such benefits might be discovered and distributed among beneficiaries, including between states. In the law literature, there has been a concerted effort to analyse the normative content of rules and principles of international law on transboundary waters, ascertain their status as customary international law obligations, and identify areas where legal norms or treaty1 arrangements might be strengthened (McCaffrey 2007; McIntyre 2007; Wouters 2011) . Much of this literature has focused on the principle of equity, and its capacity to allocate benefits between states, as well as the procedural and institutional structures needed to implement any equitable arrangement (e.g. McIntyre 2017) . In the economics literature, game theory has been advanced to explain why riparians may or may not cooperate over their transboundary waters (Barrett 1994; Rogers 1997) . There have also been significant efforts to estimate the costs and benefits of transboundary water cooperation (Sadoff and Grey 2002; UNECE 2015) and to explore the potential role of markets at the transboundary level (Dinar and Wolf 1994; Fisher 1995; Zeitouni et al. 1994) . While the aforementioned literature demonstrates that there is much to be gained by states cooperating over transboundary waters, it should also be appreciated that such benefits are far from guaranteed. Particularly in power asymmetric settings, and where governance arrangements are weak, ensuring that benefits are equitably distributed between states, as well as their populations, remains a key challenge (Meijerink and Huitema 2014; Mirumachi 2015) . This paper aims to help address this key challenge through a combined study of law and economics. While there has been significant attention placed on transboundary water conflict or cooperation from the disciplines of law or economics, little of this work seems to rely on first principles of both law and economics. There is, however, a great potential to draw from the economic analysis of law, which entails the deployment of the tools of microeconomics to determine the effects of legal rules and their social desirability. The parties involved, such as consumers, producers, or arbitrageurs, optimising their respective objective functions, are assumed to behave rationally, and the social desirability of equilibrium outcomes is examined under the framework of welfare economics. In other words, the study of law and economics seeks to establish not only the effects of legal rules on the optimising behaviour of parties, but also the implications for societal well-being. Not much research in law has drawn on economics to explain the correlation between treaty design, normativity, and compliance. From an economics perspective, Dombrosky (2007) applies different economic methods to analyse transboundary water ‘institutions’, which are broadly defined, and treaty design is only covered partially (see also Dinar 2008; Schmeier 2013) . Makridis (2013) attempts to explo (...truncated)


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Rafael Emmanuel Macatangay, Alistair Rieu-Clarke. The role of valuation and bargaining in optimising transboundary watercourse treaty regimes, International Environmental Agreements: Politics, Law and Economics, 2018, pp. 1-20, DOI: 10.1007/s10784-018-9396-y