Optimal dynamic water allocation: Irrigation extractions and environmental tradeoffs in the Murray River, Australia

A key challenge in managing semi-arid Basins, such as in the Murray-Darling in Australia, is to balance the trade-offs between the net benefits of allocating water for irrigated agriculture, and other uses, versus the costs of reduced surface flows for the environment. Typically, water planners do not have the tools to optimally and dynamically allocate water among competing uses, and water is misallocated. We address this problem by developing a general stochastic, dynamic programming model with four state variables (the drought status, the current weather, weather correlation and current storage) and two controls (environmental release and irrigation allocation) to optimally allocate water between extractions and in-situ uses. The model is calibrated to Australia’s Murray River and shows: (1) ‘pulse’ or artificial flood events are insensitive to parameter values; (2) from 2001-2009 a water reallocation that would have given less to irrigated agriculture and more to environmental flows would have generated between half a billion and over three billion USD in overall economic benefits; and (3) water markets increase optimal environmental releases by reducing the losses associated with reduced water diversions.