• water markets;
  • institutional design;
  • environmental water allocation;
  • nested governance;
  • Western United States
  • D02;
  • Q25;
  • Q28

The commitment to recover water for the environment in the Murray–Darling Basin is unprecedented internationally. However, the use of water markets to reallocate water for the environment first occurred in the Western United States in the late 1980s as part of water reforms that remain ongoing. This paper explores lessons from institutional innovations in the Western United States, including design principles to coordinate environmental water management across jurisdictions and adapt to unintended consequences caused by socioeconomic and hydrologic interactions at multiple scales. Two decades of implementation experience in the Western United States suggest a middle path between top-down and bottom-up approaches: nested governance arrangements that invest in local institutional capacity while ensuring complementary state and federal roles for basin-scale integration and accountability.