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Tapping Water Markets in a Dry State

  • Reed Watson
  • Death Valley, NPS photo

    What changes are needed to help make California’s water supplies more sustainable over the long term and better able to respond to periods of drought? Is water marketing an important component to securing the state’s water future, and if so, what is needed to make it flourish? Are changes in state and/or federal regulation and policy necessary and appropriate to ensure adequate water supplies for cities, power, agriculture, and industry?

    In the September/October 2015 issue of The Environmental Forum, Reed Watson joins a panel of experts weighing in with their recommendations.

    Tapping Water Markets in a Dry State
    Reed Watson, Executive Director, PERC

    California’s drought has reached epic proportions. The three years between 2011 and 2014 were the driest in the state’s recorded history. Last winter’s snowpack, totaling a meager 5 percent of the annual average, was the lowest on record. And, according to the U.S. Drought Monitor, nearly half of the state is experiencing exceptionally dry conditions, the most severe category on the scale.

    The lack of moisture is wreaking havoc on the state’s economy, with the agriculture industry hardest hit. Economists at the University of California at Davis recently estimated the drought’s 2014 agricultural impacts at $810 million in lost crop revenues, $454 million in increased groundwater pumping costs, and $203 million in lost livestock and dairy revenues.

    The environmental toll is similarly devastating. Without sufficient stream flows, fish populations throughout the state have plummeted. Meanwhile, the exceptionally dry conditions have increased the number and severity of wildfires, with 20 percent more wildfires recorded in 2014 compared to the previous-five-year average.

    Given the media coverage of the drought and its impacts, one might think water scarcity is a new or temporary phenomenon in California. It is not. For decades, water supplies have been insufficient to satisfy all the demands of California’s growing population. With the state’s population projected to increase from 38 to 44 million people by 2030, water scarcity will be a fact of life in California regardless of short-term precipitation trends.

    The question moving forward is, What can California do to make the most of its scarce water resources?

    The answer: embrace water markets. Water markets allow users to cooperate rather than fight over water. They also force users to consider the full cost — the scarcity value — of their water consumption. If a city, farm, or industrial facility can use less water and transfer the savings to others in the market, they have a financial incentive to conserve.

    To be sure, California law already allows users with water rights to transfer them. However, after adjusting for population and land area, the number and volume of water transactions is lower in California than in several other western states. In particular, short-term transfers and privately funded acquisitions for environmental flows are increasingly rare in California.

    The primary inhibitor to such water trading is the bureaucratic burden: the transfer review process must conclude a proposed transfer will not infringe on the rights of other water users or degrade the quality of California’s environment. The process can take several months. That is more than enough time to render a proposed transfer useless. And yet, these are valid and needed checks on the market. The challenge is to encourage water marketing in a way that respects existing rights and allows for the expression of environmental demands. Here are three ideas.

    First, the state must shift the burden of proof in the transfer review process. Currently, the “no injury” rule requires petitioners to show that a proposed transfer will not injure other rights holders or the environment. Proving such a negative can be exceedingly difficult given the interconnectedness of water rights in California. Shifting the burden of proof, even partially, to opponents of a proposed transfer would likely eliminate frivolous challenges to socially beneficial and environmentally sound water transfers.

    Second, the state must embrace groundwater banking. Storing water underground during wet years to later consume in dry years offers California an effective way to smooth consumption across periods of inconsistent precipitation.

    However, subtle changes to the state’s water laws are needed to tap the full potential of groundwater banking. Specifically, banks should be allowed to store conserved water without first specifying when, by whom, and for what purpose the water will ultimately be used. Under the auspices of preventing speculation, the state currently requires this information, but this rigidity reduces the marketability of the stored water and, thus, the incentive to conserve in the first place.

    Finally, the state should direct water law cases to judges with water law expertise. California’s water laws are highly complex, and the resolution of water disputes is consequently slow and unpredictable. Directing water law cases to judges with expertise would likely accelerate and improve the resolution of those cases, thus making water rights more secure and more easily transferable.

    Obviously, none of these policy proposals will magically increase precipitation in California. And, compared to the more radical proposals to overhaul the state’s water law, these reforms are admittedly modest. However, these ideas do offer a starting point for Californians to embrace water marketing as a way to make the most of the state’s scarce water resources.

    By adopting these and other reforms that encourage water transfers without eroding water rights or environmental protections, California can mitigate the economic and environmental effects of water scarcity in the short term (droughts) and into the future.

    Key Reforms and Collaboration the Best Path Forward
    Andrew Fahlund, Deputy Director, California Water Foundation
    Water markets will be valuable tools, “but they must be structured to avoid doing harm — to adjacent water rights holders, lower income and disenfranchised communities, and the ecosystems from which water is withdrawn.”

    The Drought Is a Vital Stress Test for the Future
    Ellen Hanak, Director, Water Policy Project, Public Policy Institute of California
    “California urgently needs to modernize water accounting to support fair and transparent allocations during droughts.”

    Programs to Help Out During the Dry Years
    Bill Hasencamp, Manager, Colorado River Resources, Metropolitan Water District of Southern California
    “We need to both ramp up our development of local water projects and conservation, as well as find a way to allow cooperative water transfer programs on the Colorado River to be available when water from the Sacramento River is scarce.”

    California Should Plan Forward on Water Supply
    Chris Scheuring, Environmental Attorney, California Farm Bureau Federation
    “Let’s acknowledge that the sky is not falling, that California is not Australia, and that it is not time to junk the water rights system.”

    Off to a Good Start, but We Need to Do More
    Frances Spivy-Weber, Vice-Chair, California State Water Resources Control Board
    “Funding sources, beyond bonds, should be established to enable greater, sustainable local investments in water-saving technologies and infrastructure.”

    Read the full recommendations of the other experts in the September/October 2015 issue of The Environmental Forum.

    Written By
    • Reed Watson

      Reed Watson is the director of the Hayek Center for the Business of Prosperity and a professor of practice in the John E. Walker Department of Economics at Clemson University.

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