Water Markets

A very interesting article from New Geography about using capitalism to deal with water shortages; an excellent read.

An excerpt.

Critics of California’s current water policy advocate more infrastructure spending on things like dams, canals, and desalination plants. Many would also curtail water releases for the benefit of fish and other wildlife.

Certainly, infrastructure spending would be better than wasting money on the governor’s high-speed-train fantasy. However, California cannot spend enough money on water infrastructure to prevent water shortages. And, solving California’s water shortage does not require an end to “dumping water” to save fish.

California has a history of droughts lasting as long as 200 years. You can dam every canyon in California and line the coast with desalination plants, and you won’t solve the water shortage in a 200-year drought, or even a ten-year drought. Under the current allocation and pricing system, California will simply consume every new drop of water produced. We will have a water shortage all the same.

Consider Westborough and Hillsborough, in the South San Francisco area. Hillsborough consumes more than four times the water per person as Westborough, just six miles away. Increasing the supply of water in California will simply allow Westborough to be more like its neighbor. The problem is how to constrain demand in places like Hillsborough.

California policy makers prefer to use authoritarian conservation policies and police-state enforcement tactics to allocate water and control demand. These polices do not end water shortages. They perpetuate the shortage, and they add to the burdens imposed by energy and growth policies which are already driving businesses and people out of the state.

Eliminating California’s water shortages in the presence of recurring droughts will require that the state resort to something truly radical — a free market in water. This will require that ownership of water be clearly defined, that resale be allowed, and that we adopt a market-clearing price.

We know what this looks like. Water markets equipped Australia to endure the 1995-2009 Millennium Drought. This was the worst Australian drought since European settlement. Total water stored declined to just 27 percent of capacity. Yet water trading allowed Australian cities to avoid the most severe water restrictions. It protected agricultural businesses, and it ensured that the country’s endangered habitats and species received adequate water.

Remarkably, in an end-of-drought survey, over 90 percent of Australian farmers reported that water markets were important to their businesses’ survival. There are many lessons for California here. A key one is that the tension between water users is completely the creation of policy. There is no need for the tensions between the agricultural industry and California’s cities, between growers and endangered fish, between Hillsborough and Westborough, between neighbors. Water markets can balance competing uses in a way that benefits all.

To work, markets need something to trade. The basis for trade in a functioning water market is exclusive access to a share of water from a specific body. Australian water laws provide this. California’s water laws do not.

In California, water rights are often tied to land ownership. The right to surface- or ground-water is conferred by owning the land and often can only be transferred by selling the land. If a land owner wants to use the water, he needs only to put a straw in the ground or the stream. The landowner is entitled to “reasonable and beneficial” use of the water, but that right only extends to the borders of the property. He can use all the water he can pump, but he has to use it on his land. There are legal barriers preventing the sale of water.

This creates a “use it or lose it” system of water allocation, with lots of absurdities. We have growers using sprinklers to irrigate low-value crops like alfalfa in our deserts, while neighbors shame each other for watering their lawns and cities establish water police to enforce arbitrary rationing goals. We have huge aquifer overdrafts, with massive damage to the environment and to highways and canals.

California water users are drawing from a common pool. Since they cannot do anything with their water except use it or lose it, an individual’s incentive is to use as much water as possible, before it’s gone and his neighbor gets it. During a drought, it’s literally a race to the bottom of the well. A functioning water market would provide each user with a specific allocation. Then, as the supply of water diminishes during a drought, remaining allocations would become more valuable, increasing the economic return to conservation.

Retrieved May 5, 2015 from http://www.newgeography.com/content/004914-a-fix-california-water-policy

About David H Lukenbill

I am a native of Sacramento, as are my wife and daughter. I am a consultant to nonprofit organizations, and have a Bachelor of Science degree in Organizational Behavior and a Master of Public Administration degree, both from the University of San Francisco. We live along the American River with two cats and all the wild critters we can feed. I am the founding president of the American River Parkway Preservation Society and currently serve as the CFO and Senior Policy Director. I also volunteer as the President of The Lampstand Foundation, a nonprofit organization I founded in 2003.
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