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01 May 2015

A Water Market: Can Financial Tools Help Get a Precious Resource Where It Is Needed?

Written by  Brian Calvert

California has been taking strong measures to deal with extreme drought. Gov. Jerry Brown recently ordered cities to cut water use, and approved new regulations to limit the flow of water in toilets, urinals and faucets.

But some economists think that there are more efficient and effective ways to mitigate drought—so they’re starting to dust off the idea of water markets.

Putting financial tools to work in the world of water management, they believe, could free up more water for use, overcoming some of the major problems associated with dry spells, and avoiding the need for some crisis measures. Proponents say markets can tell us where water is scarce and where it isn’t, and could help address one of the more nefarious aspects of water-wasting: how cheap water seems compared to how important it is.

“Drought is a train moving at us at three miles per hour,” Jennifer Pitt, director of the Colorado River Program for the Environmental Defense Fund, says, “and if we don’t get off the track, it’s our own damn fault.”

Rather than complicated laws, policies and agreements, a market system could allow users to sell or buy rights from year to year, or to conserve water use without losing water rights. Such instruments, for example, would help a broccoli farmer lease his water rights to an almond farmer, earning money on a fallow field for a year while preventing a catastrophe in his neighbor’s orchard. Water law today often prohibits farmers from doing that.

While California’s drought has dominated headlines, the Colorado River Basin and many other watersheds are facing a longer-term problem: As the climate changes, dry areas of the planet are likely to get drier, so droughts will probably last even longer.

“Markets are going to be critical to the solution to drought,” Pitt says. That doesn’t mean privatizing water fully, but recognizing water’s relationship to the land it runs through—and therefore to property.

Currently, most water is bound to property rights, under a series of doctrines that make it hard to move around and hard to conserve. A use-it-or-lose-it aspect underpins many water policies. They may be mere slips of paper, but water rights can be as cumbersome to move as boulders. That lack of flexibility in Western water policy and law creates “quite a bit of tension and risk,” says Peter Culp, a water lawyer at Squire Patton Boggs, in Phoenix.

In a recent discussion paper for the Brookings Institution’s Hamilton Project, “Shopping for Water: How the Market Can Mitigate Water Shortages in the American West,” Culp and co-authors Robert Glennon, at the University of Arizona, and Gary Libecap, at the University of California at Santa Barbara, give five proposals for putting water markets in place: “Reform legal rules that discourage water trading to enable short-term water transfers; create basic market institutions to facilitate trading of water; use risk mitigation strategies to enhance system reliability; protect groundwater resources; and continue to expand federal leadership.”

That means, for example, that states could encourage water users to free up water on a short-term basis. (The broccoli farmer who gives his water for a year for the sake of his neighbor’s almonds is an example of this.) They also suggest finding ways to link water rights to consumption, rather than diversion, and to ensure that junior water users are not harmed in times of drought. They advocate for eliminating the “beneficial use doctrine,” which demands that all water must be used for a beneficial purpose, such as agricultural irrigation or a city utility, or see its right forfeited. That idea, the authors say, hampers markets and discourages efficient use of water.

Water markets certainly have detractors and caveats. There’s a lot of reluctance to move out of the old system, which has been in place for years and is surrounded by complicated, hard-to-untangle laws and traditions.

Such rights could also be traded without regard to the rural communities that rely on them, says Patricia Mulroy, the former water czar for Las Vegas and currently a fellow at Brookings.

“Once the market forces take hold, the only thing people will talk about is the money,” she says. “And only the economists and the accountants will move their lips.”

This story originally appeared in High Country News.

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