Analysts look to water markets to fight CA drought

waterScrambling for workable models found elsewhere in resources policy, some analysts have begun to argue that California should regulate markets for water.

At Bloomberg View, for instance, the editors made a splash with a recommendation drawn from Australia’s approach to limited water. “The system sets an annual cap on the amount of water that can be used without threatening future supply, then breaks that amount into entitlements for different users, which they can trade, temporarily or permanently,” they wrote.

“California, like most other U.S. states, also lets farmers buy and sell their water rights, to each other or to cities. But the transactions are not supported by a transparent online marketplace (though laws passed last year will help track water use). And they’re bogged down by red tape and other costs. The volume of trading shows it. From 2006 to 2010, agricultural districts or urban water utilities bought only about 3 percent of the water used in California’s San Joaquin Valley, according to the Public Policy Institute of California.”

Tilting the policy balance

In some ways, the creation of formal water market in California would be reminiscent of the cap-and-trade regime already well underway in pricing carbon emissions. That has raised questions about the level of complexity involved in taking on the project.

As one carbon trading expert has indicated, Californians can and do already trade water, but not within the sort of Australian-style system sophisticated enough to address water allocations at the statewide level. “It’s the equivalent of someone driving around and talking to ranchers and asking them if they want to sell their water,” McKenzie Funk told NPR. “To have this sort of hyper-efficient, computer-driven water market I think could help if it sends a price signal. But to set it up would be a mess.”

On the other hand, some observers noted, more efficient water markets could be opened up simply by stripping away the favoritism embedded in current regulations, rather than adding layers of new policy.

Water pricing in California has long been shaped by regulatory distortions. As Shikha Dalmia noted at The Week, “Although residential users pay more for water than farmers, they still pay below-market prices. Sacramento homes pay a flat rate for their water, no matter how much they consume. They don’t even have meters. In Fresno, which gets less than 11 inches of rain a year, monthly water bills for families are sometimes only a third of those in Boston, which gets four times more rain.”

FarmMeanwhile, agricultural users have enjoyed cut-rate water for decades. Writing in favor of water markets at the Sacramento Bee, Lawrence McQuillan and Aaron White cast blame at “California’s 1930s federal Central Valley Project and 1960s State Water Project,” which “provide water to contractors at heavily subsidized prices. Farmers in parts of California are consuming subsidized water at $20 per acre-foot that is worth more than $2,000 per acre-foot in urban areas.”

Although Dalmia agreed that shifting “overnight” to full market pricing was “probably not doable,” she argued that California’s biggest water users, who benefit the most from market distortions, should bear the biggest cuts in the interim.

Tweaking taxes

As policymakers puzzle over California’s pricing regime, some proposed solutions have muddied once-reliable partisan lines on issues as fundamental as tax policy. At National Review, for instance, two co-authors recently made the case for slapping a special water inefficiency tax on organic farmers. The logic, wrote Terry Anderson and Henry Miller, is that “organic agriculture uses more of critical inputs — labor, land and water — than conventional agriculture. Taxation would reduce the demand for water-wasting organic products relative to non-organic alternatives, and thereby reduce some of the pressure on California’s dwindling water supplies.”

With few, if any, policy analysts pushing for a hands-off approach to California’s water woes, prospects for fresh legislation amid the state’s ongoing drought seemed set to brighten.

3 comments

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  1. vonborks
    vonborks 21 May, 2015, 10:20

    “The logic, wrote Terry Anderson and Henry Miller, is that “organic agriculture uses more of critical inputs — labor, land and water — than conventional agriculture.” Amen! Organic food is the biggest scam ever perpetrated on the American public.

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  2. Wayne Lusvardi
    Wayne Lusvardi 21 May, 2015, 13:08

    What total nonsense.

    1. Westlands Water District had a fully computerized water market over a decade ago and it was abandoned and the farmers use brokers now. It was a failure.

    2. The Murray-Darling Basin in Australia is not a model for a water market in California. Australia is a socialized water infrastructure system and does not issue municipal bonds to build water facilities. They expropriate taxes and build facilities with cash. In the U.S. we use bonds to finance dams and pipelines and that means long-term contracts to buy that water are needed to underwrite the bonds. If farmers had to buy water in a daily or monthly or even yearly spot market no water infrastructure bonds could be issued and no farmers could get bank loans to produce crops.

    Moreover, the Murray-Darling basin only serves farmers (not cities) and the water conveyance systems mainly work by gravity flow. California needs huge pumping stations to lift water over the Tehachapi and Mojave Mountains.

    And the Murray-Darling Basin separated land from water rights by government edict. So government allocates farmers’ water “rights”. Water rights do not run with the land as they do in California. If California uncoupled land and water rights the property tax based in rural counties would collapse.

    3. Water is NOT heavily subsidized. There are NO payments to farmers to reduce the cost of water. Old water facilities have cheap water; new facilities have expensive water. That is not a SUBSIDY.

    Farmers pay a huge premium for the price of farm land that has water rights in California. So any assumed water subsidy is offset by having to pay premium property taxes on their farmland. If we cut the water right out to farmers land values would plummet from, say, $15,000 per acre to $100 per acre (desert land values).

    If a homeowner has a below market mortgage interest rate, say 4%, and rates climb to 8%, do we accuse homeowners of getting a subsidy? NOOOO! Then why do the economic intelligentsia say farmers get water subsidies?

    4. There already is a market for 95% of wholesale water in the State and Federal water systems in California. It is the market in long-term water contracts. Just as homes have long term mortgages that create both a mortgage market and a home re-sale market, water bonds backed by long-term water contracts create a water market.

    The other 5% of system water is traded for in the spot market. That is where water prices climb to, say, $1000 per acre foot. The difference between the spot market price ($1,000 per AF) and the price in long term contracts (say $100 to $300 per AF) is not a subsidy any more than your mortgage (say 4%) is a subsidy compared to the interest rate on your VISA card (25%). A VISA card is the spot market for money. Your mortgage is the long term money market.

    And a system wide wholesale water market wouldn’t work in California for another reason: why pay for water when you can sue for it?

    In an adjudicated groundwater basin a court allocates an amount of water to each participant in the basin. The water is free, but there is a conveyance and treatment cost. Adjudicated water basins are created when one property owner or city sues another alleging the other party overdrafts the basin.

    Secondly, environmentalist often get huge allocations of water they do not pay for. They go to court and sue for it.

    Imagine if you had a market for new cars but one block of buyer could sue in court for free cars. That would ruin any market.

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  3. Bruce
    Bruce 21 May, 2015, 13:26

    And what happens in a severe worldwide drought that has happened in the past. Trade what? Desalination plants along our coasts must be considered in the solution discussion.

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