Analysts look to water markets to fight CA drought

by James Poulos | May 21, 2015 5:00 am

water[1]Scrambling 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[2].

“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[3] 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[4] 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.”

Farm[5]Meanwhile, 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[6] 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[7] 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.

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