It’s all about water markets

April 1, 2019
by Lois Henry
Lois Henry

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Almonds take too much water. Wait, alfalfa is the bad guy. What about those water hogging geeks in Silicon Valley? No, no, no — that “evil” fracking is to blame.

If it’s a day that ends in “y,” Californians are finding new water guzzling bogeymen to vilify. Meanwhile, economists are quietly shaking their heads. All this shaming and finger pointing is beside the point.

It’s all about water markets, they say.

Under truly free and open markets, prices reflect how people value water, which depends on how it will be used.

For instance, farmers will pay a lot for water to keep high value crops alive. They’ll pay less if they have access to groundwater. If they have land to fallow, it may make more economic sense for them to sell water if they own it. In all those scenarios, an open market means water goes to its highest use based on value.

“Blaming ag doesn’t make sense,” said water economist David Zetland, an assistant economics professor at Leiden University College in the Netherlands whose blog “aquanomics” explores water markets in depth.

“The state needs to set a limit on how much water is available and then allow trade. We do the same with oil markets, land markets and other commodity markets. Farmers know how to do markets in their sleep.”

That includes a cap on groundwater use, he added.

No need to tell farmers what to grow or demand city dwellers cut shower times. Scarce water equals higher prices, which means people cut back. Simple.

Water rights holders currently have the ability to sell, trade, transfer and exchange water. It’s not nearly on the scale it needs to be, economists say. And California needs to do a lot more water accounting before it can get there.

But it can be done.

And it has.

The Aussie way

Look at Australia, proponents say. Years ago, amidst a 10-year drought, it set a cap on how much water was available, cut a portion off the top for the environment, then reallocated existing water rights (giving historic rights “higher security”) and let the market roll. No one died. Not even farming. In fact, agriculture is flourishing and cities, which don’t participate in the market, are managing demand at the same time ecosystems are rebounding.

When it’s wet, all water allocations get 100 percent of their share. When it’s dry all shares are cut back with higher security shares cut less.

Prices are more predictable and hoarding less attractive.

“Markets ration the current supply and encourage investment,” agreed Vernon Crowder, senior analyst for the food and agribusinesss research advisory group at Rabobank. “When ownership is uncertain, you have waste.”

And, actually, California’s crazy patchwork quilt of water rights creates more uncertainty than it resolves.

Some rights are based on the fact that a dude stuck a sign next to a river claiming water 150 years ago. Others were born when someone took water from a river and no one complained. Still other rights are codified in contracts with the state and federal governments. Some are “junior,” some are “senior.” On and on. Then there’s groundwater.

Each right, by the way, has a different price tag that often has no relation to what the water is actually worth. Some farmers pay as little as $20 per acre foot, others $250 and up. Most of that is the cost of conveying the water, not for the actual water itself.

When things get dry, that tangle of ill defined, unclear, overlapping rights come out of the woodwork.

Who gets how much? Who has priority? Who should be cut first?

The state has never done a thorough accounting of our ground and surface water to answer those questions, but that may be changing.

A few years ago, the state began requiring basins to monitor groundwater levels. New groundwater laws are forcing users to account for how much they take out and put back every year with the ultimate goal of keeping groundwater in balance.

And the state hasn’t been shy about getting into people’s pre-1914 (the dude with the claim 150 years ago) surface water rights recently, cutting back a number of senior rights last year and again this year.

Gov. Jerry Brown said on Thursday that changes to California’s water rights system are coming, though the changes will be “less transformative” than some would like.

Hands off my rights

Any talk of tinkering with rights causes concern among those who have them, even though they acknowledge water markets have a lot of upsides.

Eric Averett, general manager of Rosedale Rio-Bravo Water Storage District, has studied up on the Australian model and finds it fascinating.

“The drawback is, for everyone who thinks they’re in a secure position with their rights, a market does away with that, and it’s a big risk,” Averett said.

Water economist Zetland understood that fear but said it’s misplaced.

Putting water into an auction-style market helps determine its value. An owner can sell water rights for good, sell just a year’s supply of water or use it to grow crops or houses or golf courses based on that value. Either way, the right is protected, said Zetland.

When I asked if a market would create hoarding, price gouging or cutting out small farmers and the poor, Zetland pointed out that the current situation in California has people hoarding, price gouging and small farmers and several poor communities are without water already, or soon will be.

“Markets give you more options. They do not make your life worse.”

That’s not to say an open water market would magically give everyone everything they want.

We would still only have so much water.

The state would have to quantify and cap how much water is available for trade. Which means there would be winners and losers.

Poor, rural towns, for instance, might be severely restricted in their ability to grow. (If groundwater were in balance, though, they would likely not go dry, as they are now.) Farmers without rights to sell or money to buy water could be out of business.

“You have to manage the resource within your supply,” Zetland said.

Politicians who paint a rosier picture aren’t telling the whole truth. Building new dams or relaxing pumping restrictions in the Sacramento-San Joaquin Delta is just taking water from someone else, which creates its own problems. And without a market to naturally limit demand, “You’re just going to have a shortage again,” Zetland said.

Well, we’ve certainly been down the shortage road enough times. Perhaps it’s time to look for a new path.

SJV Water is an independent, nonprofit news site dedicated to covering water in the San Joaquin Valley. Get inside access to SJV Water by becoming a member.

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Maven’s Notebook is an excellent daily accounting of California water happenings statewide.