Tapping Water Markets in California

Drought may force the unthinkable: resorting to property rights and markets.


Pray for Rain

Reed Watson sees a silver lining in California's drought crisis. "Only such an environmental crisis changes the law," says Watson, executive director of the Property Environment Research Center (PERC) in Bozeman, Montana. "Only when a situation gets so severe do people begin to define property rights and turn to markets to solve environmental problems."

Make no mistake: The drought in California is severe. The current shortfall in precipitation has now lasted four years. The snowpack in the Sierra Nevada Mountains that supplies most of California's surface water is just 5 percent of the April 1 average. As an emergency response to the drought, Democratic Gov. Jerry Brown has ordered the State Water Control Board to "impose restrictions to achieve a 25 percent reduction in potable urban water usage through February 28, 2016."

Achieving such steep reductions will be a huge challenge. As it happens, the board reported in April that statewide water use fell by less than 3 percent in February, as compared to the 2013 baseline. To bring the total down more, Brown has empowered the board to "bring enforcement actions against illegal diverters and those engaging in wasteful and unreasonable use of water." Water wasters in some cities could be fined up to $500 for breaking the rules.

"Too little, too late," says Watson. "A predictable byproduct of 20 years of water mismanagement." 

What about transferring water from agricultural uses to thirsty urban areas? After all, 80 percent of water in California not allocated to environmental uses goes to irrigate farms. Some rice farmers in northern California are reportedly considering selling their irrigation water to Los Angeles for $700 per acre-foot. An acre-foot—enough water to cover one acre to a depth of one foot—amounts to just under 326,000 gallons. At $700 per acre-foot, LA would be paying about two-tenths of a cent per gallon for that water.

A drought does not necessarily entail a water shortage. Droughts are caused by nature. Shortages exist when demand exceeds supply and markets are prevented from allocating a resource to its highest value use, usually because the price of the resource is held artificially low. So trades like the proposed water sales from farmers to Los Angeles can help alleviate shortages in drinking, hygienic, pool, and lawn sprinkling water.

Unfortunately, California has failed to develop institutions to handle water scarcity other than political allocation. Consequently, such trades are very hard to pull off. So what to do?

In an interview, Watson provided a preview of an upcoming PERC report titled Tapping Water Markets in California. The report's goal is to offer incremental, politically possible reforms that can be done this legislative session. (In a column last September, I discussed a more radical and longer-term water market reform based on Australia's system of water rights. Although Watson thinks it's a good idea, he believes that it would require a political miracle to get California to adopt so sweeping a scheme.)

Watson is agnostic about transferring water from farms to cities, although he does note, "I personally prefer to look on a landscape of rice paddies rather than the next marginal housing development in Los Angeles." He thinks that farmers have already made significant efforts at conservation and that there are not a lot of additional savings to be found in the agricultural sector. To my suggestion that Americans should get their vegetables from New Jersey, where Gaia regularly provides adequate rainfall, Watson observed that the growing seasons are longer in the Golden State.

Right now lots of water in California is stuck in low-value uses because the bureaucratic transactions costs to arranging water transfers are so high. PERC's plan includes a proposal to let people bank water in underground aquifers. In the current system, holders of water rights must specify to the State Water Control Board when they are going use their water, where they are going to use it, who is going to use it, and for what purpose it is going to be used. If water rights holders fail to put their supplies to a beneficial use, they run the risk of losing their rights to it. Storing water underground for later use—say, during a drought—is not considered a beneficial use by the State Water Control Board. This should be changed. "During wet years, water entrepreneurs could pump and save water and then market it later in dry times," said Watson.

Another PERC proposal is to streamline the very onerous environmental review process that strongly discourages water transfers. Watson notes that a lot of water transfers are repeat transactions, yet each one must be evaluated anew every year, even though the new transaction is the same as the already-approved old transaction.

A third change involves how water transfers are adjudicated. California has special judges who resolve disputes brought under the California Environmental Quality Act. Since would-be plaintiffs know that the judges are experienced in handling this type of litigation, this system tends to discourage frivolous and time-consuming suits. Plaintiff lawyers who want to dispute or disrupt water transfers now have the power to forum-shop, seeking friendly or inexperienced judges to hear their cases. PERC proposes to establish a similar set of water court judges to discourage such shenanigans and to speed up water trading.

PERC's longer-term vision would involve wiping the slate clean of water subsidies and encouraging every interested party to participate in water markets. Watson believes that environmentalists will eventually come to understand that they can compete in water markets too, and that they would be better able to achieve their conservation goals that way than through the political process. Some examples already exist in the state, such as the Scott River Trust in northern California, which leases water from farmers to enhance salmon spawning habitat. 

"If people can't trade water, then they just keep doing the same things that they've been doing," said Watson. "The ultimate goal is to flip the switch on entrepreneurship. If unleashed, entrepreneurs will discover and develop all sorts of new technologies to use and conserve water." Perhaps the current crisis will become sufficiently severe that it forces California policy makers to contemplate the unthinkable: secure property rights and free markets.

Disclosure: I have had a long, friendly and intellectually productive relationship with PERC. I had the honor of being a Julian Simon Fellow at PERC in 2010.

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  1. Having the greentards compete in the market is a fantastic idea. It will soak up their resources while also supporting more efficient allocation.

  2. Water markets? You can’t do that! Water is a basic right! Just pass a law outlawing droughts!

    1. No, no… we must take the capitalism out of water. Then we will live in a world of plenty, because magic.

    2. Where’s the “Like” button? I want to like this comment so bad!

  3. I predict that California will look at all the available options, including water markets and choose the solution that ensures the worst possible outcome.

  4. hahahahahahaha!!!! More than likely the free market will be blamed and this will lead to tighter gov. control of the very thing they’ve bungled.

  5. They should propose a pipeline from the Great Lakes to CA and see who votes for it.

    1. Given the ridiculous amount of control California voters already exert on the rest of the Union, they might as well just leave that decision up to California voters. Pretty much the system now.

      1. They’ll misread the maps or get bored or something, and accidentally build a pipeline from the Great Salt Lake…

    2. Golden State Pipeline?


      1. I’d vote to call it “The Hydroloop”.

        1. A water hose that runs at 1200 mph

    3. Even though CA voters said pipelines are bad for the environment, they would vote for this one.

  6. My co-worker’s step-sister makes $80 /hour on the laptop . She has been out of work for seven months but last month her paycheck was $21155 just working on the laptop for a few hours. find out here now

  7. Oh, good. The current group of TopMen? will work to unravel the ideas of past TopMen? whose policies contributed to this.

  8. In answer to the title question: Yes, it probably will. California is a corrupt state and the people there like giving their money to government. Dry weather is so easily cast as an environmental issue and California’s so obsessed with looking 1980s trendish that Honey Boo Boo could pull it off.

  9. There are market forces at work. There always are. It’s just a question of how badly-distorted they are. In the case of CA water, it’s an amazingly-complex, fucked up mishmash of retardation, evil and stupidity.

    May God have mercy on their wretched souls….

    1. That’s been my mantra for a while, that markets always work, just as gravity always does. The problem is that politicians have so much power nowadays that markets never get a chance to fix the problem before politicians jerk the rug out from under them again.

  10. As they flee California, I can only hope that they have enough gas to get through Arizona . . .

    Except the cute ones. They can stay here.

    1. They’re alllll gonna want cake, RC. Just sayin’…

    2. But not enough gas to get to Texas.

      As a matter of fack, you can keep all the handsome Cali refugees if you don’t sell the uglies enough gas to get to Texas.

      We have plenty of Honey’s.

  11. The big underlying problem here seems to be the “use it or lose it” system of water rights. This is sort of like having a land rights system in which if you let your land lie fallow, the state will seize your property and give it to someone that will farm it. It doesn’t take much imagination to see where that would lead.

    Secondary to that is the administrative difficulty in selling and transferring water to cities, which prevents the market from establishing an equilibrium price.

    Two simple reforms would go a long way to improving this situation:
    1. Let water rights holders bank unused water in underground aquifers.
    2. Make it easy for people to buy and sell water without the administrative hassle.

    1. Side note:
      This situation is an excellent illustration of how rights are really mechanisms for solving resource allocation disputes. The problem in this case is that California has a stupid system of water rights. Instead of being an absolute property right to X amount of water, that the owner can do with whatever he wants, the right is conditional on state approval. You only get the right to that water if you use it for an approved use. Storing it or selling it not being among those uses. This, expectably, leads to all sorts of perverse outcomes. And thus we can see why absolutely property rights – where the rights hold can do what he wants with his own property WORKS BETTER, which is why property rights evolved to be what they are in modern society. Not the arbitrary schemes that progressives like to imagine they can simply invent and impose on society at will.

  12. I’d guess that whatever California does, it will be called a water market, but it won’t be anything close to a water market, but the progs will blame the failure on water markets. And the Koch brothers.

    But you never know. I never thought I’d see congestion-based pricing on the interstates here in Georgia, but the traffic got bad enough in Atlanta that they’re building hot lanes like crazy now after 20+ years of HOV failure.

  13. Some rice farmers in northern California are reportedly considering selling their irrigation water to Los Angeles for $700 per acre-foot. An acre-foot?enough water to cover one acre to a depth of one foot?amounts to just under 326,000 gallons. At $700 per acre-foot, LA would be paying about two-tenths of a cent per gallon for that water.

    What the hell? The rice farmers make more profit off selling their water for a pittance than they would using it to make rice? I guess this explains why rice is dirt cheap.

    1. Not for long, maybe.

      1. I can certainly do without San Francisco treats.

    2. I’m sure that Los Angeles’ attitude will be, “Why should we buy water when it’s so much cheaper to buy legislators?”

  14. People in CA are spoiled when it comes to water (source: me, lived here my entire life); change will be difficult.

    For example, the East Bay Municipal Utility District a few weeks started piping in not as good tasting — yet completely potable — water due to the drought’s impact on supplies. They were overwhelmed with complaints. If you can’t get people to even accept marginally less “fresh” tasting water from their taps four years into an epic drought, how are you going to get them to accept market forces making their water actually cost what it should?

    1. It’s all about marketing. Those who want artisanal water would be happy to pay the “artisanal” surcharge.

    2. I find this really interesting. Living in Michigan, you’re basically guaranteed water unless you have the unluckiest plot of land EVAR.

      And water’s not so cheap here (unless you just sink a well, like I did at every house I’ve ever owned here and in Ohio).

      But Cali? Interesting to me. I will truly enjoy seeing how this plays out – I’m long on popcorn futures…

    3. It was actually water from the same source, Lake Pardee. EBMUD was attempting to save the lower, colder water as long as possible so they attempted to send down water from the higher levels that has more algae, ultimately causing the taste and odor complaints, which are completely normal taste and odors for millions of people in the state that live off surface water treatment plants.

  15. “As it happens, the board reported in April that statewide water use fell by less than 3 percent in February, as compared to the 2013 baseline.”

    Given that agriculture, which uses 80% of the water, wasn’t asked to cut any usage at all, 3% isn’t too far short of 25% of the remaining 20%’s usage, so – goal basically achieved, right? If the goal really is for the 20% to cut overall usage by 25%, that seems a little unrealistic . . .

    It’s almost as if the call for 25% percent reduction by all non-ag users was pure political stage show.

    1. “It’s almost as if the call for 25% percent reduction by all non-ag users was pure political stage show.”

      Nail meet head.

  16. The “board” structure that oversee’s water utilities doesn’t help. Most of them run on single issue topics, have very little knowledge of the field (or their own water system in most cases), and you flat out don’t stand a chance unless you have some type of catchy slogan about keeping the water rates low. I’ve sat in on enough of these meeting that I’ve thrown my elbow out from air wanking.

    That’s just at the local level. Trust me, things get even more fucked up and as they work there way up.

  17. But my Facebook tells me it’s all because of teh evilz of Nestle water bottling plants.
    It’s almost like they want people to PAY FOR WATER!!

  18. Drought in California is neither new nor severe (yet, give it a few more decades)…the “regular” rainfall since recordkeeping began about 100 years ago is likely to have been the abnormal condition.

    “With the state’s severe drought and growing concerns about meeting water needs next year and beyond, the study reveals that the region could face an even worse-case scenario of future drought. In fact, so-called megadroughts that last more than 30 years are short compared to what Kirby’s study has found.

    “This is ground-breaking because our research shows conclusively that the variability in wetness and dryness has changed tremendously over the past 3,000 years, showing evidence of centennial-scale droughts ? much longer than the epic or megadroughts identified from tree-ring studies,” said Kirby, associate professor of geological sciences.

  19. These sort of conditions have existed in the South West before as a matter of historical record. The 20th Century happened to be a “wet century” and everyone thought it would continue to be so into the 21st Century. This is the same mistake made by the Norse who colonized Green during the Medieval Warming period. When the weather turned colder, they discovered that it was too cold to grow crops where they were. No doubt some left, but others stayed and eventually died there.

    There is plenty of water for farming in other parts of the US, just not in California.

  20. All tis is due solely to the stupidty and greed of Brown and his Dems – he could have build reservoirs and lakes, etc that would have allowed the state to survive droughts, which are and always have been common to the Southweatern U.S. for tens of thousands of years. But
    the snail darter fish got in the way. Funny, he doesn’t seem perturbed by all those hawks and American eagles his wind turbines are killing.

  21. I remember, not too long ago, when people in southern California were fined for NOT WATERING THEIR GRASS. It also, happened when the replaced the grass with desert-like flora, rocks, and sand! Those people (government types) need to get their shit together!!

  22. I have worked as an engineer with public water systems in four different states.

    I’m not surprised about the seemingly low response to drought restrictions. Usage would normally go up so imposing the restrictions prevents that. Given the mandatory low flow fixtures, there really isn’t a lot of extra room for additional savings.

    Water utilities tend to define capacity based on pumping capability, available flows in the distribution system, and perhaps (finished water) storage. When they do incoporate source they may look at 7Q10 but not the lowest flow on record. I wonder if there are building moratoriums…about a decade ago I was peripherally involved with a utility that served about 25,000 people. During a drought their source was apparently down to about 25 days. And they were still hooking up new customers! Thankfully, it rained.

  23. I find it amusing that the state with the most Green-tards stresses the local environment more than any other state in the Union.

    I wonder how many Eco-Fascists have contemplated the “save the snail darter from the dams” / “chop up the falcons, hawks, eagles, and bats with their wind mills” dichotomy?

    1. Killing animals is ok as long as it is in the name of furthering the cause

  24. Google pay 97$ per hour my last pay check was $8500 working 1o hours a week online. My younger brother friend has been averaging 12k for months now and he works about 22 hours a week. I cant believe how easy it was once I tried it out.
    This is wha- I do…… ??????

  25. Google pay 97$ per hour my last pay check was $8500 working 1o hours a week online. My younger brother friend has been averaging 12k for months now and he works about 22 hours a week. I cant believe how easy it was once I tried it out.
    This is wha- I do…… ??????

  26. I get paid over $87 per hour working from home with 2 kids at home. I never thought I’d be able to do it but my best friend earns over 10k a month doing this and she convinced me to try. The potential with this is endless. Heres what I’ve been doing,


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