Water Market Best Hope to Ease California Drought

State could follow Australia's lead for stretching water resources

As California's drought enters its fourth year, policy makers here mostly argue over two alternatives – stepping up conservation and water-use enforcement or building new dams and other water-storage facilities. But the solution to the water crisis is more likely to be found on an application that can be downloaded onto our cellphones.

A growing state can't assure abundant water supplies by fining businesses and residents who use too much water — any more than it can expect new reservoirs to do much to bolster supplies in the near future given the many years it takes to build (and fill) them.

However, it's been shown — most recently in Australia — that making it easier for water owners and users to buy and sell their water supplies and water rights will assure that water will flow to its highest and best uses. In other words, California needs a more active water market, with more decisions made by businesses and consumers — and fewer made by agencies responding to groups (farmers, environmentalists, big-city water users) that wield political power.

This idea is catching on — and not only by libertarian dreamers. Many environmentalists like the idea because accurate water pricing will discourage consumption. "Other countries that have endured severed droughts have tried another approach — water markets," explained NPR's Linda Wertheimer in an April program. "In 2007, in the midst of a year's-long drought in Australia, the country expanded water rights trading. Farmers were given allocations of water, in addition to the water they're entitled to, and they could then buy and sell that extra water."

It appears to have worked. As market advocates note, California has the system of canals, reservoirs and pumps needed to move water around. It needs a more sophisticated way of measuring the water supplies. Before long, Australian users figured out a way to trade this resource efficiently. An online system developed, with buyers and sellers handling transactions on an application known as Waterfind – similar to the way people buy and sell stocks and bonds.

It's impossible to know exactly how it will work in California until people with a vested interest in making some money selling water – or in getting more water for their businesses or farms — figure it all out. But those people who say water is too complicated for a market-based system haven't been paying attention to California's evolving cap-and-trade system. Pollution credits are more complex and harder-to-define than water.

In fact, California water merchants already participate in a market. But it doesn't work quickly. It's so complicated — and so open to litigation — "that it scares some people off" and farmers worry "that selling water could put water rights in jeopardy," explained Nathaniel Johnson in a recent Grist magazine article. He published a complex, Rube-Goldberg-like chart of all the many governmental approvals needed before water owners can sell their water to interested parties.

Even if California legislators scoff at the wide-ranging market system embraced by Australia, there are a number of market-oriented policies they can embrace. The Property and Environment Research Center, a free-market think tank in Bozeman, Mont., has detailed some simple reforms that could make it easier to transfer water supplies — mostly by streamlining state restrictions and making it harder to tie up water transfers with lawsuits. The goal, said PERC's executive director Reed Watson, is to find "feasible policy reforms that could let water users trade water … without harming other water users or the environment."

Liberals and conservatives generally agree the California Environmental Quality Act, or CEQA, holds up construction, which is why legislators regularly pass exemptions for their favored projects (such as the Sacramento Kings arena now being built in that city's downtown). So why can't they consider similar exemptions for projects that provide a resource that's far more precious than professional basketball?

I'd add another reform – limiting the California Coastal Commission's ability to hold up the construction of ocean-water desalination plants, which is another market-oriented approach to the drought. The commission approved a project in Carlsbad, but has delayed a similar Huntington Beach project over fear that it will harm plankton.

A lively water market won't make it rain. But it might help Californians stretch their water resources long enough until Mother Nature decides to help out.