Posts in Water

^{USGS image by David Pratt.}

As California’s drought enters its fourth year, more than 70 percent of the state is under extreme drought conditions. Just this week, the California Water Commission announced new lawn restrictions for development projects, limiting grass to 25 percent of the landscape. But such efforts amount to merely a drop in what is already a very dry bucket.

Like California, Australia recently experienced a prolonged period of drought. In response, Australia implemented several reforms to promote water markets that allowed water trading to occur across competing uses. But did it work? And if so, could California and other western states do something similar?

Jeff Bennett is an economist at Australian National University and a 2015 PERC Lone Mountain Fellow. He is also the author of the recent report from the Reason Foundation, How to Solve California’s Water Crisis: Lessons from Australia’s Water Reforms, examining Australia’s experience with water markets.

To learn more, we asked Jeff about water market reforms in the “Land Down Under” and what lessons we can learn to address California’s drought.

Q: With California and much of the western United States reeling from drought, some have pointed to Australia as a model for how to deal with water scarcity. What exactly has Australia done?

A: Australia’s water reforms have centered on the Murray Darling Basin, an area of more than 400,000 square miles in the southeast of the continent. Water in the Basin is used for irrigation and domestic use, but it also supports a wide range of wetland, river, and floodplain ecosystems.

Prior to the 1990s, water uses were heavily regulated by government agencies. The result was an over allocation of water for irrigation as politicians sought political favor from the farm sector and an inflexibility in the ways that water was used. Now, property rights to water have been clearly defined and an active market has emerged in which irrigators trade water rights.

The price of water is determined by the interaction of supply and demand. During a drought, as water becomes increasingly scarce, the price of water increases. In response, irrigators ration their use and invest more in water saving technologies. As the price rises to reflect increasing scarcity, less valuable uses of water are given up. For example, irrigated annual crops are not planted, and only the most valuable uses of water are continued. The process ensures that water is used as efficiently as possible.

At the same time, the over-allocation issue was addressed by establishing and funding an agency to buy back water rights from irrigators. That water is now used to provide “environmental flows” that sustain river ecosystems.

Q: Why did Australia move toward this market allocation of water?

A: The over allocation of the waters of the Murray Darling Basin to irrigation became apparent in the 1980s and 1990s. The lack of water began to cause the loss of wetland areas and forests of River Red Gums along the rivers. Increasing levels of soil salinity caused by excessive irrigation were also of concern. Hence, both farming and environmental groups began voicing their concerns about the management of the water resource.

However, it was the “Millennium Drought” of the 1990s and 2000s that brought the situation to a head. The unprecedented conditions brought about by the drought, on top of the stress already caused by over allocation, triggered widespread recognition that urgent action was required to ensure the survival of both the environment of the Basin and its farming communities.

Q: What have been the results of Australia’s reforms? Has it worked?

A: The market for water rights provides remarkable flexibility in the management of water for irrigated agriculture. It allows farmers to cope more effectively with both seasonal and annual variability in water availability.

The structure of irrigated agriculture is evolving in response to the reforms. Lower-valued uses of water such as irrigated pastures and grains have given way to higher-valued crops such as wine grapes and almonds.

So while the overall amount of water used in irrigated agriculture has declined as a result of the reforms, the value of production has remained relatively stable. In this regard, the reforms worked. The environment of the Basin has begun a ”repair” phase, and the early evidence suggests that wetlands and floodplain ecosystems have recovered—although this is harder to judge given that the reforms have so far been implemented across a sequence of relatively wet years.

Q: What were the responses to Australia’s reforms?

A: The crisis situation brought about by the Millennium Drought created a political context in which change was feasible. However, there were winners and losers from the reform process. Farmers who were freed to either buy or sell water did so because they were made better off by their actions. Buyers have built their enterprises to become more flexible and more profitable despite the higher prices of water. Sellers have either left the agricultural sector, downsized their irrigation operations, become more efficient in their use of water, or converted to dryland farming.

Many Australian farmers required that the reform package be “sweetened” by subsidizing some water conservation investments to ensure that production levels could be maintained. However, these sweeteners were not enough to placate some interest groups in the Basin. Protests against reform were mounted in towns across the Basin, citing concerns that some communities would be threatened by reduced irrigation activity on the surrounding farmlands.

It is true that population has declined in some towns. But these losses have not deviated from long-term trends of depopulation in small communities. Some regions have actually grown with the relocation of water rights and the consolidation of rural populations into larger towns.

Those concerned with the condition of the Basin’s environment have been overwhelmingly supportive of the reforms but continue to advocate for more government spending on the purchase of water rights from irrigators for environmental flows.

Q: What about Australia’s cities? How have they dealt with drought?

A: The water reforms implemented in the Murray Darling Basin have not been mirrored in the allocation of water in Australia’s major urban centers. Faced with supply shortages during the Millennium Drought, water supply authorities in cities such as Sydney and Melbourne resorted to use restrictions and supply supplementation investments.

Restrictions included time-of-day as well as use-type rationing. For example, watering of gardens using fixed hoses was initially restricted to night-time hours and then banned altogether. Major investments were made in desalination plants, and households were subsidized to install rainwater tanks and water-saving plumbing.

With the Millennium Drought now over and water supplies up again, these desalination plants are now unproductive, yet they still place tremendous financial burdens on their cities’ residents because of the need to run them in maintenance mode to preserve their reverse osmosis filters.

The costs of these investments have now been shown to far exceed the benefits they produced. Their impacts could have been achieved at far lower cost through the effective use of price as a means of rationing available supplies among competing uses.

Q: In terms of urban water use, what could be done to promote exchange between higher-value users and lower-value users?

A: The advantages of water trading in the Murray Darling Basin were not experienced by the people of Sydney, Melbourne, and other major urban centers.

People with high values from water use such as gardeners with prize-winning roses were treated just the same as those whose water use was inconsequential. Price was not allowed to act as a signal of water scarcity, and people were not able to react to that signal as they saw fit. Instead, bureaucratic processes dictated what could and couldn’t be done. Rose gardeners, therefore, had to carry buckets of water to their beloved plants, contributing to the emergence of a condition that became known amongst chiropractors as “bucket back.”

This situation could be addressed by allowing urban residents to react to changes in water prices. If the price of water was determined by the level of water in storage, those with high-valued uses of water could simply decide to pay the price while water savings would come from those with low values for water.

Reform would free up trade in water between urban and agricultural users. Given that the value for potable water in urban areas is generally higher than that generated by irrigated cropping, there are potential gains from trade between urban and rural users.

Q: Is Australia’s experience a model for California and other western states dealing with drought?

A: In Australia’s experience, water trading has proven to be a highly effective mechanism for dealing with drought. California and other western states would do well by taking on board the experience “Down Under” as a guide to what could be achieved and how.

The removal of bureaucratic allocation processes and the establishment of water markets in both irrigation and urban contexts would ensure the flexibility needed in drought conditions. Safeguarding the environment through the purchase of water rights from irrigators is also key strategy. It also ensures that irrigators are compensated for the loss of their rights to water.

However, even these environmental allocations should not be removed from the water market. Ongoing trades between consumptive water users and those responsible for environmental flows can be advantageous for all parties.

To read more, see Jeff Bennett’s report “How to Solve California’s Water Crisis: Lessons from Australia’s Water Reforms” at the Reason Foundation.

Roman Polanski’s 1974 classic Chinatown starring Jack Nicholson and Faye Dunaway demonized water transfers in Southern California as the scam de jure of corrupt politicians and greedy land speculators. Hollywood’s connection to reality is often a tenuous one, and Chinatown is no exception. Water markets can generate enormous economic, social, and environmental benefits, as PERC scholars have long documented. But the film is accurate in one respect: water is a deeply politicized issue in California.

An example worth considering is the Cadiz Valley Water Conservation, Recovery, and Storage Project, a proposed groundwater recovery and storage venture in the Mojave Desert. Cadiz Inc. is a publicly traded company that owns forty-five thousand acres atop a large aquifer and at the base of two San Bernardino County watersheds.

The corporation plans to drill wells that would capture groundwater coming from the watersheds before it filters through the aquifer and is lost to evaporation and saltwater contamination at nearby dry lakes. Cadiz would then pipe the captured groundwater to the Colorado River Aqueduct which supplies southern California with much of its water. The project also contemplates storing surplus Colorado River water during wet years for extraction and use during dry years.

Despite the fact that Cadiz would create a reliable water supply from water that would otherwise be lost, the project has been hamstrung by lawsuits, regulatory reviews, and political agendas. Specifically, critics claim the project will eliminate local mining operations, that the groundwater is potentially contaminated, and that conveying the groundwater out of the basin will negatively impact the Mojave Desert ecosystem.

Another source of opposition comes from politicians who view the Cadiz project—and others like it—as a threat to centralized water management authority. Southern California water utilities are currently considering a plan to rebuild the State Water Project, the government run and now failing infrastructure that transports water from Northern California, and the development of local and less expensive supplies undermines the need for such investments. Politicians from Northern California know this, and they’ve come out in force against Cadiz.

Indeed, this is not the first time politics have threatened to derail the Cadiz project. In 2001, Cadiz Inc. had nearly reached an agreement with the Metropolitan Water District (MWD) when pressure from Senator Dianne Feinstein killed the deal. Ten years later, Feinstein still strongly opposes the project and is leveraging all of her political strength to stop it.

The Cadiz project has the potential to capture otherwise wasted water and send it to southern California municipalities who are desperately in need of more reliable water supplies.  The fate of the project should depend on economic and environmental considerations, not the back-alley politics and favoritism featured in Chinatown.

PERC’s Executive Director, Dr. Dino Falaschetti, recently visited the George W. Bush Institute, where he sat down with Dr. Eric Bing to discuss how economic growth affects the environment.

Q: Dino, PERC research is helping us better understand how economic growth relates to environmental quality. Is there a tradeoff between the two, or can we have both?

A: We can have both. Economic growth depends on our ability to increase productivity – that is, to make more goods and services with less inputs. Making more with less also advances environmental goals of conservation and sustainability. In this important sense, growth is green.

Q: If growth is green, then should principles for economic growth also apply to environmental amenities like water?

A: Yes! Research has long documented the importance of institutions for private property in creating economic wealth and distributing it widely. Interestingly, research also shows how property rights can improve environmental governance. As my colleagues argue in Greener than Thou, absent secure property rights, we tend to treat both our economy and environment like we treat rental cars, leaving the long-term care for someone else. The rental car companies (not the renters) clean and maintain the car, and do so because they face the benefits and costs of ownership.

To see the importance of property rights for conservation, consider the growing conflicts over scarce water resources.  Although water is vital for human welfare, we price it cheaper than dirt. The reason is that clearly defined and enforced water rights are incredibly rare; in most regions, water is an open-access resource governed by the principle of “use it or lose it.” So long as property rights are lacking for water resources, water users will not face the full consequences of their consumption, and water scarcity will only worsen.

Good news also exists. Entrepreneurs are creating water markets, and these markets have improved on rationing mechanisms like water-use-restrictions. Anglers and boaters on Oregon’s John Day River, for example, are contracting with farmers and ranchers over the use of instream flows. This market-based resolution of environmental conflict is creating benefits for both agricultural and recreational interests, and improving environmental quality by strengthening incentives to efficiently irrigate.

Q: Is anyone else succeeding with this approach?

A: Yes! PERC’s Enviropreneur™ Institute, for example, has helped over 200 alumni succeed professionally by resolving environmental conflicts through contracts, property rights, and markets. Markets and the process of exchange give people with different ideas and values regarding natural resources a way to cooperate rather than fight. When cooperation supplants conflict, gains from trade emerge.

HabiHut of Belgrade, Montana is also empowering environmental entrepreneurs, even where economic institutions fall short of ideals. HabiHut sells water filtration kiosks to entrepreneurs in Nairobi, Kenya. Because the kiosks are portable, they can avoid political red tape that frequently discourages entrepreneurial ideas from going to market. And it’s not only the entrepreneurs who are benefiting from access to such technology. Indeed, water quality and accessibility are also improving, as are local economic conditions. Before these businesses could start so freely, community residents often spent hours trying to find drinkable water and paid six times the price that entrepreneurs now charge.

Q: What stops environmental market solutions from emerging more broadly?

A:  In a word, politics.

Command and control approaches to governing economies and ecologies have a poor track record. But these approaches don’t fail for everyone. Rather, they persist by enriching an influential few at the expense of many.

By offering more productive incentives to individuals, and tapping local information in an inherently complex world, property rights and markets do better when measured against the objectives of economic performance and environmental quality. PERC has been a leader for more than thirty years in pushing environmental governance in this direction despite political interests in inefficiency.

When the Ancient Mariner observed “water, water everywhere, nor any drop to drink” he would have no intention of sharing a freshwater source, had he found one. Indeed, we are awash with water here on the Blue Planet, but only a small fraction is in the location, volume, and quality needed to satisfy our demands. Yet the slogan for this year’s World Water Day is “Water, water everywhere, only if we share.”

Altruistic sharing, however, is not the solution to water scarcity. Rather, we must rely on self-interest, entrepreneurship, and markets to bolster accessible water supplies and to allocate our scarce water resources to their highest valued uses.

Markets are the quintessential mechanism for overcoming resource scarcity. Markets motivate entrepreneurs to find new supplies, deliver them to the marketplace as cheaply as possible, and compete with other producers on price. They also discourage waste by forcing consumers to pay the cost of their consumption.

We can harness market forces to align the incentives of water users with the practical realities of water scarcity.

For an example of how water markets can spark the entrepreneurial spirit and increase the supply of usable water, consider the Cadiz Valley Water Conservation, Recovery and Storage Project in the Mojave Desert of California. On its property in San Bernardino County, Cadiz, Inc. is attempting to capture 50,000 acre-feet of groundwater per year and deliver it to the 18 million water users served by the Metropolitan Water District of Southern California.

Not only would the Cadiz project make use of water otherwise lost to evaporation and salt contamination, it would also create a banking opportunity for participating water users to store excess water in wet years for later consumption in dry years. To be sure, the owners of Cadiz stand to make money if the project garners regulatory approval; and it’s this profit opportunity that is growing the proverbial pie of accessible water resources.

Aside from augmenting existing supplies and tapping into new ones, markets can foster cooperation and voluntary agreements between otherwise conflicting water users. In central Texas, for example, a consortium of businesses and communities along the Lower Colorado River has floated the idea of paying more than $100 million to downstream rice farmers to reduce their annual water usage. 

Rather than expanding reservoir capacity to the tune of $206 million, or using to the political process to reallocate the water without paying for it, the Central Texas Water Coalition would acquire rights to the water legally and to the mutual benefit of the parties involved. The idea is particularly appealing for Texas rice farmers who, for the past two years of drought, have gone without reliable irrigation supplies.

The opportunities for markets to enhance supplies and foster water cooperation are not limited to the United States, nor do they necessarily favor the rich to the detriment of the poor. For example, in the years following the privatization of Chile’s water management system, access to water increased from 63 percent to 99 percent in urban areas and from 27 percent to 94 percent in poorer rural areas. Privatization, combined with tiered pricing, dramatically increased water access across the socio-economic spectrum.

On this World Water Day, as calls for water sharing crowd the opinion pages and blog roles, consider the mechanisms by which we might actually increase water access and conservation. Water markets can enhance accessible supplies, promote voluntary trading, and increase relative abundance so that there truly is water, water everywhere.