Monday, July 25, 2011

Water Rights Markets - Again

"While small in number in recent years, sales of water rights are expected to accelerate as the pressure continues on a finite supply of water."

"Farmers of high-value crops, developers and cities all are looking for water."

"The state Department of Ecology is trying to encourage the water market by acting as a clearinghouse for information for both potential sellers and buyers. The agency has itself been a buyer to bolster instream flows."

"We have a firm belief in a market solution...That is what we want to be focusing on a lot over the next decade."

These quotes are all from a recent article:  Yakima River Basin -- A Market Solution  By David Lester, Yakima Herald-Republic.


Water Markets are being touted by many as the solution to the problem of allocating finite water supplies. By their own admission there are various interested parties in areas where marketing is being tried and the expectation is that there will be many more. 

I can see the value of this approach in areas yet to be developed, or even in areas just reaching their full development.  But what about areas that are already overdeveloped?  If there are no sellers, nothing happens.  If the price of water rises enough to move sellers, and full consumptive water use transfers to new users, the area likely benefits economically, but it still remains overdeveloped.  That's not a solution.  If your market only allows for 75% of the historic consumptive water use to be marketed (for conservation purposes) who pays for the value of the other 25%?  And what if the economic returns can't make up the previous value of that 25%? 

In Lester's posterchild case, a former irrigated alfalfa farm sold water rights to a classy, upscale winery 60 miles away who then drilled groundwater wells to take the former surface water rights.  The argument was hundreds of thousands of dollars of additional economic gain and more jobs.  This claim is no doubt true, but were the new groundwater wells evaluated to make sure they would have no negative impact (impairment) on existing wells in the new area?  What if 10 new wineries want to do the same thing in the same area?  What if a poorly managed, high pollution-risk factory bought and transferred these same water rights? 

I can only assume that some regulating agency/entity would control all these less than undesirable outcomes, but then, you no longer have such a free market.  And everyone knows what managed markets are capable of.  Besides, who thinks a state agency bidding for water rights to keep a stream flowing will compete well with a world-class winery?  Or a micro-chip production facility?   Or even a corporate hog operation?  It may not be a big thing to everyone, but the social fabric and economic base of an area relying heavily on a market-driven water rights allocation solution can easily change over time.  Of course, in an overdeveloped water basin the economic and social bases are going to change anyway as the resource depletes - at best becoming smaller and less significant over time. 

I'm not anti-market for water solutions. In fact, there are water and water right markets I don't fully understand - like the all-in water rights auctions and the many and varied state and local water banks created - including various lease markets.  But I have yet to find a water or water rights market that addresses the social aspects of water rights and water usage, or, when taken to the nth degree doesn't eventually exclude all of the lower economic, but nonetheless equally important, water uses of an area.  Are these simply trade-offs that must be endured for the overall good of the system?  Is the highest bidder always the best use of water?

So I simply say take a look at marketing options carefully before committing.  They all tend to look good and operate pretty well at first, but when they kick in and start running at full speed and efficiency, I'm not sure they all take me where I think we should go.


  1. Wayne, I know we have discussed our differing perceptions of the merits of water markets before, but thought I might weigh in here. I think the issues that you raise above can be difficult to apply in practice, but don't necessarily lead to a conclusion that a market does not work. Water markets are useful in situations where all resources have been allocated and what is needed is a fair method to shift rights between various water users. A market will ensure that water rights find their way to the highest value use. Without a market, water uses become "stuck" at a single point in history unless government acts to forcibly shift water use from one purpose to another. In a basin where water rights have been overallocated, I see only one fair option: the government that overallocated the water rights buys them back through some sort of reverse auction, probably best done in small tranches. It is simply not fair to place the burden of a shift in government policies on a few citizens; the burden should be borne by everyone through collection of general tax revenues in order to protect investment-backed expectations from those citizens who accepted the government's offer of water rights. Once a water resource has been balanced for sustainability, a market is the best way to reallocate rights. The beauty of a market is that it does not pick "winners" and "losers"; rather, it gives private parties the ability to enter into voluntary transactions to achieve the highest value uses of water. Ultimately, a well-functioning market will promote the most efficient use of water resources and allocate them to the highest value uses. Such a market will require active management, and transfers must be tested to avoid injury to third parties. There are some practical difficulties to preventing such injuries, and no doubt some errors will be made, but I think it is still a preferable way to manage water resources than the typical current system of gridlock.

    Wes Strickland

  2. Wes, thank you for your insightful comments. You are mostly right in what you say, of course, and maybe my fear that the post-market, new water uses will radically change the social fabric of the area is way off base. I guess if the locals want to retain their way of life, they just choose not to market their water - at any price - other than to water users who are going to use the water the same way. Again, once you commit to a market system, there are fewer guarantees of how your area's water is going to be used. The only thing you do know is that it'll be used for a higher economic return for someone - who may be local or may not be.

    Once a water resource is balanced for sustainability a market is a good way to reallocate rights. I completely agree. One of my original questions was the market's ability to operate in a water arena that is well over-appropriated (far from sustainability). I don't understand how a market will bring this area closer to sustainability. In my neck of the woods the full consumptive use of the former water right is marketed, which means the overdraft continues regardless of who the new owner is or how they use the water. We have an economic gain, but a resource wash. We simply must have reduced CU AND increased economic returns - with every transaction - to meet our dual goals in our over-appropriated area.

    In our Kansas banking thinking, a maximum of 90% of the CU is marketable - thus assuring at least a 10% reduction of historic CU with every transaction. We eternally hope the remaining 90% can generate enough economy to offset the water use reduction. And as much as I believe it virtually always will, we still struggle with who eats the value of the 10% reduction minimum. The seller wants full price and the buyer doesn't want 90% of the value of what he just bought. Either the state has to subsidize the transaction, or the buyer/seller each have to eat 5%. But either is doable as you have pointed out.

    I'm not sure why I'm obsessing over this because in Kansas we already have a market system - it's just very juvenile. Our water rights are property rights to the use of the state's water which can be bought, sold, leased, willed, given away, turned back or anything else you can do with real property. As we've tried to pay irrigators to forfeit their water rights we have discovered very quickly that these guys know exactly how much money they're currently making with each AF - and our price needs to be above that level. If we ever get back to a more acceptable level of use, I'll be the first to promote markets - pushing to make the most economic use of the remaining water as possible.

    Another thing I'm fuzzy on are the third party injuries you mentioned. Are there a couple of classic examples of this kind of injury relative to water policy decisions? Is the loss of the regional social fabric that I'm concerned about included in this term? (I googled it and got the standard insurance definition that had no relation to water)

    Wes, I'm not at all suggesting that markets don't or won't work. I'm simply suggesting that they seem likely to change things when extrapolated out far enough, and that change, regardless of how economically rosy it looks, may not be what you expect.

    I'm really surprised LoticWater and Aguanomics haven't shown up on my doorstep, yet! They haven't, but I can hear them both rolling their eyes!! Thanks again. Wayne.