Shopping for Water How the Market Can Mitigate Water Shortages in the American West Gary D. Libecap Bren School of Environmental Science and Management Sustainable Water Markets Program University of California, Santa Barbara Foundation for Teaching Economics April 7, 2016 Las Vegas

Growing Challenges with Sharing and Managing Water in the Semi-arid West and the Colorado Basin: Role of Water Markets

Overview Drought and the problem of not viewing water as an asset. Benefits of water markets. How to create a market: –Water rights –Trading platform Water markets and the environment. Urban water pricing—the problem when water is too cheap. Summary.

Growing Gap between Water Supply and New Demand The current drought only underscores a long- standing problem, which is that: Water has not been viewed as an asset in itself –Seen primarily as an input for production or consumption –Poorly measured—Who has what? How is it used? How much is used? Where is it used? Alternative uses? Incentives for wise use, conservation, and reallocation to meet new demands for the environment, recreation, urban, new valuable crops largely have been missing

How could a Water Market Help? Markets influence both supply and demand –Price signals for information on alternative water values –Prices moderate and rechannel demand voluntarily –Prices provide incentives for conservation and reuse –Markets provide a platform for reallocation to meet new demands smoothly and rapidly Water markets can make water an ASSET to be valued, conserved, protected, redirected as needed Water markets can better align incentives How to create a market?

How to Create a Market? Ownership! –Who owns the water? –What is the water rights system? Measurement! –How much water? –How is it used? –What are hydrologic links between surface and ground water? –Short-term and long-term issues

How to Create a Market? Clarify water rights and make them secure. –Cannot trade what is not owned –Adjudication—align paper and wet water claims –Clarify water rights within irrigation districts What is the water rights system? –Prior appropriation. –First in time, first in right. –Seniors get first diversion privileges. –Initially supported mining and agriculture and investment. –Basis for trade today, including environmental flows.

Appropriation or Riparian?

Prior Appropriation, Riparian, Hybrid

How to Create a Market? Provide a platform for trading –Information on willing sellers and buyers. –Create or allow water banks for storage, brokering. –Storage trading, dry-year options for farms, cities. –Emphasize demand-offset arrangements. –Infrastructure for moving water.

Water Markets and the Environment Expansion of water markets will help the environment more broadly –Water banks and reservoir storage credits for urban and other uses also benefit the environment. –Pricing moderates demand. –Pricing reduces waste and encourages conservation, reducing pressure on stream flows. –Water managed and shared more effectively. –Instream flow leases or purchases.

Water Markets and the Environment

Market Successes: Environmental Trades Instream flows: –Buyers: federal and state agencies, non profits –Sellers: irrigators –Short-term leases during dry periods –Payment for irrigation and canal/ditch improvements, longer term

Market Trades would Better Align Prices and Incentives for Urban Use Same groundwater well in NE Tucson –Agriculture: $27/AF; urban use: $479-$3,267/AF Recent drought short-term leases in San Joaquin Valley from east ($20-30/AF) to west ($1000/AF)

The Power of Prices in Urban Use Tucson has steep block pricing Most of Phoenix area uses lower flat rates by season

Market Opportunities: Promote Trade within the Metropolitan Water District of Southern California

Current allocation system does not reward conservation. More pressure by MET on Colorado River sources. Some members have more water than do others. Currently, penalized if do not use all the water allocated to them. Exchange potential among MET’s 26 members that would be secure, bankable, and tradable. Trading potential to encourage conservation.

If Water Markets are so Useful, Why are they so relatively limited? Property rights to water are weaker than for land. Lengthy regulatory review, “no harm” requirement. Ease of opponents to protest, raising costs to traders and delaying. Trading “consumptive use” avoids any harm. Limiting protests to those directly affected. Have protests bear costs. Streamline regulatory approval process.

Conclusion No new water and growing, shifting demand. Have to share water more effectively. Water markets are a key element of the response to the growing water crisis. –Faster. –Less contentious. –More complete—align incentives. –Generate information on alternative values.