1. The Problem of Water: Greater Reliance on Voluntary Transfers through Water Markets to Achieve Environmental Objectives Gary D. Libecap University of California, Santa Barbara National Bureau of Economic Research Hoover Institution

2. The Problem of Water 80 percent of water in the American West is used in agriculture. 80 percent of water in the American West is used in agriculture. – Appropriative Rights Doctrine – Beneficial use – Little alternatives, applied low-valued agriculture at the margin Growing Demands to re-allocate some water from agriculture to urban and environmental uses. Growing Demands to re-allocate some water from agriculture to urban and environmental uses. How to achieve this? How to achieve this? – Judicial re-allocation – Exchange through reliance on water markets Magnitude of the issue Magnitude of the issue

3. The Problem of Water National Science Foundation funded study of western water markets National Science Foundation funded study of western water markets Water Strategist 3,317 transactions between 1987-2005. Water Strategist 3,317 transactions between 1987-2005. A comprehensive data set on transactions, sectors, duration, contract type, nature of trades, prices. A comprehensive data set on transactions, sectors, duration, contract type, nature of trades, prices. Extract from monthly issues, all recorded trades—origin, destination, amounts, contract, price. Extract from monthly issues, all recorded trades—origin, destination, amounts, contract, price.

4. The Problem of Water

6. Water Transfers by Sector, 1987-2005 (Annual Flows) Classification Number of TransfersFrequency Amount of Water (af)Frequency Agricultural to Agricultural471 7,132,84923% Agricultural to Urban1,825 5,531,17518% Agricultural to Environmental233 6,025,57819% Urban to Agricultural38 263,6901% Urban to Urban440 5,656,60418% Urban to Environmental54 1,130,1024% Environmental to Agricultural0000% Environmental to Urban11620% Environmental to Environmental66284,5601% Combination164 4,939,95716% Total3,232 30,964,577100%

7. Substantial amounts of water is exchanged within sectors: Substantial amounts of water is exchanged within sectors: Most active is agriculture to urban: Most active is agriculture to urban: – Total amounts: 56% of trades and 29% of water, annual flows: 18% of the water. Movement of water from agriculture to environmental uses: Movement of water from agriculture to environmental uses: – Endangered Species Act. – Voluntary Purchases for Instream Flows: Oregon Water Trust, Washington Water Trust, Montana Water Trust, Bureau of Reclamation. – Required legislative change in the states. – Total amounts: 7% of trades and 13 % of the total water; annual flows, 19% of the water. – Combination of short-term leases to address drought or for dry-periods during the year (pay farmers to release irrigation water; longer-term leases and sales.

8. The Problem of Water

10. Transaction Size by Category Classification Average Transfer Size (af) Total Amounts Average Transfer Size (af) Annual Flows Agricultural to Agricultural34,48415,241 Agricultural to Urban21,7793,032 Agricultural to Environmental78,05225,861

11. The Problem of Water Alternative is judicial/administrative re-allocation via litigation. Alternative is judicial/administrative re-allocation via litigation. – Costly, contentious, and slow. Lacks information on correct amounts. Mono Lake Case Mono Lake Case – Over 20 years of litigation. All the while, the level of Mono Lake dropped. – All or nothing transfer of water. No compensation. – 2005 40 percent of Los Angeles’ historical aqueduct supply directed to environmental enhancement in Mono and Inyo Counties. – 166,000 acre feet annually,$83,166,000; PV= $1,427,052,576. – 1995 to 2000 the aqueduct provided 63% of city’s water. 2001-34%. Friant Dam Case Friant Dam Case – Court-directed after 18 years of litigation.

12. The Problem of Water Conclusion Conclusion – Important social and economic gains from transferring water from Agriculture to urban and environmental uses. – Where possible, rely on voluntary exchanges via water markets, whereby existing water rights are respected and purchased. Rather than litigation. – More rapid, less contentious. – Information is generated. Farmers have to determine the opportunity cost of not selling. Those seeking re-allocation have to determine just how much water is necessary because it has to be paid for. – Occurring now via leases and sales.