The Australian Markets Report (2008-2009) is an example of everything wrong with water market enthusiasm.
The primary objective of the Commission’s Australian water markets reports is to inform market participants about market structure, trading activity, prices and key policy drivers.
Providing this type of information to both direct and indirect participants in the market is an important step towards improving market performance.
Then it counts up the number and nature of water trades. From everything I’ve seen, Australia is the best example of having a water market for the purpose of having a water market. The metric of its success is whether it was a lot of water market or a little water market. This is all ridiculous. An assessment of a water market for the purpose of improving its performance should look at whether it does the things it was designed to accomplish. In towns with more trades, are farm mortgages more secure? In towns with more trades, do farmworkers have better working conditions? Do schoolchildren skip more? Do people choose to use smart irrigation timers? Do couples make love more often? There should be some policy goal, chosen for some purpose (secure the Delta, support east side farming, make food affordable, make meat expensive, some goal). And then we look at all the ways we could get to that goal, and perhaps a market is the least cost way to achieve that. If so, we choose a market as the way to accomplish the goal. Here, watch this applied to Cap and Trade.
In Cap and Trade, we want to reduce carbon emissions. Reducing carbon emissions is the goal. We do that because of conditions in the physical world. We set a cap on carbon emissions because we have science about how much the atmosphere can absorb this year without the oceans boiling over and the continents exploding. Right? A policy goal, set by real world conditions. Then, after science and people have agreed on that goal and set a cap, we look around for ways to do it. We could regulate emissions. We could tax emissions. We could create a market in emissions. Some people think creating a market in emissions would be the lowest cost way to get to our policy goal of reducing emissions. In that case, they like Cap and Trade. But we don’t want a cap and trade system because we LOOOOOOOVVEE trades. We haven’t won if there are more faster trades than ever before. We win if we hit the cap.
That’s the problem with all the talk about water markets. I never hear it paired with a goal. “I want a water market that gets me a smaller, robust farming system.” “I want a water market that gets me the cheapest possible water for urban users.” “I want a water market that gets me the most expensive possible water for urban users, because then they’ll conserve.” So far as I can tell, Australia wanted a water market because it wanted a water market, and we want a water market because Australia has one. If Australia wanted a water market because it would make farming easier, because it would move water to cities, because of something, you can’t tell from the Water Markets Report. It doesn’t measure anything but their market’s marketiness, which should only be of interest to the technicians tweaking it to accomplish some goal better. But they don’t even have a goal.
If you don’t have a goal for a water market, it will do ONE THING. It will seek out economic efficiency. Was that the goal in the first place? Who the fuck knows, we never talk about actual goals. Economists like to get rid of economic inefficiency, but some people call economic inefficiency their “jobs” and “towns” and “lifestyles”. (I was impressed to see Dr. Michael discuss this issue a while back.)
I’m not even opposed to water markets on principle. Once we have an actual goal, a market that was designed to support that goal could be the fastest cheapest way to get it. Or not. It almost certainly won’t be the fairest way to get that (because we aren’t starting with wealth spread evenly throughout society, so poor people will not be able to use the market to express their full preferences), so we should decide up front whether fairness is one of our design criteria. But all of that is a secondary, technical conversation. The first conversation should be to choose the goal.