What would enhancing a California water market next year mean?

The next reason it is hard to apply techniques from Australia’s water market to California’s drought is that I’ve never seen a description of what California’s water market would be.  This isn’t my usual gripe about no-defined-goal.  Even among people who want a market just ’cause they know it would be so great, I haven’t seen a description of what that market would be.

Next year, if it is a dry Year 5 and we heed the calls for a water market, what would we do?

  • Intra-basin markets in the Sac Valley and the San Joaquin Valley?  Those already exist, to some extent.
  • More ag to urban transfers?  To whom?  City of Sacramento?  City of Porterville, on behalf of East Porterville?
  • More sales within each water project?  Sales between the water projects?

What is the extent of the hypothetical water markets for better drought management?  Is this all about Metropolitan Water District as a buyer?  Or the districts that lay low on the west side of the San Joaquin Valley (Lost Hills, Dudley Ridge), as buyers? Is this all about Feather River water going to LA?

The different potential markets could use different pieces of the conversion process to Australian-style water markets.  The first, less-mentioned, part of the Australian unbundling process for any type of market is setting instream flows and designating refuge water.  Without trying to revise water rights into shares and allocations by next year, markets within the major valleys or water project could be facilitated with centralized complete water diversion information, a centralized exchange board, and upstream (and possibly downstream) carryover storage.  But if “the market” that advocates really want is Sac Valley water for Southern California, then from what I read, we don’t need anything from Australia.  We need more conveyance capacity through the Delta.

Without an actual proposal for a market (the region, the scope, the type, the intent), I can’t say whether anything from the Unbundling Water Rights report could be helpful.  I don’t actually want to see water markets here, but if that’s where the momentum is going, we need some solid proposals.  How big?  WHY?  What mechanism?  WHY?  Where, whom?  WHY?  Why, for the love of god?  In small words about tangible things that people care about, WHY?!

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19 Comments

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19 responses to “What would enhancing a California water market next year mean?

  1. LarryF

    Some basic rules might include:
    No transfers to Urban until the purchasing agency has an allocation-based, effective rationing program that has updated 80%+ of plumbing fixtures, irrigation systems and high-water use landscapes, eliminated high-use customers and established 50(?) gpcd.
    No transfers to Agric. until the purchasing agency has an allocation-based effective rationing system based on age of trees and soil-type (and 95% irrigation efficiency district-wide) and then purchases only enough water to keep the permanent crops alive without producing a crop. No transfers for annual crops.
    No water removed from natural water-courses unless an environment sustaining flow is present.
    No groundwater substitution allowed for surface-water transfers (or groundwater transfers) from a basin that does not have an effective groundwater management plan that has verified that the basin is not over-drafted and that there is a plan to recharge the amount of water that is transferred or substituted.

    • LarryF, markets may not be perfect, but highly centralized prescriptive solutions are not the solution. Allowing for many decisionmakers who can tailor their resource use to their individual situation is preferable to a single decision that can lead to adverse results. Setting reasonable bounds on those decisions is the key.

    • LarryF

      But allowing water to go to the highest bidder is also not the solution. Do you have any restrictions or does the market reign supreme?

  2. Water markets are already here. The question is whether we expand water markets beyond the 10 MAF in permanent transfers (CVP and SWP contracts) and up to 2 MAF in short term transfers that typically occur in water short years. And even so, the transfer market literally “dried up” this year–growers pulled out of commitments to MWD and intra-ag transfers that were hot in 2014 were nonexistent this year.

  3. Steve Bloom

    LarryF’s ideas seem to me like a good start toward reasonable bounds. What sort of adverse result, mcubedecon?

    LarryF, you’d leave the existing rights system in place?

    • Markets allow for differences in individual situations. Overly prescriptive resource allocations create two problems. First, participants have to run a gauntlet of bureaucratic red tape to meet these conditions before they even get to participating in a marketplace that already has high transaction costs. See my paper listed in this blog post for more about this issue: https://mcubedecon.wordpress.com/2015/10/28/cap-trade-and-market-design/. Second, such strict standards where many agencies will only do as much as listed here and may be willing to go beyond this if an another agency is willing to pay them for the added savings. The point of using markets in this situation is that society as a whole can gain significant economic benefits by allowing those who have high costs of achieving water savings to give resources to those who have much lower costs so that society as a whole get higher overall savings.

      LarryF’s proposal appears to be just a means to obstruct market transactions. The standards of participation shouldn’t be any greater than those required for entities not participating in the market. If he’s concerned about the transfer of economic well-being from one region to another, there are more direct and efficient means of addressing that problem than creating onerous conditions that prevent California from using its water more efficiently.

    • LarryF

      Your lack of response to what restrictions might be appropriate provides no clarity to this discussion. While economic theory provides nice talking points it will be useful if you provide some real-life examples of your theories. If water is a public resource then reasonable regulation is implied. If water is a commodity subject to the influence of monopoly, lobbying and resource plundering then the common good is threatened. I am supportive of water transfers with reasonable regulation and your comment that I wish to obstruct the market is incorrect. I would like to see a water market that serves the public interest – so our words are the same. I await your examples of how our current transfers have been over-regulated or appropriate and how you would improve the transfer paradigm. Please be specific and leave out the generalities (i.e. “more direct and efficient means of addressing that problem’).

    • I don’t think additional restrictions on the buyers beyond what is already in place in a such a market are appropriate. You haven’t provided any justification for your restrictions other than appealing to public interest, and you haven’t defined the public interest in any dimension. I’ve defined it in at least one dimension–improved economic efficiency. (I acknowledge there are other dimensions, but that’s a much longer conversation than we can have here.) Currently, water transfers already have to go through substantial environmental review, and cross-Delta transfers have to provide environmental flows in addition to the transfer (typically about 40%). In addition, many ag-urban transfers have provisions to compensate for third party impacts on the surrounding community. (We’ve worked on several of these.) I’m not sure whether you’re aware that these limitations are already in place. I don’t think these restrictions need to be reduced. I do think there are other measures such as creating a more liquid market structure (e.g., a water “dealer” as was set up in the 1992 and 1995 Water Banks) that will facilitate market transactions.

      Your point about the need to reform California’s water rights system is valid, but that’s off point from imposing onerous restrictions on participants in water transfers. And even then, it’s important to consider how to compensate current water rights holders. A sure way to stymie any reform is to ignore their economic interests by introducing a confounding factor about “fairness”. You have to choose your singular goal and be willing to compromise on your other objectives, otherwise you’ll achieve nothing. I blogged about that here: https://mcubedecon.wordpress.com/2015/10/23/a-political-economic-analysis-of-the-red-state-blue-state-dichotomy-on-climate-change-policy/.

    • LarryF

      There are at least two choices if we wish to change our water rights system. First and least disruptive is to reduce existing water rights to reflect actual water availability, provide the environment with the most senior water rights, and integrate into the rights that they are subject to change depending of the amount of run-off. Second, based on the South African model, to scrap water rights and replace them with water-use licenses subject to review based on societal need and benefit. I prefer the first option as a start. And groundwater must be regulated quickly if further destruction of the basins is to be avoided.

  4. onthepublicrecord

    LarryF’s proposal is for a suite of water conservation measure that would ensure that the agencies that take it would be using its water more efficiently. By your last sentence, do you mean those agencies would use their water even more efficiently if they had they had more latitude to choose what to do?

    • Yes, the sellers of water would use their water even more efficiently. The point of allowing decentralized choices in a market is that the water users can choose whether it is beneficial to use their water more efficiently or to pay someone else to use water more efficiently. If you have a problem with this basic premise, then you have a problem with the fundamental principles of the market that drives our economy. Water is really no different than any other commodity in this way. Certainly environmental restrictions are required on water use and transfers, but it is not inherently tied in perpetuity to the existing human use on a piece of land (especially since that use is probably already facilitated by a previous human-created infrastructure project.)

      BTW, we already have clear demonstrations of how this has worked well. The first is the Acid-Rain Program that has greatly coal-fired power emissions. And the second is how agriculture has greatly improved irrigation efficiency as the value of water becomes more evident through past transfers. (And I have a blog post about that: https://mcubedecon.wordpress.com/2015/11/12/why-ag-savings-might-not-be-the-solution-to-urban-water-woes/).

    • And it’s not “latitude” to be more efficient; it’s incentive to be more efficient. The latter concept is too often overlooked at people look too often to sticks when carrots are usually more effective. (See the failure of increased incarceration to reduce criminal activity in some communities.)

    • LarryF

      Many ‘carrots’ are already offered to both urban and agric. water agencies/users. The challenge is getting water agencies/users to take advantage of those carrots. That is where pre-conditions on water transfers are especially important. Getting the agencies /users that want to purchase water to first use the offered carrots to provide the societal benefit of resource use efficiency is a long-term benefit to user, agency and society.

    • I don’t see the “carrots” you’re alluding to. They get few incentives from state or federal entities to encourage conservation–they have to fund most of it internally within a district. Thus, the preconditions are only a stick with no offsetting economic benefits.

      I also see no rationale why these preconditions should be required for participating in transfers but can be ignored if an agency wants to rely on internal resources. And as I’ve pointed out, most of the large water agencies already have significant long-term transfers that they purchased many years ago. Why should only new transfers be subject to your proposal? Why not existing transfers, like the CVP and SWP contractors? Your proposal is internally inconsistent (and draconian on top of that.) I only see an arbitrary set of standards with little underlying basis.

    • LarryF, this is what I take away from your proposal: if a water user has lots of water available, the user can continue to be wasteful for theire own purposes because they don’t need to reduce water use and they don’t have an economic incentive from outside to conserve. Meanwhile, a water user who is crimped on water use and almost certainly has imposed some water conservation measures (I can assure you this is universally true in California), must impose even more conservation measures before they can look outside to buy water from that wasteful user. And all of us suffer when the transfer is blocked because the wasteful user continues to waste water instead of transferring its excess, and the water can’t be used for a higher economically productive use.

    • onthepublicrecord

      Districts that want to apply for grant funding (to get recent bond monies) have to have a qualifying water management plan (and be following it). I suspect that is the kind of carrot LarryF is referring to.

      The State often requires these sorts of things as prerequisites for participation in grant funding (or possibly a state run water market) because they cannot impose them on everyone, or so they can say that the participants did the measure voluntarily. It isn’t a mandate if the districts are doing the measures voluntarily so they can get benefits that no one is forced to apply for.

      It is true that only imposing requirements this way doesn’t make for uniform application out in the world. But so far we haven’t seen political willingness to impose stronger conservation measures on everyone. This approach at least gets some self-selected districts doing them starting now. If it works for them, other districts will follow.

    • onthepublicrecord

      And all of us suffer when the transfer is blocked because the wasteful user continues to waste water instead of transferring its excess

      Of course, I prefer that the wasteful user have the wasteful use declared “unreasonable” and taken away by the State Water Resources Control Board. I don’t see why the wasteful user should get to benefit now for being historically wasteful.

    • Having a UWMP or AWMP for bond funding is one thing. But intentionally blocking a clear incentive to get another district to conserve water seems very counter productive.

      And again blocking transfers because one objects to current “unreasonable” uses is sure way to lose a political battle. Either attack water rights directly, or accept that current users have property rights in historic usage, and that we will have to compensate them for those rights to reallocate water resources.

      Clearly defining property rights is critical to efficient resource use. So one person’s “unreasonable” use is another’s created surplus. Just because new microdrip technology is now available doesn’t mean that flood irrigation was historically wasteful. The attempts to claw back water that becomes surplus into the public realm so that it can then be claimed by someone else for their economic gain is counterproductive. Why would anyone want to conserve water if they’ll just be handing someone else water for free?

      Don’t set up restrictions on a different process because either you view this as somehow unfair or that you imagine that it will somehow change the unreasonable use. It most certainly will not achieve the latter goal, and we’re just cutting off our nose to spite our face to get at the first objective. Don’t confuse battles over fairness with achieving more efficient resource use. This conflation of goals is already undermining the state’s drive for GHG reductions.

  5. One other point on using centrally-planned prescriptive resource allocations. We’ve already run that experiment: we obliterated a nation’s infrastructure, split it in two and imposed two different economic systems. We then remerged that nation 45 years later and saw the results. The market-based economy has more than doubled the productivity of the centrally-planned one. I blogged about Germany here: https://mcubedecon.wordpress.com/2014/07/06/how-do-we-best-induce-technological-innovation-weve-already-run-that-experiment/