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Thursday, Mar 28, 2024

An Alternative View: Let the Market Rule

One economist sees a silver lining in California’s drought crisis. “Only such an environmental crisis changes the law,” said Reed Watson, executive director of the Property Environment Research Center in Bozeman, Montana. “Only when a situation gets so severe do people begin to define property rights and turn to markets to solve environmental problems.” Make no mistake: The drought in California is severe. The current shortfall in precipitation has now lasted four years. The snowpack in the Sierra Nevada Mountains that supplies most of California’s surface water is just 5 percent of the April 1 average. As an emergency response to the drought, Democratic Gov. Jerry Brown ordered the State Water Control Board to “impose restrictions to achieve a 25 percent reduction in potable urban water usage through February 28, 2016.” Achieving such steep reductions will be a huge challenge. As it happens, the Water Control Board reported in April that statewide water use fell by less than 3 percent in February, as compared to the 2013 baseline. To bring the total down more, Brown has empowered the board to “bring enforcement actions against illegal diverters and those engaging in wasteful and unreasonable use of water.” Water wasters in some cities could be fined up to $500 for breaking the rules. “Too little, too late,” said Watson. “A predictable byproduct of 20 years of water mismanagement.” What about transferring water from agricultural uses to thirsty urban areas? After all, 80 percent of water in California not allocated to environmental uses goes to irrigate farms. Some rice farmers in northern California are reportedly considering selling their irrigation water to Los Angeles for $700 per acre-foot. An acre-foot – enough water to cover one acre to a depth of one foot – amounts to just under 326,000 gallons. At $700 per acre-foot, Los Angeles would be paying about two-tenths of a cent per gallon for that water. Right now lots of water in California is stuck in low-value uses because the bureaucratic transactions costs to arranging water transfers are so high. A drought does not necessarily entail a water shortage. Droughts are caused by nature. Shortages exist when demand exceeds supply and markets are prevented from allocating a resource to its highest value use, usually because the price of the resource is held artificially low. So trades like the proposed water sales from farmers to Los Angeles can help alleviate shortages in drinking, hygienic, pool, and lawn sprinkling water. Unfortunately, California has failed to develop institutions to handle water scarcity other than political allocation. Consequently, such trades are very hard to pull off. So what to do? Legislators in Sacramento could immediately enact three modest proposals that would go a long way toward alleviating future droughts. First, allow water banking. Under current regulations, holders of water rights cannot pump and store water underground during wet years so such entrepreneurs could make up shortfalls by selling later during dry years. Second, streamline water transfer approvals. Every transfer transaction must now be evaluated every year by regulators, even though the new transactions are largely the same as the already-approved old transactions. And third, establish dedicated water courts staffed with experienced judges to speed rights and allocation decisions and prevent forum shopping by plaintiffs’ lawyers.  In the long run, California should adopt measures pioneered by Australia in which secure property rights to water were assigned and published in a register so that everyone knows who owns what. This enables the creation of a transparent and efficient water market. During a recent 10-year drought in southeastern Australia, water prices reached about $500 per acre-foot, falling to around $25 per acre-foot after the drought broke. Robust Australian water markets also reduce the risks to towns and cities during a drought. For example, the city of Adelaide in South Australia was able to buy water from irrigators to meet consumer demand. Perhaps the current crisis will become sufficiently severe that it forces California policy makers to contemplate the unthinkable: secure property rights and free markets. Ronald Bailey is science correspondent at Reason magazine in Los Angeles.

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