There has been no shortage of news articles on the California drought this year. Many have helped inform the public about critical issues related to the conservation and development of water resources in the state, and about changes or potential changes in the laws and regulations concerning urban water use and groundwater. There have also been a number that focus on the existence of and increased activity in a market for water rights and supplies, including this article from today in Bloomberg.

The articles are correct that there has been an increase in the number of water transfers in California for the 2014 irrigation season. Most but not all transfers involve the re-allocation of water from an agricultural irrigation user to another water user, which may be a municipal water utility or another agricultural operation. During 2014, it has been notable that most of the buyers as well as the sellers are farmers, with relatively low participation by municipal entities. Some municipal utilities have tried to purchase water supplies, but failed due to lower bids than proposed agricultural users.

There are some water transfers almost every year in California, since the practice was encouraged by the Legislature in the mid 1980s. What is surprising is how few transfers occur during most years, including 2014. Water transfers are the key mechanism to re-allocate water supplies from less valuable and efficient uses to uses that are more productive. The strong push for improving the efficiency of water use (sometimes called “conservation”) would create only small pockets of benefit without the existence of a water market to re-allocate the saved water to other users or environmental purposes. Impediments to transfers keep their number lower than it should be, mostly because of high transaction costs, conveyance restrictions and over-deference to junior rightholders and the source areas.

Despite the clear benefit for water efficiency, some Californians oppose the smooth functioning of a water market. Some are agriculturalists who hope that a thin market will result in lower prices for their purchases, some are municipal and state officials who believe that water use should be directed by governmental fiat rather than market forces, and some are environmentalists who argue that all efficiency improvements should benefit the environment rather than being re-allocated to other uses (even if this means that few improvements occur). The control of water conveyance infrastructure by federal, state and local agencies with no desire to share capacity is one of the largest impediments to effective water markets.

California needs significant, pervasive reform of water markets in order to truly improve the efficient use and productivity of its water resources. Some policy wonks have called for such reforms during the 2014 drought, such as this New York Times editorial by Ellen Hanak from the Public Policy Institute of California, but there does not appear to be a strong current in that direction. Hopefully the Governor and Legislature will make water transfers a key part of changes to state laws regarding water, especially if the drought lingers into 2015. Until then, those of us who implement transfers will keep doing so with the tools at hand, using transfers to improve the use of California’s water resources one deal at a time.

3 comments

  1. Wes, California in drought is looking more and more like Australia in drought every day…..but without the same level of public support for water trading as a transparent and equitable mechanism for redistributing waster to users of highest need (including to the environment for protecting drought threatened critical habitats). You may have seen our recent National Water Commission summary report on Water Trading in Australia from 2007-2013, a period which covered our ‘Millennium Drought’ (8 years of drought) and beyond. If not, see http://www.nwc.gov.au/publications/topic/water-industry/trends-and-drivers-2012-13
    Cheers Gary

    1. Thanks, Gary. As you say, we do not have your level of public support for water markets in California or other US states. Of course, it’s my understanding that it took a couple more years of drought to gain that support in Australia also! One doesn’t want to hope for that, but adapting to one drought certainly helps in preparing for others and making your water supplies more resilient.

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