Aquanomics

Water Markets and the Environment

Randy Simmons

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351531368
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Water is becoming increasingly scarce. If recent usage trends continue, shortages are inevitable. Aquanomics discusses some of the instruments and policies that may be implemented to postpone, or even avoid, the onset of water crises. These policies include establishing secure and transferable private water rights and extending these rights to uses that traditionally have not been allowed, including altering in-stream flows and ecosystem functions. The editors argue that such policies will help maximize water quantity and quality as water becomes scarcer and more valuable. Aquanomics contains many examples of how this is being accomplished, particularly in the formation of water markets and market-like exchanges of water rights.Many observers see calamity ahead unless water supplies are harnessed and effectively conserved, and unless water quality can be improved. It is also clear that declining water quality is a serious problem in much of the world, as increasing human activities induce high levels of water degradation. Those who voice these concerns, argue the contributors to this volume, fail to consider the forces for improvement inherent in market political-economic systems that can address water issues. The contributors see water quality in economically advanced countries as improving, and they believe this establishes the validity of market-based approaches.

1
Introduction

B. Delworth Gardner and Randy T. Simmons

When the well is dry, we know the worth of water.

Benjamin Franklin

Water is a ubiquitous but highly contentious substance. It covers over 70 percent of the earth’s surface, yet it is constantly being touted as becoming increasingly scarce. Across the globe, water is being discussed and debated, often in bitter and ominous language. Mark Twain was right many decades ago when he quipped, “Whiskey is for drinkin’, water is for fightin’ over.”¹ Many observers see calamity ahead unless water supplies are harnessed and conserved more effectively, and unless water quality can be improved.

Commenting on this worldwide concern about water, The Economist reports: “Two global trends have added to the pressure on water. The first is demography. Over the past 50 years, as the world’s population rose from 3 billion to 6.5 billion, water use roughly trebled. On current estimates, the population is likely to rise by a further 2 billion by 2025 and by 3 billion by 2050. Diet matters more than any other single factor because agriculture uses about ¾ of the world’s water; industry uses less than a fifth and domestic or municipal use accounts for a mere tenth.”²

Despite the rhetoric of impending doom, is there really a world water crisis? We think the answer to this question is both yes and no. If recent trends in various demands for water are simply extrapolated through time, given the fact there is only a finite water supply, it seems inevitable that serious shortages will occur sooner or later. It is also clear that declining water quality is a pressing problem in many areas of the world, as increasing human activities and, sometimes, natural forces induce high levels of water degradation. What this pessimistic view fails to consider, however, are the ameliorative forces inherent in socio–political–economic systems that can correct and reverse dangerous and ever more costly trends, and indeed are likely to do. One need look no further than improving water quality in many of the economically advanced countries to establish the validity of this point.

This book discusses what some of these palliative instruments and policies are and how they may be implemented to effectively postpone, or even eradicate, the onset of water crises. These critical policies critically include establishing secure and transferable private water rights and extending these rights to uses that traditionally have not been allowed, such as instream flows and ecosystem functions. Such policies economize on water quantity and quality as they become scarcer and more valuable. This book contains many examples of how this is being accomplished, particularly in the formation of water markets and market-like exchanges of water rights.

Another focus of the book is to consider remaining impediments to market implementation and how their removal would both improve water quality and effectuate a more efficient allocation among uses. Some extant policies and rules, in fact, even prohibit markets from resolving conflicts over water use. How can this be? Part of the answer is found in the very physical nature of water as a resource as discussed next.

Rethinking Water Policies

Water is most frequently regarded as a “natural resource” somewhat akin to land and air. Yet, for many, water is uniquely different as reflected in the following quotation: “water should not be seen simply as an economic commodity, subject to the usual market laws of supply and demand and to calculations of efficiency, but rather, that it should be viewed as a fundamental necessity that society chooses (for good reasons) to treat differently from other resources.”³ This view probably has its origins in the indisputable fact that water consumption is necessary for all life to exist. How could such an essential element be left to the vagaries of impersonal markets when life itself is at risk? Therefore, this view holds that everyone ought to have a stake in how water is used. (It is this notion that gives rise to the “anticommons” problem discussed by Bretsen and Hill in chapter 6 and to the promulgation of the “public trust” doctrine discussed by Huffman in chapter 7.) We would argue, in contrast, that viewing water as different from other resources has created much mischief in the form of a vast amount of political tinkering in its governance that has diminished water’s productivity and value. All people perceive themselves to be stakeholders in water use and that they, therefore, should have a voice to exert political influence to block any change in water allocations that may strike their fancy.

Going further, water is a fugitive resource in the sense that it tends to move from place to place (especially through the hydrologic cycle in its various forms) and, therefore, is more difficult to manage and govern than is stationary land. Acceptance that “water is special and different” can be clearly observed in the evolution of institutions that govern water’s ownership, allocation, and use. Still, while granting that water may be different from other resources in some ways does not mean that it is inappropriate to look at water issues under the prism of economic analysis and reasoning in order to account for changing demands and increasing scarcity, which are essentially economic phenomena.

To better understand where we are, why governing rules are so complex, and why changes are so difficult, it is useful to explore briefly the origins of water institutions, particularly those in the American West, the geographic context of much of the discussion of water policies in this book. In the economic and social development of the West, water was generally the most limiting productive factor. Land was plentiful, and labor was relatively mobile and could move to locations with the most favorable employment opportunities. One of the keys to the economic development of the region, therefore, was the harnessing of water supplies and combining them with land and labor in production activities such as mining and agriculture.

Water development began in the mining camps and pioneer settlements that were created long before formal systems of law emerged in the West. These experiences on the frontier, what Frederick Jackson Turner called the region between urbanized civil society and untamed wilderness, were privately organized means of distributing, allocating, and sharing a scarce resource. By “privately organized,” we mean they were not sponsored or controlled by a government agency or entity. Water development in the pioneer settlements was often accomplished by a single individual or a few families, but more often by a group of people working together to form a joint stock company in which contributing individuals would receive ownership shares. The stories of these private efforts are often quite astonishing. Much the same thing occurred in the mining camps where initial water diversions were made by an individual or partners, but as the scale of endeavors expanded, larger associations were developed to control and redirect water flows.

Noting that water development happened privately and ahead of government does not mean that there was an absence of governance. Indeed, private systems of governing how rights were established, defined, and enforced evolved along with the private water systems. To borrow a phrase from Anderson and Hill, there were “institutional entrepreneurs”⁴ who worked to develop the water management systems that emerged and evolved, and which survive to this day.

Many of the pioneer communities in Utah, Arizona, and New Mexico found remains of Native American irrigation works. Like the aboriginals before them, these European-descended people found that diverting water from the streams was necessary in order to grow crops in the arid West. The settlers first built simple and then more complex irrigations systems. In Providence, Utah, for example, the home of one of the authors of this chapter, the first twelve families arrived in 1859. By the summer of 1861, using pick-and-shovel labor and horse-drawn plows and scrapers, they had dug a four-mile canal and diverted ten second-feet of water from a nearby river to irrigate several hundred acres of cropland. They named their joint-stock company the Providence–Blacksmith Fork Water Company, issued stock to those who helped build it, and sold stock to newcomers. Over the next several years, they extended the first canal and built a second one. The original company continues to operate today and has the right to divert twenty-two second feet from the Blacksmith Fork of the Logan River. Part of the land that was originally farmland is now subdivisions so the water irrigates lawns, gardens, and a city park. Providence City owns shares in the company and, like any other shareholder, pays dues to the company.

The Providence–Blacksmith Fork Water Company is just a small example of the many private water developments that occurred throughout the Western states. Private development was so universal that by 1950, of the 24,869,000 acres of irrigated land in the seventeen Western states, 19,169,000 were irrigated by private irrigation firms.⁵

Water development in Western mining camps is at least as astonishing as in the pioneer agricultural communities. In order to move water to rocker boxes to separate gold from gravel or to hydraulic mining sites where gold was separated by pressurized water, miners built dams, ditches, canals, and flumes. Gold was discovered in California in 1848, and by 1857, water companies had built more than 4,000 miles of canals, ditches, and flumes.⁶ In order for all that to happen,

institutional entrepreneurs hammered out the prior-appropriation system that dominates western water law to this day. Under this system, water rights were granted to a person or a company when they diverted the water from its source; and when not all water claims could be met, the priority of rights was determined by the first-in-time-first-in-right rule. Under this rule, claims were adjudicated on the basis of the date filed. In the years of low water flow, that meant that late claims might not have a right to water, but water owners had a secure right and a reasonable expectation about how much water they could claim under what circumstances.⁷

The same first-in-time-first-in-right rule was applied across the West in both mining and agriculture, allowing the security necessary for people to make investments in water conveyance systems and in mines, farms, and later industries and cities that needed the water in order to survive and prosper. Without secure rights, the investments could and would not have happened. These rights specified a water supply source and established a specific date when the right became effective. Each right also established a point of diversion of the water from its original source, defined the season of permitted use, and named the “beneficial use” to which the water would be put. The first-in-time-first-in-right feature of the water right was of crucial importance, because those who held the most senior rights would have their entire right satisfied before more junior rights received any water at all. The practical consequence of this legal framework was a very high probability that a water supply would be delivered at a time and place that could be accurately anticipated.

In both agriculture and mining, water was diverted from original supply sources such as streams, rivers, and underground aquifers and moved through canals and pipelines to locations of use. (See chapter 13 for elaboration.) In addition, water use could be deferred to more valuable seasons of use by constructing storage reservoirs. Beginning with the passage of the federal Reclamation Act of 1902, massive multipurpose dams and irrigation projects were constructed under federal auspices in every Western state. This development produced a major reorientation in policy and governance. These projects were governed by federal regulations affecting water allocations and pricing, including a huge subsidy to irrigation. In large measure, the changes in water institutions that were invoked were the consequence of this larger government role and included the creation of large water, conservancy, and irrigation public districts. These were empowered by law to tax private real property in order to acquire revenue to manage these complex organizations and to facilitate repaying financial obligations to the federal government. (See chapter 9 for a discussion of some of the consequences of this taxing power.) The important point for us here is that throughout the region’s development phase, governing institutions were crafted that were designed to encourage new water development and subsequent diversions of dependable supplies to productive purposes. The codified water law and administration of the various states of the region demonstrate how complex and comprehensive these institutions were and remain.

In our view by far the most significant of these water-governing institutions was prior-appropriation law as described previously. One of the things that worries us most about contemporary trends is the weakening of these private property rights in water.⁸ The stability produced by these clear water rights produced an economic environment where investments could be made and planning could occur—obviously necessary conditions for economic progress. But one man’s meat may be another’s poison. The insecurity of junior rights and the exclusion of those who held no rights but fancied themselves “stakeholders” in water use sowed the seeds of conflict and legal challenges to the existing institutional framework. Much of this book is concerned with these challenges and how best to cope with them.

By their very nature, groundwater aquifers present a vexing problem of inadequate and undefined property rights. If unregulated in the quantity of water that can be pumped, a single pumper captures the full benefits of his activity but shares the cost of lowering water tables with all other users of the aquifer. This is a classic example of the tragedy of the commons. The inevitable result is overutilization and possible depletion of the resource. States have attempted to deal with this common-property problem in various ways. California, however, is one of the few states that still has no effective regulation of groundwater aquifers. In chapter 12, Brian Steed discusses this issue and its resolution as the County of Los Angeles has acquired effective control of its groundwater resources.

Another complication that continues to harass us is that the world we live in is never static. Changes are manifold and somewhat unpredictable, and in recent years, water has become valued for instream conservation and recreational purposes as well as for the traditional uses that required diversions. Changing institutions to accommodate newly valued water uses, however, is controversial because of opposition from entrenched economic and political interests who fear that granting rights to new uses will diminish the security of water deliveries for their traditional uses. Thus, any changes in the rules could involve large shifts in the creation and distribution of income and wealth. Keeping water instream to protect endangered fish and plants, for example, might well require a reduction in the quantity available for diversions to produce crops. (See chapter 11 for an excellent discussion of this highly visible example from California. See also chapter 4 for a state-by-state review of developing instream flow regulations.) Or, reductions in the federal irrigation subsidy would be expected to increase costs of production in irrigated agriculture and cause reductions in net farm income and in agricultural land values. Conflict is thus inevitable unless institutions can be reshaped to facilitate change without sacrifice by entrenched interests who have created large and expensive lobbying activities designed precisely to protect these interests.

The upshot of this discussion is that institutional arrangements and systems of property rights that were effective in the region’s development stages may be inadequate and inefficient now. Those institutions emerged to manage mining, agricultural, industrial, and domestic water uses. Today, demands for instream flows, public access for recreational purposes, and ecosystem preservation compete with those traditional uses, and the conflict between new and established demands are often settled in legislatures and courts in ways that are also inadequate, inefficient, and subject to enormous risk.

But is all hope lost in this morass of competing uses and conflict? We don’t think so. Inevitably, as change produces disparities in the value of goods and resources, so long as property rights are fully defined and protected in these commodities and the resources that produce them, markets spontaneously arise to effectuate trades that both parties in the exchange believe will enhance their well-being. One of the authors of this chapter once heard the famous economist, Professor Kenneth Boulding, describe the market as an “old mule” that mankind employs to move resources around to produce gains in wealth that enhance human welfare. Hence, it should not be surprising to observe the spontaneous stirring of markets in water allocation along so many different avenues where value disparities are evident. This book gives major emphasis to these emerging markets and how they are e...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• Acknowledgments
• 1. Introduction
• 2. Markets for Freshwater Ecosystem Services
• 3. Water Quality Markets: Institutional Design and Performance
• 4. Buying Water for the Environment
• 5. Auctions of Water Rights
• 6. Transactions Costs and Water Markets: The Anticommons Perspective
• 7. The Evolving Public Trust Doctrine: An Obstacle to Water Marketing
• 8. Market-like Water Quality Trading: Why It Matters, and How to Make It Happen
• 9. The Economic Effects of Using Property Taxes in Lieu of Direct User Fees to Pay for Water
• 10. The Economics of Dam Decommissioning for Ecosystem Restoration: Making Informed Decisions to Remove Aging U.S. Dams
• 11. The Sacramento-San Joaquin Delta and the Political Economy of California Water Allocation
• 12. Lessons from Los Angeles: Dealing with Diminishing Predictability in Los Angeles Water Sources
• 13. Dams, Water Rights, and Market Transfers in California
• About the Authors
• Index