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Water for Cash – A Primer on Water Markets

April 04, 2017
Despite heavy rains and snowfall last winter, the water issues in the western United States have not been resolved for the long term. Groundwater tables are still low after being relied upon heavily during the previous drought years. The underlying legislative and infrastructural conditions prior to the drought have not changed. A sustainable, free-market solution, addressing future water crises could be a market for water trading. Instead of the government allocating water resources, water trading incentivizes and monetizes water conservation on the demand side while also helping water get to where it is most needed [1].

A Water Market and Its Benefits

Water rights are central to any discussion about a water market. In the western United States, water is allocated primarily by historical precedent and fixed [2]. In California for example, if a piece of land came with a right to 10,000 acre feet of water 100 years ago, that water right is likely still bundled with that land. Moreover, any piece of land that is adjacent to a body of water or over a groundwater source comes with a right to the adjacent water. Under most current arrangements, owners of water rights lose their right to water if they do not use their entire allocation [3]. This arrangement incentivizes a “use it or lose it” mentality, where users of water are encouraged to utilize their entire allocation instead of conserving water. The perverse incentive scheme results in a race to the bottom of the water barrel. Users are pushed to pump as much groundwater or utilize as much of the surface water as possible so that other users cannot take advantage.

A potential free-market solution that addresses these poor incentives is a water market. As explained on an NPR segment on water, a water market can be described as a stock market for water [4]. Instead of offering financial products like stocks and bonds, sellers in water markets can offer short or long term leases on their water rights and even sell them outright.

A water market offers numerous advantages. First, it encourages conservation. By creating a price for water, it can visibly demonstrate the effects of saving it [5]. According to the Nature Conservancy, there is still much potential to implement water conservation technologies and irrigation techniques in the United States [6]. If a user can trade their water savings for cash, they will be much more likely to invest in conservation technologies [7].

(<strong>Image:</strong> Utilizing Dripline, a popular irrigation technique that optimizes water use <strong>Source:</strong> Precision Farming Dealer)(Image: Utilizing Dripline, a popular irrigation technique that optimizes water use Source: Precision Farming Dealer)

Water trading, done right, also has the reciprocal effect of getting water to where it is most needed. In the short-term, transfers can reduce the economic effects of droughts by shifting water to activities and places where a lack of water will cost the most [8]. In the long-term it can account for geographic changes in water demands and in turn a shifting economy [9]. Proponents of the transfer benefit can point to successful real world examples. When a stable market for water rights was opened in Nebraska, a conservation group invested to restore the Platte river without the hassle of legislation [10]. In Washington State, farmers with junior water rights saw their allocation evaporate in 2015, but because of a water market they were able to purchase the necessary water from senior rights holders to keep their fruit orchards in production [11]. In Australia, a water trading market designed during the worst years of the Australian drought increased conservation and preserved the Murray-Darling river basin agricultural industry [12].

Water markets offer the clearest opportunity where environmentalists, urban users, and agriculturists can work together to optimize water allocation.

Procedural Challenges

The benefits of a water market are only realized if the market is managed effectively. An effective water market needs the following characteristics: established and clear water rights, an ability to undertake transactions related to those water rights, and access to relevant market information [13].

Most water markets in the western United States do not meet these conditions. Many states, just like California, have a lack of clear water rights [14]. In addition, these rights are not easily tradeable. For one, they are often bundled to the land and cannot be separated [15]. Secondly, sellers undertake a significant amount of risk. A lack of clarity in water rights law leaves the potential for attorney involvement in any water transaction [16].

Even without legal interference, the exchange market as it currently exists is difficult to navigate. A seller must gain permission from countless local and state government water authorities before leasing or selling their water rights [17]. Even then there is no guarantee the water will be delivered. Sellers do not have control over the decision to operate state aqueducts that ultimately determine where water goes [18].

(<strong>Image:</strong> The State-Run State Water Project of California, <strong>Source:</strong> http://www.watereducation.org/aquapedia/state-water-project)(Image: The State-Run State Water Project of California, Source: http://www.watereducation.org/aquapedia/state-water-project)

Additionally, it is hard to tell whose water is whose, and if people own the rights to the water they sell. The nature of water itself dictates that it must be stored somewhere, and this storage is frequently communal. Also, there must be some way to measure the seller using less and the buyer using more as it is impossible to trade the same water that is on one’s property to someone else miles away. This measurement information must be accessible by all potential sellers and buyers, and currently the infrastructure for providing this information does not exist. “Because water is liquid in the liquid sense, it is not at all liquid in the financial sense.” [19] Building a water market then will require tremendous coordination amongst buyers, sellers, governments, and technologists who will engineer the online systems that would make water trading feasible.

Potential Drawbacks

For all its benefits a water market does come with considerable risk that must be acknowledged and addressed.

The need for greater coordination amongst different stakeholders does invite the potential for increased government regulation, especially as it pertains to measuring water use. The water market in Australia could not have existed without mandatory meters on every water pump in the water trading area [20]. In the 1990s, when water users utilized a water trading platform to substantially increase water trading in California, the platform was managed by a temporary government entity called the State Drought Water Bank [21]. Without substantial private investment, it is hard to imagine a water trading market without similar types of government involvement.

(<strong>Image</strong><strong>:</strong> The State Drought Water Bank ran during 1991 and as a likely consequence, water trading increased dramatically. <strong>Source:</strong> Public Policy Institute of California)(Image: The State Drought Water Bank ran during 1991 and as a likely consequence, water trading increased dramatically. Source: Public Policy Institute of California)

On the contrary, private investment could also be a drawback. One of the greatest dangers of a water market are that current private water users will divest completely liquidating their water rights. In Colorado, perhaps the State the most developed water markets, “some communities turned into virtual ghost towns when Denver suburbs bought their water rights.” [22] The reality is that many rural communities across the Western United States are similarly built on agriculture, sustained by water, and are subject to similar risk as those Colorado towns. Unfettered selling raises even further ethical questions regarding whether those investors not involved with the underlying core water needs should become involved in the market. Many rural communities simply do not have enough control of their own resources to resist geographically distant investors with access to troves of capital or middlemen who will try to make a quick buck. A potential solution could be a market solely based on water leases and not on selling water outright.

There is also the drawback of not just encouraging water conservation, but encouraging water production. That is instead of implementing technologies to save water, users will be encouraged to pump more groundwater to sell more which will drain aquifers further [23]. To create an environmentally sustainable water market, there would have to be legislation curtailing the sale of groundwater that is pumped solely to sell on the open market.

Conclusion

In the West, the water issue has not been solved for the long-term. Water markets might be a viable, free-market solution that optimizes the allocation of water we currently have. They present the best opportunity for urban users, environmentalists, and agriculturists to find common ground, conserve water, and get water to where it is most needed.

However, for a water market to function and benefit all stakeholders, architects of any market must address key procedural issues and potential drawbacks of the system. Without proper design and implementation, water trading could generate further challenges that would outweigh any potential benefits. With the right team, clear intentions, and inclusive conversation we could soon be looking at a world where we together will decide where water flows.

References

  [1] http://www.csmonitor.com/Environment/Inhabit/2017/0308/How-water-swaps-help-the-West-manage-a-precious-resource.

  [2] http://www.bing.com/cr?IG=A1846C70733741E093A2710176E9BCF6&CID=171B4C325C636C6C093E46785D526D7D&rd=1&h=6HrZMkahFAd_638323M3-ryL97oKSd51pBl-9Wa15Cw&v=1&r=http%3a%2f%2faic.ucdavis.edu%2fevents%2foutlook05%2fSawyer_primer.pdf&p=DevEx,5061.1.

  [3] http://www.csmonitor.com/Environment/Inhabit/2017/0303/America-s-biggest-water-users-farmers-learn-to-use-less-of-it.

  [4] http://www.npr.org/2015/04/18/400573611/a-water-markets-might-work-in-california.

  [5] http://www.npr.org/2015/04/18/400573611/a-water-markets-might-work-in-california.

  [6] https://www.nature.org/ourinitiatives/habitats/riverslakes/water-markets.xml?redirect=https-301

  [7] http://www.csmonitor.com/Environment/Inhabit/2017/0303/America-s-biggest-water-users-farmers-learn-to-use-less-of-it.

  [8] http://www.ppic.org/main/publication_show.asp?i=1177.

  [9] http://www.ppic.org/main/publication_show.asp?i=1177.

  [10] http://www.csmonitor.com/Environment/Inhabit/2017/0308/How-water-swaps-help-the-West-manage-a-precious-resource.

  [11] http://www.csmonitor.com/Environment/Inhabit/2017/0308/How-water-swaps-help-the-West-manage-a-precious-resource.

  [12] http://www.nationalwatermarket.gov.au/about/

  [13] http://www.nationalwatermarket.gov.au/about/

  [14] http://www.ppic.org/main/publication_show.asp?i=1177.

  [15] http://www.nationalwatermarket.gov.au/about/

  [16] http://grist.org/food/california-has-a-real-water-market-but-its-not-exactly-liquid/

  [17]http://grist.org/food/california-has-a-real-water-market-but-its-not-exactly-liquid/

  [18] http://grist.org/food/california-has-a-real-water-market-but-its-not-exactly-liquid/

  [19]http://grist.org/food/california-has-a-real-water-market-but-its-not-exactly-liquid/

  [20] http://www.nationalwatermarket.gov.au/about/.

  [21] http://www.ppic.org/main/publication_show.asp?i=1177.

  [22] http://www.csmonitor.com/Environment/Inhabit/2017/0308/How-water-swaps-help-the-West-manage-a-precious-resource

  [23] https://ww2.kqed.org/science/2014/06/23/some-california-farmers-fallow-fields-others-sell-water-for-big-profits/

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  • <h3>National Bureau of Economic Research (Public Use Data Archive)</h3><p><img width="180" height="43" alt="" src="/live/image/gid/4/width/180/height/43/478_nber.rev.1407530465.jpg" class="lw_image lw_image478 lw_align_right" data-max-w="329" data-max-h="79"/>Founded in 1920, the <strong>National Bureau of Economic Research</strong> is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.</p><p> Quick Link to <strong>Public Use Data Archive</strong>: <a href="http://www.nber.org/data/" target="_blank">http://www.nber.org/data/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The Penn World Table</h3><p> The Penn World Table provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950-2010.</p><p><a href="https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php" target="_blank">Quick link.</a> </p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>NOAA National Climatic Data Center</h3><p><img width="200" height="198" alt="" src="/live/image/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg" class="lw_image lw_image483 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 3x" data-max-w="954" data-max-h="945"/>NOAA’s National Climatic Data Center (NCDC) is responsible for preserving, monitoring, assessing, and providing public access to the Nation’s treasure of <strong>climate and historical weather data and information</strong>.</p><p> Quick link to home page: <a href="http://www.ncdc.noaa.gov/" target="_blank">http://www.ncdc.noaa.gov/</a></p><p> Quick link to NCDC’s climate and weather datasets, products, and various web pages and resources: <a href="http://www.ncdc.noaa.gov/data-access/quick-links" target="_blank">http://www.ncdc.noaa.gov/data-access/quick-links</a></p><p> Quick link to Text & Map Search: <a href="http://www.ncdc.noaa.gov/cdo-web/" target="_blank">http://www.ncdc.noaa.gov/cdo-web/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The World Bank Data (U.S.)</h3><p><img width="130" height="118" alt="" src="/live/image/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg" class="lw_image lw_image484 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 2x, /live/image/scale/3x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 3x" data-max-w="1406" data-max-h="1275"/>The <strong>World Bank</strong> provides World Development Indicators, Surveys, and data on Finances and Climate Change.</p><p> Quick link: <a href="http://data.worldbank.org/country/united-states" target="_blank">http://data.worldbank.org/country/united-states</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Reserve Economic Data (FRED®)</h3><p><strong><img width="180" height="79" alt="" src="/live/image/gid/4/width/180/height/79/481_fred-logo.rev.1407788243.jpg" class="lw_image lw_image481 lw_align_right" data-max-w="222" data-max-h="97"/>An online database consisting of more than 72,000 economic data time series from 54 national, international, public, and private sources.</strong> FRED®, created and maintained by Research Department at the Federal Reserve Bank of St. Louis, goes far beyond simply providing data: It combines data with a powerful mix of tools that help the user understand, interact with, display, and disseminate the data.</p><p> Quick link to data page: <a href="http://research.stlouisfed.org/fred2/tags/series" target="_blank">http://research.stlouisfed.org/fred2/tags/series</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>MapStats</h3><p> A feature of FedStats, MapStats allows users to search for <strong>state, county, city, congressional district, or Federal judicial district data</strong> (demographic, economic, and geographic).</p><p> Quick link: <a href="http://www.fedstats.gov/mapstats/" target="_blank">http://www.fedstats.gov/mapstats/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Internal Revenue Service: Tax Statistics</h3><p><img width="155" height="200" alt="" src="/live/image/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg" class="lw_image lw_image486 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg 2x" data-max-w="463" data-max-h="596"/>Find statistics on business tax, individual tax, charitable and exempt organizations, IRS operations and budget, and income (SOI), as well as statistics by form, products, publications, papers, and other IRS data.</p><p> Quick link to <strong>Tax Statistics, where you will find a wide range of tables, articles, and data</strong> that describe and measure elements of the U.S. tax system: <a href="http://www.irs.gov/uac/Tax-Stats-2" target="_blank">http://www.irs.gov/uac/Tax-Stats-2</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>USDA Nutrition Assistance Data</h3><p><img width="180" height="124" alt="" src="/live/image/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg" class="lw_image lw_image485 lw_align_right" srcset="/live/image/scale/2x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 2x, /live/image/scale/3x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 3x" data-max-w="1233" data-max-h="850"/>Data and research regarding the following <strong>USDA Nutrition Assistance</strong> programs are available through this site:</p><ul><li>Supplemental Nutrition Assistance Program (SNAP) </li><li>Food Distribution Programs </li><li>School Meals </li><li>Women, Infants and Children </li></ul><p> Quick link: <a href="http://www.fns.usda.gov/data-and-statistics" target="_blank">http://www.fns.usda.gov/data-and-statistics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Congressional Budget Office</h3><p><img width="180" height="180" alt="" src="/live/image/gid/4/width/180/height/180/380_cbo-logo.rev.1406822035.jpg" class="lw_image lw_image380 lw_align_right" data-max-w="180" data-max-h="180"/>Since its founding in 1974, the Congressional Budget Office (CBO) has produced independent analyses of budgetary and economic issues to support the Congressional budget process.</p><p> The agency is strictly nonpartisan and conducts objective, impartial analysis, which is evident in each of the dozens of reports and hundreds of cost estimates that its economists and policy analysts produce each year. CBO does not make policy recommendations, and each report and cost estimate discloses the agency’s assumptions and methodologies. <strong>CBO provides budgetary and economic information in a variety of ways and at various points in the legislative process.</strong> Products include baseline budget projections and economic forecasts, analysis of the President’s budget, cost estimates, analysis of federal mandates, working papers, and more.</p><p> Quick link to Products page: <a href="http://www.cbo.gov/about/our-products" target="_blank">http://www.cbo.gov/about/our-products</a></p><p> Quick link to Topics: <a href="http://www.cbo.gov/topics" target="_blank">http://www.cbo.gov/topics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Aviation Administration: Accident & Incident Data</h3><p><img width="100" height="100" alt="" src="/live/image/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg" class="lw_image lw_image80 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 2x, /live/image/scale/3x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 3x" data-max-w="550" data-max-h="550"/>The NTSB issues an accident report following each investigation. These reports are available online for reports issued since 1996, with older reports coming online soon. The reports listing is sortable by the event date, report date, city, and state.</p><p> Quick link: <a href="http://www.faa.gov/data_research/accident_incident/" target="_blank">http://www.faa.gov/data_research/accident_incident/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>HUD State of the Cities Data Systems</h3><p><strong><img width="200" height="200" alt="" src="/live/image/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg" class="lw_image lw_image482 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 3x" data-max-w="612" data-max-h="613"/>The SOCDS provides data for individual Metropolitan Areas, Central Cities, and Suburbs.</strong> It is a portal for non-national data made available through a number of outside institutions (e.g. Census, BLS, FBI and others).</p><p> Quick link: <a href="http://www.huduser.org/portal/datasets/socds.html" target="_blank">http://www.huduser.org/portal/datasets/socds.html</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>