Making Water More Liquid

When water is scarce, letting people trade it gets the precious resource to where it’s needed most
Source: Getty Images

The water wells in the rich farmland of California’s Central Valley keep getting deeper, and the pumps keep getting more powerful. Farmers have agreed to reduce their usage of surface water, but nothing stops them from looking for water beneath their properties. So, in the fourth year of a devastating drought, down they go, pursuing a water table that keeps receding. So much water is being pumped out that the land is subsiding, damaging bridges and canals. One Central Valley cotton farmer has drilled five 2,500-foot wells, each the depth of two Empire State Buildings, the San Jose Mercury News reports. It’s literally a race to the bottom.

What’s going on in the Central Valley is a tragedy of the commons. As with overfishing or overgrazing, the drilling farmers overexploited a free, shared resource even before the drought struck. Individually, their logic is impeccable. Collectively, it could be disastrous. In that respect, the Central Valley is a microcosm of an increasingly parched world that hasn’t learned how to manage one of its most precious resources. A NASA study released in June said that “about one-third of earth’s largest groundwater basins are being rapidly depleted by human consumption.”

People have been puzzling over how to share water for as long as civilization has existed: No one really owns the stuff. It refuses to be tamed, cycling restlessly from air to land to sea. In some times and places it’s precious, in others excessive.

An important step toward resolving conflicts over water is to make it liquid, financially speaking. Water today is illiquid in the sense that the right to use it can’t be transferred easily. California’s mechanism for trading water is slow, clunky, and opaque. “If you wanted to do a trade now, you’d have to meet a broker in a coffee shop somewhere. There’s no Wall Street Journal, no Bloomberg, no Carfax,” says Richard Howitt, a scholar at the University of California at Davis’s Center for Watershed Sciences.

A free market in water can’t exist without clearly defined property rights. California lacks that for groundwater, relying on the courts to sort out conflicts. That leaves farmers furiously trying to outpump each other. A state law passed last year will gradually bring groundwater under regulation, but it doesn’t fully phase in until 2040. “I’m a market animal. I’m a money manager. But having efficient market forces requires a rational regulatory body,” says John Dickerson, founder and chief executive officer of Summit Global Management, a water-business investor in San Diego.

California does have a system for regulating surface water, one that dates back to the 19th century gold rush, when miners diverted water from streams to pan and sluice for gold. The state’s water law is based on the old miners’ code: first in time, first in right. Since 1914 a state agency, now the State Water Resources Control Board, has overseen allotments. Senior rights holders get first dibs on a certain quantity of water based on their historical use. Water rights go with land when it’s sold. That’s a workable basis for a trading system because it establishes a property right. (In the wetter Eastern states, where control of water is less of an issue, a vaguer “reasonable use” standard applies.)

California’s system needs some serious modernization, though. It encourages waste by dictating that water not used this year is forfeited in the future. Courts and the legislature have made clear that farmers won’t lose their water rights if they sell water when they have extra, but some potential sellers remain leery. More important, the state water board must determine exactly how much water holders are entitled to sell. This is necessary because historical allotments of “paper water” far exceed the actual amount of water that California gets, even in nondrought years. Progress is being made: For the first time, senior rights holders are being required to report their water usage annually—and to document their historical rights.

Physical obstacles to trading must be removed, too. Water gets stranded in the wet north of California because it’s hard to move southward past the delta of the Sacramento and San Joaquin rivers, the vast estuary east of San Francisco Bay. Governor Jerry Brown supports building bypass tunnels beneath the delta, but that could cost $17 billion and upsets some environmentalists, who fear the delta will be degraded.

Nothing is easy. Irrigation districts, controlled by agricultural interests, sometimes reject water sales to cities by willing member farmers. The ag interests fear that allowing farmland to go fallow will wreck the farm economy, says Clay Landry, managing director of WestWater Research, a water marketing and consulting firm in Boise, Idaho. With a few exceptions, California has done a poor job of helping rural communities make the transition from farming to other ways of earning a living. So they stick with what they know. The upshot is a sclerotic system in which only about 5 percent of California’s water is traded, and most of that among close neighbors.

If California’s water were fully liquid, more would be flowing to urban areas and less to agriculture, which generates 1.5 percent of the state’s gross domestic product but accounts for 80 percent of the water used by people (i.e., not counting water spared for “use” by nature). The state would need to build fewer costly desalination plants, such as the $1 billion San Diego County plant starting up this fall.

The mix of agriculture would probably continue to shift toward high-value vineyards, orchards, and tomatoes and away from corn, rice, and alfalfa, which need lots of water but fetch low prices and can be grown elsewhere. Farmers given an incentive to conserve water would be quicker to fallow their marginal fields or shift to less thirsty crops. Some types of farming might migrate to water-rich parts of the country—like Iowa, a grain-growing state that’s begun experimenting with vegetables. To protect endangered species, government and environmental groups could step up purchases of water rights to keep streams and wetlands full.

Australia shows what a water market can achieve. There, water rights are traded on an exchange like stocks, prices are posted for all to see, and transactions can be concluded in a day. Allocations are based mainly on a share of what’s actually available, not unrealistic fixed amounts. Farmers in the fertile Murray-Darling Basin of southeastern Australia almost completely stopped producing rice during the Millennium Drought last decade and switched to higher-value crops to keep making a living. University of Adelaide professor Mike Young says the market became possible when farmers chose streamlined water rights and surrendered their tangled old ones. “America is the home of free enterprise,” he says. “The fact that there’s not a water market in America means the institutional arrangements are all wrong.”

California captures enough water each year to meet all its needs if it operates efficiently—a big if. Water usage is already falling. Gradually, “markets are doing what markets do,” says WestWater’s Landry. “There’s learning, information sharing, creativity, and discovery.” The drought is speeding up the process. “What causes change more than anything is crisis,” Thomas Howard, executive director of the State Water Resources Control Board, told Bloomberg earlier this year. “I do see us making progress and moving toward the ideal system.” If not, there’s always Plan B: Pray for rain.

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE