California's Drought Demands Better Markets
Use it like it's expensive.
California's cities are adapting to the state's worst-in-a-century drought, hitting aggressive targets for water reduction set by Governor Jerry Brown in April. The bigger challenge is to change the behavior of farmers, who consume 80 percent of the state's water and have so far been spared the same magnitude of restrictions.
That's not because farmers are any less creative, efficient or environmentally responsible than city dwellers. The problem is that the water used by farms in California, as in much of the Southwest, remains mostly protected from the market price signals that could allocate it most efficiently.
California has a system of sorts for transferring water from farms to cities, but it is complicated, bureaucratic and litigious, as John Lippert explains in the December issue of Bloomberg Markets. In the Imperial Valley, some 500 farms control the rights to 3.1 million acre-feet of water a year -- one-third as much as the state's cities use. Farmers pay next to nothing for it; their ability to use the water is instead determined by how long they've owned the land it flows past, a system that's lasted for more than a century.
In 2003, with cities demanding more water, the federal government pressured the Imperial Valley's irrigation agency to transfer some of its farmers' share to San Diego, at a price below what individual farmers could likely get today if they could sell the water directly. The money from San Diego pays for water conservation projects in the valley. Many farmers have objected; some sued the agency, a legal battle that took more than a decade and ended in failure and frustration.
The U.S. Department of the Interior calls the Imperial Valley's deal with San Diego a model for elsewhere in California and other states. It should aim higher. A better approach would be to charge farmers something that more accurately reflects the value of the water they use. At the same time, the government should make it easier for farmers to sell or lease their water rights, so that the opportunity cost of using it inefficiently is higher. Australia has shown that such reforms can work.
The way to see that California's increasingly scarce water is well-allocated is to stop sheltering it from the laws of supply and demand.
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