Water market offers better approach to conservation

The State Water Project and Central Valley Project provide water to contractors at heavily subsidized prices.
The State Water Project and Central Valley Project provide water to contractors at heavily subsidized prices. Sacramento Bee file

Gov. Jerry Brown’s April 1 order for a 25 percent reduction in urban water use follows unprecedented restrictions from the State Water Resources Control Board in March. Such top-down mandates would be unnecessary if California followed more innovative approaches already working in other places plagued by drought.

The new rules in California limit watering lawns, serving water in restaurants and using potable water on golf courses, and prohibit hosing off driveways and decks. The reductions will be enforced using fines, cease-and-desist orders and enforcement officials. This is what happens when market prices are not used to allocate water.

California’s 1930s federal Central Valley Project and 1960s State Water Project provide water to contractors at heavily subsidized prices. Farmers in parts of California are consuming subsidized water at $20 per acre-foot that is worth more than $2,000 per acre-foot in urban areas.

Government barriers to trade lock water into old usage patterns that often do not reflect the changing economy. Agriculture consumes 80 percent of California’s water used by humans, yet it produces only 2 percent of the state’s output.

Today, 22 of California’s 58 counties restrict sale of water across county lines. The federal and state governments impose burdensome rules that deter trades among all but the most determined. As a result, water does not get allocated to its highest-value uses.

When prices accurately reflect scarcity, people decide how best to reduce consumption. The government doesn’t ban trips to Grandmother’s house when gasoline becomes scarcer. When gasoline becomes scarcer, gas prices rise and consumers decide how best to conserve. We don’t have gas cops, and we don’t need water cops.

With market pricing, farmers can decide which water-saving technologies to employ and which crops are no longer profitable given the real cost of water. California farmers today waste subsidized water growing rice, alfalfa and other water-intensive crops better suited to be grown elsewhere.

California’s water is too precious to be mispriced and wasted. In a state with 38 million people and climate variability, old ways of managing water are obsolete. California should follow the lead of Australia and allow water markets to flourish.

In the 1990s and early 2000s, Australia experienced a mega drought called “The Big Dry.” In response, Australia enacted major water reforms that quantified water rights and allowed large-scale trading. A sophisticated online platform called Waterfind was developed to bring buyers and sellers together at mutually agreeable prices in real time.

This technology ensures that the price of water reflects its true scarcity and water is allocated rationally. When water became more valuable than their crops, many Australian farmers survived the drought by selling water to urban areas. Total water consumption fell by 35 percent in Australia after adopting scarcity water pricing. California deserves a 21st-century water market.

California also needs innovative new supply options. The state’s deteriorating water collection and conveyance system is overly dependent on mountain snowmelt. The snowpack was just 5 percent of normal on April 1.

No major water infrastructure project has been built since the 1970s. Now, four years into a historic drought, California is behind the eight ball.

The unelected California Water Commission will decide which water-storage projects are built with $2.7 billion of water bond money approved in November. If history is any guide, these projects will take years to complete and bureaucrats will settle for the traditional massive surface-storage model, where there is substantial loss from evaporation.

California is home to many of the world’s top problem solvers. It is time to unleash this entrepreneurial talent on water issues by removing irrational barriers to trade and incentivizing competition. And this is not mere theory.

New approaches are working in drought-prone Australia, where entrepreneurs are creating a new tomorrow. Given the opportunity, this would work in California as well.

Lawrence J. McQuillan is a senior fellow and the director of the Center on Entrepreneurial Innovation at the Independent Institute in Oakland. Aaron L. White is a policy analyst at the Independent Institute.