California’s chronic water problems were once again national news when Gov. Jerry Brown signed legislation establishing a code of water-use restrictions that would be more fitting for an undeveloped nation. As usual, policymakers chose the austerity of coercive public policy over the voluntary, cooperative agreements that markets use to efficiently and fairly allocate goods and services.
Aside from a few small enterprises, there are no comprehensive water markets in the state. More than 90 percent of the water that flows through California is under the control of a centralized government entity. A Ventura County pilot program under the authority of the Fox Canyon Groundwater Management Agency, however, could change everything.
“In a significant breakthrough for the state’s water economy, a community of farmers near Ventura are about to join a new groundwater market,” according to the Water Deeply news and analysis site.
In this model, farmers, who have had to operate under a use-it-or-lose-it policy, are free to sell their groundwater. For some, the sales will generate more revenue than sales of the crops they would have otherwise irrigated with the water. Others will be able to both irrigate their crops and sell their excess supply. Water Deeply says experts believe the market, which kicked off in June and is the first of its kind in California, “may be replicated in other parts of the state.”
The project is a response to the Sustainable Groundwater Management Act, three bills passed in 2014 that created, according to the California Department of Water Resources, “a framework for sustainable, groundwater management.” The new state groundwater management scheme has the potential, says Matthew Fienup of California Lutheran University’s Center for Economic Research and Forecasting, to force some farmers out of business due to the “existential financial stress” it would place on them.
Three years ago, Fienup wrote that “farmers have to use their water on their own property or lose access to it in future years. This is the economic equivalent of forcing them to grow hay in the desert. These farmers might prefer to sell their water, while temporarily leaving their land fallow, but California law prohibits this.”
Today, the more than 90 farmers so far participating in the Ventura County pilot program, which Fienup helped create, have been liberated.
There’s no reason why water can’t be allocated by markets. Two decades of rationing farmers, a dam of environmental regulation, and prohibitionist legislation have not solved California’s water problems.
Water markets offer a far better outcome. They’ve been successful in Oregon, Nebraska and Colorado, as well as outside the U.S. “The finest example of water markets that function,” according to Fienup, are found in Australia. It is instructive, he says, “because not long ago Australia’s water laws looked a lot like California’s.”
In 2009, at the end of a 15-year drought, 90 percent of Australian farmers said water trading helped them keep their operations going. The water markets also fueled economic vitality. The Australian National Water Commission reported the trading system boosted Australia’s GDP by $220 million in 2008-09.
“Given the $1.84 billion and 10,100 jobs lost in California’s agricultural industry in 2015 as a result of the water shortage, the economic returns from water trading cannot arrive soon enough,” Fienup wrote in 2015.
It should also be noted that the economic benefits in Australia did not come at the expense of the environment, a fact that eco-conscious Californians should appreciate.
California’s self-inflicted water crisis should be nothing more than a brief entry in history books read by future generations instead of the chronic, interminable headache it’s become. But as long as policymakers keep looking for answers among themselves, the slow-motion disaster will continue without interruption.
There is, however, a way out. First, retail water consumers should not be paying prices set by government utilities. Let the market set them. Market prices mitigate scarcity as consumers respond with self-rationing when prices increase. Market prices will also attract entrepreneurs who will have a financial incentive to introduce new ways to increase supply to meet consumer demand.
Second, more projects like the Ventura County market need to be launched. Policymakers have the political clout, as well as the obligation, to make sure the program is repeated across the state.
Freeing California water will require officials to address a number of other complex issues — environmental regulations and storage chief among them. It won’t be easy, but it has to be done.