Water Markets Offer a Better Way to Allocate Scarce Resources in the West

Competition for access to limited water resources has been a hallmark of life in the West for generations. Attempts to manage water through political solutions have consistently resulted in conflicts between states and various user groups, including cities big and small.

Water scarcity affects everyone and everything in the West. Wildlife habitat, agriculture, energy production, recreation, and, as witnessed the past few summers, the ability to manage wildfires all depend on access to water. Yet, political solutions to water shortages continually fall short.

The old maxim that whiskey is for drinking; water is for fighting is as true today as a century ago. But an alternative to political governance is quickly gaining a foothold in the West in the form of water markets.

One way to resolve conflicts over limited water resources is by creating a market that allows those with water rights to transfer their rights to other user groups and receive fair compensation in exchange.

Water rights – both private and public – have evolved historically and are not easily changed. These rights are often reflected in property values and rents, complicating efforts to respond to drought or new demand for water from swelling populations. Most western state water rights are based on a “use it, or lose it” maxim, which often encourages ranchers, farmers, and local governments to use more than needed - a wasteful and inefficient system.

When it comes to managing scarce resources where demand is high, it’s imperative to have a governance system that can efficiently direct finite water resources to the greatest good while also being fair, equitable, and effective. Water rights and water markets offer an effective and efficient way to allocate water.

Water markets are a relatively new and increasingly popular tool in the fight against water scarcity. They make voluntary exchanges of water rights possible between buyers and sellers. Markets work best where there are many traders and transactions to minimize the risk of a single entity gaining a monopoly.

Water markets provide a mechanism for transferring water rights between various user groups that is transparent, fair, and equitable. For example, farmers in a drought year may buy or lease water rights to ensure their crops survive until harvest, reallocating water to where it is needed most. The ability to purchase water in the market helps the agricultural community cope with drought and encourages conservation. Water markets can also reduce conflicts between municipal, agricultural, conservation, recreational and industrial needs.

In a well-functioning market, both buyer and seller receive clear price signals of the value of the water based on how much water is available and how much other buyers are willing to pay for it. All sides are incentivized to use a scarce resource efficiently, which supports conservation.

All sides benefit. Voluntary water markets create a flexible and transparent framework that reduces conflicts in the water transfer process. Both sides of the transaction understand the value of a water resource because the market and not politics set it.

Markets also treat all user groups alike. A market approach provides farmers with important information – in the form of price signals – they need to determine which crops to plant based on their water use. Farmers have a natural incentive to find innovative ways to use less water because doing so reduces their operating costs. The same is true for recreational, industrial, municipal, and other user groups competing for limited water resources. The higher the demand, the higher the value of the resource – and the greater the incentive to conserve.

While markets have inherent benefits, water transactions can require users to run a gauntlet of regulatory hurdles and bureaucratic red tape. Meeting the regulatory requirements of the relevant state and federal agencies and local supply organizations can be burdensome, especially for smaller users. Reforms to better define the regulatory review process and reduce transaction costs would make the process more user-friendly and efficient.

The alternative to voluntary water markets is often conflict. In January, Nebraska announced plans to build a $500 million canal and reservoir over concerns about development in the South Platte River Basin in neighboring Colorado. Nebraska depends on the Platte for much of its water supply, but so does Colorado, which quickly responded that it would “protect and aggressively assert” its water rights.

Water wars are nothing new. The legal fight between Georgia, Alabama, and Florida over the shared Apalachicola-Chattahoochee-Flint basin has spanned more than three decades. The states of Arizona and California engaged in a water war that ran from 1930 to the early 2000s. Nebraska spent decades entangled in a legal battle with Kansas over water rights to the Republican River, which runs through Colorado, Nebraska, and Kansas.

While water wars have historically been limited to surface waters, these wars have extended to groundwater, as reflected in the ongoing litigation, Mississippi v. Tennessee, a battle over the rights to a regional groundwater aquifer beneath both states that the U.S. Supreme Court ruled on in November.

One thing for sure is that demand for water is not going down. Water usage is evolving across the West as the changing climate and prolonged drought alter the water supply. As more and more people move West and demand for land increases – urbanization and agricultural uses are among the leading causes of increased demand for water – systems for allocating scarce water resources that are fair and transparent are an imperative of good governance.

Voluntary markets are a valuable method for allocating limited resources in a timely and cost-efficient manner, which is why economists and policymakers increasingly advocate for their use. Local and state policymakers also understand local challenges better than distant federal regulators and are often best suited to implement place-based solutions that incorporate the competing needs of multiple user groups. Water markets also provide an efficient way to share resources that cross political boundaries.

As the West grows more arid and water resources become more scarce, markets offer an efficient way of transferring access rights from lower to higher-value uses and a fair way to overcome the resistance of existing property rights holders. Water markets are also a way to include all user groups, including environmental groups who may choose to purchase water rights from existing users for conservation purposes.

For markets to function properly, they need a transparent legal framework that allows holders of water rights to transfer their rights to other parties and receive fair compensation. And while over-regulation is always a risk, a minimum amount of regulation is needed to ensure users are complying with market rules and to avoid monopolies and market cheating.

Done correctly, water markets can reduce friction between user groups and recognize the rights of property owners while increasing both access to and conservation of a finite resource in the West.

Additional information on the nuances of water markets can be found here: Conservation groups want to buy land to protect it. One problem: It’s often illegal; Water Wars: Who Controls The Flow?; Western Water Law: Understanding the Doctrine of Prior Appropriation; Trading Water, Saving Water