California’s extensive network of reservoirs, canals and aqueducts facilitates water marketing. Source: Managing California’s Water, From Conflict to Reconciliation, PPIC, 2011

By Ellen Hanak and Elizabeth Stryjewski

This week, the Public Policy Institute of California (PPIC) released a new report that provides a checkup on California’s progress with two innovative water management tools:  water marketing and groundwater banking.  These tools are part of a modern approach that will enable California to manage its scarce water resources more flexibly and sustainably.

Water marketing involves the temporary, long-term, or permanent transfer of water rights in exchange for compensation. Such transfers can lessen the economic and environmental costs of drought and also help accommodate longer-term shifts in the patterns of water demand.  Groundwater banking is another cost-effective tool:  it involves the deliberate storage of surface water in aquifers during relatively wet years, for retrieval in dry years.

During the late 2000s, California experienced a multiyear drought—the perfect opportunity to see whether the past few decades of state and federal encouragement of these tools have paid off.  We find some progress—but also some backsliding since the drought of the late 1980s and early 1990s.

That earlier drought jump-started California’s water market, thanks in large part to direct state actions. In the late 1980s, the Department of Water Resources (DWR) began purchasing water from a few irrigation districts to make it available to wildlife refuges and State Water Project contractors.

By 1991, when faced with the prospect of draconian across-the-board rationing, DWR launched the state’s first drought water bank, a large-scale brokering program that acquired water from numerous willing sellers and resold it to those facing high costs from shortages.  When the rains returned, the water market continued to grow, as many local districts got comfortable trading with each other (Figure 1).

Figure 1.  The graph shows the evolution of California’s water market. Currently, about 2 million acre-feet of water trades are committed annually, with around 1.4 million acre-feet actually exchanging hands. Source: California’s Water Market, By the Numbers: Update 2012, PPIC

Today, market trades account for roughly 5 percent of all water used annually by the state’s businesses and residents. Water agencies in most counties now participate in this market. Farmers—the largest water-using sector—continue to be the primary providers. Recipients include other farmers, cities, and environmental programs supporting wildlife reserves and river flows for fish. Long-term and permanent trades—especially valuable for supporting shifts in patterns of water demand—now make up well over half of the market.

However, the market did not perform so well during the latest drought, as the graph above shows. To mitigate the drought, overall sales would have been expected to increase considerably relative to the preceding non-drought years. But our study estimates that transfers provided a total of only 500,000 to 600,000 acre-feet in drought-oriented supplies between 2007 and 2010, above and beyond transfers that would likely have occurred anyway (Figure 2).

Figure 2. The slowing market was unable to provide much drought relief from 2007 to 2010 — just 500,000 – 600,000 acre-feet. Source: PPIC, 2012

The market slowdown began in the early 2000s. This slowdown reflects a variety of infrastructure and institutional constraints, including more complicated approval procedures and pumping restrictions introduced in 2007 to protect endangered native fish in the Sacramento-San Joaquin Delta, a key water conveyance hub.

Groundwater banking did a better job mitigating the drought.  For some time now, water agencies in several parts of the state have been recharging aquifers with surface water for local users.  Our study focused on a new form of banking in which local groundwater managers store water for parties located elsewhere in the same county or in other regions.

From the mid-1990s to 2006, these water banks—located in Kern County and Southern California— had built up reserves of nearly 3.4 million acre-feet.  Between 2007 and 2010, they returned nearly 1.9 million acre-feet to their depositors, considerably more than the drought-related water market sales (Figure 3). Groundwater storage likely played an even greater role than these numbers suggest:  DWR estimates that nearly 90 local agencies have been storing water in their local aquifers.

Figure 3. New groundwater banks were useful in the 2007-2010 drought. Withdrawals totaled 1.9 million acre-feet — three times the volume that was traded in the same period. Source: PPIC

What lessons can be drawn from this experience?  Despite its good showing, groundwater banking still faces obstacles.  More comprehensive local basin management—a common practice in Southern California and Silicon Valley—would prevent unsustainable pumping and long-term declines in groundwater levels.  Outside pressure—with a credible threat that the state would step in if local agencies fail to do so—might be the best way to proceed, ideally accompanied by positive financial incentives.

To strengthen the water market, the state needs to clarify and simplify the institutional review process, while continuing to ensure that transfers do not harm the environment or other water users.

Both marketing and banking depend on addressing infrastructure weaknesses that restrict water conveyance through the Delta. Those constraints have already limited both the market’s ability to furnish water supplies in dry years and the availability of supplies to replenish groundwater banks in wet years. Because routinizing marketing and banking transactions will require risk-taking, high-level state and federal officials should be involved, perhaps through a coordinating committee to facilitate decisions.

Attending to these and other priorities described in the report will help ensure the success of two of the state’s most critical strategies for efficiently managing its water resources.

Ellen Hanak is a senior policy fellow and Elizabeth Stryjewski is a policy associate at the Public Policy Institute of California.

Further reading

Governor’s Commission to Review California Water Rights Law. 1978. Final Report. Sacramento, CA.

Hanak, E. 2003.  Who Should Be Allowed to Sell Water in California?  Third-Party Issues and the Water Market.  Public Policy Institute of California.

Hanak, E., J. Lund, A. Dinar, B. Gray, R. Howitt, J. Mount, P. Moyle, B. Thompson. 2011. Managing California’s Water:  From Conflict to Reconciliation.  Public Policy Institute of California.

Phelps, C.E., N.Y. Moore, M.H. Graubard. 1978. Efficient Water Use in California:  Water Rights, Water Districts, and Water Transfers.  R-2386-CSA/RF. Santa Monica, CA: RAND Corporation (report to the California State Assembly).

Tanaka, S.K., T. Zhu, J.R. Lund, R.E. Howitt, M.W. Jenkins, M. Pulido-Velazquez, M. Tauber, R.S. Ritzema, I.C. Ferreira. 2006. “Climate Warming and Water Management Adaptation for California.” Climatic Change 76(3-4): 361-387.x