American River, 1977. Source: California Department of Water Resources

by Jay Lund, Ellen Hanak, Barton “Buzz” Thompson, Brian Gray, Jeffrey Mount and Katrina Jessoe

This is a re-posting from 11 February 2014 (in the previous drought).  

With California in a major drought, state and federal regulators will be under pressure to loosen environmental flow standards that protect native fish. This happened in the 1976-77 and 1987-92 droughts, and today’s drought could become much worse.

These standards demonstrate the high value society places on the survival of native fish and wildlife. In past droughts, we have given away some of these protections because of pressure to make more water available for other uses.

But this time, California can do better. We can create a special water market that better meets the state’s goals of both ensuring a reliable water supply and protecting the environment. In this market, growers and cities would pay for the additional water made available from relaxed environmental standards, and the revenues would help support fish and wildlife recovery.

Water trading can often greatly dampen the costs of drought. Farmers irrigating high-cash crops such as almond trees can buy some water from growers of alfalfa, rice and other crops that are less profitable per drop of water used.

Such trading can greatly reduce the overall economic and social costs of a drought and distribute these costs more broadly. Importantly, such market transactions ensure that those who use less water than their entitlement are compensated for the reduction. Because water buyers must pay for the added water, they also have an incentive to conserve.

Source: California Department of Water Resources

Although environmental uses generally do not have water rights, instream flow and water quality rules intended to protect endangered fish and other wildlife from extinction are similar to very secure water entitlements.

But in past droughts, state or federal decisions to relax environmental standards essentially became a gift to other water users. The shorted environmental uses were not compensated, and farmers and cities that benefited had less incentive to conserve water and be prepared for droughts – for instance by underinvesting in local storage or overinvesting in perennial crops that need more reliable water supplies than the system can provide.

A better approach would create a drought environmental water market, so that those who gain from relaxed standards help compensate the losers. When standards are loosened, fish threatened with extinction may require additional expensive actions such as restoration, habitat acquisition and “conservation hatcheries,” which help maintain endangered species outside their natural environment.

Unlike past environmental water markets, where agencies only bought water for fish and wildlife refuges, some environmental flows in this special drought market would be treated as senior water rights that could be sold. Fisheries agencies could sell some of these flows when they determine that the reduction will not jeopardize endangered species. The sale of this water would provide funds that help native species recover and lessen demands to relax environmental flows.

For example, a relaxation of environmental flow requirements that made available 100,000 acre-feet of water – perhaps worth $400 an acre-foot during a drought – would generate $40 million to help pay for compensating actions. Those actions might include buying water for environmental purposes elsewhere in the state or creating a reserve fund to aid native fish after the drought.

Making this new market work would require some new rules, and there are several options. Compensated relaxation of environmental flow standards could be done as:

• Part of the Endangered Species Act regulatory program (biological opinions, incidental take permits or habitat conservation plans),
• Negotiated agreements with water users, or
• Fixed penalties for violating flow and water quality standards.

Dry lakebed, 1988. Source: California Department of Water Resources

The price could be set at the fair market value of the water made available, the cost of compensatory environmental actions, or a fixed or negotiated fee established by the regulatory agency.

Creating such a drought environmental water market would help limit the reductions in environmental river flows, while ensuring that such reductions receive some compensation.

For California, this would be an appropriate expression of the state’s co-equal environmental and economic goals for water management in times of hardship. If we can’t all get better together in a severe drought, at least we can reduce and share the pain fairly, in a way that provides some help to fish and other species that depend on our rivers for their survival.

 Jay Lund is director of the Center for Watershed Sciences at UC Davis; Ellen Hanak is a senior fellow at the Public Policy Institute of California (PPIC); Barton “Buzz” Thompson is director of the Stanford Woods Institute for the Environment; Brian Gray is a professor at the UC Hastings College of the Law; Jeffrey Mount is a senior fellow at the PPIC; and Katrina Jessoe is an assistant professor of agricultural and resource economics at UC Davis.

Further reading

Hanak et al., (2011), Managing California’s Water: From Conflict to Reconciliation, Public Policy Institute of California, San Francisco, CA, 500 pp., February

Hanak, E. and E. Stryjewski (2012), California’s Water Market, By the Numbers: Update 2012, Public Policy Institute of California, San Francisco, CA

Howitt, R.E., “Empirical analysis of water market institutions: The 1991 California water market,” Resource and Energy Economics, Volume 16, Issue 4, November 1994, Pages 357–371

Israel, M. and J.R. Lund, “Recent California Water Transfers: Implications for Water Management,” Natural Resources Journal, Vol. 35, pp. 1-32, Winter 1995

Lund, J. et al., (2010), Comparing Futures for the Sacramento-San Joaquin Delta, University of California Press, Berkeley, CA, February

Lund, J.R. and M. Israel, “Water Transfers in Water Resource Systems,” Journal of Water Resources Planning and Management, ASCE, Vol. 121, No. 2, pp. 193-205, March-April 1995

Thompson, B. (2000), “Markets for Nature,” William and Mary Environmental Law and Policy Review, Vol. 25:261