California has big troubles. It hasn’t rained for two years. Our reservoirs are almost depleted. Our aquifers are being overdrawn. Forecasts for next winter’s rain, which were optimistic not long ago, have become increasingly pessimistic.
Of course, everybody knows California is in a drought. So, California is doing things. We have education programs. We have shaming apps and neighbors reporting on neighbors. We have fines for water wasters. We have Water Cops. We have the Lawn Dude.
Still, Californians underestimate the drought’s total cost.
The drought’s environmental costs are especially underappreciated. It is an environmental disaster. When water gets tight, fish, birds, and other wildlife suffer. We see increasing numbers of confrontations between snakes and predators, like mountain lions and bears, and people. Animals l ose most of these confrontations. In some areas, we are losing entire riparian and wetland ecosystems.
Ocean water is intruding into coastal groundwater basins. Nitrate and sulfate levels in drinking water are rising, and in some areas exceed levels permitted by public health standards.
Even the land is changing. Persistent aquifer overdrafts are causing land to sink. Infrastructure and buildings, breaking under the strain of sinking land, will need to be rebuilt or repaired. All these factors increase the costs of the drought. Worse, once an aquifer is collapsed, it can never be restored. Our storage capacity is permanently reduced. Persistent aquifer overdrafts may even increase the frequency of earthquakes.
Over-drafting of aquifers needs to stop. Riparian and wetland habitats need to be maintained. The price that water users pay should reflect all costs.
California’s current response is increasing the drought’s costs. Education programs are expensive. So are water cops and the systems to prosecute and punish profligate water users. And yet, water usage has not significantly decreased.
Some costs are immeasurable. A society with water cops driving around looking for people watering their lawns, where neighbors shame each other on social media or report neighbors to authorities, starts to look oppressive. The mutual trust necessary for an efficient and well-ordered society starts to erode.
The damage could be far less. Nixon made the OPEC oil shocks worse by capping prices and using coercive government tools to reduce demand. This is exactly what California is doing with water. Demand exceeds supply. The price to users is too low.
It would be simpler to let water prices rise to a market-clearing price. This would quickly reduce aquifer overdrafts, while leaving sufficient water to support ecosystems and the species they support. It would also mean that most Californians would see prices increase a lot.
This proposal tends to drive people crazy, yet we allocate few resources the way we allocate water.
Consider that life-giving resource, coffee. Between January and April of 2014, coffee bean prices increased 72 percent on global markets. The United States retail price rose about 33 percent. The price increases reflected a drought in Brazil. Coffee consumers did not need to have detailed information about South American weather patterns. The price provided all they needed to know.
Consider gasoline, too. In a market where powerful cartels manipulate global supplies, the price of gasoline conveys detailed signals about the state of global supply. Whether a large refinery in California is temporarily shuttered, or political unrest roils a Middle East oil producer, consumers can stay abreast of changing conditions by observing price changes at the pump.
Why not with water?
Many people object on fairness grounds, arguing that water is a necessity, and market prices would deny that necessity to poor people. Others object on legal grounds, arguing that our water prices are a complex result of history, legal precedent, and sometimes contradictory laws. Still others object to leaving some water for animals and plants while people suffer.
The fairness argument is easy to dismiss. The price that matters is the price of the last gallon sold. We could easily give everyone some minimum allocation of water for free (or nearly-free) and then charge a market-clearing price for everything beyond that.
Voilà! Problem solved. No oppressive government measures.
This system is employed in Tucson, Arizona. There, steep block pricing has allowed the city to allocate scarce water to vitally important uses. One need only compare an image of Tucson homes to one of Phoenix homes to see the strategy’s effectiveness. In Phoenix, where flat-rate pricing is used, you occasionally see residential landscaping a Seattle home owner would envy. In Tucson, it’s all cactus and rock gardens.
The argument against leaving water for plants and animals relies on the concept that people are more important than other living things. We don’t need to debate that. It’s only important in a situation where human life is at stake, and California's water situation is not a threat to mankind. Twenty-first century America is fabulously wealthy. Leaving some water for the critters may cost us, but we can pay it and still have a standard of living that most of mankind throughout history would have envied.
The legal objection is also easy to challenge. Fortunately for all of us, California's water laws weren't brought down from Mount Sinai by Moses, and, like the Commandments, they are routinely violated. Most of California's water law, with the exception of transfer and resale legislation, is pretty good. The problem is that it isn't being enforced.
Assertion of the existing laws can improve the situation. Only 23 of California’s approximately 400 groundwater basins have undergone "adjudication". Generally, adjudicated basins are models of efficient allocation. Water prices in these jurisdictions are connected to supply and demand and are also, predictably, significantly higher than in non-adjudicated basins.
There are two important issues with California's water laws that need to be addressed. One relates to owners of agricultural land; they are entitled to "reasonable and beneficial use" of water under the land. This is called an "overlying right." Unfortunately, they’re not allowed to sell or transfer the water to other users. This needs to change.
Another is that the California Environmental Quality Act, the Endangered Species Act, and the State Water Resources Control Board prevent the building of the infrastructure that's required to move water. About 75 percent of California’s supply of water originates north of Sacramento, while 75 percent of California’s demand for water originates south of Sacramento. Water needs to move, and the California State Water Project is insufficient to allow local and regional transfers. Northern Colorado and parts of Oregon provide examples of regions that effectively transfer water between users.
Asserting California's existing water laws and changing inefficient parts of those laws are revolutionary ideas, and a first-order political challenge. To do so would require leadership and courage, two characteristics that are almost non-existent in American political leadership. It's worth the effort. It would fundamentally improve California's future.
Unfortunately, it could take five to ten years, a time frame not conducive to managing today’s emergency. Californians need to understand that we have a crisis, and we need to act now.
Matthew Fienup teaches graduate econometrics and works for the Center for Economic Research and Forecasting at California Lutheran University, where he specializes in applied econometric analysis and the economics of land use. He is currently working on his PhD at the Bren School of Environmental Science and Management at the University of California Santa Barbara. He holds a Masters Degree in Economics from UCSB. Bill Watkins is a professor at California Lutheran University and runs the Center for Economic Research and Forecasting, which can be found at clucerf.org
Flickr photo by M. Dolly, California Garden: "Hacking out the lawn and replacing it with drought tolerant and native plants... Best decision ever! Shown here: Abutilon palmeri - Indian Mallow, and Salvia mellifera - Black Sage."
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Beautiful Picture, but not!
Messrs Fienup and Watkins seek to have it both ways. The economic delusion they share with most water mavens is the root cause of the present problem with conservation strategies.
What good is a pricing signal if only a small fraction of consumers are exposed to it?
The notion that there is a realistic first-world allocation of water that should be exempt from a price signal is where the whole theory fails. When 80 or 90 percent of Southern California water users consume less than this allocation, no conservation occurs. When they use more than the allocation, they vote.
There's the rub.
The only solution that can produce an actual reduction in consumption is to expose ALL water users to market rates for water. No special cases. No subsidies. No exceptions.
The problem for California water agencies is that the nexus between their cost to to acquire and deliver water and the prices (or rates) at which they sell it has long ago been illegally abandoned. Social engineering, pension feathering, and subsidies to unrelated government activity abound in the water business. This makes a steep across-the-board increase in water rates untenable without restructuring the agencies themselves.
Look around Southern California at the hundreds of local water agencies, each serving a small area, historically perhaps no more than extent of a large farm or ranch. Each has a costly administrative staff, union contracts, elected board of directors, and so on, but only 20 to 50 thousand customers is typical.
Most of these agencies are exposed to the same wholesale cost to acquire water from regional agencies, and same costs to deliver it (mostly electricity, purchased from regional utilities at regulated rates).
So why are their rates for water so different?
Water ceased long ago to be a cost-based government service. Today, the water business is a club increasingly made up of people who want to preserve their franchise while lecturing ordinary users about what is "good" and "bad" about their behavior. After all, they get paid and pensioned for delivering the lecture too!
The answer is flat-rate water at the wholesale and retail level that reflects the supply cost. If the supply cost is too low to prevent environmental damage due to demand, it is the responsibility of the Legislature to establish legal restrictions on over consumption of primary resources. This will produce conservation and has positive the secondary effects of giving the social engineers in the water business a well-deserved furlough and eliminating operating deficits that are used to justify the relentless growth of these anachronistic agencies.