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Water Rights and Water Marke;Ng

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Water Rights and Water Marke;Ng Water rights and water marke0ng Michael Hanemann Arizona State University It’s about water rights • The larger context is improved management, allocaon and use of water. • But that depends, in turn, on the property rights to water. • Water rights are typically part of the problem. • The problem can be that exis<ng water rights have not been comprehensively determined (adjudicated). • It can be that water rights are not enforced. • It could also be that exis<ng water rights seem poorly suited to contemporary condi<ons, generang some need to modify or revise them. • In these cases, ushering into existence a beHer defined or more comprehensive set of water rights, or a more flexible set of water rights, or a new set of water rights, may be a Key building blocK towards creang an improved water management system. What economists think (Op-ed in Wall Street Journal) In the context of the 2014-2016 California drought 3 4 This makes two implicit assump0ons about property rights 1. Farmers own the water they use (just liKe they own the land they farm). So, they should be free to sell it. 2. There is no right or regulatory obligaon to instream use or protec<on of fish or aquac habitat. If the government wants these things to occur, and needs water for this, it should pay the marKet price of that water. • Both assump<ons are dead wrong. • The farmers who use water in California do not actually own that water. • As specified in the California Cons<tu<on, all water is owned by the people of California. • The farmers have a right to use the water, subject to certain condi<ons, which can be modified retroac<vely. • Including modificaon to meet public trust needs. • In many cases, the right to abstract water is owned by the water district that supplies the farmers, not by the farmers themselves. • Efforts to take that right from districts and give it to individual users failed. • The general welfare reQuires that the water resources of the State be put to beneficial use to the fullest extent of which they are capable. • Mul<ple uses are favored; reserving water for a single-purpose use is disfavored. • The California water rights agency is expressly directed to determine whether proposed water transfers will have unreasonable effects on fish, wildlife, or other instream beneficial uses. 6 The property right to water: key dis0ncons • Dis<nguish the property right to divert water from the contractual right to receive water from a water supply organizaon. • About 20% of the water used in California is obtained through supply contracts with the two large water projects in California, the federal Central Valley project and the State Water Project. • Contractual rights are governed by commercial law. • Dis<nguish surface water from groundwater, since they are subject to different legal regimes. • The right to abstract water is a usufructuary right. It is a right to use water from a water source. It does not convey ownership of the water resource. • The water in California is owned by the state of California in the interest of the people of California. 7 The property right to water is different than that to land • “Water rights are a uniQue form of property, because the property right in water is limited (or rendered less certain) by a variety of factors, both physical and legal, that seldom affect real property and other property rights.” Physical features that make water different • It moves around – it flows, seeps, percolates • The same molecule of water can be used seQuen<ally by different people. • Return flow • The same molecule can be used simultaneously for mul<ple purposes by mulple people. • Water flowing in a river provides drinKing and irrigaon water, hydropower navigaon, recreaon, aquac habitat. • It func<ons as both a private good and a public good. • This argues for some sharing of the right to use water, rather than exclusive individual ownership. Physical features, connued • Precipitaon and streamflow are highly variable in <me. • The difference between recorded minimum and maximum annual streamflow can be an order of magnitude. • This, too, argues for sharing of the right to divert water rather than exclusive individual ownership. • If there is abundant streamflow and I was the sole owner, most of it would run to waste in the ocean. • The variability of supply makes the property right problemac. • To what do I have a right? A fixed amount or a share? • In the case of riparian rights, I have a right to an unspecified share. Riparian rights are liKe tenants in common. • Under appropriave rights, there is a fixed amount. But, what amount? • An average amount of diversion? NO • A minimum amount of diversion? NO • A maximum amount? YES. But that makes the actual amount you can get uncertain. Compare water with land • Two owners cannot simultaneously use the same piece of land – they cannot each locate a building on the same piece of land. • A plot of land is a discrete resource with given boundaries. • For this reason, a property right associated with land – the right of first possession – worKs poorly for water (see below). 11 Economic features that make water different • Key differences between surface water and ground water: • Economies of scale play a crucial role in surface water supply • Surface water is transported from source to user over much larger spaal scales than groundwater. • With groundwater, users ohen have their own individual wells. With surface water, the storage and conveyance infrastructure are collec<vely provided. • The recipients of surface water typically share the delivery infrastructure. • And, they share the financial obligaon to pay for its financing. • Typically in developed countries the surface water infrastructure goes beyond what individual farmers can construct with their own labor. It reQuired capital to hire an engineering company for the construc<on. • The users lost their individual ownership of the water rights and were collec<vely obligated to pay the debts incurred in construc<on. • This led to formaon of water districts and mutual water companies. • Almost no scope for modularity in surface water development. Essen<ally the en<re system – storage, diversion, transmission, treatment, & local distribu<on – has to be in place before a single drop can be delivered to users. • UnliKe groundwater, which can be developed one well at a me. • But capital has to be raised up front before construc<on can start. Interest has to be paid before a single cent of revenue comes in. 13 Cost structure complicates financing • The capital intensity and longevity of physical capital create problems of cost allocaon and make financing hard. • Financing is the Achilles heal of water supply • If the costs were mainly operang cost it would be very simple to rely on “the user pay principle” and pay-as-you-go financing. • As it is, the capital intensity and capital longevity mean make it very hard to have “user pay.” • One ends up relying heavily on transfers: • between one group of users and on other • between one generaon and another • between non-users (the developed countries) and users. 14 Legal features that make water different • Water is essen<al for life. In olden <mes, rivers were the only means of long-distance transfer. • Water was thus the ul<mate merit good and the ul<mate public good. • In Roman law, water in a stream could not be privately owned – what could be owned was the right to take water from the stream and put it to use (usufructuary right). • “UnliKe almost every other form of property, water has always been viewed as something in which the community has a stake and which no one can fully own” (Sax, 2008). • In the sixth century, the emperor Jus<nian declared that “by natural law” air, running water, the sea and the seashore are “common to all.” • This is s<ll a common view. The no-injury rule in water law • Because of return flow, the use of water (especially in agriculture) generates an externality. How to manage that externality? • A Coasean would assert that bargaining among the par<es should fix the problem. But that is highly imprac<cal in most case. • A Pigouvian might argue for a tax of subsidy to internalize the externality. But that, too, is not prac<cal. The externali<es are spaally specific, so a uniform tax/subsidy rate would be wrong. • Western water law, generally, eschews a balancing between the costs and benefits of disrup<on of return flows caused by a water transfer. • Under prior appropriaon, the main approach is the no injury rule that reQuires a change in the place or type of use to avoid causing any harm to the use of water by other water rights holders. • Determining whether there is injury and how much it must be abated ohen involves li<gaon and generates significant transac<ons costs. Water is an entangled commodity • This occurs because of externali<es associated with the use of water. • It occurs because of the legal property right. • “UnliKe almost every other form of property, water has always been vied as something in which the community has a stake and which no one can fully own.” (Sax, 2008) • It occurs because the supply of water (especially surface water) involves shared infrastructure that is jointly financed. Water as a source of conten0on • The fact that mul<ple uses, and mul<ple users, can benefit from the same stream is an abundant source of conflict. • Also, over <me, new uses of water emerge. Ohen, the populaon that would liKe to exploit a water resource grows over <me.
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