“Unlocking” water markets: an experimental approach

1. “Unlocking” water markets: an experimental approach Joseph Cook a Sergey Rabotyagov b University of Washington aEvans School of Public Affairs bSchool of Forest Resources 2nd AnnualPacific Northwest Climate Science Conference, Seattle WA Sept. 2011

2. Why water markets? • Prior appropriation water rights • Allow for water to flow from lower to higher value uses, i.e. maximize efficiency of water use • It is possible to design a market mechanism which respects hydrological, infrastructure, and ecological constraints • Yakima Basin appears to have potential for mutually beneficial water trades

3. The Yakima Basin

4. Tan = hay or timothy hay Red = tree fruit Yellow = grains, corn Blue = CRP Hatch = hops From 2008 WSDA survey Table A-1. Net Earnings per Acre-Foot, by Crop, Kittitas Valley Yak-Tieton Sunnyside, Roza, and Wapato Source: ECONorthwest, with data from the PNW National Laboratory; and from original data sources reported in HDR and Anchor QEA. 2010. Water Needs for Out-of-Stream Uses.. Oct 13, 2010 memo

5. Why so few transactions?

6. Our approach • Experimental approach • “Framed field experiments” (Harrison and List) • Preserve context • Fix some things in the lab, but recognize the importance of “homegrown” values participants bring to experimental (and any other) market transaction

7. Our approach • Previous experimental studies on water markets used university undergraduates (Dinar et al 1998, Murphy et al 2000, Garrido 2007). • However, it is likely that real water market participants have preferences that are not well captured by undergraduates (or other convenience samples) • Only a handful of water market studies involve irrigators (Tisdell et al 2004, Ward 2006, Cummings et al 2004, Alevy et al 2010).

8. Attributes that may (or may not) matter • Water price (and monetary payoff) • Type of buyer: Ecology, Irrigation District, Developer • Type of lease: full season vs. split season • Water bank: operated by Ecology, or operated by new non-profit • Timing: what year in the crop rotation? (last vs. middle)

9. A hypothetical farm • Senior non-proratable water right • Grow 100 acres of timothy hay, 2 cuttings per year • October, planning for next summer • 1 year leases, NOT sales • Buyers approach subjects with a “posted price” – decide whether to accept or not • Hay stands: 2nd year vs. 4th (last) year • Not presenting today: • Reverse auctions

11. 4 6 tasks like this one. PAYOFF, not price

12. 4 8 tasks like this one.

13. Data • 12 senior water rights holders participated in focus groups and helped craft the hypothetical farm and the market context • 18 senior water rights holders participated in September experimental market sessions • Needed more: Fielded a mail survey to gather more data on irrigators and to recruit into experimental market sessions • 167 out of 482 (35%) responded to a survey • 31 more agreed to participate in experimental sessions • In all, 49 senior water rights holders participated in experimental sessions in September and December • Also involved 38 UW undergraduate students, 4 experimental market sessions in mid-October

14. Some irrigator demographics (n=49)

15. Higher water price  higher payoff from a contract  more likely to agree to a water contract Results: irrigators Irrigators dislike agreeing to a water contract with a developer Irrigators prefer a split-season lease

16. More complex model of irrigator choices • Test the irrigators’ preference for leasing water in the middle of their crop rotation • In addition to the characteristics of the water lease offered, we test whether the characteristics of the irrigators affect their willingness to participate in a water market • Capture heterogeneity of preferences not reflected by irrigator characteristics

17. Non-monetary attributes are important:irrigators prefer some buyers over others • prefer to lease to an Irrigation District • prefer NOT to lease to a Developer • prefer to lease water for only a part of the season • prefer to lease water at the end of hay rotation • prefer NOT to lease water if currently farming are more likely to lease water if • are less averse to risk • have water market experience • younger and more educated • unobserved heterogeneity exists

18. Model predictions

19. Get more participation if pay more for water

20. What is a premium demanded by irrigators for participation?

21. Mail survey results (n=167) • Senior water right holders were asked to think about the net returns from farming (on a per-acre basis) that their own operations generate, and to consider participating in a water market transaction which would result in 100%, 150%, or 200% of annual profits. • Dichotomous choice with follow-up • If yes to 150%, ask about 100% of profits • If no to 150%, ask about 200% of profits • Analyze with Interval model • Ask about one-year split-season, one-year full season, and five year lease.

23. Can produce a water supply curve • Using Yakima Superior Court water right documents, we estimate that the total volume of water rights held by our survey population is 171,003 ac-ft. This includes all rights in the “Upper Yakima Basin” (sub-basins 01-15) older than May 9, 1905. This estimate excludes small private irrigation districts (“ditch companies”). Including these small districts increases the total water available to 222,925 ac-ft per year.

24. Conclusions • Find strong evidence that non-monetary attributes of market offers matter to irrigators • Prefer leaving water in agricultural use • Averse to offers from developers • Prefer split-season leases • Find no evidence for a desire for a new nonprofit water bank • Sociodemographic characteristics matter • Trust, simplicity, and effective communication is likely to be key moving forward

25. Thanks: We gratefully acknowledge financial support from the University of Washington’s Environment Institute, in the College of the Environment (coenv.washington.edu), and research assistance from Lily Hsueh, Mary Ann Rozance, Sean Trimble, and Kyle Schoenfeld. Questions?