Gary D. Libecap University of California, Santa Barbara National Bureau of Economic Research

1. The Problem of Water: Greater Reliance on Voluntary Transfers through Water Markets to Achieve Environmental Objectives Gary D. Libecap University of California, Santa Barbara National Bureau of Economic Research Hoover Institution

2. The Problem of Water • 80 percent of water in the American West is used in agriculture. • Appropriative Rights Doctrine • Beneficial use • Little alternatives, applied low-valued agriculture at the margin • Growing Demands to re-allocate some water from agriculture to urban and environmental uses. • How to achieve this? • Judicial re-allocation • Exchange through reliance on water markets • Magnitude of the issue

3. The Problem of Water • National Science Foundation funded study of western water markets • Water Strategist 3,317 transactions between 1987-2005. • A comprehensive data set on transactions, sectors, duration, contract type, nature of trades, prices. • Extract from monthly issues, all recorded trades—origin, destination, amounts, contract, price.

4. The Problem of Water

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6. The Problem of Water

7. Substantial amounts of water is exchanged within sectors: • Most active is agriculture to urban: • Total amounts: 56% of trades and 29% of water, annual flows: 18% of the water. • Movement of water from agriculture to environmental uses: • Endangered Species Act. • Voluntary Purchases for Instream Flows: Oregon Water Trust, Washington Water Trust, Montana Water Trust, Bureau of Reclamation. • Required legislative change in the states. • Total amounts: 7% of trades and 13 % of the total water; annual flows, 19% of the water. • Combination of short-term leases to address drought or for dry-periods during the year (pay farmers to release irrigation water; longer-term leases and sales.

8. The Problem of Water

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11. The Problem of Water • Alternative is judicial/administrative re-allocation via litigation. • Costly, contentious, and slow. Lacks information on correct amounts. • Mono Lake Case • Over 20 years of litigation. All the while, the level of Mono Lake dropped. • All or nothing transfer of water. No compensation. • 2005 40 percent of Los Angeles’ historical aqueduct supply directed to environmental enhancement in Mono and Inyo Counties. • 166,000 acre feet annually,$83,166,000; PV= $1,427,052,576. • 1995 to 2000 the aqueduct provided 63% of city’s water. 2001-34%. • Friant Dam Case • Court-directed after 18 years of litigation.

12. The Problem of Water • Conclusion • Important social and economic gains from transferring water from Agriculture to urban and environmental uses. • Where possible, rely on voluntary exchanges via water markets, whereby existing water rights are respected and purchased. Rather than litigation. • More rapid, less contentious. • Information is generated. Farmers have to determine the opportunity cost of not selling. Those seeking re-allocation have to determine just how much water is necessary because it has to be paid for. • Occurring now via leases and sales.