Why the Environment Needs Water Markets

A Great Egret, foreground right, feeds in a rice field near Williams, Calif. More than 165 California rice farmers signed up for an incentive program to make habitat improvements in their rice paddies to provide migratory and water birds a place to stop, feed and breed.Rich Pedroncelli, AP

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Environmental objectives have  become a major factor in operating water systems in the U.S.

Since the 1970s, environmental regulations have prevented many environmental impacts, provided minimal environmental flows and prevented construction of large environmentally damaging projects. But environmental regulations have not succeeded in developing reliable programs and operations for restoring the sustainability of native species.

Regulation has been an important stop-gap approach to slow environmental degradation, but is insufficient for environmental recovery or management. Water operations for most other purposes are much more successful by providing system operators more assets and flexibility to respond to varying conditions and improve with time. Environmental water regulations often provide insufficient water or water at the wrong place and time.

In the western U.S., water conditions are highly variable, with distinct wet and dry seasons, and wet and dry years. Agricultural prices also are highly variable, driving needs to shift available water among different crops. Changes in regional economic structure, with the growth of cities and permanent crops and declines in mining, also bring needs to shift water among different users. In this variable and changing environment, water markets often improve water operations.

Water markets provide an ability to flexibly reallocate water to reduce impacts of drought and increase effective use of water in wet years. They allow more profitable water uses to grow to better support economic prosperity, particularly in rural areas during drought.

Markets also can provide mechanisms to improve environmental effectiveness over regulations alone. A major success for the Pacific Flyway during the California drought was The Nature Conservancy’s BirdReturns program in 2014. This “reverse auction” program allowed farmers to bid to flood acres of farmland during the winter to support birds during the drought.

The Nature Conservancy then could choose low bids that provided the best kinds of flooding for the mix of birds expected during the migration season. Scott River’s Water Trust similarly purchases water strategically for salmon passage in far northern California. The results integrate local agriculture and ecosystems with minimal cost and maximum flexibility.

Markets could serve the environment in additional ways. During drought, environmental flows are often relaxed by regulators, essentially providing a gift of water to human users without environmental compensation. Instead of giving away water, it would be better environmentally and economically for regulators to auction off such environmental relaxations to provide funds for environmental recovery after the drought. Roughly 700,000 acre-feet (863.4 million cubic meters) of environmental flows were relaxed in California during the drought. With water market prices over $1,000 per acre-foot, potential environmental revenues could have exceeded $500 million.

Even outside of drought, environmental managers might find times when ecosystems would be better served by selling some environmental water to finance fish passage or reconnection of streams with floodplains.

Reducing human water use can provide more water for the environment, and many people genuinely want to help. Allowing households to dedicate some of their conserved water to environmental uses would increase incentives for urban water conservation, better tie urban and environmental water uses, and improve water availability for the environment.

Environmental management is sorely limited in effectiveness by inadequate funding and other flexible assets. California has several opportunities for allocating shares of water infrastructure to be managed for the environment, such as new surface storage or shares in Delta tunnel capacity.

Such assets could be managed directly to support environmental flows or their capacity could be rented for human water uses compatible with the environment, to raise more flexible funds.

Aquifer recharge from wetlands or environmental flows might be credited to an environmental account to directly support environmental uses or be sold to farmers or cities for sustainable use during droughts.

Substantial barriers restrain the use of markets to serve the environment. The largest barrier is our thinking and laws conceived to stop environmental impacts, but not adaptively recover environmental functions. Changes in laws, institutions and agency culture are needed to supplement regulatory proscriptions with creation of operable and marketable environmental assets in water, infrastructure and revenues that can aid environmental recovery, as is done in Australia. Today’s regulated flows are hard to trade, even when they create little environmental improvement.

Environmental markets bring some risks. Incompetence in management, bad luck, poor stewardship and paying for poor water and habitat will sometimes occur, just as poor decisions sometimes occur in markets generally. The biggest risk, however, seems to be that the environment would lack sufficient assets to support ecosystem objectives reliably.

Markets offer a companion mechanism that gives flexibility and adaptability for managing some environmental problems at lower cost and providing more effective environmental protection. As byproducts, environmental markets also bring more detailed and adaptive attention and accountability to environmental management, funds for environmental restoration, and better integration of ecosystems with human uses of land and water. Changes will happen in water and water management.

Markets, as imperfect as they are, can help the environment keep up and prosper.