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Does California Need a New Water Market?

In California water users can buy and sell water, but the system for doing that is so bad that most farmers don’t bother. This situation during the drought has renewed calls for the state to revamp its water market. Some experts share their idea of how that should be done.

Written by Alastair Bland Published on Read time Approx. 6 minutes
California drought water cuts 56e7168dc2952

Once, gravity determined where water went.

Now, economics can have an almost equally powerful influence over the flow of our most valuable resource. This is seen especially clearly in Australia, where a sophisticated water market allows the fast and efficient trade and sale of surface flows between water users. It is as easy for the buyers and sellers as managing a bank account online, and for farmers a few taps of the smart phone screen may bring water flowing onto their land.

California’s water users are also able to buy and sell water, but the system that facilitates such water deals is relatively slow, archaic and inefficient. It is so user-unfriendly, say sources, that it hardly works for many would-be buyers at all. Many farmers, no matter how desperate they are for water, don’t even bother trying to buy any, according to a reportpublished in November by the Public Policy Institute of California.

“The existing water market is administratively awkward,” says U.C. Davis professor emeritus Jay Lund, also the director of the university’s Center for Watershed Sciences and a coauthor of the report. Laws and regulations – some of them designed to protect the environment – create formidable obstacles to transferring water.

Because of this, completing a water transaction under the existing market can be such a slow process that for farmers, for whom timing of irrigation is critical, attempting to buy water can be a pointless endeavor.

But as California’s scarce water comes under increasing demand, state leaders and water policy analysts want to see an overhaul of the state’s water market. Replacing the current system with a more efficient water-trading platform, says Lund, would make almost everyone happier.

“With a good water market, if you’re a senior water right holder, the value of your water has just increased, because someone else can use it, too,” he says. “And if you’re a junior water right holder, you now have an option if it’s a dry year by buying it from someone else.”

But those in the environmental community are not convinced at all that a water market would benefit their interests, like fish, wildlife and water quality. Kate Poole, a senior attorney with the Natural Resources Defense Council, says a system for efficiently buying and selling water may leave fish – as well as some people – in the dust.

“Markets are designed to get water to the highest bidder, and the environment and low-income communities don’t have sufficient funds to compete on a level playing field with local agribusiness or cities vying for water,” Poole says. “There’s also potential for a true, free water market to harm those sectors by increasing the incentive that various water users have to divert and sell more water from an already overtapped system.”

A streamlined water market could have dire effects on groundwater supplies, warns Barbara Vlamis, executive director of the water watchdog group AquAlliance. Already, water users routinely engage in a scheme called a groundwater transfer by which one user sells their surface water, then replaces that water by pumping more from the ground. These transfers can work the other way, too, when a farmer sells groundwater then buys surface water from another user to irrigate his or her land.

Vlamis warns that these controversial transactions, which are made possible by California’s lax groundwater regulations and have impacted aquifers statewide, would probably be accelerated if it becomes easier to trade surface water.

“When you make something easier, there are people who are going to try to make a buck on it,” she says.

Vlamis says a water market could provide benefits for both buyers and sellers, but the system, she says, falls apart “if you in any way have groundwater involved.”

Richard Howitt, professor emeritus of agricultural and resource economics at U.C. Davis and another coauthor of the PPICreport, doesn’t believe this is entirely true. He says the regions most stressed by groundwater extraction in the San Joaquin and the Sacramento valleys have already put in place local regulations that control the use of this otherwise mostly untracked resource. However, Howitt agrees groundwater transfers could become more frequent if groundwater regulations aren’t put in place as part of an enhanced water market system.

Californians are increasingly looking toward Australia for ideas, innovations and inspiration in how to manage water efficiently. It is here that, during a 12-year-long drought that began in the late 1990s, homeowners and water managers installed rainwater capture systems and extensive water recycling grids. Officials also instituted a water market that radically overhauled how water is handled between users. Overall, the system has been considered a great success, with better tracking of water supplies – both surface and subsurface – and streamlined movement of water from one user to the next that has improved efficiency of agricultural, residential and industrial water use.

The Australian system, lauded as it has been, is not without its problems, though. Corruption has tainted the water market as banks and powerful speculators buy up water rights to sell when the price is right. In some cases, these water speculators have allegedly caused price crashes to prompt rapid sales of water.

Howitt says the Australian market system is overall well designed but perhaps a bit too complex for California’s needs.

“We can improve the water market here quite a lot without having to go whole hog,” he says.

In fact, efforts are underway that could make California’s water market user-friendly for all. Assemblyman Marc Levine, a Democrat who represents Marin and Sonoma counties, introduced a bill in February that would require the California Department of Water Resources to post a listing of prospective water buyers and sellers on a constantly updated public website. Levine’s bill would also require water officials to prioritize water exchanges that created benefits for either the environment or communities.

One of the leading problems with the existing water market in California is the time it takes to complete a transaction.

“It can take a whole season to make a transfer,” says Lund, noting that farmers need to pull water from a river when it is available and flowing, not months later.

Howitt says California’s water trading system is nearly impossible for anyone to use but a few well-connected farmers who know all the right people.

“What we don’t have is transparency, a structure where everyone, not just a few powerful buyers, can know what’s going on – the price, the availability and current environmental standards,” Howitt says. “What we need is some sort of central clearing house of information, so that if you’re a small buyer or a small seller, you can get into the market with some reasonable market information and without too much hassle.”

Mike Wade, executive director of the California Farm Water Coalition, which represents agricultural interests, believes California’s current water market works fairly well but, like most sources, says the main problem affecting it is the time it takes for buyers and sellers to complete a deal.

“Getting the approvals is time-consuming,” he writes in an email exchange with Water Deeply. This is due to largely regulatory constraints in the Delta region that limit pumping of water into the San Joaquin Valley, he says. These restrictions are meant to protect water quality, Chinook salmon and delta smelt. “It can take three months for all of the approvals to take place to approve a transfer. Instead of responding to immediate needs, transfers have become planning tools for future demand.”

Bypassing this slow regulatory scrutiny by preauthorizing certain types of transfers, especially those involving small amounts of water, could help open up the market, according to the PPIC’s November report, titled Allocating California’s Water: Directions for Reform. The authors also suggest consolidating the permitting process to eliminate “multiple layers of review by multiple agencies each time they want to share water.”

In his interview with Water Deeply, Howitt says low-income communities would not be left thirsty in a system where water flowed toward the highest bidder.

“In rural and in urban systems, there should be a basic household quantity of water, which I think is a basic human right,” he says.

He adds that there would be plenty of room to streamline the process of selling water without compromising environmental safeguards.

“But right now,” he says, “it’s just too time-consuming and expensive, so that a lot of people don’t even bother.”

Top image: Irrigation pipes sit along a dried irrigation canal on a field farmed by Gino Celli, who relies on senior water rights to water his crops, near Stockton, California. Some experts think a revamped water market could help the state’s farmers, especially in drought years. (Rich Pedroncelli, Associated Press)

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