Why Water Markets Might Work In California

Originally published on April 27, 2015 12:17 am
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California is struggling to divide up and conserve a precious resource - water. Recently, Governor Jerry Brown ordered cities and towns across the state to cut water use by 25 percent. That is one way to do it. Other countries that have endured severe droughts have tried another approach - water markets. In 2007, in the midst of a year's-long drought in Australia, the country expanded water rights trading. Farmers were given allocations of water, in addition to the water they're entitled to, and they could then buy and sell that extra water. So would this system work in California? Is it even a good idea? McKenzie Funk is a journalist and the author of the book "Windfall: The Booming Business Of Global Warming." He joins us from the studios of KUOW in Seattle. Welcome.

MCKENZIE FUNK: Thanks for having me.

WERTHEIMER: So how does a water market actually work?

FUNK: Yeah, when I visited the water markets in Adelaide...

WERTHEIMER: Which is an Australian city?

FUNK: It's a city at the bottom of the Murray-Darling River that was fixing the biggest drought. They described it as a stock market for water. You could buy and trade; you could register the shares of water you wanted to trade up the system, and a computer would do it for you with the help of brokers.

WERTHEIMER: Now, how do you get the water that you trade? How do you know how much you have available to you to trade?

FUNK: They literally have meters on all the pumps that go into the Murray-Darling River. So when a farmer wants to trade his water, he'll turn off his pump, and the guy downstream will turn his on. It's about as simple as that.

WERTHEIMER: So if you're having a very dry year, the chunk of water that they have to work with will not be very big?

FUNK: Exactly. And so the short-term price of water if you wanted to give someone your water for a year was fluctuating wildly. It was quite expensive, and many farmers sold in the worst of the drought. Some of them sold the titles to their water outright so they would not go back to farming. They wouldn't go back to their farms.

WERTHEIMER: Did the system accomplish what it was intended to accomplish?

FUNK: I think that it's considered success. And the reason is that the biggest purchaser of water was the government, and they were doing it for environmental flows, as they called them, simply getting enough water in the river to keep it moving downstream.

WERTHEIMER: What are the other drawbacks for trying a system like this?

FUNK: Well, the most important good thing about it, before we talk about drawbacks, is that it puts a price on water. And the price signal says that you're not going to waste it as much as you might otherwise. The bad thing is that opening it up to the market, if you're not careful, means it goes to the highest bidder. And it goes to crops that might be valuable in terms of dollars, but are they necessarily socially valuable? I'm talking about wine in Austria, almonds in California and other crops. But other less-valuable crops, they stop producing. And the food crisis of 2008 did relate to the Australian drought. It related to the amount of rice that was being exported from Australia, which went down to almost nothing. And that had big effects on markets across the world.

WERTHEIMER: Well, so do you think it would work in California, if, by some magical means, people came around to the idea of marketing water?

FUNK: There already is water trading in California. It's just not a market like they've set up in Australia. It's the equivalent of someone driving around and talking to ranchers and asking them if they want to sell their water. To have this sort of hyper-efficient, computer-driven water market I think could help if it sends a price signal. But to set it up would be a mess.

WERTHEIMER: McKenzie Funk's book is called "Windfall: The Booming Business Of Global Warming." Thank you very much.

FUNK: Thank you for having me. Transcript provided by NPR, Copyright NPR.