What California Can Learn from Australia’s Water Reforms

Commentary

What California Can Learn from Australia’s Water Reforms

While government has a role to play in the definition, enforcement, and tradability of water rights, it should otherwise get out of the way

As Californians search for solutions to the worst drought in the state’s history, some have looked across the Pacific to the example of Australia. That’s a good choice: Australia has dramatically improved its management of water over the past two decades. But some advocates seem to have misconstrued the central lessons from Australia, suggesting that they justify more government intervention. A new Reason Foundation paper by top Australian environmental economist Jeff Bennett shows that while government has a role to play in improving the definition, enforcement, and tradability of water rights, it should otherwise get out of the way.

Like California, Australia has a highly variable climate and has been plagued by droughts. Also like California, for most of its history successive Australian governments sought to address increases in demand for water through taxpayer funded infrastructure projects and mandatory environmental diversions. But the infrastructure projects failed to keep pace with demand, especially during droughts, while the mandatory diversions resulted in conflicts, especially between agricultural users and environmental pressure groups.

Then, during a particularly severe drought in the 1990s, Australia reformed its system for allocating water, creating better-defined and more readily tradable rights and replacing mandatory diversions with voluntary purchases. Prices now better reflect both the scarcity and cost of delivering water, so farmers have stronger incentives to invest in water conservation. In addition, environmental groups are able to purchase additional water for conservation purposes.

Some have claimed that the Australian experience shows California’s government should intervene in the market to address the “problem” of inherited water rights. That misconstrues what Australia actually did, which has echoes in California’s early history, when miners and farmers developed highly functional and effective systems of water ownership and trading.

Even today in some cases, Californians who place a high value on water, including cities and some farmers, have been able to purchase water from those with rights to water but who value it less. But such trades are rare because water rights have been over-allocated, most are held by government agencies, and there are many often-insurmountable restrictions on moving water from one place to another.

Since the government took over allocation of new water rights in 1914, it has allocated about five times as many such “rights” as there is water in an average year. That is a recipe for uncertainty and conflict. California needs a quick, simple and inexpensive means of determining the actual amount of water allocated to each rights holder. Since precipitation varies from year to year, such allocations would ideally be shares of the total, rather than absolute amounts.

California also should change its “beneficial use” requirement so that rights owners may store their water; currently, they must use it or lose it. Rights owners would then conserve water during wetter years, so that it might be available for use during years of drought.

Restrictions imposed by state and federal agencies on trading water must be eliminated so that water can be put to its highest valued uses. Meanwhile, water storage and transportation infrastructure owned by state and federal governments should be sold or leased to private companies or nonprofits that have stronger incentives to ensure the infrastructure is maintained, improved, and used to store or move water where it is most highly valued.

At present, about fifty percent of all California’s fresh water is allocated to “environmental” uses, including significant mandatory diversions to the Sacramento-San Joaquin delta, ostensibly to protect endangered fish. But those allocations have resulted in considerable conflict between environmental pressure groups and other water users. Such conflicts could be avoided if California were to end mandatory diversions for environmental uses, as Australia did.

But California can go one better than our antipodean cousins, who created a state agency for environmental water purchases. Having opened up the market for water, a better approach would be to allocate funds (perhaps including some of the $7.5 billion water bond voters supported last November) to match those raised by non-profit conservation groups to purchase water rights. Those non-profits would then have to take into account the value others place on water when prioritizing investments in conservation of species and habitat, rather than lobbying for “free” transfers.

In April, California Gov. Jerry Brown signed an executive order requiring a reduction in potable water use, along with subsidies to convert 50 million square feet of lawns and turf to “drought tolerant landscapes.” This attempt to plan municipal water consumption from on high is both iniquitous and inefficient – and has resulted in a backlash from municipalities that already manage their water well. A far better solution would be to convert municipal water agencies into private, mutual companies. Prices would then be determined by the shareholders, i.e. domestic users, and would better reflect both scarcity and supply costs. Consumers might then choose to use less water but would not be forced to do so by diktat.

The clear lesson from Australia is that markets can achieve more equitable, efficient and environmentally sustainable uses of water, if they are allowed to operate. For that to happen in California, federal and state governments must remove many obstacles they themselves imposed.

Julian Morris is vice president of research at Reason Foundation and project director for the policy paper “Doing Better with Less: Lessons for California from Australia’s Water Reforms“.

Julian Morris is a senior fellow at Reason Foundation and executive director of the International Center for Law and Economics.