A Market-Based Approach From Australia Can Help Solve California’s Water Crisis

Policy Brief

A Market-Based Approach From Australia Can Help Solve California’s Water Crisis

Here are six fixes California can implement based on Australia's successful water allocation system reforms

California is in the midst of a water crisis that threatens to do enormous damage to the economy and ecology of the state. Meager rains earlier this year did little to alleviate a years-long drought that has reduced agricultural output, depleted reservoirs and put a severe strain on urban water supplies. Unfortunately, the response of policymakers thus far has done little to address the problems that caused the crisis.

Since the 1960s, California has invested too little in updating and upgrading its water infrastructure. In November, voters authorized the issuance of a $7.5 billion bond to finance various water projects but most of these are short-term in nature and will not result in long-term supply increases.

At the same time, many water users have perverse incentives to over-consume water. While it makes sense to introduce a system of water management that encourages consumers to use water more rationally, this idea has been misapplied by proponents of demand restrictions who think they know best whose water use should be limited-and how. In April, Governor Jerry Brown signed an executive order requiring a 25 percent reduction in domestic potable water use, along with subsidies to convert 50 million square feet of lawns and turf to “drought tolerant landscapes.”

There are better ways to manage water that experience shows would be more efficient, equitable and sustainable, and would require neither additional taxpayer-financed investment nor the imposition of arbitrary restrictions by government.

This policy brief outlines water reforms undertaken in Australia in the 1990s and their results, which in many ways are applicable to California today. The author, Professor Jeff Bennett, one of the foremost authorities on Australia’s water rights system and the author of numerous papers on the subject, emphasizes the importance of establishing clearly defined, readily enforceable property rights to all available sources of water, and enabling those rights to be traded without undue fetters. The result of such reforms has been water prices that better reflect its scarcity value as well as delivery cost.

Bennett details the three fundamental reforms that were implemented in Australia:

  • Separate water title from land title
  • Develop water markets
  • Allocate water for environmental flows

Building on these three reforms, this policy brief describes six specific changes to the allocation and control of California’s water that would enable the state to achieve similar successful reforms to those undertaken in Australia.

  • Remove the “beneficial use” requirement as it applies to water rights, or at least expand its meaning so that storage is permitted
  • Establish a quick, simple and inexpensive means of determining the actual amount of water allocated to each appropriative rights holder
  • Remove bureaucratic restrictions on trading water
  • Sell or lease the water storage, transfer and supply infrastructure held by state and federal agencies to private companies
  • Convert municipal water agencies into private, mutual companies
  • End the practice of mandating diversions of water for environmental purposes and instead introduce mechanisms that enable the purchase of water rights by groups concerned about protecting habitat and species

Centralized control over water failed in Australia and it is failing in California. The best approach to solving California’s water crisis is to allow markets to operate.

Attachments

Jeff Bennett is a professor in the Crawford School of Public Policy at the Australian National University. He has over 40 years' experience as a teacher, researcher and consultant in the fields of environmental economics, resource economics and agricultural economics.

Julian Morris is vice president of research at Reason Foundation, a non-profit think tank advancing free minds and free markets.