Water, water everywhere. And increasingly, not a drop a drink.
As tensions over the future of water consumption hit their boiling point, a new working paper published through the National Bureau of Economic Research (NBER) posits one way to quell them, at least in California: remake the state’s water transfer market in the image of a radio spectrum auction.
In the US, western states have provided the most acute window into an increasingly complex and difficult process to secure water. Lake Mead and Lake Powell, two crucial reservoirs, sit nearly half-empty. California, Arizona, and Nevada were only able to muster a stopgap conservation agreement in October after years of squabbling over climate change-sapped flows from the Colorado River. California is pursuing a $14 billion tunnel to move water from the northern part of the state to the south. Not to mention all the Native American tribes left in the lurch as their long-standing rights to water get subjugated by state and local US governments. Now the NBER paper, authored by Stanford economist Paul Milgrom and graduate student Billy Ferguson, suggests a spectrum auction that ran from 2016 to 2017 could offer one solution.
Different revenue streams
In states like Arizona, the market for water is somewhat liquid, and landowners are able to sell the water flowing under and past their land the way they would lumber or crops. But in California, the situation is a bit different: The water belongs to the state, and the government-run irrigation districts are the ones who manage water sales. That makes it harder to take advantage of differences in the price of water between so-called “senior” rights holders, who get the first, cheapest sip because they own land with older claims on the water, and “junior” rights holders, who get what’s left because their rights are newer. Often inland, upstream farmers have senior rights and coastal, downstream cities have junior rights.
“While most water economists agree not only that surface water rights reform is needed but also on many details of the desired structure, change has still been stymied both because there is no realistic transition plan and because of the daunting administrative costs of such a change,” the paper reads.
A company called Veles Water did introduce an index tracking the price of Californian water in 2018, and in 2020 the CME Group initiated trading on a contract based on that index, but farmers haven’t found it especially useful because the contract settles in cash, not water. Milgrom and Ferguson are trying to design a market that gets the wet stuff flowing to whoever’s willing to pay for it, be they farmers or cities.
If water got treated like spectrum, or the radio wave frequencies that transmit our wireless mobile, internet, and cable connections, then water rights would be able to go from parties who can get it for cheap, like upstream farmers, to parties who can’t, like downstream cities. Milstrom, who won a Nobel prize in 2020, helped design and implement the Federal Communication Commission’s 2016/2017 spectrum auction, which raised $20 billion by letting broadcast television stations sell their rights to use certain frequencies to the likes of T-Mobile and Dish.
In that auction, spectrum users measured how much they were using their frequencies, then those who found out they had some spectrum to spare put some of it up for sale. KQED, the Southern Calfornia public media company, netted $95 million from the sale of its spectrum.
Making the wrong kind of splash
But not everyone is a fan of turning water into a more readily tradeable financial commodity. Arizona has already been seeing waves of big-money investors flooding into the state to buy up water-rich land to cash in selling liquid gold to desperate municipalities. And there has been some movement in Washington, DC to ban the trading of water amid fears that a basic need should not be a commodity. Spectrum-style auctions would be much more complicated and politically fraught when water becomes the central good.
But Milgrom and Ferguson suggest that it’s better to let the market figure out who gets the water of the future, rather than Mother Nature.
“There is a promising path to a voluntary transition, in which no protected user has to surrender its existing rights,” they write.
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