Prior Appropriation is a Cap-and-Trade System

I didn’t set out to do this when I started this blog, or when I started my research into the future of water and society in the American West, but I seem to have brought upon myself a debate with the field of water economics.

Water economists like market-derived solutions to our water problems, a voluntary way to connect low-value users who have water entitlements (like legacy farmers) and high-value users who lack them (like burgeoning cities, or growers of permanent crops). In the ideal world for economic theory, water would be used in any particular year by the person or entity most willing to pay for its use.

Olathe Sweet sweet corn- the corn so nice they named it twice. Image by Modmarket.

Olathe Sweet sweet corn- the corn so nice they named it twice. Image by Modmarket.

This is how we govern all sorts of resource problems, of course. If there is a corn crop failure in Olathe, Colorado, the price will skyrocket, and who will be left with access to the remaining corn? Those willing to pay the elevated price. (Count me in. Olathe corn is outstanding.) Who will have no claim on the corn haul? Those who historically bought corn.

So you can see why economists like to take issue with the doctrine of prior appropriation. Put (overly) simply, the doctrine gives superior rights to those who have used water the longest. This flies in the face of economic theory; it is (allegedly) a monument to inefficiency.

(I should point out here that there are plenty of non-economists, perhaps the majority of people without water rights, that find prior appropriation nonsensical/ insane.)

Economists would like to replace this system with something resembling cap-and-trade as used in the regulation of sulfur dioxide emissions. The appeal is obvious. We are emitting too much, as determined by the state, and it’s cheaper for you to reduce your allocation than it is for me, and so I trade with you for some excess part of your allocation. The overall amount of money spent by the system is reduced. Similarly, if you can make $1000 an acre-foot from your irrigated land and I can make only $800 from mine, it’s in both of our interests for you to pay me $900 in exchange for my water.

I take no issue with any of the above (though the economists who read me seem to think I do).

This kind of economically efficient activity is entirely possible under a system of prior appropriation. How do I know this? Because this kind of trading in water rights happens All. The. Time. Constantly, in fact. Most of the trading happens in one-year leases that respond to water’s availability. Need some more water? Call the city with the huge reservoir. Short of water? Lease water from your neighbor- or to him, and go fallow. There were over 4000 transfers of water in the twelve Western states from 1988 to 2009 totaling 36.1 million acre-feet of water.

And it’s not just one-year leases, either. Here are news reports, all from 2014 or 2015, of permanent sales of water in California, Colorado, and New Mexico. In every single case, it is a high-value user buying out a low-value user in order to avoid shortages themselves, maximizing productivity.

So there’s the trade. Where’s the cap? In Australia’s Murray-Darling basin, the darling (forgive me) of free market theorists, the interstate Basin Authority sets the amount of water that will be available each year, and trading commences underneath that cap. We have no state cap on water withdrawals, which suggests people will keep taking too much and there will be no reason to trade.

The Murray-Darling basin. Boy if I didn't know anything about it before this blog, I sure do now. Image courtesy the Murray-Darling Basin Authority.

The Murray-Darling basin. Boy if I didn’t know anything about it before this blog, I sure do now. Image courtesy of the Murray-Darling Basin Authority.

This is a false conclusion. There is a cap on water withdrawals under prior appropriation. It is the amount of water physically available in the stream. If my headgate is dry, I cannot take my allocation unless I buy some water and have it flow down to me. Simply because this cap (beneath which trading takes place) is set by nature and not by the state does not mean it does not exist. In fact, I would argue that in some ways the cap of physical availability is superior to one set by the state: it instantly responds to conditions on the ground; it is not set once per year. What if the state is wrong?

I will grant the economics profession three concessions:

  1. The transaction costs involved in trading water in the West are very high. It varies by state, and usually between temporary and permanent transfer, but I can’t log on to coloradowatermarket.gov and instantly sell my water right (not that that would necessarily make a difference, see here). I go to court, or to the State Engineer, and there’s a substantial process involved (*Idaho not included). This depresses trading activity, although I would argue it is further depressed by other factors.
  2. The harder it is to market excess water, the easier it is to justify overuse and waste. I don’t agree with the claim that forfeiture and abandonment pose an existential threat to water conservation, but there’s no doubt that if farmers could easily sell their efficiency savings they would become more efficient.
  3. “Physical availability” caps do not adequately protect instream flows, for obvious reasons, unless the stream itself has a superior water right. The caps in the Murray-Darling are set to guarantee some water “left over” for environmental purposes. Strict prior appropriation does not. Then again, if we’re only concerned about willingness-to-pay, or opportunity cost subsidies, I doubt instream flows stack up against a farm that’s about to go bust.

I happen to think that all three of the above issues could be addressed without throwing out priority dates based on first beneficial use. But regardless, economists should realize that to a very large degree, water is already allocated by economic values: cities buy the water supply of entire counties, environmental trusts buy water for instream flows, and no major city has yet gone dry in a drought year because its rights were too junior, though ditch systems have by choice, in exchange for monetary compensation.

These reallocations happened consistent with economic theory, as constrained by the physical realities of water delivery. Perhaps economists are too obsessed with the lack of instant online markets, or with the persistence of priority dates, or with the lack of a government-set cap on withdrawals, to realize that when it comes to this debate, they’ve already won.

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3 thoughts on “Prior Appropriation is a Cap-and-Trade System

  1. I don’t understand the objections in principle to rights of prior appropriation. What the heck is land ownership if not based on prior appropriation? California is filled with home-equity millionaires whose only virtue was already being here when prices started running up in the ’70s.

  2. Fwiw, I did quite a bit of economics schooling, although I am not now an economist.

    I wrote a long while back that the “cap” in the “cap and trade” should be set to accomplish something (decrease atmospheric pollutants), but for the most part, people who talk about markets in water don’t think clearly about what that goal would be. In the framework of your post, I’d say that the “cap” set by appropriative rights achieves the goal of “use all the water”. That is a goal, but not the one I’d choose.

    • You’re exactly right, and that’s the reason for my concession on instream flow protection, and why I’ve argued for commentators of all stripes to offer and defend the values that their system aims to protect, and not just offer up a system design.

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