Governing the commons: Making markets for water

Floating market
Fresh water may be the ultimate community shared resource or commons. It’s a finite and renewing resource. It’s essential for life as we know it. We spend billions of dollars on space exploration searching for it on other planets. How we make use of this scarce shared resource now and in the coming decades will say a lot about our social nature. Marketing principles about pricing and distribution can help us make better use of water during times of drought.

For 30 years, Australia has use transparent pricing and easy distribution of water rights to make more efficient use of water. As explained in this Bloomberg article, nearly a third of water in Australia’s prime agricultural zone is traded in a market. Contrast that with less than three percent of water in California, a U.S. state currently experiencing severe drought.

Here’s how water trading works. During periods of low supply (a drought), demand raises, which raises prices. Agricultural organizations that can spare water, either through efficiency or by forgoing water-dependent activities, lend or sell their water rights to those who cannot do without water. This way, water moves to those who need it most; people get rewarded for conserving and sharing water.

For instance, a rancher might decide to raise fewer cattle during a drought, because the value of water is higher than the value of beef. The rancher then trades his water for the coming season or year to a vintner or orchard keeper who needs to keep vines and trees alive. The extra water is probably expensive, but it’s better than losing the vineyard and trees forever.

We already take the market approach in reducing carbon admissions from power plants and large industrial users. In these carbon markets, organizations buy and sell rights to emit carbon into the atmosphere. That way, those who pollute less can sell their rights and make money; those who want or need to continue emitting above their allotment must pay a market rate for the rights. This sort of market mechanism has been found effective in lowering emissions.

According to a recent NPR story, California is considering creating a water market like Australia’s. Currently, lending or trading water in California is cumbersome at best. The legal paperwork takes months to complete, even for a short-term loan of water. Over the years, the state of California has granted rights to several times more water than the state has an in average year. It will take years, if not decades, to reset the state’s legal framework for water. Until then, trading water might be one to make more efficient use of a scarce shared resource.

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