WATER, CLIMATE WATER, CLIMATE

CHANGE, AND MARKETSCHANGE, AND MARKETSRichard Slaughter, Ph.D.Richard Slaughter, Ph.D.

Climate Impacts Group, University of WashingtonClimate Impacts Group, University of WashingtonRichard Slaughter Associates, Boise, IdahoRichard Slaughter Associates, Boise, Idaho

SICCIASICCIAJune 28 - July 2, 2004June 28 - July 2, 2004

Grainau, GermanyGrainau, Germany

Supported by National Oceanic and Atmospheric AdministrationOffice of Global Programs

Columbia Basin

Main Points

• Adaptive capacity differs by policy arena• Water markets can facilitate adaptation

– Legal basis for water allocation– Idaho water market evolution– Resolution of existing disputes

• What happens without markets– Klamath 2001

• Creating the basis for a water market

Main Points

• Adaptive capacity differs by policy arenaAdaptive capacity differs by policy arena

Conventional Wisdom when Allocating a Public Resource

• Outcomes should be optimized

• Future outcomes can be improved through planning

• Planning requires knowledge of the future

• The future is uncertain

• Therefore, we must reduce uncertainty, manage decisions in the face of uncertainty

Alternate Approach

• Many future unknowns are, in fact unknowable– Strategies of N actors over N dimensions

• Where N is a small infinity

• The perfect is the enemy of the good• Planning introduces structural rigidity

– Creates contract rights and obligations

• Therefore: focus on improving institutional flexibility, introduce information as available

Three Arenas for Climate Information

1. CC information directly useful for decision

2. CC information automatically incorporated

3. CC information must overcome structural rigidities

Three Arenas for Climate Information

1. CC information used for policy decision• Agencies with authoritative responsibility

• Highway design• BUT: problem of agency mission:

• highways• Corps of Engineers

• Urban water systems• Ski area permitting

2. CC information automatically incorporated (when credible and communicated)

• Private investment• Will avoid investment that will be negatively

impacted• Ski resort development• Crop selection

• Continuous adjustment at the margin

Three Arenas for Climate Information

3. CC information must overcome structural rigidities

• Re-allocation of a public resource• Water• Forests

• No authoritative structure• Involves investment/allocation beyond the

scope of private entities

Three Arenas for Climate Information

Alternative Fixes for Structural Limitation1. Create a new authoritative structure

• May politicize decisions• Allocation is now in the public arena

• Risk of creating a bureaucracy of gatekeepers• Russia, FSU• Description of Mediterranean water institutions is

classic

• Risk of narrow agency mission • Corps of engineers: navigation, flood control• Highway trust fund: automotive transportation

Alternative Fixes

2. Introduce characteristics of systems that exhibit automatic adaptation

– Example: water market

Main Points

• Adaptive capacity differs by policy arena

• Water markets can facilitate adaptationWater markets can facilitate adaptation– Legal basis for water allocation– Idaho water market evolution– Resolution of existing allocation disputes

How Do Markets Assist Adaptation to Climate Variability and Change?

Markets require a rights allocation based in law

Legal Bases of Water Use• Riparian Rights

– Found in Eastern US, where water is plentiful– Rights attach to riparian land only– No consumptive use; well adapted to water mills

• Prior Appropriation– Found in Western US, where water is scarce– Right is held by first appropriator for beneficial use– Consumptive use is assumed– May be used away from water course

• Community Rights (Spanish heritage)– Continuous reallocation, based on current need– Will not support investment

Objections to Prior Appropriation

• Most rivers already over-appropriated– Streams dewatered in dry years

• In-stream flow not a beneficial use on par with irrigation– New in-stream rights junior to older irrigation rights

• Security of downstream rights valued higher than use efficiencies– Injury to third parties may prevent transfers

J. Hamilton, IEAB appendix B, 2000

Idaho Response to Objections

• Over-appropriation– In-stream defined as a beneficial use– Rights adjudication– Rental pool and permanent transfers

• In-stream a junior use– Water may be purchased separately from land– Older rights may be transferred

• Hydrologic complexities prevent transfers– IDWR models and mitigation provisions– Committee of Nine precedent 1919

How Markets Work

• Fee simple transfer of ownership of property or commodity

• Benefit to both sides – win/win situation

• Water is NOT owned in a fee simple sense• Water rights are usufructuary – a right to divert and use• Water supply is NOT fixed• Water is ‘asset specific’

Idaho Water Market Idaho Water Market StructureStructure

• Source• Priority Date• Point of diversion• Place of use• Purposes of use• Time of use• Quantity diverted• Quantity consumed

A Change in ANY item can trigger a challenge.

Water Rights are defined by

Water Marketing in Idaho•

• Water banking a beneficial use (1977)• No injury to third party (Pareto Optimal)

• Mitigation required• Conjunctive management with groundwater• Established procedure for determining mitigation

• Moving party does not bear sole burden of proof• Hydrologic modeling used to determine mitigation• Only the consumptive use to buyer

• Rental pools and water bank (1936 - 78)• Global rental pool on upper Snake 2003

Water BankWater Bank

The owner/lessor acknowledges the following:

1. Payment to the owner/lessor is contingent upon the sale or rental of the right from the bank.

2. While a right is in the bank, the owner of the right may not use the right even if the right is not rented.

3. A right accepted into the bank stays in the bank until the Board releases it or until the lease term expires.

4. While a water right is in the bank, forfeiture provisions are stayed.

5. Acceptance of a right into the bank does not, in itself, confirm the validity of the right or any elements of the water right.

Water Bank Conditions

Rental PoolsRental Pools

Idaho Rental PoolsLimitations

• Administratively determined price• “Last to fill” penalty for water in the pool

Global Rental Pool (2003, District 1)• All storage owners must participate (abandoned)• All owners share in rental receipts• “Last to fill” is eliminated• Prices vary based on carry-over and expected flows• In 2003, the driest year on record, there were no curtailments, but “price too low”

Caveats•Three checks written: administrative fee, official price, payment “under the table”

• For use in Idaho only (eliminated in 2004)

• No injury to other water rights

• No enlargement in use of a right

• Water must be beneficially used

• Water must be sufficient for the intended use

• Water use must be in the local public interest(effects on the public water resource)

Considerations for Rental

Idaho Water Markets - Recent Values

LocationDate Start

Length of Term

Water Source Administration

Recent Price: Posted Price or Minmum (acre foot)

Activity (acre feet per year) Purchaser

Rent or Lease Rental Pools:

District 1Upper Snake 1930s

Up to 20 years Stored Committee of 9 $2.95/ $10.50 250,000

Irrigation/ Power/ In Stream

District 63 Boise River 1988 Annual Stored Local Dist. 63 Board $6.50/ $6.93 3,000

Irrigation/ Power/ In Stream

District 65Payette River 1990 Annual Stored Local Dist. 65 Board $3.20/ $8.50 150,000

Irrigation/ Power/ In Stream

Shoshone-Bannock

Upper Snake 1990

Up to 5 years Stored Tribe

Lemhi River Lemhi River 2000Part Year to

AnnualIn Stream (NMFS) Local Committee $50

In Stream (BoR)

Water Bank:

State State 19791 to 5+ years

Surface/ Ground

Water Resource Board

Rental Pool Rates 5,000

Irrigation/ Power

Snake River 2001 AnnualIn Stream (NMFS)

Water Resource Board $50 40,000

In Stream (BoR)

Permanent Transfer

State State 1900s PermanentSurface/ Ground

Water Resource Director Various All

Source: Idaho Department of Water Resources

Private TransfersPrivate Transfers

Private Transfers

• For use in Idaho only (additional tests on supply and “reasonably anticipated” demands for water)

• No injury to other water rights (Pareto Optimum)

• No enlargement of a right – only consumptive use transferred to buyer (Except BOR purchase for fish - 2005)

• Water must be beneficially used

• Consistent with “conservation of water resources”

• Water use must be in the local public interest

Number of Water Rights Transfers - Idaho

0

50

100

150

200

250

300

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003Water Year

Number of permits

Snake River Moratorium after 1992 ( no new water rights)

Most recent transfers are 'change of use' (dairies)

No. of permits, not volume of water

Existing DisputesExisting Disputes

Thousand Springs• Aquifer level and output has been raised by surface irrigation

• 1960s surface rights from springs depend on the effects of prior development (artificial recharge)

• Groundwater pumping since 1970 for irrigation, municipal, and industrial uses, and new irrigation technology have lowered aquifer level

• Several water “calls” have been made

• The solution will involve sale of rights through the water markets

Nez Perce Claims• Native American treaty claims from the mid-19th century

• Claim is for 100% of the flow of the Snake for fish support

• Major settlement reached in May 2004

• Settlement includes purchase of up to 60,000 AF of permanent rights, from willing sellers

• Will dry up 30,000 acres of marginal land

• Plus, guarantees 427 AF flow augmentation through purchases from the rental pools.

Main Points

• Adaptive capacity differs by policy arena

• Water markets can facilitate adaptation– Legal basis for water allocation– Idaho water market evolution– Resolution of existing disputes

• What happens without marketsWhat happens without markets– Klamath 2001

Snake River Below MilnerR. Slaughter 2001

Without MarketsWithout Markets

Alternate Case:Klamath Basin, Oregon

Klamath Project 1904, Bureau of Reclamation (BOR)

Lands in the project mostly Class II and III

200,000 acres of lower valued land lie upstream from Upper Klamath Lake, are not part of the Project

In 2001, a lawsuit under the Endangered Species Act (ESA) action required that irrigation be reduced.

The only short-term administrative action available was to cut off BOR clients in the Project

Klamath Loss Estimates (source OSU p. 379)

Calculated Gross loss 2001: $ 87 million Ground water substitution: 13 million Adjusted gross impact: $ 74 million

Estimated loss if a water market had been in place: $ 6 million

Water Prices (acre foot)Idaho Rental Pools and Bank: $2.95 - $10.50 (Plus under the table)

BoR fish flush: $50 - $100

Metro Water of Southern California: $82 - $294

Desalination: $1,500 - $2,500

Grand Canyon vacation homes: $16,800

Main Points

• Adaptive capacity differs by policy arena

• Water markets can facilitate adaptation– Legal basis for water allocation– Idaho water market evolution

• What happens without markets– Klamath 2001

• Creating the basis for a water marketCreating the basis for a water market

Structuring Structuring Water MarketsWater Markets

Property Rights Literature

• Ownership matters

– Right to use, to appropriate returns, and to change the form and substance of an asset

– Rights allocation must be such that parties have an ownership stake, have investment at risk, and have contract rights sufficient to significantly impact allocation decisions

Transactions Costs Literature

• Costs matter– Information

• Water availability, quality, price

– Contract enforcement• Options

– Judicial ordering and enforcement– Ex post private ordering and negotiation

» Thousand Springs and Nez Perce settlements are excellent examples of ex post re-ordering

Four Bases for Contract

• Planning

• Trust

• Competitive Market

• Governance (Regulated Market)

Three Contract Problems

• Bounded rationality– Are significant future events known?

• Opportunism– Is unproductive behavior discouraged?

• Asset specificity– Can like units be freely traded?

Contract Matrix

Behavioral Assumption

Contract basis Bounded rationality

OpportunismAsset

Specificity

Planning No Yes Yes

Trust Yes No Yes

Competitive market

Yes Yes No

Regulated market

Yes Yes Yes

Conclusion

• Water Markets must be:– Based in Prior Appropriation, or other

means of allocating definitive property rights

– Regulated for process• Example: emerging Idaho markets

– NOT regulated for outcomes• Example: ESA, BOR Klamath contracts

Richard Slaughter, Ph.D.Richard Slaughter, Ph.D.

Climate Impacts GroupClimate Impacts Group

University of WashingtonUniversity of WashingtonKing BuildingKing Building4909 25th Avenue NE4909 25th Avenue NESeattle, WA 98195 Seattle, WA 98195

Ph: 206.616.5350Ph: 206.616.5350Fax: 206.616.5775Fax: 206.616.5775karpov@u.washington.edu

Richard SlaughterRichard Slaughter

907 Harrison Blvd907 Harrison BlvdBoise, ID 83702Boise, ID 83702Ph: 208.850.1223Ph: 208.850.1223Fax: 208.345.9633Fax: 208.345.9633richard@rsaboise.comrichard@rsaboise.com