WATER, CLIMATE CHANGE, AND MARKETS Richard Slaughter, Ph.D. Climate Impacts Group, University of Washington Richard Sl

1. WATER, CLIMATE CHANGE, AND MARKETS Richard Slaughter, Ph.D. Climate Impacts Group, University of Washington Richard Slaughter Associates, Boise, Idaho SICCIA June 28 - July 2, 2004 Grainau, Germany Supported by National Oceanic and Atmospheric Administration Office of Global Programs

2. Columbia Basin

5. 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

6. Main Points • Adaptive capacity differs by policy arena

7. 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

8. 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

9. Three Arenas for Climate Information • CC information directly useful for decision • CC information automatically incorporated • CC information must overcome structural rigidities

10. Three Arenas for Climate Information • 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

11. Three Arenas for Climate Information • 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

12. Three Arenas for Climate Information • 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

13. Alternative Fixes for Structural Limitation • 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

14. Alternative Fixes • Introduce characteristics of systems that exhibit automatic adaptation • Example: water market

15. 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 allocation disputes

16. How Do Markets Assist Adaptation to Climate Variability and Change? Markets require a rights allocation based in law

17. 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

18. 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

19. 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

20. 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’

21. Idaho Water Market Structure

22. Water Rights are defined by • 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.

23. 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

24. Water Bank

25. Water Bank Conditions 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.

26. Rental Pools

27. Idaho Rental Pools • Limitations • 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”

28. Considerations for Rental • 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)

29. Source: Idaho Department of Water Resources

31. Private Transfers

32. 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

33. Snake River Moratorium after 1992 ( no new water rights) Most recent transfers are 'change of use' (dairies) No. of permits, not volume of water

34. Existing Disputes

35. 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

36. 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.

37. 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

38. Without Markets Snake River Below Milner R. Slaughter 2001

39. 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

41. 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

42. 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

43. 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 market

44. Structuring Water Markets

45. 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

46. 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

47. Four Bases for Contract • Planning • Trust • Competitive Market • Governance (Regulated Market)

48. Three Contract Problems • Bounded rationality • Are significant future events known? • Opportunism • Is unproductive behavior discouraged? • Asset specificity • Can like units be freely traded?

49. Contract Matrix

50. 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