Water markets are needed to adjust to a hotter world

A 2013 look at at a boat dock at Lake Travis, whose water level decreased markedly amid a historic drought. Photo by Rebecca Vanherdehaage

Six months after Texas was hit by severe flooding during Hurricane Harvey, more than half of the state is back in drought conditions. This pattern of long dry spells punctuated by flooding and storms is becoming a new normal for the state. The 2010-2014 drought, which at some points was the most severe on record, was followed in May 2015 by the heaviest monthly rainfall ever recorded by the state at the time. This trend is projected to continue in coming decades and will only be compounded by increased water demand from Texas’ growing population.

Adjusting to this new normal will require changes in how the state deals with water.

The state’s long-term water plan formally recognizes that meeting future water needs will require the “voluntary redistribution” of water rights; in other words, trade. Yet current water regulations can make it difficult to transfer ownership of water even when there is a willing buyer and seller.

For example, unlike other sorts of property, water rights are restricted based on the purpose for which the water has historically been used. A water right designated as “agricultural” cannot be sold for municipal or industrial use without approval from the state. Obtaining these approvals can be costly in time and money. In one case, the city of Marshall waited six years to get approval to add a new use to its existing water right before finally giving up.

The costs of going through the approval process have created serious price-distortions in the market. An analysis by Jedidiah Brewer found that in 2005, transfers of an acre-foot of water per year (a common unit of water measurement) cost $7,000 more when they were from an agricultural to a non-agricultural use than when the transfers were between two agricultural uses.

The situation is even worse when water rights-holders seek to sell their rights for use in another geographic location. Approval of so-called “inter-basin transfers” requires multiple hearings with notice and public comment, as well as consideration of a wide variety of amorphous factors. The inclusion of broad, often subjective factors in the approval process allows just about anyone to object to a proposed transfer, thus slowing the approval. Compounding the injury, even if an inter-basin transfer is approved, Texas law provides that the transferred water right would lose seniority, meaning that in cases where there was not enough water to meet all rights-holders’ needs, it would be the first to lose out.

On one level, this caution is understandable. No one wants to approve a transfer that could end up hurting the community. Subjecting approval to vague community-impact standards, however, can end in project denials for political reasons. Imagine if similar impact assessments were required before a restaurant could move locations or an individual could buy a car. A complex and costly transfer approval process can also create “lock in,” where those who need water most can’t get it. This will hurt Texas communities over the long term.

It doesn’t have to be this way. Some western states have developed expedited approval processes for temporary water transfers. In Oregon, transfers can be approved in as little as a month. And because the transfers are not permanent, regulators can always re-evaluate them later if problems occur.

Texas can also speed up the approval process by focusing on concrete harms to other water rights-holders or the environment, rather than conditioning approval on broader economic impacts, which are often hard to determine. The state should be leery of second-guessing buyers and sellers who have agreed on a deal that will benefit them both. The best way for Texas to meet its water challenges is to apply the limited-government approach that has been so successful in the rest of the economy.

Josiah Neeley

Energy policy director, R Street Institute