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November 15, 2016
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How I Saw: Analysis and Commentary. . . - 9in x 6in
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Chapter 40
How I Saw It Downloaded from www.worldscientific.com
by NATIONAL UNIVERSITY OF SINGAPORE on 10/25/17. For personal use only.
Water Rights and Wrongs
July–August 2003
Water markets are on the move. New ones are emerging and those
that already exist are being modified. Energy and emissions brokers
are entering the market and this once arcane business continues to
attract a widespread following. The reasons are obvious. Water is
scarce and becoming more so. Command and control has had little
success in achieving the best possible use of this commodity.
There are two key issues to consider — the quantity of water
available and its quality. It seems reasonable to start by focusing on
issues of quantity. We will deal with quality in a subsequent column.
A few facts help in understanding why water rights will continue
to see significant demand and why there is a role for transparent
markets in these rights. According to the UN Environment Program (UNEP), 2.5% of the world’s water is freshwater but the vast
majority of it is locked in the polar regions and glaciers. Approximately 0.01% of the water on earth is freshwater that can be readily
used for human consumption. This small and fixed supply must be
used to satisfy an ever-growing demand. Officials at the Third World
Water Forum held in Kyoto in March this year reported that water
demand is growing approximately three times as fast as the current
rate of population growth.
This supply-demand imbalance is one of many factors causing desertification. According to the UN Convention to Combat
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Desertification (UNCCD), an area of 4 billion hectares, roughly
equal to a third of the planet’s land surface, is affected by desertification. The United Nations estimates that this figure is increasing
by some 5.25 million hectares each year.
But, the problems go far beyond desertification. According to
officials at the WaterForum, nearly 1.2 billion people lack a safe
water supply and virtually all regions of the planet face water problems. It is expected that many of the conflicts in the 21st century
will involve disputes over water rights. One example is the current
battle between the United States and Mexico over water from the
Rio Grande.
Such disputes are not only international in nature, but are also
taking place at the state level. Water rights have always been a hugely
contentious issue among the western US states that draw from the
Colorado River. As scarcity increases, water markets are expected to
becoming more prevalent and sophisticated.
Water rights are expressed in terms of acre-feet, a volume of water
equal to one acre, one foot deep (equivalent to 326,000 gallons).
Rights to acre-feet of water can be bought outright or leased temporarily. Trades almost always go through a third party. In the course
of our research for this article, it became clear that the market is
fragmented and lacks price transparency.
Two states provide relevant examples of the status of water rights
trading. In California, industrial and residential users compete with
agriculture for ever scarcer water resources. According to the Pacific
Research Institute, agriculture uses almost 80% of the state’s water
resources, whereas urban areas consume 20%. The state has experimented with water markets and informal local transactions led to
the creation of WaterLink, an electronic trading platform on which
buyers and sellers can post bids and offers. In response to these
initiatives and other enabling legislation introduced by the government, brokers and other market participants are entering this
nascent market.
New Mexico is another state that has experimented with informal
water markets. A system based on private or municipal ownership
November 15, 2016
How I Saw It Downloaded from www.worldscientific.com
by NATIONAL UNIVERSITY OF SINGAPORE on 10/25/17. For personal use only.
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Analysis and Commentary on Environmental Finance (1999–2005)
of irrigation ditches called acequias was brought to the region by
Spanish settlers in the 1500s. Users of water from another person’s acequia had to compensate the owner. This remains the model
for water allocation in the state. Today, all the water rights associated with private lands have been assigned. Farmers, manufacturers,
power producers, or any other type of private landowner in need of
water must buy rights from a municipality or private entity. The
figure shows the breakdown of water consumption in the state of
New Mexico by sector. Similar to the situation in California, tension
exists between agricultural water users and industrial and residential
users.
Problems of water scarcity further complicate an interstate dispute between New Mexico and Texas. New Mexico has to maintain
a specified flow rate in the Pecos River to fulfill the Texas–New
Mexico Pecos River Compact. In 2003, New Mexico expects it will
have to send 17,000 acre-feet over the State line. In 2002, the State
Legislature appropriated $70 million in public funds to finance purchases to meet this obligation. In order to deliver, New Mexico has
to buy at least 12,000 acres worth of land and water rights from
landowners. One is led to believe that more informed and costeffective public decisions could be made if better price information
was available.
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November 15, 2016
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How I Saw: Analysis and Commentary. . . - 9in x 6in
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How I Saw It Downloaded from www.worldscientific.com
by NATIONAL UNIVERSITY OF SINGAPORE on 10/25/17. For personal use only.
Water Rights and Wrongs
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169
New Mexico has a major opportunity to become a leader in the
emerging water markets due to the commitment of Governor, Bill
Richardson and John D’Antonio, New Mexico’s Secretary of the
Interstate Stream Commission.
For students of markets, it appears that, similar to the current
state of the carbon market, the buying and selling of water rights
is fragmented and suffers from high transaction costs. This lack of
price transparency complicates policy and business decisions. The
status of water rights in the Western United States exemplifies the
need for organized markets that can help inform the debate on this
issue by creating agreed standards and practices. Current efforts by
private, public, and academic participants can help form the necessary institutions that will pave the way for an organized exchange
model.
I would like to thank Jeff Sterba, CEO of Public Service Company
of New Mexico, for facilitating a meeting with key leaders in New
Mexico.
Thanks also to Claire Jahns, Nathan Clark, Rafael Marques, and
Michael Walsh for their assistance in the preparation of this article.
CCX update: we are pleased to announce two new members
representing important new sectors for the exchange. Bayer
Corporation is the first North American entity owned by a
German company to join and Tufts University is CCX’s first
US private university member.
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