November 15, 2016 9:33 How I Saw: Analysis and Commentary. . . - 9in x 6in b2702-ch40 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 166 page 166 November 15, 2016 9:33 How I Saw: Analysis and Commentary. . . - 9in x 6in 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 b2702-ch40 page 167 167 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. 168 9:33 How I Saw: Analysis and Commentary. . . - 9in x 6in b2702-ch40 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. page 168 November 15, 2016 9:33 How I Saw: Analysis and Commentary. . . - 9in x 6in b2702-ch40 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 page 169 169 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.