Water markets have long been touted as a way to increase economic efficiency by letting those who need water buy it from willing sellers. Yet many obstacles have prevented water markets from flourishing in California. Perhaps the most serious obstacle has been the proliferation of misconceptions about what water markets are and who they serve. In this and future blogs, we hope to demystify water markets and to explain the potential of groundwater markets to help farmers adjust to the Sustainable Groundwater Management Act (SGMA).

Defining a water market

First things first. What is a market? A market simply consists of individuals buying and selling the rights to something of value and the rules about how they do so. The sold item can be a good like a car or a soymilk latte. Or it can be a service like tax accounting or a hot yoga class. (Whatever floats your boat.) All of us participate in markets every day, usually without stopping to think about how what we do fits into “the economy.” The truth is, we are the economy.

Water is no different in this sense. Water agencies sell water to all of us for use in our homes, on our farms, and in our businesses. Most of us don’t stop to think about it unless we’re hit with a big bill for trying to turn our backyard into a tropical garden.

But California’s farmers increasingly don’t have that luxury. California’s farming regions are grappling with the need to limit groundwater use to sustainable levels to meet the requirements of SGMA.  In much of the San Joaquin Valley, achieving sustainability by 2040 means making significant cuts in water use. This has created uncertainty about farmers’ livelihoods and the future of some farming communities. Farmland that lacks secure water rights is already seeing a steep decline in value relative to land with more secure water rights, which makes it difficult to get loans from banks and threatens farm viability.

Many farmers are adapting to this new reality. They are figuring out how to use tools such as managed aquifer recharge to store water underground when it’s plentiful and use it later when needed. This has accelerated efforts by local water agencies to establish the rules governing how much groundwater can be pumped, how pumping is tracked, and how farmers get credit for the water they recharge.

Farmers are also thinking more and more about how to get extra water to make up for what they can no longer pump out of the ground. And they’re thinking about what they’d be willing to pay for it, or even how much money they could get for selling water to their neighbor. In other words, they’re thinking about water markets.

Facing the fear

Water markets have existed in California for decades. Water agencies regularly trade water between themselves to fill the gaps when, for example, one agency has a surplus and another faces a shortage. Yet despite this, the concept of trading water inspires concerns almost across the board.

Speaking with stakeholders, one hears a range of concerns. Some farmers worry that participating in markets could lead to the loss of their water right. Others are concerned that small farmers will be disadvantaged in markets that would likely favor large industry and agribusiness. Community advocates are concerned that markets could exacerbate existing inequities, cause wells to go dry, or worsen water quality. Environmentalists fear that water markets could pull even more water away from struggling groundwater-dependent ecosystems. And still other critics are apprehensive about the transparency (or lack thereof) of water markets.

Underneath these concerns lies, perhaps, a more fundamental truth: though water is treated as a good like a latte, it is also fundamental. A person can survive without lattes, but she cannot survive without water.

The good news is that there are many ways to ensure that water markets don’t hurt other users. The process is by no means easy, but it can go a long way towards alleviating concerns and protect water users. In our next post, we’ll explore the art of good water market design.