Water Banking and Optioning of Water Rights

As we covered in Module 8, one additional hedge against fluctuation in supply, and/or against climate change, is to purchase, trade, or bank water, either using one's own allocated water in times of surplus, or through purchase of someone else's unused water rights in a given time period. For example, Las Vegas has adopted this strategy to provide alternate sources in times of severe water shortage, through agreements with Arizona and California. These agreements are one means to transfer water, either actually or virtually, from areas where it is available (in surplus or actively stored in aquifers) to those where it is needed.

More sophisticated arrangements have also been explored, in which water is treated as a commodity and with prices determined by demand. One example of this is described in the High Country News piece "LA Bets on The Farm". The basic concept is that the MWD of Los Angeles pays farmers with water rights for irrigation to fallow some portion of their land. Because, at least currently, there is no shortage of food, the exchange works: LA gains an additional water supply, and the farmers or irrigation districts make a bit of money (without having to take on any risk associated with growing crops, commodity prices, or the like). A more recent iteration of the agreement provides both parties with additional flexibility to account for unpredictable precipitation patterns and water supply, whereby the MWD purchases "options" to the water rights for $10/acre-foot. By March of that particular year, the MWD must decide whether they will take the water or not. If they do, they pay an additional $90/acre-foot (enough that the irrigation districts make some money); if not, there's still time to plant crops, and the irrigation district keeps the option fee.

At their core, these approaches use the market to define the pricing of water, and to shape the terms of agreements that will be mutually beneficial. In part, they work because the amount of water needed for irrigation far exceeds that for municipal or domestic uses (see Module 1). And in part, they work because the irrigation districts receive water that has been heavily subsidized, largely through public investment in major infrastructure that underlie the water systems. Ultimately, however, it is not clear that the exchange or purchase of water rights will really work in the face of severe drought, major climate changes, or continued increases in demand. After all, these strategies are essentially a form of regional water re-allocation or transfer – but in a zero sum game, they can only work if there is enough surface water or groundwater to be had.

Recognition that these strategies may ameliorate shortages and can serve as a valuable hedge against variability in supply, but are unlikely to fully solve problems of water scarcity if we insist on continued development in water-poor regions, has led to large-scale proposals to transfer water or exchange water rights over great distances and across borders. For example, as discussed briefly in Module 8.1, and in Chapter 3 of The Big Thirst, Las Vegas has begun to explore distant sources of water. These include groundwater in Central and Northern Nevada (a project currently underway), as well as proposed exchanges in which Las Vegas would bankroll desalination facilities in Coastal California, and trade the "new" supply of desalinated water for withdrawal of the same amount from Lake Mead. As described in the next section, the basic fact that there is water available if one reaches far enough – and is willing to pay for it - has led to all manner of proposals to move water across oceans and continents. To an extent, this calls into question Fishman's assertion that all water problems and their solutions are "local".

Activate Your Learning

Explain (~100 words) why water banking or optioning is not a viable long-term solution to water scarcity in the case of prolonged water shortage related to sustained severe drought or climate change.

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