HOLLYWOOD and its stars, Silicon Valley and its software giants,
miles of sunny beaches and their sunbathers - these are the
images California normally evokes in people. But the state
means much more than that. For the cognoscenti, it means
water and its viable use; it means the Hollywood hit
Chinatown, which tells a story of murder and intrigue over
control and diversion of water from farmlands in the north to
Los Angeles (LA) in the South; it means the premier agricultural province in the us. More than a quarter of California's
agricultural land is irrigated, compared to an average of only
two per cent in the grain-belt states (Iowa and Illinois, for
instance) in mid-western US.
There is, naturally, a story behind California's success.
Between the period 1987-92, the state had reeled under the
impact of a prolonged and severe drought, during which
annual water availability was less than 50 per cent of that in
normal years. The state responded by overhauling its archaic
water management system and by introducing innovative economic concepts like water trading and water banking; the policies resulted in a dramatic increase in the efficiency of water use.
Most precipitation in California occurs in winter, while
agricultural and urban demands peak in summer. The major
croplands are in the Central and Imperial valleys where the
demand for water outstrips the rainfall. Eighty per cent of the
available water is consumed by the agriculture sector. The
state is also highly urbanised, with huge metropolitan
centres around LA and San Francisco adding to the pressure
on the limited water supplies. The situation has induced the
creation of a vast network of reservoirs, canals and aqueducts
one of the most sophisticated water systems in the world
that collect water in the north during winter months
and transport it to the southern parts of the state in summer
(see map:Water maze).
Infrastructure for storing and transporting water was
expanded earlier in the century by farmers in the Sacramento
and San Joaquin valleys by building a network of private aqueducts and canals to provide surface water for irrigation.
During this pre-war period, urban municipalities in LA and
San Francisco also developed their own water supplies. After
the war, the federal and state governments responded to the
post-war boom in California by completing two major public
water projects, the Central Valley Project (CVP) and the State
Water Project (SWP) to provide water to parts of the Central
Valley and to cities in the southern part of the state. A network
of gigantic pumps is used to transport water to southern
California that otherwise would have gone to the San
Francisco Bay and Delta districts.
This major diversion of water away from the Bay and Delta
has had an adverse effect on water quality. The pumps killed a
large number of fish. Several species of salmon were endangered. Today, California's environmentalists are fighting to
save the salmon and restore some of their natural habitat in
the San Francisco Bay and Delta. Recent water reforms in
California have attempted to restore some of the Central
Valley for environmental purposes.
Also, environmental groups have successfully lobbied to
use a part of the existing water resources for controlling environmental degradation. For example, the Wild and Scenic
Rivers Act passed by the US Congress has put limits on water
use from the North Coast rivers. Similarly, litigation has
restricted the access of LA city to Owens Valley.
Farmers in California grow nearly 200 different crops with
varying water use requirements. Crops such as rice and alfalfa
require relatively large amounts of water, while vegetable and
fruit crops (lettuce and strawberries) require less and also
fetch higher prices. Nearly half the farmers use furrow and
flood irrigation technologies, a third use sprinklers and the
remaining use the more efficient micro-sprinkler and drip
technologies on their lands. Thus, differences in crop water
use and technology cause wide variations in the productivity
of the water used.
"The problem is not of availability of water, but its management," argues Ariel Dinar, water economist at the World
Bank who has worked extensively on California water issues.
"There is inefficiency both in agriculture as well as in urban
uses. For example, upto 25 per cent of the water carried by
canals is lost because they are not lined. In many cities, residential use is not metered and consumers get as much water as
they need for a fixed fee," he adds.
Allocation of the water is dictated by a system of property
rights known as the 'prior appropriations' doctrine. This is a
'queuing system' of water rights that can be aptly summed up
by two simple rules: 'First come, first served' and'Use it or lose
it'. Farmers are assigned water-use rights according to the time
when they start diverting
water. They are not restricted to any
fixed quantities as long as
they put the water to 'beneficial use',.
but can lose the right if the water is not used.,
They are no
allowed to sell their excess water and if they decrease their
withdrawals, they lose the rights to the water they
did not use.
Given this system, no wonder that farmers apply as much
as possible, without any qualms. They have no incentive to conserve
their water and use it efficiently.
These inefficiencies are
compounded by government subsidies. In the past, the federal
government has paid rice
farmers in the state 40 per cent more than the
world price for their crop. So, farmers continue to grow rice, which is
a large user of water, even though it fetches incomes of only us $500
per acre compared to more profitable alternatives such as
peach and citrus
(us $5,000-8,000 per acre) and strawberries
(us $20,000-40,000 per acre).
However, environmentalists in the state are much less opposed to the use of water in rice than in other crops such as cotton because rice production has important environmental benefits. Over the years, rice paddies have become wetlands that provide a feeding and nesting area for thousands of migratory bird.
In the CVP and SWP, a
variation of this doctrine holds, in
which farmers called
'contractors' are assigned contracts that
specify the volume and price
of water for a specified period of
time (as long as 40 years). In
theory, the water is
supposed to be priced to cover operational and
capital investment costs; in practice, as a report
by the
University of California observed, project
water has been
"notoriously cheap". In many
districts, farmers do not pay by the
volume of
water used but on a per acre basis, using as much
water as
they can beneficially. This has resulted in
inadequate conservation
by users and inefficient
use of water.
Economists have long argued that the efficiency
of water use in agriculture will increase dramatically if only farmers were allowed to trade in
water rights. This will reduce inefficiency because
farmers will adopt better conservation measures
on their fields, enabling them to sell part of their
water rights. Over time, a market for water rights
could be created that will, using famous 19th century economist Adam Smith's "invisible hand",
guide the water to its most efficient use. These
issues have been recognised in recent years by
water managers and governments not only in
other states in the us, but also in other countries.
However, unlike other commodities such as
land, markets in water are more difficult to establish. Buying and selling a commodity like water
requires investments in infrastructure such as
canals, improved measurements, metering,
billing and monitoring and protection of water
flows. These investments are more likely to be
made by the government than by a private entrepreneur. In California, at least until the drought
of 1987-92, a sufficient amount of water was
available and thus there was no compelling reason to reform
the antiquated water allocation system.
The drought forced farmers to adopt better irrigation
technology. A survey conducted by the University of California
revealed that 35 per cent of farmers installed new
sprinklers
and 33 per cent installed new drip irrigation systems. Before
water
the
drought, farmers used no drip irrigation on vegetables.
After the drought, they
irrigated 10 per cent of the vegetable
crop with drip systems. Land under
drip irrigation for fruit
production went up by more than 50 per
cent. A fifth of the
cotton growers started using sprinklers and the
number of
farmers using computer-aided irrigation also doubled. Many
laser-leveled their fields, and others were reported to be applying water
during cooler hours (to reduce evaporation). Some
districts lined their
canals to reduce conveyance losses.
The water crisis caused by the
prolonged drought triggered
major institutional changes. Water
districts that received less
water from the projects introduced
block-pricing, in which
farmers got a fixed quantity at a base price and
options to buy
additional quantities at higher prices, which forced them
to opt for more efficient
crops and improved irrigation methods.
An example of the chain reaction set off by an increase in water price is the Broadview Water District. In 1988, it adopted a simple two-block structure for water prices: the initial block at a price of us $16/AF (acre-foot) and additional tail water at us $40/AF. Fixed costs were recovered by an
annual assessment of us $42/acre unrelated to water consumption. It was estimated that Broadview farmers responded to a
10 per cent increase in the price of water by decreasing consumption by more than eight per cent. These tiered pricing
schemes have two beneficial effects: they encourage conservation and adoption of modern technology and provide
revenues to the water districts, which can be used in turn to
provide subsidies for technology adoption by farmers.
Water districts and government agencies increasingly realise
that they cannot dictate to the farmers," says Richard Howitt,
professor at the University of California at Davis and a leading
water economist in the state, "But they can provide farmers
with economic incentives to conserve water. This can be done
through providing mechanisms such as trading, water banks
and innovative pricing schemes that will allow water to be
moved from low-value to high-value uses."
Although the drought was mostly a blessing in disguise, it
did not affect all farmers evenly. Farmers with senior rights continued to operate with their historical allotments while supplies
to the junior rights holders were cut. This caused significant
economic hardships in some cities and rural communities, such
as in the San Joaquin Valley. As a result, trading of water
between and within districts was induced by using a variety of
mechanisms. A water bank was created by the water districts to
trade water. It bought water from districts with a surplus and
sold it to districts that were running a deficit. The total amount
bought was 825,000 AF for us $125/AF and sold 435,000 AF for US
$175/AF. The water sold was withdrawn by the purchasing district from the Bay and Delta districts. Some water was also
bought by the metropolitan water districts for urban and residential use. There was surplus water left in the Bay and Delta
districts, which increased the water flow and led to an improved
habitat for fish and other marine life. In other words, the water
was reallocated but not wasted (see box: Water barter).
The experience of the California drought shows that
farmers respond to economic incentives to save water and
increase water-use efficiency. Policymakers recognised this
potential for improvement and towards the end of the
drought, the us Congress passed the Central Valley Project..
Improvement Act (CVPIA - the Bradley/Miller Bill) which
recognises an environmental mission for the CVP.,, allocates
0.8 million AF of water for such benefits, and permits water
contractors to sell water outside their districts.
"The most important contribution of the drought was
creation of water scarcity," says Dinar. "That led to the passing
by the us Congress of the historic Bradley-Miller Bill which
requires transfer of a certain volume of water from agricultural
and municipal uses to the environment." It instructs the
government to purchase water for restoration of the San
Francisco Bay and Delta districts, and it
allows farmers to sell their water rights
to cities and to one another. "This act
was a victory for environmentalists
fighting for restoration of the state's
ecological habitats and who argued that
the transfer of water away from environmental uses was excessive;", asserts
Thomas of the NHI. Various other laws
have also been enacted recently which
have supported this process.
"What trading and water markets do is
that they increase the value of the water
without increasing its cost," says
Howitt. A major computer simulation
study on policy responses to the
drought conducted by researchers at
the University of California found that
water trading is the single-most important factor that determines the impact
of water supply reductions on the state
agriculture sector. It found that output
could be increased by more than 25 per
cent with no additional water supplies,
if only water trading were allowed. If
water supplies in Central Valley alone
were cut by 25 per cent, farmers' incomes would go down by
only one per cent. However, without water trading, losses
would be five times higher. This is because when water is
traded, farmers will reduce acreage on low-value crops and the
same will be distributed over each region in an efficient
manner. Without trading, if all the water is cut from a single
region, some high-value cropland will also be fallowed, leading to higher losses.
Without trading, statewide economic losses are much
higher (us $300 m) and employment losses are also 11 times
higher. These results suggest that if water were to be diverted
for environmental uses, or to meet the increased demand from
the cities, losses to agriculture could be minimal under a water
market.
Another issue of importance is the question of water rights
and who should benefit from the sale of water if trading were
allowed. If the government were to keep the sale proceeds,
then any proposed transition to a water market may be
blocked. Senior rights holders, who today get large volumes
of water at low prices, may need to be compensated for their
participation. There are important 'third-party' effects that
also need to be considered. For example, companies that sell
inputs such as fertilisers and pesticides may resist the sale of
water out of the region as that will decrease demand for their
products among farmers. The building of conveyance facilities
will decrease the amount of water that is available through
groundwater pumping, mostly used by cities in California.
Policies currently on the table include proposals that restrict
the water being sold to the amount used by crops. Such measures will slow the introduction of full-fledged water markets.
For water planners elsewhere in the developed and developing world, the question that may be asked is: do we need a
drought to trigger a major change in water policy.? From at least
California's experience, it may seem so. However, as has been
seen in Africa and other areas around the world, droughts by
themselves cannot trigger water reform unless there is sufficient awareness among the people, and the various parties
involved are able to see the tangible benefits from reform.
Ujjayant Chakravorty is associate professor of Agricultural and
Resource Economics, University of Hawaii, Manoa (US). David
Zilberman is professor at the department of agricultural and
resource economics, and the director of the Centre for
Sustainable Resource Development at the University of
California, Berkeley (US)
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