California and drought

Respecting existing property rights is critical to efficiently reforming environmental policy

Photo by flickr user gregb77

In providing environmental benefits it is critical to work within the existing formal or informal property rights system. Otherwise meeting the resource objective is overwhelmed by battles over property that will raise the transaction costs of negotiation and enforcement and delay response. Moreover, such policies entail compensating existing rights holders for costs they bear in providing broad public goods. This compensation implies a shift from a polluter-pays to a beneficiary-pays rule in environmental policy. Polluter-pay rules invite resistance, raise costs, and also delay response.

During California’s drought, it has been argued that agricultural water rights holders, who use most of the state’s water, be required to set aside a share of their rights for protecting environmental stream flows. These actions assign costs for stream flow maintenance to water rights holders, while others capture most of the benefits. Water rights holders who lose water without compensation view the policies as government capture of their property. An alternative is to lease water from incumbent rights holders as an option whenever stream levels fall critically. Such contractual approaches better align incentives for environmental improvement by distributing costs and benefits proportionately. A large body of empirical evidence in the management of common pool resources reveals the importance of a proportionate cost and benefit distributions.

The Issue

In California and elsewhere in much of the American and Canadian west, water rights are held under the system of prior appropriation. This system is different to the more common riparian system that assigns water ownership to adjacent land-owners in shares based on the size of their appurtenant property. By contrast, prior appropriation assigns rights based on time priority. Early, high priority rights holders have first claim on stream flows to meet their diversion needs before more junior claimants secure water. Most senior water rights were established by the end of the 19th century. During drought, senior rights holders may receive their full diversion whereas more junior rights holders receive none. In this setting there are informal or formal short-term leasing agreements among irrigators to reallocate water, and similar practices could occur with environmental groups or the state for stream flow maintenance.

More broadly, the California Governor’s office in April 2015 called for mandatory cuts of approximately 25% from 2014 levels of potable urban water use. Urban water is regulated by the state. Faced with criticism that agricultural users were not sharing the cutbacks, state regulators called for 100 senior water rights holders in the San Joaquin and Sacramento watersheds to reduce water use voluntarily or face mandated restrictions. Similar regulations were implied for irrigators elsewhere should the drought persist. Some irrigation districts challenged the policies as the capture of their property and broadly, agricultural interests are prepared to resist such efforts.

Why is that? The mandated reductions necessarily impact the most senior rights holders because they are the parties who have water. Not only would the mandates disproportionately harm senior rights holders, but they undermine the basis for the long-standing prior appropriation rights system. If water is taken from senior rights holders, then priority loses its meaning and long-term expectations regarding water access, use, and investment are changed. As a result, it is far less disruptive to work within the existing property structure.

We have experience with the environmental and resource costs of ignoring incumbent rights in attempting to provide environmental benefits with Mono Lake. Los Angeles acquired water rights in the Mono Basin in the 1930s to augment its water supplies from Owens Valley to the south. By the late 1970s the two regions were providing 85% of the city’s water and generating electricity for urban use. Major diversions of Mono Basin water began in 1970 and these deprived alkaline, hypersaline Mono Lake of tributary water. The lake level declined by about 1.6 feet a year, and environmental groups and government agencies sued to halt the diversions. In these suits, the city’s water rights were rejected and water was to be taken without compensation. The city estimated that the costs of water replacement would be $1 billion, not counting the lost value of stranded capital in water delivery and electricity generation. Lengthy and costly court battles ensued for 20 years, delaying protection of Mono Lake and continued decline in lake levels as the parties fought over Los Angeles’s water rights.


California has formal water markets that serve to reallocate water to higher-valued uses and to encourage conservation and investment in water infrastructure. Water markets, however, require secure, defined water rights. Our estimates reveal that there are very large gains from trade in the state that currently are not being achieved, in part because of insecure water rights. Important benefits could be achieved in this area in a state that is facing continued drought and growing demand for freshwater. Similar issues are encountered in wild ocean fisheries, where the potential for rights based management is lost due to limited use right security and trade restrictions.

Drought policy in California is one example of the importance of respecting formal and informal local property rights in providing improved environmental quality rapidly and at comparatively low cost. Similar conditions arise in species and habitat protection and fish stock conservation.

Gary is Professor of Corporate Environmental Management at the University of California, Santa Barbara.

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