Planet Money - Two Indicators: Water Pressure

Episode Date: September 3, 2021

It's another extremely dry, hot summer for the American West. Our daily podcast, The Indicator from Planet Money, brings us two stories about the water shortage in the West with economic ideas that may help. | Subscribe to our weekly newsletter here.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money from NPR. The climate crisis is really hitting America this week. We've had Hurricane Ida rampage through the eastern United States, bringing deadly flooding everywhere from Louisiana all the way up to New York. And as the eastern United States gets wetter, on the other side of the country you've got the opposite problem. Super hot and super dry. Following the summer's heat waves,

wildfires are out of control with South Lake Tahoe evacuated and all of California's national forests closed. Rain can't come soon enough. So our daily podcast, The Indicator from Planet Money, has spent all week digging into the economics of droughts. Hello and welcome to Planet Money. I'm Darian Woods. Economics is all about how scarce resources are divvied up, and few of those resources are more important than water. So today on the show, we share a couple of stories on water shortages, how we got here, and also how to take a little bit of pressure off the system.

That's coming up after the break. Our first story today is all about a radical proposal to alleviate the struggle over dwindling water supplies. Indicator host Stacey Vanek-Smith and I spoke to Christine Klein. I liken it to religious fervor. Christine is a water rights lawyer. She started her career as a water rights litigator for the Attorney General's Office in Colorado. She said that forever shaped how she sees water and water rights. If you've ever been in Denver,

underneath the Golden D dome of the Capitol, there's what I think of as a cathedral to water. And it has a poem and it starts with, here is a land where life is written in water. So you just cannot overstate the importance of water in the West. Or the legal tangle that is Western water law. And this is especially important now. Most of the West is essentially a desert. On top of that, the West is in the middle of a 20-year megadrought. A water shortage has been declared on the Colorado River for the first time ever. And meanwhile, the demands on Western water are growing every year. And as Christine was thinking through the complexities

and stresses of water and water rights, her mind kept coming back to finance and economics. And that gave her an idea. Maybe we should start thinking about water more like money. But before we get there, we have to understand a little bit more about water rights in the West. They are complicated and they have deep roots, very old, deep roots. The lore is that Western water law began in the mining camps. So if you think about the gold rush in California, it was about, you know, in the 1850s. And so it was trying to decide who gets to use water for various purposes. A lot of the rules and guiding principles that were locked into place in the 1850s still hold. One big one is something called

the Prior Appropriations Doctrine. The basic doctrine is first in time, first in right. So the first party to take a certain amount of water, put it to beneficial use without waste, and they would be entitled to every last drop of their water right until the next most junior person was entitled to a single drop. So that's the pure prior appropriation doctrine. Yeah, wow. Yeah, yeah. About 70 years after that, Western states came together to divvy up the Colorado River,

which is kind of the lifeblood of the West. 40 million people in seven states rely on it. The Colorado River Compact from 1922 allocated 15 million acre-feet of water, thinking that was what we had, and that was an exceptionally wet year. And so they divided a pie that's bigger than we've really had. So a lot of the most fundamental laws around water in the West were locked down in the 1850s and the 1920s. And since then, of course, the West has undergone a profound transformation. Populations have exploded. And cities like Las Vegas, Los Angeles, Phoenix and Denver are some of the biggest and fastest growing cities in the country.

Industry has grown almost unimaginably. We've got Silicon Valley, Hollywood, aerospace. Agriculture has boomed. Farmland in the West is some of the most productive and lucrative in the world. And recently, environmental concerns have come to the fore. And every year, all of these parties, they all come to the state asking for their share of the water. Christine says a lot of years, the states owe more water than they have to give. So if you added up all the water rights people have on paper, a paper water

right, nature in some years can only provide just a fraction of that amount. And in extreme cases, I've read about parts of California being over-appropriated 800%. Christine says it's a lot like a person who owes a lot of money to a lot of people, but does not have the cash to pay. And this water debt situation has been causing some pretty terrible situations. Right, like during the extreme drought that hit California five years ago, there were towns that literally ran out of water, like nothing came out of the taps. Farmers watched their crops die in the fields. Some lost their farms. Rivers ran dry. In parts of California, the ground actually sank as aquifers were sucked dry. And people started

getting desperate. We're having, you know, instances where farmers and ranchers are almost to the point of armed conflict with water managers that are holding back water for fish. It's not working if we're to that point where we're so water-stressed that we just can't work together. We just need a reset. A reset. Christine started thinking about this and she thought, if this were a financial situation where a person owed more money than they could pay, there'd be a really obvious solution here. And you came up with this concept of water bankruptcy. Water bankruptcy. What does that mean? Well, if you think about real bankruptcy, it's when someone can't pay their debts. And if you think in the

water law context, most of the Western states perhaps all are in a situation of too many promises, too little water. Christine thought that bankruptcy could provide a useful framework for the increasingly chaotic situation that Western states are in. Of course, this is not an easy solution. In a financial bankruptcy, most of the creditors usually do not get everything they're owed. They have to settle for just a portion of it. And Christine says that is a very hard sell to people who may have 100-plus-year-old water rights. Everyone has to be to the point where they're frustrated enough,

they're willing to give a little to get a little. And so in water law, what would that mean? It might mean a little bit different allocation that's a little more sustainable. Christine admits the downsides are substantial. Megarepsies, after all, are devastating. It's like major surgery. Right. And they would essentially be ignoring people's legal rights to the water, at least resetting them. But Christine says something has to give because there are just too many people with too many legal rights to too little water.

And she says water bankruptcy or something like it could provide a framework that could help bring order and fairness to a desperate situation. No matter what we do, we have a lot of stress ahead of us, a lot of climate and water stress, but I'm just trying to think of a way to make it as, I can't say painless, to make it less painful,

the least painful that we can make it. Because, says Christine, the pain is here and more is coming. She says we need to start thinking about water differently and acknowledging the value of it. A little bit like the way we acknowledge the value of money and other assets. assets? Well, in one sense, water is the most valuable thing there is. It's life-sustaining, and without it, we die in a matter of days. So in that sense, it's really the state's most valuable, most fundamental, most life-sustaining asset. And Christine says economics and finance could provide some ideas and options to move forward. She points out this is happening already. Water markets have cropped up in the West, where people can sell their unused water rights to the buyers who need it.

And some places are going even further. Like in Australia, they have what basically amounts to a stock market for water. After the break, we're going to be looking at the financial solution Australia is trying out on its own water shortage. Today on the show, we are talking droughts. The Western US is getting drier every year. So we wondered, could we here in the US learn from the driest continent on earth? And it turns out that the driest continent on earth is Antarctica.

So we thought, what about the driest inhabited continent? So we turned to Australia. Come on over. We'll show you what not to do. This is Australian farmer Carly Marriott. She's wearing a white woolly jumper, of course. My husband and I, we run a sheep and cropping farm. We've got three little kids and yeah, we spend most of our days either wrangling sheep or children or a combination of the two. Carly's family have been able to farm in the Australian state of New

South Wales for generations, thanks to her great-grandfather, actually, who was part of this massive project about 100 years ago building huge irrigation lines drawn from Australia's biggest river, the Murray River. It was built around the same time as developments on the Colorado River in the US, which is kind of the equivalent. These are both huge bodies of water that have dams and canals that keep farming going in what would otherwise be pretty drought-prone areas. And it works, until the droughts got worse. In the last 20 years, the flow of Australia's Murray River

fell by half compared to last century. Now, if there's not enough of something to go around, like water, a lot of economists will just say, put a price on it, right? Like, let the market decide where that water is best used. And that is what Australia has done. They have one of the most advanced water markets in the world where anyone can buy and sell water. Carly Marriott, the sheep farmer, she can easily log on to a website on her phone. It's very exciting. So you just go into the water exchange. Got it.

And you say, yes, and here's temporary water for sale. In Australia, it's as easy to trade water as it is to use an app like Venmo or Robinhood. You could do it. I could do it. I could start trading New South Wales water rights. I'm sure you're a good journalist, but you'd make more money. You'd make far more money trading water. I got roasted, Stacey. The basic idea is this, though. The government sets aside water that

it reckons can be sustainably taken from the dams, and it puts that water on the open market for the taking to the highest bidder. And the economic intuition behind this is that it allows trades that make everyone better off. Like say I have an apple orchard in the middle of a drought and Darian, you are a cotton farmer. I was born for this role. So if I don't get enough water for the year, my apple trees will die and it will take me six years to grow them back. Of course, I would be willing to pay a lot of money for that not to happen and to get a little extra water. And let's say, Darian, that you have some extra water that I would like to buy, please. That is an intriguing offer, Stacey. Okay, I'll look up water prices on the app and I see water prices are very high. The value of cotton I could grow this year is less than that.

And unlike those apple trees, if my cotton dies this year, that's okay. Like, no sweat. I can start again next season. So I think, well, this year it might make sense to sell that water to you, Stacey. And I won't grow cotton for now. Thank you, Darian. Deal. The water has gone where

it is best used, to me and my apples. And these kinds of trades, letting the water go to its highest value use, has been analyzed by Neil Hughes and his team at the Australian Bureau of Agriculture and Resource Economics and Sciences. Neil says that allowing different regions to trade water has meant huge economic gains. For example, in the southern basin region where much of the country's farmland is. Benefits are about 12% of the value of water rights, which is about $117 million a year. Basically, their model that water trading allowed an additional $117 million worth of stuff that could be grown. So you could think about that as like 12% more produce and meat and wool with the same amount of water. And Neil says that those benefits are

even greater in the drought years when getting water to its most valued use matters the most. So these are all the benefits, but it has not been all hugs and rainbows, the way it's actually happened, right? Is that fair to say? Yeah, that's right. So 2019, at the height of the recent drought, there was a lot of bad press emerging around water markets. And a lot of that was because water prices were extremely high. Carly Marriott, the farmer, remembers this price spike well.

She was thinking at the time she might grow some sheep feed over the summer. So she logged into the website and there it was. From $100 a megalitre to $1,000 a megalitre. And we just felt like the rug had been pulled out from under our feet. And Carly started digging into how the water market worked. And she was particularly frustrated that she was being offered really expensive water from people who were not even farmers themselves. This is the major difference between the U.S. and Australia. Yes, the U.S. has water markets, but they are generally tied to land. But in Australia, you do not need to own land to trade water.

And when, say, each month when water first comes onto the website? Within an instant, you know, whatever the water availability becomes, these investors can swoop in and just buy up every possible megalitre and just hold it. Carly and her family got really riled up. They felt like these people were water flippers. So they helped organise a convoy to Australia's capital city of Canberra. We dragged our kids five hours in the middle of summer to protest. And we actually stormed, like, not America style, but we stormed to the front of parliament. Right. And we were shouting out, like we were shouting the name of the water minister. And my three-year-old, she had the megaphone and she was into him. She had it up and you just think, is this what we've become?

Like we were just flat out, you know, growing crops and chasing sheep. And here we are, you know, demanding to be heard and seen by the nation. This economic theory, the idea of just letting the markets decide, it was colliding with reality. Stories like Carly's kick-started the government into commissioning a massive review of the water market. Neil Hughes, the economist from earlier, he was very positive about the whole system. He said that having those outside investors was a good thing for the proper functioning of the market. It meant that those trades of water were likely to actually happen. If there aren't that many people using the water trading website, then farmers might just hold on to water that they don't need. But that view is by no means the consensus in water policy circles. In fact,

Carly's concern that outsider investors are totally distorting the market is part of that debate. But putting aside that controversy, you know, coming out of that big report, it has basically three main lessons for water markets. Lesson number one is regulation. Water markets are serious markets, and according to this report, regulation should be just as vigilant as you would have in other industries like finance. The same way that you might have rules around conflicts of interest or insider trading, you'd also, by that logic, need those rules in the water market. And lesson number two coming out of that report, make sure the rules reflect a rapidly changing climate. And finally, lesson number three, share information widely. At the

moment, the institutional investors can be at an advantage with forecasts, models, and like really fast internet connections. If that information is better shared, there might be less of a sense of grievance from farmers working from a slow internet connection who never signed up to be rapid day traders of water. Have you tried to beat them at their own game, sitting at the computer right on the dot of the hour? We've got better things to do. We grow grass when we can. We feed them grain when we can.

We destock when it's not viable. And we no longer have that security that our dads and grandfathers had a couple of generations ago. If you want to hear more stories about water and money, the Indicator podcast has you covered. Listen and follow to hear about the strange way that we price water in the US and also some of the fights that have broken up over water rights and drought-stricken areas. You can email us, planetmoney at npr.org. Find us on Facebook, Twitter, TikTok, Instagram, at Planet Money. The original Indicator episodes were produced by Brittany Cronin and Jamila Huxtable

with help from Julia Ritchie and Isaac Rodriguez. They were fact-checked by Michael Hurt and Caitlin Nicholas, edited by Kate Kincannon. This Planet Money episode was produced by Dave Blanchard. Our supervising producer is Alex Goldbach. I'm Darian Woods. This is NPR. Thanks for listening. And a special thanks to our funder, the Alfred P. Sloan Foundation, for helping to support this podcast.