To the Highest Bidder: A Market Solution for the Conservation of Colorado River Water
Arizona’s water use is unsustainable. Wells have gone dry across rural Arizona, supplies from the Colorado River are slowing to a trickle, and voluntary cuts are turning into permanent reductions. In January, Scottsdale asked its residents to voluntarily cut their water use by 5%.
Last August, the U.S. Bureau of Reclamation announced a Tier 1 shortage for 2023, which cut Arizona’s Colorado River water allotment by 592,000 acre-feet, or just under 163 billion gallons.
These cuts and shortages come despite the fact that the state’s water usage has consistently declined over the past 70 years, with water usage decreasing by almost a million acre-feet since 1970.
However, this savings has not kept pace with the region’s declining water supply. Areas across the Southwest have seen more than 10% declines in average rainfall compared to the early 20th century. Mogollon Rim’s snowpack, which supplies half of Metro Phoenix’s water via the Salt and Verde Rivers, has declined over 80% since the 1950s. A two decade mega drought, the largest in over a thousand years, shows no signs of letting up, with over 99% of the state in some form of drought.
More severe cuts must be made, but to whom and how much? Residential cuts are one answer, but are paltry in comparison to what needs to be conserved. Scottsdale’s 5% cut is projected to save 327 acre-feet per quarter, or 1,308 acre-feet per year. This savings represents about 0.2% of the Colorado River cut. A far more productive area for cuts is agriculture. For instance, Arizona’s 171,000 ton cottonseed crop in 2020 needed an estimated 1 million acre-feet of water, or just under half the water needs of the Metro Phoenix area. A 5% water cut for cotton producers would save an estimated 50,000 acre-feet per year, or about 8% of the Colorado River cut.
Considering that agriculture uses 72% of the state's water, it is clear that water cuts for agriculture should be the main focus of water conservation. Indeed, such cuts are already happening, although the tier system implementing the cuts is so blunt that it is driving farms bankrupt instead of forcing them to adapt. In other words, a more flexible and optimized system to cut water usage is in everyone’s interest. One way to do this is to use market incentives, which means altering prices to signal how different water usage would affect the system.
However, a glaring issue with implementing a market solution for conserving water comes down to what that price should be. In a free market where price and quantity produced are allowed to fluctuate based solely on demand, prices and quantity will settle on values that maximize usefulness for the consumer and producer. In the case of water, the demand by residents, agriculture, and other water-intensive industries would determine its price. Add those uses up to identify the total water usage and allocation. For example, water prices in areas with large amounts of cotton production relative to other areas would have corresponding higher demand and thus higher water prices.
Since the amount of water in an area is largely determined by environmental availability, a free floating price for water would automatically respond to short and long-term changes in the weather. During droughts, the price of water would rise and push people to use water more efficiently or use less of it. Over time, prices would cause society to conserve water without government intervention, an especially important solution given the state government’s lack of initiative and plans for addressing Arizona’s changing climate.
However, due to laws and agreements set by and between state and federal governments, large segments of Arizona’s water supply, including the Colorado River, are not determined by demand but by law. Water drawn from the River is governed under an interstate compact called the Colorado River Compact. Under this agreement, Arizona cannot legally draw more than 2.85 million acre-feet of water from the River per year, an amount which will shrink as water flows decrease. Furthermore, if this amount of water is not taken, the difference will be forfeited to the rest of the states in the Compact.
Arizona has a long, checkered history negotiating with other states over its share of Colorado River water, and since river water plays an important role in keeping local aquifers from being overused, losing access to it would exacerbate Arizona’s already severe groundwater overuse. This means that the quantity supplied by the river is essentially fixed to a single value. In economic terms, the supply of river water is perfectly inelastic, which has the effect of fixing the price to a single value regardless of market demand or other factors.
Inelasticity causes issues when cuts have to be made, as water-users will be willing to take any rate set by the supplier, in the Colorado River’s case by the Central Arizona Project (CAP). Although rates are discussed in CAP stakeholder briefings and roundtables, repeated and credible accusations of mismanagement and turf wars between it and other regulatory bodies suggest that rates are probably influenced more by politics than by the needs of users. For instance, one of the principal goals of the CAP is to repay the federal government for the construction of its extensive aqueduct system, so the CAP has no incentive to change prices to deviate from breakeven. CAP’s rate schedule reflects this, as each rate is a set dollar amount for a given year based on operating costs, taxes and drought-dependent rate tiers.
Rates that do not change mean that farmers are under no incentive to change their behavior until droughts are declared. It also means that when droughts are declared, farmers have little leeway to make the changes necessary to keep their business afloat. Agricultural businesses will go bankrupt, and with them thousands of jobs in rural areas.
A monthly minimum auction would help solve Colorado river water distribution by varying the amount of water available at any given time. Demand for water in agriculture is largely based on the growing period of a particular good. Cotton, for example, is planted between late Winter and mid-Spring, grows over the Summer, and is harvested in the Fall. This means that Cotton producers will use the most water in the hottest months of the year, so demand in that area would increase at this time of the year. As the rate is fixed yearly, cotton growers have no incentive to conserve during this time of the year. The most water is used precisely when the need to conserve it is highest.
If water rates are based on auctions over percentages of available water, then the supply acceptable to each supplier could be determined. Higher demand areas that need more water would require a higher percentage of water to service, and in an auction environment, suppliers would pay the highest acceptable price possible for their share. Then, to prevent auction losers from not getting any water, a base level allotment at a fixed rate would be set based on the supplier of the lowest water demand. Finally, the total amount of water available in an auction and when and how often auctions occur would be calculated by climatologists, environmental scientists, and economists to maximize environmental sustainability and economic stability.
These auction prices for water suppliers would then be passed onto agricultural users in the form of variable water rates. Rates in high demand areas would rise while those in lower demand areas would stay constant. As different agricultural products need more or less water at certain times of the year, the available water supply would follow demand. Decisions on what and how much to plant would change accordingly and naturally, as crops with high water usage during dry months would be forced to pay a premium. Over time, Arizona agriculture would adjust so that less water is used and that the water that is used is allocated more efficiently and equitably. In the end, the climate, not the government, would determine how people use water.