The utilization of markets to address envir on mental prob lems is not a new concept. Over the last three decades eco nom ists have applied eco nomic markets in address ing such envir on mental prob lems as the removal of lead from gasoline (Kerr and Newell, 2005), the reduction of acid rain producing sulfur dioxide from the atmo sphere (Bellas and Lange, 2008) and the limiting of carbon dioxide emissions (Burtraw and Evans, 2008). Markets have also been successfully used outside of the envir on mental pol icy arena to address pol icy prob lems made complex by the laws of physics such as the trading of electricity in a network (Leveque, 2006) and the combinatoric auction used to alloc ate scarce airport landing and take off slots (Rassenti et al., 1982). Since 1950, the demand for water has more than doubled in the United States. Historically, growing demand has been met by increasing reser voir capa city and through ground water mining, often at the expense of envir on mental and cultural concerns. Demand for water will con tinue to increase, par ticu larly in response to the expanding urban sector, while growing concerns over the envir on ment are prompting inter est in allocating more water for in stream uses. Where will this water come from? Virtually all water supplies are alloc ated. Providing for new uses requires a reduction in the amount of water ded ic ated to existing uses. This brings us to a choice. What is the best mech an ism for reallocating the existing supply? Government realloca tion, either through administrative, legis lat ive or judicial pro cesses, is one pos sib il ity. Substantial resistance occurs when this is attempted, as is seen with the legis lat ive realloca tion for endangered species. Markets are another possibility. From 1990 to 2000 the U.S. Census Bureau reported popu la tion growth rates for the twelve western states to range from 66 percent in Nevada to 9 percent in Wyoming (United States Census Bureau, 2000). This con tinued popu la tion growth places additional demand on already over alloc ated water supplies. Further, the
western United States is subject to climatic variabil ity (see Chapter 4). Finally, the complexity of water management is also facing challenges in incorporating Native Amer ican rights and envir on mental concerns. Water marking institutions (tempo rary or permanent trans fers) could allow for flex ib il ity in water management in light of these anthropogenic and climatic changes. Historically, there have been very few market transactions of water rights in the western United States that have involved changing the use of water. During the 1970s the National Water Commission first identified this prob lem, which led to increased research about the bene fits of market transactions in water (Meyers and Posner, 1971; Hartman and Seastone, 1970; Johnson and Gisser, 1981; Vaux and Howitt, 1984; Saliba and Bush, 1987). Since this time water markets have become more pre val ent; how ever, in cases where water markets do exist, water prices are typ ic ally fixed in advance by an administrator, trading volumes are trivial and water can only be realloc ated over long (usually yearly) time horizons. A spectrum of water market institutions currently exist either as a permanent or temporary trans fer of a water right. In either case it is im port ant to understand the prop erty rights structure for water (see Chapter 7 and 9). Several key elements are im port ant within this prop erty rights con text. Water rights start as a pub lic resource with rights to use the water being granted by some form of gov ern ment pro cess. As pointed out by Rivera (Chapter 6) and Hall (Chapter 5) both Spain and Mexico required gov ern ment consent before a right could be estab lished. After statehood New Mexico claimed ownership of water within its bound ar ies and required a permit from the State Engineer for new surface water rights. This pro cess estab lished a set of private use rights in what is other wise pub lic prop erty. These rights, whether held by an indi vidual, an irrigation district or an acequia, are con sidered “private” rights. Such “common” rights are also con sidered prop erty and compen sation is due if an unconsti tu tional taking occurs (see Chapter 7). Because water rights are prop erty they may be trans ferred to other uses and to other users. Transfers are complicated because a water right has less exclusivity of use than is normally associated with prop erty rights. The way the water is used or trans ferred is subject to a par ticu lar set of rules that reflect the limited nature of the right to use water. The two main rules are: 1) Transfers and new uses are allowed only in the pub lic inter est/wel fare reflecting the pub lic’s continuing prop erty inter est in water rights even after private use rights are granted; and 2) No harm is allowed to other users within the interconnected sys tem (third party effects). One additional prop erty right element is crit ical to water marketing-the right’s pri or ity under the appropriation doctrine. Because an early pri or ity will increase the prob abil ity of a right holder receiving water in a time of shortage (secur ity of delivery), the pri or ity will increase the value of the right. Support for water market institutions exists at both a national and state level. In 2005, the U.S. Department of the Interior released the pub lication Water 2025: Preventing Crises and Conflict in the West (USDOI, 2005). This docu ment “promotes the idea of working together for the sus tain able and efficient use of western agri cultural water supplies” (p. 31). The docu ment is based upon six prin ciples that
must be recog nized to minimize or avoid water conflicts.1 In addition, many states in the western United States (California,2 New Mexico,3 Nevada,4 Utah,5 and Wyoming6) have de veloped state water plans to address water management issues. For example in New Mexico sections C 2 and C 9 call for a water trans fer plan as “the State must de velop well defined voluntary water rights markets that will allow the identification and dedication of existing water rights to new uses either on a temporary or permanent basis” (p. 16). In addition,
because water banks, when appropriately estab lished and monitored, allow the temporary re allocation of water among voluntary water bank parti cip ants without the need for a formal water rights trans fer or change of ownership, they have the potential to provide an efficient and timely al tern ative means to mitigate short term shortages.