Who Killed Water Markets?
A free-enterprise solution to our creeping water shortage is staring us in the face. So why have water markets been so slow to materialize?
by Michael McCullough
To really grasp the enormity of Alberta’s coming water challenges, you have to make a trip to the Columbia Icefields viewpoint in Jasper National Park. (You have to make the trip there anyway, but that’s another story.) A series of signs mark how far the glacier extended in past years. Back in the 1890s, it buried what is now the Icefields Parkway. In the 1920s, it was where the parking lot is now located. To reach the ice today, you have to leave your car and trudge over a kilometre of moraine, and on the way a shocking realization hits you. At the 1983 sign, you’re still only halfway there. The pace of the retreat has been picking up alarmingly.
Whether or the degree to which you attribute this phenomenon to human activity is really beside the point. The fact is, since people have been living in this place we call Alberta, this remnant of colder ages past has been subsidizing the meagre precipitation we get on the dry side of the Continental Divide. Even in the days of the Dust Bowl, Prairie farmers and townsfolk along the main river systems, at least, could count on the run-off from the Rocky Mountain glaciers to water their crops, supply their factories and flush their toilets. More recently, though, that residual supply has been diminishing noticeably, even as the ice melts faster. In some parts of Alberta, especially in the south, summer streamflow has been reduced by half since records have been kept.
Yet the population and the demand for water grow. From the oilsands up north to a massive shopping centre outside Calgary, the tension over dwindling water supplies is increasing. To which the simplistic response, espoused by old-guard environmentalists, is to use less water. Impose sprinkler bans. Deny oil and gas producers new licences. If necessary, expropriate water rights longtime users already have. But a movement both inside and outside the province is pointing to another solution, more about how we allocate water than how much. Proponents such as B.C. author Chris Wood, whose book Dry Spring: The Coming Water Crisis of North America hit store shelves this April, believe the best way to conserve water is to make it something that is priced by volume and can be freely bought and sold.
Elizabeth Brubaker is the author of another water-reform tome, Liquid Assets, and the executive director of Environment Probe, a Toronto-based think-tank dedicated to market-oriented solutions to environmental problems. In a series of speeches to audiences in Calgary and Edmonton last October, she outlined this new manifesto for water, centred on making water rights tradable.
Under the current system of water allocation, there is virtually no incentive for users to conserve, Brubaker argues. “It’s a very old system, a system that worked better 100 years ago when water was plentiful than it does now when water is scarce,” she says. First, it is a system of prior allocation. That means that in a shortage situation the oldest licences – not necessarily the uses that generate the greatest public benefit – may take all of their allocation before the holders of licences granted later use a drop. Equally problematic is the use-it-or-lose-it nature of the licences, whereby licencees risk losing part of their allocation if they leave water in the river. “So of course everybody has an incentive to use the entire allocation, which is the opposite of having an incentive to conserve,” Brubaker says. Finally, the cost of the licence – and the water to the end user, as a rule – is based on the cost of delivering the water. The water itself is essentially free.
Her recommendation is for the legal owner of the water, the provincial government, to charge for the use of the water itself, a practice known as water pricing, and to make water usage rights more freely tradable. Such “water markets” have proven effective in conserving water and improving river ecosystems in several U.S. states, Chile and – the most often-cited example – Australia. Afflicted with the worst modern-day droughts in the developed world, Australian states overlapping the Murray-Darling river basin placed a cap on the volume of water that could be drawn from the river system in the 1980s. They then introduced measures to encourage the trading of irrigation water that, it is now widely acknowledged, simultaneously maximized agricultural output (as farmers invested in water-saving technology and sold the resulting surplus, usually to highly productive and profitable buyers) and improved the badly damaged river ecology. In the western United States, anglers and other conservation groups have been active buyers of water licences, allowing water that was previously allocated to human activity to stay in the stream.
In a small way, water markets have worked in Alberta, too. During the particularly dry year of 2001, the Alberta government imposed a moratorium on further surface water allocation on three southern Alberta river systems: the Belly, St. Mary and Waterton. As a result, a brief informal market in water trades flourished. Lorraine Nicol, a research associate in economics at the University of Lethbridge, studied this flowering of water markets and found that, by and large, it resulted in users with the most efficient machinery and highest-value crops buying water from the less productive users.
As Nicol’s 2005 master’s thesis, Irrigation Water Markets in Southern Alberta, notes, “Markets permit water to move to higher-value uses, thus increasing the resource’s productivity and enhancing economic growth. Conservation efforts can also be enhanced, since users, able to sell any excess water, are provided an incentive to conserve. For unprofitable producers, selling their water rights provides needed cash and may help to facilitate an exit from the industry.”
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