Voting Rules and Results

An interesting post on voting rights:

Did you know that different water districts have different ways to vote in district elections? Some districts have a one-landowner, one-vote structure; others have a voting structure where the vote is weighted by amount of acreage the vote caster owns; others have a voting structure where the votes is weighted by the dollar value of the land the voters owns. ‘Aha!’, you said to yourself! ‘At long last, I know the difference between a water district and an irrigation district!’ Not so fast, Spanky. I thought that too, but we’re both wrong.

She's getting at an interesting question that I cover in my dissertation [S 4.2.1]. How does the apportionment of votes affect the efficiency of the outcome? If votes are per capita but the topic is land value, the voting outcome may favor the landless at the expense of the land-owners. This is the case at Imperial Irrigation District, where people in the cities vote against water sales because they want to keep their jobs (see yesterday's post).

Bottom Line: One man, one vote makes sense when all policies affect all men equally. If they do not, voting should be proportional to who bears the costs of the policy. (Why are income taxes no higher in the US? Is that a sign that the rich control policy -- or is the fact that the rich do pay nearly all the income taxes a sign of a soak the rich policy?)

Thanks to Noumenon for the pointer

Texas versus Oklahoma

In this edition of state versus state, Texas ("If I can get it, it's mine.") is trying to buy Oklahoma water from some folks, which upsets other folks [excerpts]:

A loose coalition of southern Oklahoma organizations sought Wednesday to bolster their case against the sale of state water to Texas interests.

The Tarrant Regional Water District wants to obtain 150 billion gallons of water a year from Oklahoma streams.

Opponents say the district wants the water to further economic development in north Texas at the expense of Oklahoma towns and cities.

The Legislature prohibited water sales out of state after learning that former Gov. Frank Keating's administration planned to sell water to Texas and split the profits with the Choctaw and Chickasaw nations.

The Tarrant Regional Water District, based in Fort Worth, contends in its lawsuit that the ban on water sales violates federal interstate commerce laws.

Rep. Jerry Ellis, D-Valliant, said officials in the Dallas-Fort Worth area need to do more to conserve water instead of trying to obtain water from Oklahoma.

He also said Congress should enact a law prohibiting one state from suing another for water "when they do not have a good conservation plan in place."

The sale of any Oklahoma water to other states should be for human consumption only, Ellis said. He said if the state sells its water for industrial development in other states, Oklahoma will never grow itself.

Although I am not sure if water will make Oklahoma grow, I do know that a lack of water will sure stop it. I'm very interested to see if the constitutional argument stands up in court.

Bottom Line: Interstate water rights are one area where the federal government should be involved, but it's a different question of whether one state can block its citizens from selling their water to people in a neighboring state. Stay tuned.

Rivers in Danger

Yubanet reprints an article of rivers in danger. (Note that many rivers -- Colorado, San Joaquin, Los Angeles -- are already desecrated. Can they be restored?) The article makes a common, but bogus claim:

Without a major change in direction in public policy, the river that provides drinking water for millions of people, pumps tens of millions of dollars into local economies, and is directly responsible for thousands of jobs could be irreparably damaged; and the communities that depend on it will suffer.

The "jobs at risk" argument is often heard and almost never true. Imagine the worst-case scenario: Someone who actually makes their living on the river (as opposed to selling rafting supplies used on many rivers). If that river were to dry up, he would lose his job, but that does not mean he's unemployed forever. He just has to get a new job. People lose their jobs all the time -- factories close, owners die, lawsuits are lost, competition destroys, technology advances, and -- sometimes -- water is sold from the community and goes elsewhere. In all of these cases (including the last, infamous "third party impact"), the solution is not to try to stop change or guarantee jobs, but to work on helping people get new jobs, start their own businesses, etc. I am not talking supply side, trickle down BS here, but legitimate programs to help people.

Notice that most "save those jobs" rhetoric ends up helping special companies stay in business (e.g., Alitalia). Most of that money ends up going to shareholders and bosses, who are claiming to be "helping" workers -- Baptists and Bootleggers all over again.

Bottom Line: Rivers are valuable, bu they are no excuse to "save" jobs. Jobs are not sacred, people are.

Wyoming versus Montana

Wyoming, home to Dick Cheney, seems to have more than one guy interested in raping the land:

Montana asserts Wyoming is storing water in reservoirs that should be delivered downstream and also allowing excessive pumping of underground water reserves that feed into the two rivers.

Those groundwater reserves are tapped by some Wyoming farmers to irrigate their fields. In addition, energy companies remove billions of gallons of groundwater during production of coal-bed methane, a type of natural gas prevalent in the border region.

[Wyoming Attorney General] Salzburg said his state's construction of reservoirs had been encouraged by the compact, and he suggested Montana do the same if it wants to guard against dry periods.

He also said the depletion of groundwater by energy and agricultural interests was largely outside the scope of the 1950 agreement.

Translation for non-laywers: "Sorry, you forgot to plan for this 58 years ago, so we are going to take all you water and make fuel. If you want to survive our plunder, we suggest that you build bigger reservoirs and fight with us that way." What a charmer!

Bottom Line: Policies should change when times do. Keeping a policy just because "that's how we do it" leads to lots of problems. As I discuss in Section 4.4.2 of my dissertation, one of the main reasons that Southern California cannot manage its water supply is because they are still using pricing methods from an era of too much water (ironically, established in the 1950s). Some people need to move into the new millennium.

Dissertation Done!

...so that means I am an official PhD. To download a copy, click here.

Here is the abstract:

The Metropolitan Water District of Southern California (MET), a cooperative of retail and wholesale water utilities, serves 18 million people. This case study explains how MET---as a cooperative---is inefficient and how its member agencies suffer from this inefficiency. I show that MET is inefficient by demonstrating that its members have heterogeneous preferences over outcomes: Members that are more dependent on MET prefer policies that increase water supply; others prefer lower rates. Although heterogeneity had existed since at least the 1940s, MET avoided conflict well into the 1970s. I explore two possibilities for efficiency despite heterogeneity. First, MET had so much water that it could treat it as a club good, i.e., members did not need to agree on policies over non-rival water. Second, member agencies may have had social preferences ("one for all and all for one"). Shrinking subsidies and supplies in the 1960s changed water from a club to private good. The end of social preferences is not so obvious, so I asked MET's member agency managers to participate in public goods experiments. They do not appear to have social preferences. If MET is inefficient as a cooperative, we should see evidence of this inefficiency, and MET's pricing policies (setting annual prices in the prior year and selling water for the same price to all locations) provide this evidence. With increasing water scarcity, the damage from these policies is growing.

I use 60 years of panel data to show that water increases land value, dependency lowers it, and water may have been misallocated during the 1987--1991 drought. I describe how marginal water can be auctioned after inframarginal, "lifeline" water is allocated and present experimental results for "water" auctions in which water managers suffer endowment effects but compete more (relative to students).

In addition to the analysis of MET, other contributions are a quantification of bargaining power within an organization (dependency), measurement of water manager cooperation, estimation of the value of water on urban land, and design of auctions for equity and efficiency.

Bottom Line: This dissertation was a lot of work, but it was worth it.

Local Burdens

I've said that local government should pay for local infrastructure. The Bureau of Reclamation agrees, but politicians are still trying to bring home the pork to a town that went underwater:

The government has only a limited responsibility to repair or replace aging dams, canals and levees that were contracted to local authorities years ago, a top federal official said Thursday.

On projects transferred to local control, "in most cases the arrangement calls for those costs to be the responsibility of the water users," Bureau of Reclamation Commissioner Robert Johnson said at a Senate hearing that focused in part on the collapse of the Truckee Canal in January.

The breach in the 100-year-old levee flooded 590 homes in Fernley. The earthen embankment has been managed by the Truckee-Carson Irrigation District since the 1920s.

Fernley Mayor Todd Cutler testified the Bureau of Reclamation as the owner and the irrigation district as the operator should share repair costs of the levee "with the idea that it provides us life."

"The canal feeds a great deal of people. With that said, it is a federal facility," he said.

Depending on the level of repair deemed necessary, the costs could range from $28 million to $390 million, according to the Bureau of Reclamation.

[snip]

Requiring someone who leases federal property to pay for repairs would be like requiring a renter to replace the roof of a condominium, said Thomas Donnelly, vice president of the National Water Resources Association.

The Truckee-Carson Irrigation District is proposing a $1.50 per acre tax assessment on residents to help pay for modernization needed for the canal to return to full capacity. District officials estimate the tax will raise about $300,000 per year.

Sen. Harry Reid, D-Nev., said in testimony the Bureau of Reclamation "cannot completely abandon its legacy."

Pronouncements of sacred duties and responsibilities notwithstanding, TCID is only looking for other people's money. The mayor's non-sequitur arguments (food ==> money) and the proposed user tax are laughable ("$300k from us $27.7 million from you"). Donnelly has got his similes wrong: Think of carpets instead of roofs, i.e., you walk on it and use it; ruin it and pay for it. TCID was "maintaining" the canal, benefitting from it, and should pay to fix it.

Bottom Line: Don't use federal money for local boondoggles.

Who Benefits from Ethanol?

The blog at the Small Planet Institute wonder who is winning from higher food prices, and names one usual suspect: big agricultural processors.

My adviser (Rich Sexton) and two co-authors have a paper (forthcoming in the Journal of Agricultural and Resource Economics) that

develops an analytical model for determining the production and price impacts and the distribution of benefits from the U.S. ethanol subsidy when upstream sellers in the seed sector and downstream buyers in the processing sector may exercise market power... Seed producers and corn processors with market power are able to capture relatively large shares of the benefits of the subsidy.

They use the model to understand how market concentration affects the distribution of gains from increased corn prices among farmers, seed sellers, corn buyers and "downstream users" (us).

Market concentration leads to market power, and market power leads to a bigger share of the gains from trade, i.e., a monopoly can charge you more than a firm facing competitors.

Concentrations are significant: DuPont, Monsanto, Novartis and Dow sell 69 percent of seeds; ADM, Cargill and two others companies control 74 percent of buying side of the corn market. This level of market share means that these industries are "highly concentrated oligopolies." (Walmart has 20 percent market share in US food sales.)

They use a simulation to calculate the distribution of benefits with market power and find -- assuming "moderate levels of market power" -- that 25 percent of the gains go to farmers, 30 percent to seed sellers and buyers, and 40 percent to downstream users.

Bottom Line: The ethanol subsidy and other manipulations of the corn market are not helping farmers as much as defenders claim. Much of the "gains" are going into the hands of big companies. End the ethanol program.

Cost and Benefit of Dams

Yubanet reports on a study that found property near dams rose in value after the dam was removed.

Although the study may give landowners more reason to try to get dams removed, I doubt that the increase in value is larger than the loss in services from the dam and/or the cost of removal. Think about it: If the benefit were greater, wouldn't land owners have paid for the dams to be removed? It's more likely that the cost of removal (direct, plus loss in services) is many times the benefits. All that means is that someone else's money is necessary to remove the dams, and there are two ways to get that money: Politicians using tax money, or environmental groups using their donations.

That reminds me of the "Restore Hetch Hetchy" movement. They want to break down a dam that stores clean water for the San Francisco Bay area and generates hydropower. For what benefit? An unflooded valley that looks pretty nice as a lake/reservoir now. The trouble is that they want $5 billion in tax payer money to pay for the replacing those services elsewhere. (Those of us familiar with opportunity cost know that even if $5 billion were lying around for recreational funding, it would not be spent "restoring" something that's not in bad shape. It should be spent on urban parks.) Given that money is not even there, maybe the RHH crowd should pay to restore HH? According to their 2006 990 filing with the IRS, they have one employee and gross revenues of $180,000.* Let's be generous and assume that their supporters would donate 1,000 years of revenue towards restoring HH. That's $180,000,000 -- or 4 percent of the total cost. Can you see where this is going? RHH spends most of its time lobbying for government money for their project. Luckily, they have not succeeded.

Bottom Line: Restoring nature, busting dams, etc. is all fine and good, but someone has to pay. I am all for making companies pay when they have committed fraud, their dam is dangerous etc., but working dams are economic assets that have benefits to their owners. If others want to take them down, they will have to give just compensation. Without property rights we get chaos. Protect property rights and then negotiate.

*I just got a call back from Ron, CEO of RHH. He says they have 2,500 dues-paying members and 5,000 people have signed in favor of restoring HH. If these 5,000 paid for the restoration, they would have to come up with $1 million each.

Civil War (again) at MWD

MWD's water allocation formula [prior post] is challenged by one member agency:

An agency that supplies water to 2 million residents of southeast Los Angeles County has filed suit to overturn a new Southern California drought plan, saying it inequitably allocates water and "robs from the poor to pay the cost of new development in more affluent areas."

[snip]

The lawsuit contends that the plan, championed by Los Angeles, San Diego and Inland Empire cities, unfairly penalizes the Central Basin's lower-income, largely Latino communities while benefiting growing inland areas.

The plan would deliver water unfairly "by giving 'cheap' water to growing, more affluent water districts and communities, at the expense of poorer water districts and communities," the complaint says.

Bottom Line: There will always be winners and losers with formulas because they put too much weight on one thing and not enough on another -- depending on where you sit. Notice that nobody complains about allocation of gas, coffee shops, Lexus cars, etc. That's because those are allocated by supply and demand. Water allocation by markets would not have winners and losers -- if done as I suggest here.

Kill Biofuels

Food prices are up, and people are upset. "Experts" quoted in the NYT seem to think there are "few quick fixes" to the food shortage. How about canceling the ridiculous biofuels/ethanol programs in Europe and the US? As Mark Lynas points out:

Next year, the use of US corn for ethanol is forecast to rise to 114 million tonnes - nearly a third of the whole projected US crop. American cars now burn enough corn to cover all the import needs of the 82 nations classed by the UN's Food and Agriculture Organisation (FAO) as "low-income food-deficit countries". There could scarcely be a better way to starve the poor.

[why? to meet "tough" obligations without pain:]

The EU, meanwhile, persists in the erroneous belief that biofuels can help reduce greenhouse-gas emissions. The main reason for its speedy introduction of the replacement fuel initiative was as a sop to motor manufacturers who were lobbying hard against proposed higher fuel economy standards. With biofuels, the EU hoped, it could cave in to the car industry while still getting reduction in emissions.

[and it's not even for a good cause:]

two major studies published in Science magazine in February showed clearly that once the agricultural displacement effects of the new fuels on rainforests, peatlands and grasslands are taken into account, emissions are many times worse than from conventional mineral petrol. In other words, it would be better for the climate if we just went back to fossil fuels. Biofuels are not a "necessary but painful" way of saving the climate; they are a calamitous mistake by almost every criterion, whether social, ethical or environmental.

Bottom Line: Governments should not choose winners. Governments should set a carbon tax and let markets and competition produce the winners.

Market Inefficiency

This piece updates an earlier post on arbitrage failure in the spot and options markets for ag commodities. Farmers are losing in the markets what they are gaining from the ground -- apparently from market volatility. The only beneficiaries of sky-high prices are agricultural processors like Cargill and ADM.

Bottom Line: Be careful what you ask for. You might get it.

More Reactionaries

This essay describes how environmentalists and economists see the world. Basic point is that economists are factual and environmentalists are moral. Both are wrong of course.

A slightly more unusual essay discusses the zeitgeist of Wikipedia as an place for zealots unwilling to break from their political correctness or -- in this case -- their environmental correctness:

Tabletop, it turns out, has another name: Kim Dabelstein Petersen. She (or he?) is an editor at Wikipedia. What does she edit? Reams and reams of global warming pages. I started checking them. In every instance I checked, she defended those warning of catastrophe and deprecated those who believe the science is not settled. I investigated further. Others had tried to correct her interpretations and had the same experience as I -- no sooner did they make their corrections than she pounced, preventing Wikipedia readers from reading anyone's views but her own. When they protested plaintively, she wore them down and snuffed them out.

Bottom Line: Righteousness has no place in our complex world. Global warming may be happening, but the skeptics are entitled to be heard. Fascism takes many forms, and wrapping yourself in the flag (or the baby seals or the earth) does not excuse you from it.

Why Bother?

Michael Pollan asks himself why we should even bother to do anything about the Earth if an individual's action is not only likely to have almost no impact, but may be offset by someone else who takes advantage of additional slack to "use more stuff." From this hopelessness, he looks to personal virtue:

Going personally green is a bet, nothing more or less, though it’s one we probably all should make, even if the odds of it paying off aren’t great. Sometimes you have to act as if acting will make a difference, even when you can’t prove that it will. That, after all, was precisely what happened in Communist Czechoslovakia and Poland, when a handful of individuals like Vaclav Havel and Adam Michnik resolved that they would simply conduct their lives “as if” they lived in a free society. That improbable bet created a tiny space of liberty that, in time, expanded to take in, and then help take down, the whole of the Eastern bloc.

So what would be a comparable bet that the individual might make in the case of the environmental crisis? Havel himself has suggested that people begin to “conduct themselves as if they were to live on this earth forever and be answerable for its condition one day.” Fair enough, but let me propose a slightly less abstract and daunting wager. The idea is to find one thing to do in your life that doesn’t involve spending or voting, that may or may not virally rock the world but is real and particular (as well as symbolic) and that, come what may, will offer its own rewards. Maybe you decide to give up meat, an act that would reduce your carbon footprint by as much as a quarter. Or you could try this: determine to observe the Sabbath. For one day a week, abstain completely from economic activity: no shopping, no driving, no electronics.

[snip]

You begin to see that growing even a little of your own food is, as Wendell Berry pointed out 30 years ago, one of those solutions that, instead of begetting a new set of problems — the way “solutions” like ethanol or nuclear power inevitably do — actually beget other solutions, and not only of the kind that save carbon. Still more valuable are the habits of mind that growing a little of your own food can yield. You quickly learn that you need not be dependent on specialists to provide for yourself — that your body is still good for something and may actually be enlisted in its own support.

He has a point when he discusses how little ideas (living as if you were free) can grow into big things. We are individuals, but we live in a society, and what we do is noticed by others.

Bottom Line: Forget saving the earth. Save yourself by following your own guide of righteous behavior. Some of you may decide to drive SUVs [profanity], but others will drive bikes. What we do is what society does.

Property Rights and Takings

The battle within agricultural sectors over a proposed law:

Proposition 98, backed by the California Farm Bureau Federation and an anti-tax group, would prohibit governments from seizing property, including farmland, for private use.

But some farm groups -- including the Fresno-based Nisei Farmers League and Western Growers Association -- fear the measure would block use of eminent domain for construction of long-sought pipelines, canals and reservoirs, including one targeted for east of Fresno.

[snip]

At issue is a single paragraph that would prohibit government from taking private land for the "consumption of natural resources." The language is meant to keep cities from taking water rights.

Bottom Line: Taking land for water is pretty hard to imagine; not being able to take land for pipelines is a real problem. OTOH, the Kelo case makes me wonder about the abuse of eminent domain, and it's not a bad idea to shut down water infrastructure expansion -- at least until all the water users have a reasonable plan for managing the water and infrastructure they've got (e.g., in the Delta). Yes on 98.

Sustainable Development 2

If you don't like Herman Daly's opinion, try this:

Environmental activists, politicians and celebrities have touted the wisdom of “sustainable development” as though its meaning and value were clear. But the concept has barely been defined, let alone subjected to scientific, economic, and philosophical scrutiny.

Oxford University economist Wilfred Beckerman puts “sustainable development” to the test, questioning several of its core claims: Will economic growth burn itself out by depleting the natural resources it requires? Will global warming wreak widespread havoc? Does human activity threaten to throw a delicate planet dangerously “out of balance”? Do future generations possess rights that morally override the claims of those alive today? At what price?

After examining the evidence, Beckerman finds “sustainable development” lacking on both scientific and moral grounds. Although millions of people lack clean air and water, and are plagued by deteriorating ecosystems, these problems are caused not by “unsustainable development” but by poverty, poorly defined property rights, and lack of freedom of opportunity. And, Beckerman concludes, because “sustainable development” recommends policies that would worsen these conditions (for present and future generations), it hardly occupies the moral high ground, as its supporters claim.

Garbage Island

Expedition to the Pacific garbage gyre -- a vortex of plastic.

Desalination Sometime

An op/ed about Poseidon Resources's Carlsbad project:

All of the government agencies that have a part in approving the proposed desalination plant have publicly stated that the only answer to California’s statewide water crisis is desalination.

But the big three approval process players — the State Lands Commission, California Coastal Commission and the Water Resources Control Board — are playing pingpong with Poseidon Resources and the city of Carlsbad by approving the permit, then adding conditions to it.

[snip]

It always amazes me when government bureaus claim that they are the main line of defense in protecting the citizens from harm. I think the real mission of most bureaus like these is the self-preservation of their jobs and salaries.

In this case, by claiming they are protecting both the citizens and the ocean, everyone in San Diego County is endangered, both residents and businesses alike, as no home or business can exist without water.

I visited the plant site two years ago. I understand its engineering (a bit), ecology (a bit more) and economics (a lot); see prior post.

Bottom Line: This permit process has been drawn out by ideological opponents to the plant, but SD will not perish without it. It should be approved -- if only to allow Californians to see if it works as promised.

Coachella Reactionaries

In a prior post, I lauded Coachella Valley Water District (CVWD) for implementing an increasing block-rate tariff for water. Increasing rates are the best way to get water to small users and make big users pay more for using more.

In a related story, CVWD is in a dispute with big users (farmers, golf courses and cities(?)) over "recharge" fees to pay for pumping imported water (from the Colorado River) underground for storage and later use.

The big users are being asked to pay a tax increase from $7.70 to $10/acre foot. On a percentage basis, 30 percent sounds like a lot. Compared to what farmers in the area pay ($17/AF, it also sounds like a lot. Compared to the $600-$1,200/AF cities pay for water, $2.30 is peanuts. So -- what are they fighting about?

• "Indio officials say they have not seen any scientific evidence that shows they benefit from current recharge efforts"
• "'We believe the fee is unconstitutional and that it violates Proposition 218,' said Jim Smith, the city's director of public works. Proposition 218, approved in 1996, requires voter approval for increases to general taxes, assessments and certain user fees."

The "scientific evidence" thing may be a smoke-screen, but let's ignore it. The unconstitutional claim is a lot more dubious. As I said yesterday, AB 2882 is meant to counter claims that increases in water rates are actually tax increases.

I don't know about you, but increases in my phone rate, my insurance rate, my gardener's rate (kidding -- I don't have one) are not increases in my tax rate. Taxes are for general operations, and water charges are for water. Not only do water rates have nothing to do with taxes, but they should be higher (to encourage conservation), and they have nothing to do with land: Water, especially imported water, can go elsewhere. Property taxes are for services specific to the property (fire protection, schools, etc.) Did I repeat myself enough?

Bottom Line: Whenever they say it's not about the money, it's about the money. Check this out: "Brian S. Harnik, an attorney representing Indian Palms Country Club, said residents, too, oppose the increased fee." Oh, so residents who play golf at the country club are upset that their green fees may go up? That's just too bad. If you play golf in the desert, you're gonna have to pay through the nose. [sorry -- the chutzpah is getting to me here...]

Public Trust

In Vermont:

The Senate has passed, and the House panel is soon to take up, legislation that would declare the ground water under Vermont a public trust.

That's a legal doctrine that the legislation's backers say could provide protections for the state's underground aquifers essentially by restricting individual users from sucking them dry.

[snip]

The Vermont ground water protection bill is drawing opposition from the manufacturers' lobby Associated Industries of Vermont and other groups.

Associated Industries vice president William Driscoll said that his group and its allies believe that public trust doctrine applied to ground water could lay groundwork for many new lawsuits without advancing Vermont's ability to protect its groundwater to a significant degree.

So AIV's head is implying that the proposed Vermont law will lead to lots of suits from AIV that AIV will win and thus the law is a mistake? AIV is wrong.

Many would claim that the allocation of water rights (via prior appropriations, contracts, setting political boundaries, etc.) of a prior age do not suit the present age. They claim -- under public trust -- that these water rights should be reallocated to uses (including non-uses) that serve the public better than the status quo. This argument holds "more water" with water, since most political units claim that water belongs to the people (and rights are allocated). For example:

CALIFORNIA CONSTITUTION (ARTICLE 10 WATER)

SEC. 5. The use of all water now appropriated, or that may hereafter be appropriated, for sale, rental, or distribution, is hereby declared to be a public use, and subject to the regulation and control of the State, in the manner to be prescribed by law.

On the other hand, the case in Vermont (or McCloud) seems a much more dramatic violation of common sense than the case of, say, farmers using water in the West. Some claim that the public trust should be invoked in taking those water rights away (for use in cities or the environment), but the "unfairness" of farmers' use is not nearly so obvious as that of a bottled water manufacturer (or energy plant -- stay tuned!) that is pulling thousands of times more water out of the system than anyone else, within moments of getting the rights to that water. If anything, farmers use water that nobody wanted for many years. Farmers have hardly "pulled one over" on a gullible public -- many of the monstrosities that people complain about today were popular at the time and still are, e.g., Hetch Hetchy Dam, Hoover Dam, the California Aqueduct. (Some of them were clearly delusions of the Bureau or Corps -- then and now.)

Citing the public trust in claiming water for cities (via "people first") or nature (via the ESA or global warming) makes some sense if the farmers are refusing to let go of any water, but that is not the case. Farmers should be allowed to sell their water; if no voluntary water sales occur (depends on the price, I'm sure), then they should receive fair value (i.e., somewhere between their value added and market prices) for their water.

Bottom Line: The long-term nature of water rights means that mistakes in allocation lead to long-term harm. In the best of all worlds, the State would allocate the rights in 5-7 year cycles via auction while retaining buffers to deal with mistakes and uncertainty. If we do not live in that world, the state should consider the the magnitude of harm from existing misallocation before reallocating the public's water. The smaller the harm, the stronger is the right of those who hold rights to fair compensation and/or voluntary participation.

Economics Works!

Coping with Drought:

A new report says California farmers are planting more crops that offer higher returns and require less irrigation to cope with water shortages this year.

Earth Day

What have you done for the Earth today? What about the other 364 days?

If you want to do something, start by calculating your carbon footprint.

Two Opinions

Long-run thinking:

However, a "modest" 0.86 degree Celsius (1.5 degree Fahrenheit) increase in the 21st century could trim the average flow of the river — the primary water supply for residents in much of the U.S. Southwest — to the low end of a range marked between 1490 and 1998, USGS scientist Gregory McCabe said.

The Earth is likely to warm by more than twice that amount in the period, Rajendra Pachauri, chairman of the U.N. Intergovernmental Panel on Climate Change, said last month.

"A 2-degree Celsius warming pushes the risk so high that it's beyond anything that has happened in the last 500 years," McCabe said on a conference call. "The average flow in the Colorado drops to lower than anything we've seen."

Short-term thinking:

But Utah Division of Water Resources director Dennis Strong isn't jumping to any conclusions just yet.

"Right now we're projecting over 120 percent inflow" this year into Lake Powell, one of the river's primary reservoirs, Strong says.

Guess who's in charge of your water supply? [Article]

Water Markets extra

Francis, a reader at Marginal Revolution, asks:

Some showing that before you post again in favor of "water markets", you have read California Water Code section 1725 et seq., governing changes in points of diversion.

Or, more generally, that you have a way of reconciling your commitment to existing property rights with the destruction of property rights necessarily required for a water market.

(California does have a water market; however as it is largely between governmental agencies the market lacks liquidity.)

Here are my thoughts:

CWC section 1725 et seq. could be modified for markets, but there are differences between trading diverted water and consumptive water. This code is a bureaucratic barrier to markets. The essential point is that any modification reflect the rights embedded in 1725.

The "destruction of property rights necessarily required for a water market" is NOT necessary. Most pro-market people in water recognize that farmers should be allowed to trade their rights. The Enviros tend to favor a public trust seizure of water for in-stream uses -- which does pit one side of common law against another.(I will write more on that soon.)

California's market is between governmental agencies because 80 percent of tap water is publicly-delivered, and nearly all ag water is run through the Bureau, DWR or local irrigation districts. It's likely that water markets will be between agencies. The trouble is getting them into that nimble perspective. I think that farmers -- working through irrigation districts -- will be the marginal traders that bring more efficiency to water use in California. Cities are mostly paralyzed in terms of trading, but they will provide the $$.

World Food Crisis

The Economist reports. Stupid U.S. policies deserve some blame.

Conservation Rates 2

Last week, I posted on AB 2882, which has moved from the California Assembly to the Senate for consideration.

My earlier concerns still stand (voluntary compliance and price increases are too small). OTOH, there are a few nice features that I missed.

I talked to Alf Brandt (Principal Consultant, Assembly Committee on Water, Parks & Wildlife), who helped draft AB 2882. He says that the bill removes a barrier to increasing price, i.e., that water rates are a form of tax and raising them will require referenda, etc. Given the toxic nature of tax increases (not spending increases!) in California, I agree that this is a problem. The bill addresses it by allowing utilities to set a "Basic charge" that is "fair." After that:

A conservation charge is imposed for increments of water use in excess of the basic use allocation. The conservation charge for the increments shall, in the aggregate, provide revenue not to exceed conservation measure costs* and overuse costs**. The increments may be fixed or may be determined on a percentage or other basis, provided that the conservation charge for the highest-price increment is at least three times the basic charge.

Although "three times" the basic charge is a good minimum, they cannot be set higher than costs. I would set conservation charges much higher than costs and rebate excess revenue to water misers; see here.

The other thing that's nice in this bill (current text -- not approved!) is that "Factors used to determine the basic use allocation may include, but are not limited to, the number of occupants, the type or classification of use, the size of lot or irrigated area, and the local climate data for the billing period." The most aggressive (and fair) allocation would be based on the number of people. Type of use favors politically-powerful groups; lot size rewards golf course-sized lots; historic use rewards wasters; local climate rewards people for living in the desert (unless desert people are allotted less water!)

Bottom Line: This bill is much better than I thought it was. Differential prices are necessary for water conservation, and this is a vital first step. Let's hope that it passes and utilities implement steep price schedules that set a per capita base charge and steep prices for water wasters.

And then let's get some water markets.

---

* "Conservation measure costs" means expenses incurred for water conservation measures employed by the public entity to reduce the wasteful or unreasonable use of water, and may include conservation best management practices, conservation education, irrigation controls and other conservation devices, water system retrofitting for production and use of alternative water supplies including recycled water, energy costs related to water use, and securing dry-year supply arrangements.

** "Overuse costs" means costs incurred as a result of the wasteful or unreasonable use of water, and may include preventing, controlling, or treating the runoff of water wasted by irrigation and other outdoor uses, and procuring water supplies to satisfy increments of water use in excess of the basic use allocations for the customers of the public entity.

Water Markets

In Chapter 7 of my dissertation, I compared different auction designs for water markets.

Alberto Garrido, an economist in Spain, saw what I was up to and sent me some experimental auction stuff he did. He tests two important questions:

1. Do restrictions on trades from users with higher priority rights to users with lower priority rights "protect" those higher value users?
2. Does the right to store "owned" water from season to season in a reservoir (rather than use it or lose it every water year) help or hinder water use?

Before I get to the answers, note that Spanish water law automatically assigns senior water rights to urban areas; farmers get junior rights. In the western U.S., water rights are based on priority ("first in time, first in right"), which often means that farmers have senior rights to cities.

Garrido finds* that restrictions on trade harm the owners of senior rights -- because they cannot sell their excess water to junior holders. OTOH, they "help" the owners of junior rights by keeping prices (for the water they do get) lower than they would be with trading (hard to believe**). Overall surplus is higher without restrictions on trading, but there are distributional problems.

Second, intertemporal trading of water (via storage of "owned" water in reservoirs) has an unambiguous positive impact. The main reason for this is that storage allows users to smooth fluctuations in water supply. Garrido looks into this in a second paper***, claiming (plausibly) that reservoir storage will reduce the harmful effects from global warming. On that note, see this paper by a lawyer laying out the reasons that water markets can help with global warming.

Considering that farmers have senior rights in most of the western U.S., these results confirm what we would expect -- farmers trading with cities (senior to junior) improve the lot of farmers -- and overall surplus. Allowing water owners to store their water from one year to the next is also useful. In an older post, I argue that trading is more useful than dams in countering the effects of global warming, i.e.,

farmers facing "use it or lose it" will prefer to make $10 on low-value crops to nothing from letting the water flow. Unfortunately, water the farmer uses cannot go to cities suffering from local warming -- where it may be worth $200 or $500.

Bottom Line: These papers highlight the importance of institutions (trading and storage rights) in the management of water resources. Since institutions can be tested before implementation (did they do that before electricity deregulation in California?), all of the stakeholders (politicians, water managers, cities, farmers, environmentalists, bureaucrats) can participate and understand how different parameters and rules will affect outcomes. More knowledge will reduce uncertainty, and it will be easier to agree on policy changes.

---

* "Water markets design and evidence from experimental economics" (2007) Environmental and Resource Economics, 38:311–330. [gated]

** This result does not make theoretical sense, as junior rights holders get access to more water -- price should drop, not rise. Table 4 shows that prices in merged markets were higher than prices either unmerged market. This unexpected outcome probably results from some quirk in the experimental design, execution.

*** "Designing Water Markets for Unstable Climatic Conditions: Learning from Experimental Economics" (2007) Review of Agricultural Economics, 29(3):520–530. [gated]

Poverty IS Different

A brief article on a very interesting perspective that can change all our ideas about political and economic policies:

When we're poor, Karelis argues, our economic worldview is shaped by deprivation, and we see the world around us not in terms of goods to be consumed but as problems to be alleviated. This is where the bee stings come in: A person with one bee sting is highly motivated to get it treated. But a person with multiple bee stings does not have much incentive to get one sting treated, because the others will still throb. The more of a painful or undesirable thing one has (i.e. the poorer one is) the less likely one is to do anything about any one problem. Poverty is less a matter of having few goods than having lots of problems.

Poverty and wealth, by this logic, don't just fall along a continuum the way hot and cold or short and tall do. They are instead fundamentally different experiences, each working on the human psyche in its own way. At some point between the two, people stop thinking in terms of goods and start thinking in terms of problems, and that shift has enormous consequences. Perhaps because economists, by and large, are well-off, he suggests, they've failed to see the shift at all.

Bottom Line: This argument can explain "hopelessness" and "poverty trap" problems that most people associate with homeless, "ghetto" people, and the developing world. They face so many problems at once -- tackling one will do no good -- that they just give up and cope. This argument is easy to believe.

What is there to do about it? Even more important, what can be offered that will be voluntarily taken up? Is there even a role for government, friends, church, community?

Feel free to comment.

Fire and Water

An interesting essay on fire and fire-fighting policies:

Today’s fires do not burn as those of the past did; they have to accommodate more than a century of human-wrought changes. Nor is it obvious that they will yield the expected outcomes in biological goods and services. After all, with the climate changing, the past is no longer an adequate guide. The sudden reliance on large fires in the public domain is comparable to economic shock therapy in Eastern Europe. Fire is not ecological pixie dust that can by itself magically transform the degraded into the wondrous. It can only act on whatever is present. We are long past the time when every burned acre must be labeled “destroyed”; we are not yet to the point of recognizing that not every acre burned is “enhanced.” Turning fire management over to fire likely belongs in the realm of faith-based ecology.

Bush Acknowledges CO2

From the Onion:

"Carbon dioxide, a molecule which contains one atom of carbon bonded with two atoms of oxygen, is a naturally occurring colorless gas exhaled by humans and metabolized, in turn, by plants," Bush told a stunned White House press corps. "As a leading industrialized nation, we can no longer afford to ignore the growing consensus of so many experts whose job it is to study our atmosphere. Carbon dioxide is real."

Because carbon dioxide, which was first described by 17th-century Flemish physician Jan Baptista van Helmont as a gas he referred to as "spiritus silvestre," has long been denied by the Bush administration, the president's speech was widely hailed as a victory for advocates of empirically established scientific fact.

Bottom Line: The first step is acknowledging you have a problem....

Gas and Community

When it's too expensive to drive, you get to know your neighbors:

She and her husband lived in Florida until 1999, in a private house on a lake; the 17-mile drive to work averaged an hour. On moving west, they purchased a home in the Central Valley and commuted to the Peninsula - often a two-hour trek each way.

No longer. The commute from Hayward is a carpool shot across the San Mateo Bridge; Dan needs the car for work, DeeDee takes an AC Transit bus home at night. They ride BART into San Francisco every other weekend, along with short trips to downtown Oakland followed by a stroll to Jack London Square.

They've also plunged into Hayward life, visiting each store or restaurant that opens downtown, or going to the farmers' market. DeeDee even serves as the president of her homeowners association and belongs to a civic beautification task force.

Bottom Line: Some people are rediscovering the joys of community because it's getting expensive (in time and money) to commute from the "best" job to the "cheapest" home, to get the "biggest bargain" at the store, etc. I put those words in quotes to highlight our common mistake of ignoring time costs and/or the "soft" benefits of living in a community (borrowing a cup of flour, watching your neighbor's car, getting advice on doctors, etc.) Although it may seem like a bargain, the cheapest option is not always the best. Explore your local options and see if they have qualities that are worth a higher cash price.

Ecosystem Services under Strain

JR asks:

In the future with more people wanting more stuff from the environment (a higher standard of living for those across the globe), our resources will be strained beyond belief. Many predict this will break earth's fragile ecosystem. Hopefully and probably not, but in any event we will be straining the resources. Perhaps the only way to avoid breaking the fragile ecosystem is by an extremely efficient utilization of all ecosystem services. This means all ecosystem services, clean air, clean water, fish, birds, trees, etc., etc., as well as food, fiber, minerals, oil, etc. need to be efficiently allocated. The point is that everything from food to oil to coal to air is in someway part of an ecosystem service and the extreme pressures require extremely efficient and flexible allocation. The only way to achieve this hyper-efficient allocation while remaining flexible is through markets.

Yes.

So JR is assuming that ecosystem services are under strain (demand greater and growing faster than supply -- at current prices). Strain comes from direct demand (e.g., water diversions), as well as indirect demand (e.g., pollution). Solving direct demand problems is easier because it "just" requires property rights and trading. Solving the indirect demand problems is much harder (e.g., global warming).

In theory, we want to assign property rights, but getting the theory to work in reality is difficult. At a minimum, it is necessary to measure, allocate, enforce, trade and clear these rights. I doubt that a farmer in Brazil will pay a sheepherder for pollution permits, but there will probably be regional, national and international clearinghouses. (Think of the inter-bank payments system with far more international transfers; unlike cash flows, which tend to be local, global environmental flows -- and the arbitrage that will make them efficient -- are likely to take place between very distant and different places.)

The case with local ecosystem resources will be different, since the water I use in California is not going to come from Japan. These ecosystem trading platforms will vary with circumstances to accommodate local customs, politics and economics, but that will probably make them more efficient than some top-down design by a "clever" economist.

In the cases where demand does not fall fast enough or supply does not rise fast enough, they will have to be matched in auction-type mechanisms where some people get nothing. This rationing need not be cruel, as it's easy to design a system that ensures everyone has access to, say, 100 liters/water/day before the rationing mechanism allocates the rest.

Bottom Line: As demand for a resource (water, brainpower, clean air, etc.) outstrips supply, the price must rise to reduce demand and attract supply. Although allocating resources through markets may seem "inhumane" or "unnatural", the alternative -- destruction of resources -- is worse. Since the burden of that destruction falls on the poor more than the rich, solving the problem will make the world a fairer place. (Unfortunately, that also reduces the probability of a solution -- the rich are doing well in the current system, after all.)

Feel free to comment, question or add to this post. This is a big topic, and I am sure to have left some things out.

Gallons per Lightbulb

This post describes a study released by Virginia Tech:

Here's a measurement you probably haven't thought of before: it takes between 3,000 gallons and 6,000 gallons of water to power a 60-watt incandescent bulb for 12 hours a day over the course of a year.

The most water-efficient energy sources are natural gas and synthetic fuels produced by coal gasification. The least efficient are ethanol and biodiesel--two fuels booming in production because of supportive government policies, followed by rapid investment.

In terms of power generation, they found that geothermal and hydroelectric energy use the least amount of water, while nuclear plants use the most.

Bottom Line: It's no surprise that it takes water to produce power (and power to move water), but the problems start when water or power supplies are running short. As input costs rise, cost of the final good also needs to rise. If it doesn't there are shortages, and we hate those.

One-Minute Water Calculator

Try it here. It misses indirect water use (e.g., vegetarian versus meat eater) but does a good job with direct use.

Now they need to add a "price of water" feature that helps you find ways to save money by changing your habits. (Won't help with me -- I pay no marginal price for water to my apartment. Free water -- another bad idea...)

Carbon Tax

Marginal Revolution has a good post on this -- debating cap and trade versus a tax. I am in favor of either (do something!), and they are equivalent in theory. With caps, carbon output is known and prices fluctuate; with a tax, output fluctuates and prices are known. The important point is that people want to change behavior (hence a cap -- or VERY aggressive tax). Another important point is that rebates of "excess" revenue on a per capita basis do make the caps or taxes politically palatable -- in a democracy.

Green Power and Water

Bill Chameides (Dean of the Nicholas School of the Environment at Duke) writes that green energy sources are also better than conventional power-plants because they use a lot of water to generate energy but solar and wind energy sources do not. [my post on the topic] Another commenter pointed out how much water goes into manufacturing solar panels. Can't disagree with that, but manufacturing use is far less than operating use.

I mostly agreed with him and added some points, i.e.,

1. Most water withdrawn for cooling is "useless" in some way: too hot, polluted or evaporated.
   
2. A lot of cooling water is seawater. There's a lot of seawater but discharge can still be bad for animals.
   
3. Many energy plants get away with using so much water because they claim little consumptive use, but they are surely disrupting the system in the same way as a dam "interrupts" a river's flow.
   
4. Charging plants for water intake would help them find ways to reduce use. Factories cut their water discharge (and thus intake) by 90% when discharge fees rose. They just built recirculation systems.

Water Games?

RH asks:

Do you know of any games (preferably board games, but I'm also interested in card games or video games) that center on water and embody at least some important aspect of economics in their gameplay?

Interestingly, there are a number of "games" on the web that purport to teach about the environment, trade, etc. Unfortunately, most of them look boring ("good for you" games a bureaucrat would like). Here are some water games I found:

You are poor and want to collect aid money from the EU (really!) to fix your water supply. (from an NGO)

You are a drop of water. What happens in your "cycle"? (from NASA)

Those suck. Let's step back and consider what we want in a game (and what RH is asking for): What is it about economics and water that we want to see in a game? Assume that water is scarce. If economics is the science of scarcity, then a game about water (or similar resource) should help people manage scarcity, either alone, against others, within a group, or against groups.

Many games use points, money, etc. to keep score of who is winning. Points and moeny are scarce, but these games are zero-sum, i.e., take more money from Vegas than Vegas takes from you. Zero sum games are not about conserving resources and tradeoffs as much as beating the house.

So you want a game that rewards patience and good management of the resource -- trading consumption now for consumption later or investment now to reap bigger rewards later from an individual perspective. Stock market games are not really good for learning about the environment because it's more fun to take big risks, win or lose, and then do another game. If you cannot die in the game, it's not giving you a good lesson in economics. (And they call it the dismal science :)

Group games have far more potential. Dismissing games that plunder others (capture the flag, football, etc.), group cooperation games can be a useful way of building teamwork that will conserve and manage resources. I use the "tragedy of the commons" game to teach students about problems of open access (everyone can take, nobody can stop anyone from taking).

Here are the basic rules:

1. Two periods of timed length. "Endowment" spread on the table in front of standing players, e.g., fish or water = candy bars or pennies
2. Rules: No talking. Whatever is left at the end of period one is doubled for period two
3. Let players harvest during period one. Usually, they wipe out the resource in period one and there is no period two.
4. Replay with variations (no hands allowed, teams, property rights (territory for each player/team)) and then see how much is left at the end of period two.

This game give almost anyone a fast and clear lesson about resources and institutions. It can be used with 6 year olds or graduate students. (The no talk rule is to stop the "clever" ones from telling everyone to keep their hands in their pockets.) The lesson learned can be turned into more education about managing resources, which happens to involve a lot of economics.

Great question. I will be posting more responses to your questions and ideas over the next few days. Keep 'em coming.

Please comment if you have your own ideas or know of games that help people learn about resources and economics.

Which Bottle?

Treehugger (a green consumer site) gives advice on what bottle to buy for your tap water. (Plastic bottles -- Nalgenes too -- have lots of toxic goodies.)

Wine into Water

Do you get what you pay for?

Individuals who are unaware of the price do not derive more enjoyment from more expensive wine. In a sample of more than 6,000 blind tastings, we find that the correlation between price and overall rating is small and negative, suggesting that individuals on average enjoy more expensive wines slightly less. For individuals with wine training, however, we find indications of a positive, or at any rate non-negative, correlation. Our results are robust to the inclusion of individual fixed effects, and are not driven by outliers: when omitting the top and bottom deciles of the price distribution, our qualitative results are strengthened, and the statistical significance is improved even further. Our results indicate that both the prices of wines and wine recommendations by experts may be poor guides for non-expert wine consumers.

Get the paper here [PDF].

New Story Ideas?

Dear Readers:

I am getting tired of dams, bottled water, fish and water prices. (Not forever -- just for now...)

Any new topics that you are curious about and/or have strong opinions on?

Please leave a comment or email me

Conservation Rates

Politicians are "encouraging" conservation water pricing [story]:

The State Assembly cast a 72-1 bipartisan vote Monday to support Assembly Bill 2882, legislation by Assemblywoman Lois Wolk to encourage public water agencies throughout the state to adopt conservation rate structures that reward consumers who conserve water.

The bill does not require all water agencies to adopt conservation rates, but for those who do it establishes standards that protect consumers by ensuring a lower base rate for those who conserve water and requiring that higher rates for use in excess of the base rate do not exceed the reasonable cost of providing the water service.

Wait a sec. Lower rates for those who conserve and higher rates for those who do NOT conserve ("waste") -- but not in excess of "reasonable cost of service"? I'm all for mom and apple pie, but this seems to be a non-solution solution.

If the price to those who conserve is "cheap", that implies that it is less than the average cost of service. To make up for losses on those sales, the price for wasters will have to be higher than average cost (so, on average, prices cover costs). If that means that those prices are equal to the marginal cost of service, we have a good thing (as far as economists are concerned), i.e., marginal cost pricing. MC pricing basically means that people who are buying the most are paying the full cost of supplying the units they demand.

The trouble with marginal cost pricing in water is that most costs are fixed, so the price will have to include MC and a share of the fixed costs (if the business is not going to run out of money). Although it seems that "reasonable cost of service" implies MC only, I'd bet that they are including fixed costs. So, this bill make sense (as I understand it) economically.

Unfortunately, it suffers from two serious flaws:

1. It is voluntary, and water districts hesitate to raise prices from (unmetered) flat rates. They are wasting most of the water.
2. It does not raise prices enough. Besides the fact that many apartments do not pay for water at all, there is the additional problem that water is still far too cheap for homeowners. (I recommend far more aggressive, conservation pricing here.)

Bottom Line: Good start. Unlikely to have any impact.

Clean Tap Water

The tap versus bottled debate fragments into many sub-questions. This article (and the comments) get at a number of them. First, some highlights:

In its 2005 report, "A National Assessment of Tap Water Quality," EWG found that water suppliers in 42 states collectively identified in treated tap water: 83 agricultural pollutants, or pesticides; 59 contaminants linked to sprawl and urban areas, or those from polluted runoff and wastewater treatment plants; 166 industrial chemicals, or those from factory waste; and 44 pollutants that are byproducts of the water treatment process or leach from pipes or storage tanks.

Houlihan says this means it's crucial to read the annual report your water supplier sends out and know what you're drinking.

[snip]

And don't assume you can avoid contamination by reverting to your old ways. An estimated 40% of bottled water, including brands like Dasani and Aquafina, use local municipal supplies, and you may be inadvertently contributing to the problem.

"We're spending millions of dollars a year to clean waste in the water stream from plastic bottles that are discarded," says Eric Yaverbaum, co-founder of the new pro-tap water campaign, Tappening. "Why can't we take that money to make our municipal water supplies better?"

Although I want to say that the entire bottled water "craze" is based on faux-fitness and consumer safety scares, there are more nasty things in our tap water than before (waste byproducts, drugs, etc.) Besides reading (and understanding) your local water-quality report, it's important to understand the difference between measured and real contaminants. Also realize that filtered and purified water bought in bulk at the store or home filters are far better than using water in disposable bottles. First, because you know the water is clean (not just bottled tap water) and second, because you are not contributing to the waste stream or extra pollution from transporting water around.

[Full disclosure: I drink Davis tap water, which most people cannot handle.]

Bottom Line: Not all water is alike in the same way that not all coffee is alike. Some coffees, like some waters, are overpriced for what you get. Other waters are exceptional value or unique to an area. Caveat emptor.

How to Manage a River

Live on it for 10,000 years. This story describes a tribe whose destiny is tied to a river:

...the Klamath has suffered. Agricultural water diversions have depleted the river's once mighty flows; four moderately sized hydroelectric dams along the Klamath's main stem - plus a huge dam on its major tributary, the Trinity - have greatly reduced the spawning grounds for anadromous fish. Too, the main stem Klamath dams warm the river's water, encouraging destructive parasites and blooms of toxic blue-green algae. Increasingly, it is clear the Klamath can have the dams or it can have fish, but not both. For years, the Yurok have been at the vanguard in a battle to remove the dams. Allied with them are the other Klamath tribes, commercial fishermen and sport anglers. Opposing them are the dams' operators - which have shifted over the years, as the facilities have changed ownership - and farmers in the Upper Klamath Basin, who divert the river's water for potatoes, grain, alfalfa, horseradish and other crops.

The Klamath always has been a major front in California's water wars, one that has waxed especially hot throughout the Bush administration. In 2001, increased downriver flows by the U.S. Bureau of Reclamation to sustain salmon were resisted by Basin farmers, who seized irrigation canal head gates in protest. Water availability already was a flashpoint issue on the Klamath because much of the Trinity's flow is diverted south for the state's cities and agricultural lands.

[snip]

In 2002, the Bush administration sided with the farmers and slashed the releases to the river, delivering the water up to the irrigation districts. A massive fish kill on the Klamath followed; the salmon never really recovered from the blow.

Bottom Line: Sustainable use means that you leave the resource in the same shape you found it -- or better. If you are mining the resource, you take it closer to depletion, population crash and/or extinction. That's true for trees, rivers, fish, and water the same way it's true for oil, coal or gold. Resources will be managed well when the owner/exploiter plans to be around for 100, 1,000 or 10,000 years -- not a few growing seasons, a few quarters or a few days.

Battle of the Bottle

A bottled water story from Canada, a place hoping to get a good price for its water as well as its oil. This quote clarifies the profit margins that Nestle, Coca-Cola, et al. have been after:

Beyond the ecological issue, residents wondered why Nestlé was allowed to source its primary ingredient at virtually no cost. They pointed out that if the average citizen drew an equivalent amount of water from municipal sources, it would cost him or her $2,700 per day, whereas Nestlé will ante up not much more than that—$3,000—to tap the Aberfoyle spring for five years. (Thereafter, of course, comes commercial alchemy: A bottle of freely sourced water ends up costing more than a litre of gas.)

McCloud or McD's?

The battle to mine McCloud water continues. Nestle wants to run a bottling plant and would surely pay too little for McCloud's water. (Nestle may also destroy the environment...) The article touches on an important topic:

"When they had the mill, this town was jumping," said homeowner Paula Kleinhans. "As soon as the mill closed down, people moved, they lost their jobs, and now there are no children here. It really needs industry here."

So we have one homeowner who wants industry. Let's pretend that she represents the whole town -- everyone wants industry. First of all, what is McCloud's comparative advantage? Water and timber. Fine. Nature? Probably. Can water and timber interfere with Nature? You bet. So, McCloud wants sustainable water, timber and Nature. How to get that? Maximize value of each of those resources. Don't pulp trees for paper -- make furniture. Don't bottle water for Costco -- start a spa, bottle branded spring water, sell it to Chez Panisse or Nobu. Turn nature into an attraction for B&Bs, hikers, spirit guides, etc. Do you really want a big plant with lots of banging and noise. Is industrial pollution good (600 trucks/day) for kids?

Bottom Line: McCloud has lots of resources, and they are selling out too cheap and too fast. If McCloud wants to prosper from those resources (instead of being bent over), it needs to add value. Real economic development takes time (start small, try many things, fail often), but the bigger payoff will last for decades.

Vegas on the Money

The NC Times outlines San Diego County Water Authority's (SDCWA) command and control system of fighting drought.

In a manner eerily similar to Homeland Security's useless system of Red, Orange and Yellow threats (relatively safe Green and Blue are rarely used), SDCWA has Drought Watch, Drought Alert, Drought Critical and Drought Emergency. (Okay, I get the point -- there's a drought.)

What do those levels mean? "Drought Watch calls for a 10 percent voluntary reduction in consumer water use" while the other levels "call for" mandatory reductions of up to 20 percent, 40 percent and more than 40 percent, respectively.

How do you call for a mandatory reduction? Do you shut off people's water once the meter hits 60 percent of normal? SDCWA's calls for conservation are useless (see here and here).

Ironically (and not accidentally), the article goes on to point out how Vegas encourages water efficiency:

Water hogs still exist in the Las Vegas area, Bennett said, but they pay a heavy price in higher water bills. Large water users pay hefty surcharges and fines for practices deemed to be water-wasting. By contrast, diligent water-savers get a big reward in lower water bills.

Gee, that sounds like what I just said.

Bottom Line: I don't claim any innovation here -- people have known for centuries millennia that higher prices signal scarcity. Water is increasingly scarce. Raise prices to conserve it.

Water in California

The LA Times ran five opinion pieces by Lester Snow (Department of Water Resources) and Mindy McIntyre (Planning and Conservation League). In their last article, Snow and McIntyre debate water conservation. Amazingly, they fail to even mention, let alone emphasize higher prices. Instead, Snow discusses spending money on conservation programs, and McIntyre says that new construction should will be energy efficient. (How? A law will require it. Duh.) Here's what I said:

Michael is right*, but higher prices are often presented as "unfair" to the poor. Here's how to structure prices: (1) use meters, (2) use increasing block rates (the more you use, the more you pay per unit used), (3) raise prices by 50-400% (people will start paying attention), (4) refund revenue in excess of costs on a per-capita basis. Although rich and poor will both get money back, the water "wasters" will get 10% of their bill refunded and water misers will get 200% of their bill refunded -- a reward for conservation (More).

*"No method is more effective at reducing water usage than raising prices." Michael Ejercito

Bottom Line: Prices are an effective way to ration water. They do not require command and control bureaucracies to implement projects, plans or goals, everyone understands them, and they are more-effective, in more ways, than any one person can understand. Want to save water? Raise prices!

Ethanol Kills Children

How's that for an hysterical headline? The story is not much better:

Sharp rises in the cost of milk, grain and fresh fruits and vegetables are hitting cafeterias across the country, forcing cash-strapped schools to raise prices or pinch pennies by serving more economical dishes. Some school officials on a mission to help fight childhood obesity say it's becoming harder to fill students' plates with healthy, low-fat foods.

Bottom Line: Thank god that corn prices are up. Fat profits mean bigger campaign contributions. (Who needs kids or people in developing countries, anyway? They don't vote.) /end brutal sarcasm

Hijacking the Everglades?

This is how the Corps of Engineers "restores" nature:

Construction crews are blowing up rocks and gouging out an area bigger than Manhattan as they work to build the world's largest above-ground manmade reservoir -- 25 square miles. It will eventually hold 62 billion gallons of water and is a key component to restoring the River of Grass.

Natural Resources Defence Council is suing -- claiming that the reservoir will be used to divert water to agriculture and housing.

Knowing the parties involved, I am inclined to agree that this is a risk. Florida has built a lot of housing in former swamp-land. As is the case everywhere (Malibu, the Outer Banks of N.C., New Orleans, Sacramento Delta, etc.) encroaching on "Nature's buffer zones" is bad for people and bad for nature. Trying to "fix" nature is unlikely to work, because big fixes screw things up elsewhere and small fixes don't work.

Consider our human ancestors. "Hampered" by a lack of big machines and big money (but not big visions), they built where there was water (not in the desert), away from the floodplain (not behind levees), on solid ground (not landfill or artificial islands), etc. Although engineers have "conquored" many of these barriers, a price must be paid -- either by us (Katrina, etc.) or Nature (sick ecosystems).

Bottom Line: The ecologists say "Nature moves last," which gets at the idea that Nature should be treated with respect -- with rights. Working with Nature preserves our environment and saves us from many troubles.

In economic terms, failing to consider Nature as a player in our game increases unexpected costs and ignores important benefits -- leading to bad policies, wrong actions and worse outcomes in terms of efficiency (surplus) and equity (distribution).

Saving a Sacred River

This clipping caught my eye:

India's sacred river, the Ganges, supports over 400 million people, and for many, is an important symbol of purity. But as it travels along its 1,500-mile journey through India, over 1.4 billion liters of untreated waste water are dumped into it each day.

[snip]

Palaniappan conducted a series of workshops for SMF board and staff in strategies to change policy, use the media, and engage the public in cleaning the Ganges.

[snip]

"...there is a huge opportunity to ensure that this time, the technologies and strategies chosen to clean up the Ganga benefit the public, are technologically appropriate, and are actually implemented."

I have visited Varanasi (aka Benares), and it's an amazing, spiritual place. Many hindus go there to die, be cremated and have their ashes put into the Ganges. The water is considered sacred.

How is it that people could abuse their "sacred" river? One reason that I have heard many many times is that Ganges water is "special", i.e., it can clean anything thrown into it -- including dead bodies, 1.4 billion liters of sewage/day, etc. (Wikipedia says special.) I have looked for scientific testing of this super water (which appears to be as magical as NYC pizza water). Does anyone know of studies?

Far more important than science -- assuming Ganges water is not special -- will be convincing normal Indians that the river is not able to clean whatever is thrown into it. If you want an idea of how hard that might be, consider the religious, political and/or racial superstitions that people have in this country. (I am not going to start a flame-war by naming any.)

Bottom Line: Mere evidence or logic will not solve a problem. It will only get solved when people change what they are doing, and that will only happen when people are convinced something needs to be done AND that they can do something about it.

State, Market and Toilets

This amusing post on toilet regulations explores the tension between "state" and "market" solutions:

So, the obvious solution here is government intervention, and in some places (the USA) in the early 1990's the government decided to get tough, and used its monopoly on force -- you know, that monopoly the libertarians are always complaining about -- to compel the toilet manufacturers cartel to adopt an environmentally friendly line. They outlawed high-volume toilets. One for the state! (although to be honest I don't know which level of the state it was).

[snip]

The story shows that the state/market dichotomy is false, and that the phrasing of the question is at fault. Posing the issue as "state versus market" loses touch with reality in the face of this intricate cross-pollination between municipalities, the US Environmental Protection Agency (who is likely to develop a labelling system based on the Veritec tests), Veritec itself (which is a private consultancy) and quasi-state bodies such as the Canadian Water and Wastewater Association.

Comment: The author says that water suffers form free-rider problems because people "do not pay the full cost of their water." This is not exactly true. People often pay the average cost of water provision -- so some people pay more than the actual cost and others pay less. More importantly, almost nobody pays for the water itself -- just the cost of delivery. As water supplies get tight, the scarcity value of the water increases, and the price of water should rise above zero (like that other precious liquid, oil).

Thanks for MG for the tip.

Eat Your Cake and Have It

Farmers in Southern California pay less for water, but they are first to face water cuts in shortage. This story describes their attempts to avoid cuts:

Growers on a discounted water program who have been subject to mandated supply cuts for more than three months said this week that they shouldn't have to split the limited resource, which is essential to their business, between their homes and groves.

They said they should be allowed to buy domestic meters that would deliver full-priced, unrestricted water to their homes, leaving 100 percent of their discounted water for agricultural use.

[snip]

Ben Holtz, whose family has grown avocados on Circle R Drive in Valley Center for nearly 40 years, is one of the growers who said he wants a residential meter that is separate from the water allocation he's locked into under program rules.

"As agriculture customers, we're just as qualified to buy (domestic) water as some guy who's going to put in 10 houses," he said.

Under Metropolitan's guidelines, any water delivered to a property participating in the agricultural program is subject to the supply cut, even if some of the allocation is used for domestic purposes.

[snip]


Holtz and others said they'd be willing to forgo the discount if they could get out of the program and buy more water.

But Arant warned that leaving the program and paying full price for water wouldn't necessarily shield growers from supply cuts, because Metropolitan was created to supply water for municipal and industrial customers, not for agriculture.

When times are good, they are happy to get domestic and ag water at a discount; when water's is short, they want to buy more water -- circumventing the reductions they promised to make in exchange for discounted prices.

Bottom Line: Across the board cuts are the deal. If farmers want to buy more water, make them pay full price for all water. Subsidies lead to waste and over-use.

Save a Tree for Who?

Reuters reprints a press release* stating how much paper an average household would save by going paperless:

the average U.S. household receives about 19 bills and statements from credit card companies and banks every month and makes about seven payments by paper each month.

By switching to electronic bills, statements and payments, the average American household would save 6.6 pounds of paper a year, save 0.08 trees, and not produce 171 pounds of greenhouse gases -- the equivalent of driving 169 miles.

The survey, whose results were vetted by the Environmental Protection Agency, said it would also mean avoiding the deforestation of 24 square feet of forest, the release of 63 gallons of wastewater into the environment, and save 4.5 gallons of gasoline used for mailing.

Although these numbers seem small, they look to be accurate. Our system is pretty efficient, so the cost of billing is cheap.

They fail to include three important factors. First, paper statements take more time for consumers and companies to process. Second, the switch from paper to electronic takes significant time (let's say 20 minutes per billing source). Third, how many household have internet connections but do NOT do on-line billing?

Consider that group. Perhaps the reason they are not on-line is that the set-up cost (19*20 minutes = just over 6 hours) is not worth the stamps (and time?) they would save. Those other costs (dead trees, miles driven, etc.) are externalities that they are not responsible for.

*Hmmm... so why are these guys saying how much forest can be saved by electronic billing but not how much time and money companies could save if their customers switched? Try this:

The alliance [that made the study] is lead by NACHA, the non-profit electronics payment association, that represents more than 11,000 financial institutions who are encouraging customers to conduct more transactions online.

Whoops -- looks like we have a baptists and bootleggers situation here (save a tree! lower our billing costs!). The companies want you to switch to online billing to save trees them money. How much does paper billing cost those 11,000 companies?

Bottom Line: Since companies send bills with free envelopes, etc., they are the source of externalities. If these companies want to save the earth, they should split the benefits with consumers -- give a discount equal to half the reduction in billing costs to consumers who pay online. They (still) win, consumers win and the environment wins.

Salton Sea

The Economist comments on the irony that the Salton Sea -- a man-made environmental disaster (previous post) -- should be in the Golden State.

Demand and Supply of Water

A reader asks:

It is my assumption that the demand curve for municipal water is rather steep (True?) Therefore, if the ag water supply curve (the amount of water ag can and is willing to sell to cities) shifted right slightly, urban prices could fall dramatically. Is that correct? Just trying to get my head around the potential of broad water markets.

Yes and no.

First, the demand for water is steep, i.e., it has low elasticity. In layman's terms, that means people are willing to pay a lot to continue to receive their water deliveries.

Second, the supply curve of urban water has almost nothing to do with scarcity. The price of water is often the cost of delivering it. If urban areas have access to more water, the scarcity of water falls (what we usually call the supply curve), but the price of delivering it does not. In that sense, water would not become cheaper.

OTOH, more water flowing through the system will reduce prices. This leads to the perverse -- and often seen result -- of lower prices in the middle of a drought. Because water deliveries increase, prices fall. (The numerator of costs is rising slower than the denominator of deliveries.) This result does not help people understand that water is scarce and should be preserved.)

This would change if urban areas facing drought had to pay higher prices, but prices do not usually rise that quickly, and some people do not respond to price changes anyway.

Bottom Line: More farm water to urban areas could drop the price of water when there are shortages but not under business as usual conditions. OTOH, water prices that rose and fell with scarcity (not costs) would send conservation signals to water customers and ensure that new water from ag areas was not wasted.

Australian Wine and Water

The Economist's correspondent reports on how Australian wine growers have gone from boom to bust -- with results that are exacerbated by drought in the Murray River. Are California winemakers also vulnerable?

Sustainable Development

[many excerpts = long post] I just learned of Herman Daly from the Pluralist Economic Review. He coined the concept of "sustainable development". (Ironic -- we need the term only when things become unsustainable.) I read a few of his pieces, and these are all worth a look:

Interview: The Irrationality of Homo Economicus

what if economics is to move away from being a self-centred academic discipline interested only in working out the consequences of its own assumptions and if it's to engage itself more in the world. And we argued that you have to shift from Homo economicus as the isolated individual to the idea of person in community, whose identity is largely a function of his relationships in community with others and with the ecosystem. So that this community perspective of social and ecological interdependence is critical - and for the future.

Sustainable Development: Definitions, Principles, Policies [pdf]

[Speech to the World Bank:] Reducing poverty is indeed the basic goal of development, as the World Bank now commendably proclaims. But it cannot be attained by growth for two reasons. First, because growth in GDP has begun to increase environmental and social costs faster than it increases production benefits. Such uneconomic growth makes us poorer, not richer. Second, because even truly economic growth cannot increase welfare once we are, at the margin, producing goods and services that satisfy mainly relative rather than absolute wants. If welfare is mainly a function of relative income then aggregate growth is selfcanceling in its effect on welfare.

Steady-State Economics

The first question asked of any critic of the status quo is: What would you put in place? In place of the growth economy we would put a steady-state economy. But such a theoretical alternative is not of great interest unless there is dissatisfaction with the business-as-usual growth economy. If you have eaten poison, it is not enough to simply resume eating healthful foods. You must get rid of the specific substances that are making you ill. Let us, then, apply the stomach pump to the doctrines of economic growth that we have been force-fed for the past four decades. Perhaps the best way to do that is to jump right into the growth debate and consider critically some fifteen to twenty general pro growth arguments that recur in various guises and either expose their errors or accommodate their valid criticisms.

Speaking of growth and inequality, I also recommend this interesting essay [dead URL], which offers a very thorough critique of the current measures of inequality.

the problem of world poverty is both amazingly small and amazingly large. It is amazingly small in economic terms: The aggregate shortfall from the World Bank’s $2/day poverty line of all those 40 percent of human beings who now live below this line is barely $300 billion annually, much less than what the United States spends on its military. This amounts to only 0.7 percent of the global product or less than 1 percent of the combined GNIs of the high-income countries. On the other hand, the problem of world poverty is amazingly large in human terms, accounting for a third of all human deaths and the majority of human deprivation, morbidity, and suffering worldwide.

I exchanged several emails with the author (Pogge), and our agreement broke down over the "exchange rate" between efficiency and equity, aka, the pie and how to divide it. While everyone agrees that making the pie bigger is good (in a sustainable way -- see above), the difficulty comes in redistribution and the incentives that redistribution encourages. While I may be willing to give up one unit of "things I like" so that a "poorer" person could get 5 units of things she likes, would I give up four units? From my understanding of Pogge's email comments, ANY redistribution from rich to poor is defensible. For me, it is not: First, because things we have are sometimes earned. Second, because incentives to work or struggle fall when egalitarian redistribution is in the cards. (And we saw where "from each according to his abilities, to each according to his wants" took us...)

Bottom Line: Our economic system and ideology does not do a very good job at protecting the losers -- whether they be Nature, future generations or the poor. "Growing the pie" is hardly the solution when many benefits are possible from a wiser re-distribution of the pie. The tricky part is undoing the unfair, dumb and unsustainable distributions that we live with now -- within the U.S., within poorer countries and between countries.