Can Markets Improve Water Allocation in Rural America?

Water, one of the most fundamental resources for economic activity, covers about three-fourths of the earth's surface--but only 2.5 percent of that amount is considered fresh water. While freshwater supplies in the United States are relatively abundant, increasing demand and drought, especially in the Great Plains, have left some states wondering whether there is enough fresh water to go around.

The drive for greater efficiency in the use of water has led to the emergence of water markets. These markets allow for the equitable transfer of water rights from lower-value agricultural uses to higher-value uses, such as for emerging industries and growing municipalities. Many rural communities, though, view water markets as a threat to their economic foundation and future growth.

This article explores how water markets affect both water right holders and their rural communities. The first section describes how drought and water demand are straining existing water resources. The second section details how the emerging water markets transfer rights for water from rural to urban use. The third section examines the economic effects of water markets on rural communities. The article concludes that other mechanisms, in combination with water markets, may be needed to improve the efficiency of water allocation and compensate rural communities for lost economic activity.

I. WATER USE IN THE TENTH DISTRICT

Water has always been the life blood of the Tenth District economy. (1) Early pioneers of the Great Plains diverted water for crop irrigation, and since then, agriculture has been the largest user of water in the region. As the Midwest economy became industrialized after World War II, industries also became large water users. Today, these users are joined by rising urban populations, resulting in an unprecedented demand for water.

Growing demands for water have joined forces with nature to severely strain existing water resources. Over the past few years, persistent and severe drought has reduced stream flows, slashed water levels in district reservoirs, and depleted underground aquifers. In 2004, at the peak of the drought, many reservoirs in Wyoming were only half full, with some shrinking below 10 percent of capacity (Natural Resources Conservation Service). Even after increased precipitation this year, many reservoirs remain below historical levels.

Underground supplies of water have also declined. The High Plains aquifer, which underlies about 174,000 square miles of Colorado, Kansas, Nebraska, New Mexico, Oklahoma, South Dakota, Texas, and Wyoming, has lost about 6 percent of its stored water (USGS). This loss would be enough water to cover 200 million acres of land a foot deep. In places like western Nebraska, where current supplies are fully or over-allocated, concerns over water are intense, especially since current use already meets, or even exceeds, projected long-term supplies (Map 1).

The list of demands on existing supplies is getting longer. In 2000, agriculture accounted for 85 percent of the water withdrawn for consumptive use. Over the past half-century, dependable electricity and modern irrigation techniques, such as center pivot irrigation, have allowed farmers to tap groundwater sources, transforming semi-arid land into productive farmland (Comis; Groundwater Foundation). (2) By 1981, the number of irrigated acres in the Tenth District surged to over 13 million (Chart 1). By 2000, district irrigators were drawing 37 million acre-feet of water per year, nearly twice withdrawals in 1950. (3)

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Similarly, withdrawals by industrial users rose sharply following World War II. Rapid industrialization across the nation boosted manufacturing activity, peaking in the early 1980s. Industrial water use has tended to be even higher in places like the Tenth District, where manufacturing is concentrated in traditional water-intensive industries, such as food, pulp and paper, chemicals, petroleum and coal, and primary metals industries (Hutson and others; White).

Ethanol is a prime example of how industrial activity can boost water demand. Despite recent efficiency gains in using water, ethanol production remains a water-intensive process. (4) In Nebraska, anecdotal reports indicate that some ethanol plants have resorted to purchasing and then idling irrigated acres to acquire the water they need to operate.

Recently, increased conservation efforts have checked both agricultural and industrial use. The rise in water withdrawals for agriculture has slowed since the 1980s, thanks to advances in irrigation technologies, increased conservation, and the stricter water quality standards imposed in the 1970s (Hutson and others). Still, over the past two decades, water demand has continued to rise, due largely to growing populations and rising incomes.

Growing populations have increased the demand for power generation, which uses water as a coolant or to power turbines. From 1990 to 2000, water use as a coolant in thermoelectric power generation climbed 19 percent in district states, with the largest increases in Kansas and Nebraska. Hydroelectric use, where water is used to power turbines, has increased water demand in the district's mountain states. (5)

Rising incomes, meanwhile, have increased the amount of water used for recreation, which in turn has boosted support for environmental preservation. The U.S. Fish and Wildlife Service reports that wildlife recreation participants--anglers, hunters, and wildlife watchers--jumped 13.6 percent from 1996 to 2006, spurring tourism and creating additional demand for water along lakes, reservoirs, rivers, and streams throughout the district. (6) At the same time, preserving endangered species and their habitat has spurred demand for water in natural stream flows. For example, the USGS is currently examining the impact of water use on the ecosystem of the Platte River area, which runs from southeastern Wyoming through northern Colorado and into Nebraska. (7)

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But the biggest surge in water demand stems from rising household and commercial use in urban areas. Over the past two decades, water for public services has boosted district water use 28 percent (Chart 2). The largest gains in the district occurred in metro areas, where population gains have been strongest. (8) In metro counties, public service water use rose 40.0 percent, compared to just 11.0 percent in nonmetro counties (USGS).

Expectations of rising populations are placing further pressure on the district's scarce water resources. From 2000 to 2030, district population levels are expected to rise 17.2 percent (Table 1). And, assuming no efficiency gains, public service water use should rise at a similar rate. The largest gains are expected in Colorado, at 35 percent. Improving the efficiency of water use could help alleviate some of the strain in the district, but even if public service use is capped at 2000 levels, per capita use would need to &dine 15 percent to accommodate the expected growth. Colorado would have to cut its per capita use 25 percent. …

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