Has California considered replacing water subsidies with direct agricultural subsidies?

Question

In California, farmers get access to cheap water that they have to use for farming or else they lose all rights to it. There appear to be two political reasons for this:

1. to encourage agriculture, and
2. to maintain water rights status quo

The problem is that use-it-or-lose-it encourages water waste. Surely farmers would have greater incentive to conserve water if they paid the same water price as everyone else. For example, suppose that I am a farmer. 10 of my sprinkler heads are broken and are expected to waste 1AF over their remaining life. Replacing these heads will save 1AF but will cost $2K of labor and materials. If I pay $1K/AF for water, I will not fix the heads because the net cost to me of doing so is $1K (I spent $2K on labor to save $1K on water). But if I pay $8K/AF for water, I will fix the heads because the net savings to me is $6K.

In light of this, has any research organization or government entity studied moving California from water subsidies to direct agricultural subsidies? In other words, address political concern #1 by paying farmers for actual output produced, rather than for water consumed. ("actual output produced" is however the voters want to define it. Just so long as it's based on actual farming output rather than the water used. Heck, pay almond growers $5/pound if that's what we want. We can put the last Italian almond farmer out of business and give California farmers the full incentive to save water. Win-win!)

And political concern #2 could be addressed by transitioning to the new system in a way that immediately compensates everyone involved according to what is changing for them. For example:

1. The state buys up farmers' restricted discount rights at the current market price (which reflects both the fact that the water is restricted to agriculture only, and the value of the discount) on the existing agricultural water access markets.
2. The state removes the restrictions and discounts on the water rights, resells the unrestricted water to farmers and urban districts -- at great profit -- and applies the proceeds towards part 3.
3. The state pays all farmers for actual farming output that is not based on the legacy, restricted, discounted water, according to the desired subsidy effect.

Due to current rights structures, "the state" here may mean some combination of California, US Bureau of Reclamation, CVP, CWP, etc.

Recently there has been renewed interest in reducing water waste. So has the state considered any kind of plan to move from use-it-or-lose-it water subsidies to an unrestricted water market combined with direct agricultural subsidies? If not, what are the political facts working against such proposals?

Answer 1

Has California considered replacing water subsidies with direct agricultural subsidies?

Calling this a "water subsidy" misunderstands the situation, even though that is the net economic effect of the status quo system.

California, like most Western states, has a prior appropriation system of property rights in water. The State of California administers the system, but it isn't at liberty to just change the rules about who gets water in that system.

You get a water right in the first place by using a particular amount of water, in a particular river basin, that doesn't belong to someone else, continuously, starting from a particular date.

So, for example, if your farm was using X acre feet a year of water to grow oranges starting in 1862 and successors in interest have continued to use that continuously since then, the current owners of the farm have a legally recognized property interest in water from that river basin of X acre feet with a priority date of 1862.

Anyone who started appropriating water for themselves from that river basin at an earlier date has priority over you. Anyone who started appropriating water for themselves from that river basin at a later date is junior to you.

When the water in the river basin isn't sufficient to give everyone their full water rights, junior water rights holders are denied the right to use water from the river basin until enough of them are shut down for the water that is available to fulfill the remaining more senior water rights.

The water rights owners own that water without paying anything for it (basically, sometimes there is a nominal user's fee for the California water engineers' operating costs).

They can sell or lease their water rights to someone else in some cases, but the starting point is that they own it for free.

This de facto works as a subsidy for farmers because farmers tend to have high priority water rights because farmers started using water in the West before municipal water users did for the most part.

In an ideal Coasian world, the buying and selling of water rights would result in arbitrage that would have water owned by the highest value users of water. But due to transaction costs in very complicated to buy, sell, and lease property rights in water, and due to other market distortions like farmers valuing their heritage of farming more than the economic returns that their farms produce, this doesn't happen.

The 5th Amendment to the U.S. Constitution (as applied to the states via the 14th Amendment's due process clause) provides that property rights like water rights can't simply be canceled or readjusted by the government at will.

Instead, to involuntarily transfer water rights from one person to another, the government has to pay the fair market value of those property rights to the current owners of them. And, in California during a twelve hundred year drought, the cost of doing so is extremely great.

The OP misunderstands the extent to which the use of water rights that are transferred is restricted resulting in a discount value for those water rights. The rights are "ise it or lose it" but this does not mean that you have to use it for agriculture as opposed to for some other purpose.

For example, lots of the water rights that belong to Las Vegas, Nevada, which has a very similar prior appropriation water rights system were priority agricultural water rights that were purchased by the Las Vegas water authorities and are now used for municipal purposes.

California could invest in ways to subsidize the transaction costs of buying, selling, and leasing water rights to make the market work better, but even that wouldn't come close to solving the problem because the barriers to transfers of water rights to the highest value users of water go far beyond mere transaction costs.

This is a much more difficult issue, because it involves property rights, than it would be in the Eastern United States, or in much of the less arid world, where transferrable, prior appropriation based water rights are not a thing.

Answer 2

While this isn't a direct answer to your question I think it will get at the problems. Removing the restrictions on who has first access to water and what they purchase it for is unlikely to reduce the waste and will likely increase it. The problem is that water is used for a lot of other things that cause the water to leave the water cycle and not be returned to the area unlike what happens in the farmers case.

The biggest source of water waste in the form of leaving the area is all the various companies who bottle water and ship it around the country/world. While it might not make up a major source of the usage right now that would only increase if they had the ability to buy more water.

Overall I think any change to allow for more access to water based on ability to pay will just cause more to be sold to companies that don't care about conservation at all.

We can already see examples of companies trying to use more water then they are entitled to.

https://www.theguardian.com/us-news/2021/apr/27/california-nestle-water-san-bernardino-forest-drought

Nestlé, accused of taking millions more gallons than it is entitled to, receives draft cease-and-desist order from state officials

Bottled water is a massive industry and they have no reason to not bottle up as much as they can.

https://www.cnbc.com/2014/08/07/drought-cant-stop-production-of-bottled-water.html

Bottled water is a $22 billion annual business in the U.S.

According to the latest statistics, total bottled water sales in the U.S. reached 9.1 billion gallons in 2011. That’s 29.2 gallons of bottled water per person, according to the Beverage Marketing Corporation.

Answer 3

It's generally a tough problem to solve. Simply switching to income support for farmers (like the EU does, broadly speaking) is rather unlikely to solve the problem of inefficient water use. Rather, they'd have to encourage specific crops and discourage others. (As that report discusses, some EU countries even use the "voluntary coupled support" scheme to sponsor water intensive crops in water-stressed areas. So the mere existence of direct subsidies for crops is no guarantee of sane policies in this regard either.) At which point, the Q is if it's not simpler to tax water progressively, which also avoids WTO complications with specific crop subsidies, if these are exported.

But to add something more American to this answer, a similarly tough [if not tougher] situation exists with the Colorado river, for which CA has "senior" rights too, particularly farmers in the Imperial Valley.

The best-case scenario [...] is that growers will be paid through government funds to reduce their water consumption, and it would be entirely voluntary. Some of those funds could come from the Inflation Reduction Act or the Bipartisan Infrastructure Law, which together set aside more than $15 billion for the Western drought. This concept isn’t new: IID already runs a program that pays farmers if they can demonstrate that they’re saving water. The city of San Diego funds the program, essentially paying IID for the water that those farmers conserve.

It looks like the Biden administration is going to make some of the more momentous decisions in US history on that (this summer). And based on prior examples, we can expect decades of litigation to flow from whatever they do.