In summary
While water markets may help manage the financial risk of droughts, the more important work ahead is to strengthen the state’s actual water market.
By Ellen Hanak, Special to CalMatters
Ellen Hanak is an economist and director of the Public Policy Institute of California’s Water Policy Center, hanak@ppic.org.
California’s increasingly volatile warming climate is making droughts more intense, and complicating water management. A just-launched commodity futures market for the state’s water provides a new tool for farmers, municipalities and other interested parties to ensure against water price shocks arising from drought-fueled shortages.
Taking a Wall Street approach to an essential natural resource has prompted both fear and hype. Will California experience a new Gold Rush in water? Will speculation boost the cost of water? Perhaps both the fear and the hype are unwarranted.
To address the fear: this new market doesn’t allow hoarding or moving water out of the state. In fact, it doesn’t involve real water at all. It’s strictly a financial tool that allows participants to bet on the future price of water in California. Water users can lock in a price they are willing to pay. And although this market will also be open to investors, their involvement won’t change the amount of water that’s available in California or the price at which it’s ultimately sold. Crucially, the futures market won’t disrupt protections already in place to ensure actual water trades are done responsibly.
As for the hype, this new tool won’t alter the facts of California’s essential water challenges. The promise it brings is in helping water users manage the financial risk of droughts. Those who guess correctly about dry years and rising prices can then sell their shares for more than they paid and use the profits to buy actual water at those higher prices. In dry years, this market could also enable farmers who locked in a lower price to use their profits to cover some of the costs of fallowing farmland – like a type of weather insurance. Participants can also lose money in years when the rains are better and water ends up being cheaper than expected – like paying for insurance but not making a claim.
While this new tool may help manage the financial risk of droughts, the more important work ahead is to strengthen the state’s actual water market. Water trading has been an important management tool for several decades – helping cities, farms and environmental water managers meet evolving demands in our variable climate. Trading still makes up a relatively small…
Read more:: Water markets in California can reduce the costs of drought
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