The Federal Reserve Bank of Dallas has published an article on potential impacts to the Texas economy from water shortages, aptly named Water Scarcity a Potential Drain on the Texas Economy. Texas is experiencing record dry conditions, which is likely to combine with increasing water demands from growing urban areas to create a potentially volatile situation for future water supplies.
The article notes that solutions proposed by the 2012 State Water Plan include conservation, reuse and redistribution of existing supplies through markets. Water markets can allocate water to its most productive uses and help prevent or mitigate shortages. The effectiveness of market solutions will depend on the location of supplies, the ability to monitor usage, and the legal and regulatory frameworks governing water allocation. The authors argue that, under current conditions, both surface water and groundwater lack true market pricing, although groundwater faces greater challenges because property rights do not exist. The “rule of capture” does not create a useful property rights system, and the rules being established by groundwater conservation districts in many areas across the state offer varying levels of protection to groundwater users. Surface water supplies are somewhat better off, under the regulation of the state, but approximately 70 percent of surface water rights are controlled by river authorities, which can create or destroy economic incentives based on their policies.
In my experience across multiple US states, Texas is somewhat behind other jurisdictions in applying market solutions for water resource management. However, groundwater conservation districts and river authorities have significant legal power to establish water markets, and Texans in general have a positive attitude toward markets. What the state needs now is one or more groundwater conservation districts or river authorities to step forward and embrace a market experiment. There will undoubtedly be some legal and economic difficulties in perfecting a market model under Texas laws, and in training cities, districts and water users how to operate effectively within a market, but I agree with the premise that water markets can be a valuable tool for redistributing water supplies within Texas, for the good of the public, the environment and water users.