Down the Drain: Revising Cap-and-Trade for California

Facing incessant drought, cities across the state of California have been forced to consider every potential water-saving measure. But though desperate times call for desperate measures, one city’s water-saving solution may be deemed a bit too extreme. Southern California’s Pismo Beach recently passed an ordinance mandating that urinals installed in new buildings be completely water free and that existing urinals be switched to flushless versions. While originally focusing on incentives for efficiency measures such as offering rebates for reductions of grass square footage or swapping out old appliances for water-efficient ones, Pismo Beach selected urinal regulations to reduce water usage, mandating that existing urinals be replaced by flushless models. Forcing costly upgrades in a short time span, the ordinance has been labelled as narrow and overly obtrusive. Instead, incentive systems for water waste reduction present a much more promising model for regions looking to cut down on water use rather than a top-down mandate that provides no motivation for further improvement.

Although not every town has gone completely flushless, California state policy has effectively banned inefficient toilets: Last April, the state passed new water appliance standards that, beginning in 2016, require all new urinals to use 0.125 gallons of water or less per flush. Compared to long-standing efficiency regulations for energy use, these laws are extreme. Even a state like Massachusetts, which the American Council for an Energy-Efficient Economy rates as the country’s most energy-efficient, does not have such strict regulations. Massachusetts does not mandate that institutions with old electrical appliances switch to newer ones, but instead offers financial incentives for investing in efficient appliances. It also imposes efficiency minimums for new buildings, and funds public transit generously to cut down on vehicle emissions. This type of energy policy pushes energy efficiency, but does not force old systems to update existing infrastructure, as the Pismo Beach mandate does.

In Australia, farmers receive a yearly water allocation and “[they] have become very businesslike in their decision about whether to sell their allocation during any given season.”

But small incentives are not the only factor driving Massachusetts’ energy efficiency. Along with eight other northeastern states, Massachusetts is part of the Regional Greenhouse Gas Initiative (RGGI), a cap-and-trade system limiting its carbon emission output.

Cap-and-trade systems function based on government-set limits, or caps, on the total carbon output from all factories and power plants. The overall limit is then divided into tradable permits that the government issues to regulated sources such as the power plants and factories. Institutions that are best able to reduce emissions then have extra emissions allowances that can be sold to other, less efficient, institutions. In this way, reducing emissions leads to a financial reward, and heavy polluters are punished by having to buy more permits. Governments are then able to ensure the systematic decrease in total emissions by reducing the cap by a specified percentage each year.

Proposed cap-and-trade systems for water would function in a similar way. Much like the RGGI, such a system would divide available water resources into credits and distribute those credits to households, businesses, factories, and other approved institutions. These water users could then sell back any unused credits to water utilities, earning money for those that cut their water usage.

Unlike Pismo Beach’s solution, cap-and-trade solutions give businesses a financial incentive to be more water efficient without imposing direct penalties for failure to do so. As a group of researchers at various California universities and nonprofit organizations notes, these types of “market transactions ensure that those who use less water than their entitlement are compensated for the reduction. Because water buyers must pay for the added water, they also have an incentive to conserve.”

A cap-and-trade system for water also has the capacity to effectively maintain environmental standards during drought conditions. Often, when water is scarce, farmers benefit from political pressure on environmental regulators to loosen river ecosystem standards. But with a distinct price set on water credit, farmers overusing water and endangering existing ecosystems would be required to pay a sum that can be reinvested into necessary environmental maintenance and protection.

In 2015, California Governor Jerry Brown took the step of forcing urban water agencies to reduce 25 percent of water use, but no such restrictions were put upon the state’s agricultural giants, even when just five percent agricultural water efficiency improvements would yield the same total water savings.

While in theory, cap-and-trade systems appear to be an exciting solution to an important set of pollution and environmental issues, existing cap-and trade-systems for carbon have a more mixed record in practice, at times becoming victims of the overall success of emissions reduction. RGGI has reduced emissions in its participating states, but not necessarily because of a competitive carbon market created by the agreement. Decreased demand for the carbon permits has caused their price to drop as power plants across the country have replaced coal with natural gas, which has become cheaper and produces fewer emissions. As a result, actual emission totals fell far below the set cap, so much so that RGGI states reduced emissions ahead of the established schedule by 44 percent from 2013 to 2014. Still, this reduction did not go far enough. Although the price of carbon permits increased from $2.80 per ton of C02 in March 2013 to $4.54 in the most recent permit auction, a significant amount of last year’s purchased permits went unused. These dynamics suggest that the cap has been largely irrelevant in influencing carbon emissions as a result of the overall success in producing cleaner energy.

But despite the murkiness related to RGGI’s impacts, a cap-and-trade system for water might still be worthwhile for California. An increased water supply that would drive down prices for permits would also mean the end of a drought, and in turn, reduce the need for the cap-and-trade system in the first place. Similarly, a decreased water demand would demonstrate water appliances’ higher efficiency levels. The oversupply issues that have plagued RGGI would then be solutions in places where water is scarce.

Gregory Blount, counselor to Georgia’s Department of Natural Resources, proposed a similar plan to reduce water consumption as a response to Georgia’s 2008 draught. Based on EPA estimates that 45 gallons of water per capita per day is an achievable and sustainable level for indoor residential water use, the plan proposed a daily quota of water credits for households. With actual use in Georgia measured at 69 gallons per capita per day, the proposal hoped to make consumers more conscious of their water usage through having to pay a higher rate for whatever water credits they used beyond the specified limit.

Along with residential water reduction measures, Blount argued that a water credit trading system would incentivize improvements to water utilities to cut down on water waste. In this model, for every gallon of water that the utility saves, they gain a credit that they can then sell, creating a compelling reason to prevent the pipe leakage and meter inaccuracies that, in 2009, made up 18 percent of all water used in Georgia. The policy would therefore “create flexibility in the zero-sum game” that regions pressed for water find themselves in, Blount says. By making it financially viable for water utilities to improve water delivery infrastructure, cap and trade creates the capacity to conserve water en masse.

As of 2010, 80 percent of California water was used by irrigated agriculture. Because of California’s outdated prior-appropriation laws, the right to use water is determined largely by the seniority of one’s claim to the source.

Despite promise, the proposal never saw any legislative attention. Recalling why, Blount says that with the 2009 recession, “the demand [for water] went down and the supply went up.” In essence, the problem resolved itself – there was enough water to go around.

But California’s demand for water has not changed, and their drought persists, so it may require an approach similar to what Blount advocated for in Georgia. Unfortunately, California’s capacity to implement such a policy has been hindered by the outdated water laws that govern the western sector of the United States. The prior-appropriation water rights legal doctrine, developed in western mining camps, grants rights for water use to the first individual to take a quantity of water for “beneficial use” like farming or developing industry. In this model, water rights are property rights. But what worked for the prospectors of 1849 is not the best system for the modern context of California’s drought. To deal effectively with the water crisis it currently faces, California must consider serious water reform.

As of 2010, 80 percent of California water was used by irrigated agriculture. Because of California’s outdated prior-appropriation laws, the right to use water is determined largely by the seniority of one’s claim to the source. Established over a century ago, many of the senior rights to water are held by farmers, and as a result, they have been safe from government-mandated cuts to water use. In 2015, California Governor Jerry Brown took the step of forcing urban water agencies to reduce 25 percent of water use, but no such restrictions were put upon the state’s agricultural giants, even when just five percent agricultural water efficiency improvements would yield the same total water savings.

At the same time, farmers without access to their own water sources are put at an unfair disadvantage, having to pay high prices for government water from reservoirs or from private sources. In many cases this becomes too expensive and farmers are forced to let their fields go fallow. During 2014, six percent of California cropland went completely unused.

Instituting a water cap-and-trade system would level the playing field. With water credits distributed equitably to farmers, the system would minimize unfair advantages held by farms possessing senior water rights.

The US could look to Australia’s agricultural policy model, which has used a water market to cope with a 15-year-long drought. In Australia, farmers receive a yearly water allocation and “[they] have become very businesslike in their decision about whether to sell their allocation during any given season.” While sometimes this may translate to certain farmers selling out and leaving crops without irrigation, every farmer at least has the choice whether to sell, buy, or keep their allocated water. Their choices reflect their capacity to use the water for a maximum output, and thus the system allows the most efficient and productive farmers to thrive, translating to more food produced per gallon of water used.

In California, where no such system of equitable distribution exists, some farmers enjoy water rights while others do not. Thus, when drought conditions hit, the ones without are left without options. By instituting a water cap-and-trade system that applies to farmers, California will spread out the effects of drought and empower its farmers to make the best choices based on efficiency of water use. Including agriculture in the water market raises the stakes on water reduction for everyone. Because water means money for growers, civilians who save water would receive a more competitive price for the water credits they sell back, heightening the financial incentive for simple household water reductions. To effectively ensure comprehensive water savings, Pismo Beach, or California on the whole, might consider a cap-and-trade system to manage water rather than clinging to the non-existent lever of flushless urinals.