Who killed water markets?

Michael McCullough
Alberta Venture
August 6, 2008

To really grasp the enormity of Alberta’s coming water challenges, you have to make a trip to the Columbia Icefields viewpoint in Jasper National Park. (You have to make the trip there anyway, but that’s another story.) A series of signs mark how far the glacier extended in past years. Back in the 1890s, it buried what is now the Icefields Parkway. In the 1920s, it was where the parking lot is now located. To reach the ice today, you have to leave your car and trudge over a kilometre of moraine, and on the way a shocking realization hits you. At the 1983 sign, you’re still only halfway there. The pace of the retreat has been picking up alarmingly.

Whether or the degree to which you attribute this phenomenon to human activity is really beside the point. The fact is, since people have been living in this place we call Alberta, this remnant of colder ages past has been subsidizing the meagre precipitation we get on the dry side of the Continental Divide. Even in the days of the Dust Bowl, Prairie farmers and townsfolk along the main river systems, at least, could count on the run-off from the Rocky Mountain glaciers to water their crops, supply their factories and flush their toilets. More recently, though, that residual supply has been diminishing noticeably, even as the ice melts faster. In some parts of Alberta, especially in the south, summer streamflow has been reduced by half since records have been kept.

Yet the population and the demand for water grow. From the oilsands up north to a massive shopping centre outside Calgary, the tension over dwindling water supplies is increasing. To which the simplistic response, espoused by old-guard environmentalists, is to use less water. Impose sprinkler bans. Deny oil and gas producers new licences. If necessary, expropriate water rights longtime users already have. But a movement both inside and outside the province is pointing to another solution, more about how we allocate water than how much. Proponents such as B.C. author Chris Wood, whose book Dry Spring: The Coming Water Crisis of North America hit store shelves this April, believe the best way to conserve water is to make it something that is priced by volume and can be freely bought and sold.

Elizabeth Brubaker is the author of another water-reform tome, Liquid Assets, and the executive director of Environment Probe, a Toronto-based think-tank dedicated to market-oriented solutions to environmental problems. In a series of speeches to audiences in Calgary and Edmonton last October, she outlined this new manifesto for water, centred on making water rights tradable.

Under the current system of water allocation, there is virtually no incentive for users to conserve, Brubaker argues. “It’s a very old system, a system that worked better 100 years ago when water was plentiful than it does now when water is scarce,” she says. First, it is a system of prior allocation. That means that in a shortage situation the oldest licences – not necessarily the uses that generate the greatest public benefit – may take all of their allocation before the holders of licences granted later use a drop. Equally problematic is the use-it-or-lose-it nature of the licences, whereby licencees risk losing part of their allocation if they leave water in the river. “So of course everybody has an incentive to use the entire allocation, which is the opposite of having an incentive to conserve,” Brubaker says. Finally, the cost of the licence – and the water to the end user, as a rule – is based on the cost of delivering the water. The water itself is essentially free.

Her recommendation is for the legal owner of the water, the provincial government, to charge for the use of the water itself, a practice known as water pricing, and to make water usage rights more freely tradable. Such “water markets” have proven effective in conserving water and improving river ecosystems in several U.S. states, Chile and – the most often-cited example – Australia. Afflicted with the worst modern-day droughts in the developed world, Australian states overlapping the Murray-Darling river basin placed a cap on the volume of water that could be drawn from the river system in the 1980s. They then introduced measures to encourage the trading of irrigation water that, it is now widely acknowledged, simultaneously maximized agricultural output (as farmers invested in water-saving technology and sold the resulting surplus, usually to highly productive and profitable buyers) and improved the badly damaged river ecology. In the western United States, anglers and other conservation groups have been active buyers of water licences, allowing water that was previously allocated to human activity to stay in the stream.

In a small way, water markets have worked in Alberta, too. During the particularly dry year of 2001, the Alberta government imposed a moratorium on further surface water allocation on three southern Alberta river systems: the Belly, St. Mary and Waterton. As a result, a brief informal market in water trades flourished. Lorraine Nicol, a research associate in economics at the University of Lethbridge, studied this flowering of water markets and found that, by and large, it resulted in users with the most efficient machinery and highest-value crops buying water from the less productive users.

As Nicol’s 2005 master’s thesis, Irrigation Water Markets in Southern Alberta, notes, “Markets permit water to move to higher-value uses, thus increasing the resource’s productivity and enhancing economic growth. Conservation efforts can also be enhanced, since users, able to sell any excess water, are provided an incentive to conserve. For unprofitable producers, selling their water rights provides needed cash and may help to facilitate an exit from the industry.”

Perhaps surprisingly, the principle of water markets, if not water pricing, is already a part of both the Water Act that came into effect in 1999 and the Alberta government’s Water for Life strategy introduced in 2003. The act effectively made it possible for water rights to be severed from the land to which they were originally allocated. Out of the thousands of water licences in Alberta, however, there have been just 26 transfers over the past nine years. The most recent was the Municipal District of Rocky View’s purchase of approximately 6,700 cubic metres of water per day from the Western Irrigation District, needed to supply water to the huge CrossIron Mills shopping centre and horse-racing complex under construction near Balzac (see “The East Balzac Solution,” below). But most have been less noteworthy, often just “points of diversion” or transfers between different plots of land controlled by the same owner. According to Nicol, less than 10 involved exchanges of money. The kind of free-trading market its proponents envisioned has not materialized.

Brubaker cites a number of hindrances to freer trade in water. First, the incumbent licences tend to be held by collectives such as irrigation districts rather than individual users who are in a better position to invest in water-saving technology, switch to higher-value or water-saving crops or shift to more appropriate land uses. Second, licencees risk a take-back of 10% of their water allocation by Alberta Environment for conservation purposes every time a licence is transferred, a disincentive for trading. Third, there is also no marketplace – not even an Internet bulletin board – for buyers and sellers to seek each other out or for the value of recent trades to be posted.

But most importantly, the government has not introduced water pricing. It provides users with the water too cheaply to cause them to trade, Brubaker says. Indeed, most transfers have taken place since the government closed much of the South Saskatchewan River basin to further water grants in 2004. Before that, a new user could apply for a brand new licence, the only downside being that in a case of shortage, it would be the last in line to receive its share. Why bother buying an old licence if you could just get a new one?

Simply providing the legal framework for water markets won’t make them happen, agrees Ted Horbulyk, a professor at the University of Calgary who studies the economics of water allocation. “Build it and they won’t come,” he quips. “You have to make it easy for people.” Another factor inhibiting trades is the permanent nature of the transfers permitted under the Water Act, he says. In the U.S., temporary or contingent transfers and water options make up the bulk of the trading activity. “We don’t have mechanisms to allow any of that kind of stuff,” Horbulyk says.

As part of the Water for Life strategy, the Government of Alberta set up a study group to look at so-called “economic instruments” (including water pricing) to improve water conservation and social/economic benefits. It was originally supposed to complete a report by 2007, but the report has yet to be released and Alberta Environment now says there is no specific timetable for its release. The Alberta Water Council, a multi-stakeholder group set up to advise the government on water policy, meanwhile, has struck a working group to examine ways to “make licence transfers more effective and efficient,” says senior project manager Terry Sly. This exercise, too, lacks a firm deadline.

The University of Lethbridge’s Nicol ascribes this lack of momentum to the simple fact of ample water conditions since the drought of 2001. “The key reason is water isn’t in short enough supply,” she says. She doesn’t waver in her belief that the day will come, however. She just hopes the government acts before the ecology of southern Alberta’s rivers gets to the same stage as Australia’s Murray-Darling system by the time governments there acted. “You don’t want to [let things] go as far as Australia did before you do something,” she says.

Pricing could go a long way to solving Alberta’s water supply issues, opines Collins Ayoo, a research associate who works with Horbulyk at the U of C. “Canadians use four times the amount that [people in] other countries do, on average. Most of that water use is unnecessary,” he says. And that is largely because, at every level, we pay some of the lowest prices in the world for water and it is generally not priced according to volume. Ayoo is confident, though, that even if the government does not start pricing water, a market price will inevitably emerge as the new players who need it, like the Balzac development, put up the cash.

Still, proponents of water markets have their work cut out for them convincing incumbent water rights holders, who have more than a century of legal precedent on their side, of the need for reform. Kent Bullock is the manager of the Taber Irrigation District and a past president of the Canadian Water Resource Association’s Alberta chapter. As such, he expresses no opinion on water markets, regarding them as a fact of life in Alberta. “There is a water market now,” he says. “I think the market is working.” Certainly the association anticipates further evolution of water markets and is closely monitoring it. The theme of the 2007 Alberta conference in Red Deer was “The Birth of Alberta’s Water Economy.” However Bullock doesn’t see the urgency for major conservation measures, let alone water pricing. “The last four years there hasn’t been a shortage of water. We’re looking in pretty good shape.” As for warnings of shortages to come, “I think a lot of that’s hype,” he says.

Beyond the skepticism and inertia of entrenched interests, water markets face more ideological opposition. Groups such as the Parkland Institute worry that the poor – including less profitable commercial or rural users – might be priced out of water markets. (The government should subsidize those users directly, Brubaker advises.) Then there is what Brubaker calls the “Maude Barlow School” which links monetization of water resources to national sovereignty, believing that once water is freely bought and sold, there would be nothing to stop thirsty, rich Americans from appropriating Canadian water on a massive scale. Chris Wood notes in Dry Spring how this argument overlooks the fact that, even with a long-term water shortage more profound than ours, there is no movement afoot in the United States to acquire Canadian water. Americans are instead directing their energy at ways to better use the water they have. With good reason, too; what international water trade exists worldwide is hampered by high costs that make conservation far more cost-effective.

“There are some groups that are fundamentally opposed to water’s being bought and sold,” says Canmore-based environmentalist Danielle Droitsch. Others, including the organization she heads, Water Matters Society of Alberta, are not so quick to judge. “There are some real positives to water markets,” she says. “In general, it does facilitate more efficiency and conservation. It also facilitates higher productivity.” There are better and worse examples of water markets, though; good ones, Droitsch says, have safeguards to protect the interests of communities and the environment.

Brubaker also emphasizes that what she is talking about is not the privatization of water. By law, the provincial government owns the water and simply grants landowners, municipalities and industrial users the right to use it. That would not change. What she is talking about is putting a price on water. Some critics contend that water is a human right and too valuable a resource to put a price on. “It’s too important not to price it,” she counters. “No one objects to food being bought and sold in the marketplace. Why not water?”

The East Balzac solution

It’s a situation that’s expected to become more common in the future. Mall developer Ivanhoe Cambridge and the United Horsemen of Alberta are already building a huge shopping centre and horse-racing complex just north of Calgary. It will go a long way to growing and diversifying the tax base – currently 79% residential – of the Municipal District of Rocky View.

But wait! It’s going to take more water than the municipality can supply, and since 2004 the Bow River watershed in which Rocky View sits has been closed to new water licences. Thus began a hunt for water that for a while focused on a scheme to divert water from the Red Deer River watershed, virulently opposed by neighbours to the north.

Then in 2007 Rocky View reached a deal with the Western Irrigation District, a cash-poor non-profit owned by 400 farmers that nonetheless held a substantial licence to the Bow’s run-off. Rocky View would contribute $15 million towards replacing open canals with pressurized pipe that should save the irrigation district an estimated 2,000 acre feet of water, equivalent to 6,700 cubic metres a day. In return, the municipality would be entitled to the saved water.

Not yet approved by Alberta Environment, the deal was ratified by 57% of the members of the Strathmore-based irrigation district and community opposition has mostly gone quiet. No additional water will be taken from the Bow system (indeed, 200 acre feet will be returned to the river) and measures such as a 72-acre section of the East Balzac development being set aside as a preserve should further the interests of conservation. This, proponents of water markets argue, is how it’s supposed to work.