Get in the Flow: Policy Changes to Lower Transaction Costs and Increase Texas’ Surface Water Transfers

Abstract

The prior appropriation or “first in time” system of surface water allocation was initially adopted during the California gold rush and later implemented throughout the western U.S. to distribute water rights. Those same states are now experiencing massive population increases, often with over-appropriated rivers exacerbated by climate change.  Although water is scarcer, it is often not put to its highest value or most efficient use because prior appropriation protects inefficient and wasteful uses.

Because water rights are property rights, one way to move water to new users is through water market transfers; unfortunately, prior appropriation rules create high transaction costs, which inhibit markets.  Although senior users are protected in times of shortage, when a water right is being transferred, the transferor must demonstrate that the change will not injure existing users or the public interest.  Vesting veto rights in third parties leads to an underutilization of the resource.  Use it or lose it provisions also creates unintended consequences by encouraging inefficient applications.

Policy changes could accelerate markets, while maintaining state priorities related to type of use, water efficiency, and managing shortage.  Although many economists have advocated for market solutions, their arguments often do not respect property law.   Using Texas as an example, this article evaluates various economic proposals for water markets through a property rights lens and proposes policy changed that encourage markets while protecting vested rights.  Solutions include exempting conserved water from non-use provisions, creating marketplaces, and opportunities to fast-track transfers that protect the public trust and ecosystems.

Keywords: prior appropriation, water markets, surface water, water rights, water economics