Cap-and-Trade: Can it Work for Water Rights?

If a cap-and-trade system works for sulfur and for carbon, it should be able to work for water, too.

Here in California, as everybody knows, there is a serious water shortage – and, at the same time, there's a huge amount of water-intensive agriculture. Recently, I went on holiday with a woman who grows rice, of all things, in California. The amount of water involved is crazy, and not only because of the amount it takes to grow the rice in the first place. Because of California's clean-air laws, you can't burn off the stubble once you've harvested the rice each season. So what do the rice farmers do? They drown it in water, and wait for it to rot.

Richard Sandor, at a panel on financial innovation today, gave another example of wastefulness, this time from New Mexico: alfalfa farming, which uses hundreds of acre feet of water to create $250,000 of alfalfa. (One acre foot of water is roughly the annual water consumption of the average US household.) Meanwhile, in Albuquerque, there's an Intel factory which uses the same amount of water and creates hundreds of millions of dollars in payroll alone.

The arbitrage is obvious. Alfalfa farming is subsidised directly; it's also subsidized indirectly through the natural gas which is used to dry it. And then, on top of all that, it uses up ridiculous amounts of valuable water. It would be better for all concerned, including the alfalfa farmers, if they could simply trade their water-usage rights on an open market, to people who value water at much more than a few dollars per acre foot.