Tuesday, August 08, 2006

How Federal Policies Affect The Allocation of Water

Aug 7: The Congressional Budget Office (CBO) has issued a report entitled, How Federal Policies Affect the Allocation of Water. According to the report, the drought conditions of recent years have focused attention on the nation’s use of freshwater resources. This CBO paper examines the mechanisms that govern water allocation, how they affect the benefits that accrue to society from its use of water resources, how those effects might change over time, and what influence federal policies could have on such considerations. The paper was prepared in response to a request from the Ranking Member of the Subcommittee on Water and Power of the House Committee on Resources, Raul Grijalva (R-AZ). CBO notes that in keeping with its mandate to provide objective, impartial analysis, the paper makes no recommendations.

To examine how society uses its water resources, the CBO analysis addresses several major questions: What are this country’s water sources, and how is the water used?; What determines the underlying allocation, and does that allocation maximize water’s potential benefits to society as a whole?; and What policies might the federal government consider toward that end? The report indicates that the state laws governing property rights and the pricing mechanisms that conceal opportunity costs make the current allocation of water relatively inflexible. That inflexibility might become increasingly costly in the future, as it exacerbates pressures on federal spending and reduces the potential gains to the economy from the use of water resources. Four developments in particular augment demand pressures: the settlement of Indian tribes’ claims on water rights currently held by others; environmental laws that require greater amounts of water be retained in natural courses; growing populations in arid states; and the recurring impacts of droughts, which may increase in frequency and intensity as a result of shifts in precipitation patterns.

Under policy options, the report says that broader use of markets in deciding how scarce water resources are allocated could improve on the current system of administrative allocation that has emerged under state law. Because markets offer flexibility in balancing supply and demand -- by providing incentives to reallocate water among users, to use less water, and to provide more water -- they could mitigate society’s costs of adjusting to changing conditions. The report notes that, "The federal government could facilitate market transfers of water by clarifying the potential for broader water marketing using its jurisdiction under the commerce clause of the Constitution and federally reserved water rights. The commerce clause gives the Congress the authority to allocate interstate waters to serve the national interest -- even if doing so means overriding state law."

Access the complete 32-page report (click here). [*Water]