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Report: Texas Water Woes Need Market Solution

A report from the Federal Reserve Bank of Dallas says that Texas' water problems could impede economic growth and that the best way to address them is a free-market approach to water allocation.

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Texas’ water problems could be severe enough to impede economic growth, according to a report from the Federal Reserve Bank of Dallas that says the best way to address the problems is a free-market approach to water allocation. But experts on water policy say that the report's suggestions would be a radical departure from current allocation methods and that prioritizing water needs is not as simple as the report suggests.

As the state's population grows, water supplies are drying up. Currently, the farming sector is the state’s thirstiest — accounting for 61 percent of statewide water consumption — but represents a small fraction of the economy, according to the report, which was released this week. Experts predict that agricultural water demands will fall over the coming decades as irrigation techniques become more efficient, but population growth will probably outpace those savings as municipal demand skyrockets. The authors estimate that the state’s water supply will fall 3.3 percent by 2020 as demand rises 5.4 percent.

Current water allocation rules fail to provide incentives for consumers to change their habits, according to the report. Instead, its authors say, greater efficiency in water allocation would come if prices were based on supply and demand. 

“Farmers, whose water rights are traditionally allocated based on historical use, can’t benefit from selling their water to cities without developed markets,” the report says. “Municipalities, whose water prices often don’t reflect scarcity and thus discourage conservation, are forced to ration supplies during dry spells.

But Billy Howe, legislative director for the Texas Farm Bureau, says farmers’ water needs and incentives vary tremendously across the state. For example, 70 percent of agricultural water demand comes from far west Texas and the Panhandle, where creating markets for selling water to municipalities is not feasible, Howe said. “They’re not going to build a pipeline out there to go get the water because geography doesn’t make it feasible,” he said.

“This report tries to make this situation sound simple when it’s actually very complex,” Howe added.

Russ Johnson, a water law expert and partner at the McGinnis Lochridge law firm, said he agrees with the report’s authors that the process of buying and selling water rights in Texas “is by and large filled with impediments.” But he said Texas lacks water infrastructure to make markets operate efficiently. For example, “a big problem with the operation of the market is Lubbock can’t buy a farmer’s groundwater right 80 miles away and pump it in Lubbock,” Johnson said. 

In any case, the report suggests that water problems will plague the Texas economy until it appropriately values the resource’s scarcity. “Through market prices, people discover for which ‘needs’ they’re willing to pay,” the authors say. “Some may find that high prices preclude miles of irrigated cotton or lush St. Augustine lawns.”

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