Monday, December 9, 2019

Water Supply Reliability Out, Endangered Species Killing Incentives In With New Federal/State Delta Pumping Rules

Delta water exporters are lauding the new biological opinions released by the Trump administration and the state's new regulations known as "Trump lite" by many environmentalists.  Water exporters are praising the new rules for their use of real-time operations, as opposed to the old rules that were "calendar based."  It's great PR messaging, but lousy policy.  The message appeals on the surface - new rules are modern and with high-tech real time adjustments, while the old-rules are primitive and based on calendars.  Good political messaging, but I would argue that it does not conform to the best available social science and policy design as it reduces water supply reliability and generates strong incentives to harm endangered species.

Let's start with the goal of water supply reliability - made state law by the 2009 Delta Reform Act.  For years, I heard water exporters assure us that they didn't need more water - they needed more predictability about the operation of the water pumps so that they could plan with certainty.  Seeing a political opportunity to get more water at the expense of reliability, they have quickly changed their tune.  Calendars are old-fashioned, but they are extremely reliable, whereas real-time operations based on species location are highly uncertain, and are pretty much the opposite of reliability.

But the even bigger problem with the real-time operation of the Delta pumps are the incentives and reward structure it creates.  You do not need a Ph.D. in fisheries to realize that they lower the fish population, the less likely they will be detected, and the less restricted water pumping from the Delta will be.  On the other hand, if endangered species populations actually recover, they are more likely to be detected near the pumps, which would reduce water supplies to exporters under the proposed real-time operations. 

Scholars of the endangered species act have known for a long time that triggering regulations by the presence of endangered species creates scores of negative incentives.  During the 1980s and 1990s, there were many articles about the perverse incentives for economic interests.  These incentives became known colloquially by the acronym SSS, "shoot, shovel and shut-up," and preemptive habitat destruction in more academic circles.  I was a contributor to this literature in the 1990s and early 2000s, it was the subject of my PhD dissertation.  The policy response to this was not abandoning the ESA, but creating positive incentives through Habitat Conservation Plans (HCP) and safe harbor programs.

These new Delta policies claim to be science-based, I can't judge that, but they certainly aren't based on the best available social science or policy design.  They clearly create an incentive where water agencies are rewarded when protected species do poorly - and my understanding is that other parts of these new biological opinions create rules in other areas (like cold water habitat upstream from the Delta) that will be harmful to endangered Delta smelt and salmon.  If we wanted to save species, if they experience bad conditions somewhere else in their lifecycle (whether that was due to natural fluctuations of ocean conditions or human mismanagement of Shasta dam or other human managed parts of the system), then we would have stronger restrictions at the pumps to make up for it.  Under these rules, bad management upstream works to reduce protections at the Delta pumps, the very definition of negative incentives.

It seems to me that the appropriate policy approach for water supply reliability and species protection/ecosystem enhancement in the Delta would be a Habitat Conservation Plan.  This is something that the PPIC is currently talking about in their recent publications on ecosystem management (see I don't always disagree with them).  But sadly, the only time HCPs have been seriously proposed in the Delta is when they were being used as green gift wrap around 15,000 cfs Delta conveyance tunnels in the BDCP.  Environmentalists haven't been warm to HCPs in the Delta either, but perhaps that might change as the BDCP becomes a more distant history.

The state's own economic consultant's analysis showed the value of the BDCP was in the regulatory certainty produced by the HCP, not the tunnels themselves.  But under Governor Brown, the state decided to throw out the HCP and proceed with the tunnels only WaterFix.  If the Newsom administration wanted to correct course on the Brown administration WaterFix plan, it wouldn't downsize from two tunnels to one, it would bring back the concept of an HCP (rebrand it ecosystem management if you want) and throw out the tunnels. 

Do jobs per drop calculations support more use of water markets?

The UC-D Watershed Center counters crops per drop calculations with jobs per drop calculations and then makes a rather large leap to their conclusion ... we need more water markets - not rules and regulations.

I am not persuaded.  The biggest impact of expanded water markets, especially if combined with expensive conveyance infrastructure like Delta tunnel(s) also supported by the PPIC/Davis group, will be more ag-to-urban water transfers that direct water away from Central Valley agriculture.  The economic impact of the out-of-ag transfers on the Valley could outweigh any marginal efficiency benefits from reallocating water between higher and lower revenue farmers.  Coastal urban areas should be encouraged to develop alternative local supplies, so I would be more supportive of water transfers if ag-urban or out of basin transfers were limited.   

Water is not the only thing that can be moved around in the Valley.  As water becomes more scarce, I believe within basin transfers will be part of the solution, but it may be less costly and more efficient to move crops, farm workers, and capital to more water rich locations in the Valley than it is to move water long distances out of watersheds.  (an acre foot of water weighs 2.7 million pounds and is worth a few hundred dollars in agricultural use)     

I also wonder about the validity of these types of calculations that suggest water/jobs ratios are fixed.  Water/nut ratios cited by environmentalists might vary widely too, but I suspect their is even greater variation in water/job ratio based on local conditions and production technology.  In fact, I have long wondered the extent to which labor and water can be substitutes in the agriculture production function.  This could be part of the reason that farm job loss during droughts has generally been less than predicted by simplistic fixed proportions analysis.  For example,  Santa Clara researchers found nearly 34% of vegetable crops went unharvested in California fields during 2016-17, and that there was a lot of variation in the unharvested amounts by field even for the same crops, and that labor availability/costs was a factor.  I wonder if the unharvested percentage declines in a drought year, some fields might be fallowed, but more labor could be applied to the fields that are planted increasing the harvested crop per drop on the remaining fields.  And there might be other ways that water-labor could be substitutes, for instance in more closely monitoring/managing irrigation equipment.

I am very much a market oriented economist, but I am deeply skeptical about the potential of water markets to be a major part of California water solutions.  The transactions costs are extremely high (both transporation and regulatory), the potential for third-party impacts is large, and markets are unlikely to be competitive. 

And as water becomes increasingly scarce, I believe regulatory limits on planting decisions could be warranted some day, and could be part of long-run management plans.  We could use market principles to limit the cost of the regulations, for example if we have licenses that limit plantings of certain permanent crops - these could be transferable in markets.  I once heard a very smart salmon fisherman say (sadly I forget their name) something like "we have to deal with transferable catch limits and quotas to avoid the tragedy of the commons in the oceans, why not an ITQ (individual transferable quota) for trees to avoid the tragedy of the commons in groundwater."

The job per drop data also suggest reducing field crops like corn and rice that have low labor intensity and relatively low revenue per acre.  I worry if that were to go too far.  These crops often provide valuable wildlife habitat, and fallowing these types of crops in drought years provides an important buffer to reduce water use while minimizing economic disruptions due to their relatively low labor intensity and relatively high ability to substitute with imported crops.

Of course, these calculations of jobs per drop are based on 2010 data and probably already outdated.  The cost and scarcity of labor is having a much bigger impact on most farmers than the cost and scarcity of water.  As discussed above, labor scarcity could increase the jobs per drop calculation for vegetables but the change in that number would not necessarily be very meaningful for water management. 

While I have cautioned about drawing too many conclusions from these numbers above, I would also be very interested in seeing updated calculations for 2020 and the years ahead as data becomes available.