Financing Water Reform in the Western United States

Lake Mead, which supplies water to Las Vegas, Arizona, and Southern California, shows a ring from mineral deposits left by higher water levels. A seven-year drought and increased demand spurred by explosive population growth has caused a 100-foot drop in water levels since the 1960s.

To grasp the scale of water scarcity in the West, consider that earth fissures have opened up in Arizona from excessive groundwater pumping.1 In Southern California, lack of water has prompted the cancellation of scores of commercial and residential construction projects.2 In Northern California, a fight is brewing over the Sacramento-San Joaquin Bay Delta that may rival any in the state’s political history.3-6 In 2013, the U.S. Bureau of Reclamation cut the allocation of water to farmers south of the Sacramento-San Joaquin river delta to 20 percent of their contracted amounts.7

Las Vegas, which is almost entirely dependent on Colorado River water withdrawn from Lake Mead, is constructing a third water intake pipe at the cost of $800 million because the lake’s levels have dropped too low to use existing ones.8 In spite of recent increases in the levels of Lake Mead and Lake Powell, these vital storage reservoirs are only slightly above half capacity at what is now their full pool. In none of the past 10 years has Lake Mead been more than 60 percent full, based on annual average lake levels. The long-awaited Colorado River Basin Water Demand and Supply Study, issued last December by the U.S. Bureau of Reclamation, contains an ominous prediction about the future of the river. In 2060, it said, the average demand for water was likely to outstrip the supply by roughly eight times the current usage of Las Vegas. Its release prompted American Rivers, an environmental organization, to declare the Colorado to be the most endangered river in the country.9

In 2011, Texas suffered its driest year in recorded history, and the following year a Texas agency estimated statewide agricultural losses at $8 billion.10 In 2013, Cargill closed a Plainview, Texas meatpacking plant because of tight water supplies; the plant employed 2,300 people in a town of only 22,000.11 And, since 2008, though the West is desperate to find energy, regulators in Idaho, Montana, and Arizona have denied permits for new coal-fired power plants because water is in such short supply. Nevertheless, in 2012, farmers in the West shipped hundreds of tons of water-guzzling alfalfa to China at the same time as California is debating whether to spend tens of billions of dollars to improve the water delivery system from the Bay-Delta, which comprises the Sacramento/San Joaquin River Delta and the San Francisco Bay.12

Such water scarcity in the West is ultimately caused by an imbalance between supply and demand and by legal rules that 1) often allow for unrestricted access to a limited supply, and 2) hinder markets from reallocating water to the highest-value use. The U.S. Census Bureau predicts that the country’s population, which was 300 million in 2007, will reach 420 million in 2050. Currently, nine of the ten fastest growing states are in the West.13 Population growth, the migration of Easterners to the West, and climate change are placing heavy stresses on the shrinking supply of water. Massive diversions have created environmental havoc, sometimes completely drying up rivers. And unsustainable pumping from wells has caused severe drops in the water levels of aquifers throughout the West.1,2

We do, however, have the tools available to prevent water scarcity in the West from becoming so serious that it dries up whole rivers or reduces the output of the agricultural sector. Modest rate increases under a tiered-pricing structure for water consumed at home (“at the tap”) could generate the capital necessary for significant infrastructure improvements for municipal water systems and, more importantly, for farms, where most water is used. Further, the revision and expansion of the Clean Water and Drinking Water State Revolving Funds (SRFs) managed by the federal Environmental Protection Agency (EPA) could significantly offset and spread out the costs incurred by consumers from our proposed rate hikes and provide a more immediate source of capital for key infrastructure improvements. This capital would also be helpful in offsetting the reduced tariff revenue resulting from reduced use due to higher prices.


Robert Burns/AgriLife Today
A Texas farmer struggles to keep up with his crops’ moisture demands. A shift to low energy precise application irrigation could help mitigate the problem.

Science-driven Targets for Sustainability

A recent analysis of water sustainability in the Western United States concluded that cities, industries, and farms appropriate approximately 76 percent of the renewable sources of fresh water across the seven states of the Colorado River Basin.14 That’s nearly double the sustainable levels, which are projected to be 40 percent.15 We recommend a reduction of surface and groundwater withdrawals to a less stringent target level of 60 percent over the next 50 years. While we recognize that this level does not completely achieve sustainability, it is a feasible goal, and one worth pursuing.

Lowering withdrawals to this target would entail a 21 percent reduction from today’s levels, a bare minimum for two reasons. First, climate models suggest a decline in stream flow of 10 to 30 percent over much of the region over the next 100 years.16-18 Second, the population in many of the region’s cities is projected to double over the next 30 to 50 years.14 Thus, the required reductions in withdrawals of surface and ground water range from 21 to 43 percent depending on relative changes in supply and demand.

What are some alternatives for addressing water scarcity in the West? The traditional approach to water shortage involves “hard path” solutions—primarily the augmentation of our supplies by more diversions, wells, and dams.19 However, given the situation as laid out above, we have very little water left to divert, pump, or store without tapping into increasingly deep aquifers and further depleting ground water sources.2 Factor in climate change, and the untapped renewable supply gets even smaller.

Another possibility is the desalination of brackish or ocean water using technology that removes salts from water. But desalination is not a magical solution that will erase imbalances between water supply and demand across the West. First, desalination is extremely expensive. Second, it consumes large quantities of energy, the generation of which can require large quantities of fresh water.20-22 And third, it involves a significant disposal problem associated with the brine concentrate that is produced during the process. Still, the need for water is so acute that desalination may become part of an integrated water portfolio employed by some coastal cities, and even inland where rivers carry naturally high levels of salts.23 A final option to augment the dwindling water supply is the reuse of treated municipal wastewater. Treated or reclaimed water is an economically viable source for watering lawns, golf courses, parks, and highway medians, and for some industrial and agricultural applications.

Turning to the demand side, water conservation—both at the tap and on the farm—must take center stage as we move to address Western water shortages. Over the last 10 years, some communities, such as Albuquerque, Las Vegas, and Tucson, have succeeded in reducing their per person water consumption by 30 percent.2,24,25 But other communities, especially in Southern California and Arizona, where mesic yards with lush lawns best suited to a wetter climate are still common, have barely given a nod in the direction of conservation. Either way, however, the price of water is surprisingly low in the West when compared to prices in places with a higher rainfall.25,26

Financing Efficiency in the Western United States

We argue that price signals and market forces offer underused tools to encourage conservation and reallocation of water to higher-value uses in the West, where the market for water is exploding.27-29


Library of Congress
A road in the Texas Panhandle, 1936, with heavy clouds of dust in the sky—a typical phenomenon of the Dust Bowl, and one that is increasingly common given prolonged drought in the South.

The three principal organizations representing water interests are farmers, municipalities, and nongovernmental organizations (NGOs). In recent years, municipalities and NGOs have been purchasing sizable volumes of water from farms in the seven basin states, where there is considerable room for improvement in efficient water use. For instance, converting all farmland in the West from flood to low energy precise application (LEPA) irrigation would achieve almost half of the 40 percent reduction target for the agricultural sector. Conservation easements and water trusts have recently emerged as other methods to provide farmers with alternative sources of income while allowing river water to continue flowing downstream unimpeded.2 We propose a portfolio of financial instruments for catalyzing water reform in the Western U.S. that would engage the three water interests to collaborate on water-use efficiency, thereby leaving more freshwater in rivers and deltas.

First, we recommend a region-wide price reform of water at the city tap that would be instituted as a tiered state tax, with a standard surcharge based on usage across the seven basin states. Such a rate structure, with increasing block rates, would send clear signals that the more water used by each person, the higher the cost for each additional unit. For example, a third-of-a-cent per gallon tax on all domestic water usage over 73 gallons per capita per day (GPCD), plus an additional one-cent per gallon above 107 GPCD, would cost the average family of four between $252 and $877 a year. This two-tiered tax would generate a revenue stream of about $348 million to $1 billion per year.

The goal of this rate structure is twofold. The initial aim would be to generate revenue that could be used to finance capital costs for: 1) reclaimed water infrastructure in municipalities, 2) the conversion of farmland to LEPA or micro-irrigation, and 3) matching-grant programs to stimulate water transfers between agriculture and environmental organizations. These tiered rates would also be likely to encourage domestic efficiency. Although this efficiency would work at odds with revenue generation, in either case conservation gains would be substantial and water sustainability improved.

We estimate that water tariff revenues over a period of 8 to 14 years (assuming a two- or a single-tier tax scheme, respectively) could significantly offset or completely finance:

  • the construction and maintenance costs of new water recycling facilities and systems in all Western cities with populations greater than 100,000
  • the conversion of all farmland irrigation to a more efficient technology
  • and one-to-one matching funds for NGOs to lease or purchase “banked” water from farmers at more competitive prices.

We recognize that an annual cost to families of $252 to $877 is a substantial amount, especially in difficult economic times. However, not only would water price increases encourage conservation, but construction projects associated with water efficiency infrastructure would create jobs, potentially offsetting some of the detrimental economic impacts of higher water rates.

A second and key part of our proposed plan is the encouragement of federal investment in infrastructure. Increased water tariffs could be bolstered by parallel new investments in existing programs that provide low-interest loans to improve water quality, namely the Clean Water State Revolving Fund (CWSRF) and Drinking Water State Revolving Fund (DWSRF) administered by the EPA. Established by Congress, the SRFs are self-perpetuating loan assistance programs geared toward modernizing water and wastewater systems. The beauty of this financing system is that an initial outlay of federal loan funds enables state and local governments to leverage these funds by issuing municipal bonds. Each state contributes 20 percent of the federal grant, and the repayment plus interest are returned to the fund, which grows over time. Every dollar that the federal government has loaned through the CWSRF has produced a better than two-to-one profit. Thus, the program is self-sustaining. This alternate source of financing would contribute to efficiency revenues if tiered prices do indeed stimulate urban conservation, and hence lower tax revenues.

Given the historical success of the SRFs, we advocate broadening the program to allow loans not just to water treatment facilities, but also to irrigation districts, which are political subdivisions of the states. Irrigation districts would be expected to use their capacity to issue bonds, thus leveraging the SRFs. The proceeds would be used to improve the irrigation efficiency of farms throughout the West. The water thus conserved could be sold for urban and environmental uses, which would raise the capital needed to repay the loans and retire the bonds. An increase in Congressional appropriations to basin states of $8.9 billion dollars over 20 years—a 3.5-fold increase in average allotments over the last 20 years—would jumpstart the program. This initial investment, if matched two-to-one by the states from water tariff revenues, would provide more than half of the capital necessary for efficiency projects needed to restore regional stream flow to the 60 percent target. If SRF loans continued to generate a two-to-one return on initial investments through interest payments, then an enhanced SRF combined with tariff and banked water sale revenues would provide more than adequate capital for the full restoration to target flows for major rivers in the West. Finally, SRF-funded efficiency projects would stimulate the Western U.S. economy with thousands of construction projects to line earthen canals, install water metering timers, replace flood irrigation with more efficient systems, and embrace LEPA or micro-irrigation.


Wolfgang Staudt/Flickr
The essential reservoir of Lake Powell in Utah now reaches only slightly above half capacity when it is at full pool.

Moving Forward with Reform

We should tap into the power of market forces to encourage the reallocation of water from high water use for low-value crops to higher value uses. For example, farmers in California’s Imperial Irrigation District (IID) have temporarily fallowed some fields that have been mostly used to grow alfalfa, and are using funds provided by the city of San Diego, which is purchasing the unused water, to modernize their irrigation infrastructure. Once completed, farmers will bring the fields back into production and will be able to grow the same amount of product with less water. In effect, municipal residents finance the infrastructure overhaul.2 We should provide farmers with incentives, like San Diego has for the IID, to enhance efficiency and bank the saved water for other uses. One important incentive is the market value of the water itself. We should encourage farmers to sell or lease their rights for municipal, industrial, or environmental uses.

For a water market to function and improve sustainability this way, three legal rules must be in place. First, farmers need quantified water rights. Second, these rights must be transferrable. And, third, there must be a ban on new diversions or the drilling of new wells. Alas, in some Western states, there are few if any limits on diverting water from rivers or drilling wells. In Arizona, outside of “active management areas,” anyone can drill a well and pump a limitless amount of water.30 In California, farmers are often allowed to sell their surface water rights and then drill new groundwater wells. The net effect is not to reallocate water in exchange for new revenue, but simply to place additional stress on an over-tapped supply.

The Arizona and California rules epitomize what Garrett Hardin called “the tragedy of the commons.”31 Water is a limited public resource but the rules allow limitless access to it, which encourages unsustainable water use. To seriously address the American West’s water scarcity issues, we must break the relentless cycle of overuse.

There are likely many potential combinations of incentives and regulations that will get the West on the right path. Our analysis suggests that a combination of federal investment through expanded State Revolving Funds and a tiered tax on water use at the tap can generate adequate capital to restore acceptable levels of river flow. Price signals, market forces, and the appropriate regulation of new withdrawals could all be used to rein in unsustainable water use without creating a contentious roster of winners and losers.