PERCCase StudiesColorado RiverWater Bank:Making WaterConservation ProfitableBy Reed Watson & Brandon ScarboroughEdited by Laura Huggins
2Water as a Crop SeriesRanchers in western Colorado think about more thanflood irrigation when they see flowing water, they thinkabout income. In fact, a group of west slope ranchersdevised a model for water banking that could makewater conservation more profitable than irrigating,and now they are working with state agencies andconservation organizations to turn that idea into reality.Still in the development stage, the dations for other groups consideringwater banking as a way to getColorado River Water Bank wouldallow municipalities on Colorado’s more value out of water.Front Range to buy water consumptionrights from irrigators on Colorado’swest slope who reduce their Water is a scarce commodityBackgroundwater consumption. This marketbasedapproach to water conserva-the region has one of the fastestin the Rocky Mountain West, yettion means water has value beyond growing populations in the country.irrigation—water itself is becoming Population growth along the Fronta profitable crop.Range of Colorado, where theThis case study explains why state’s largest cities are located,water conservation is paramount is driving water demand past thein Colorado and how water bankingis the most cost-effective population grew by 2 percentlimits of water supplies. Colorado’sapproach to water conservation. from 2007 to 2008, making it theThe conclusion offers recommen- third fastest growing state in thecountry, yet decades-long droughtmeans fewer water resources areavailable to meet the needs of theburgeoning population. In additionto the hydrological constraints onwater consumption, legal requirementsmay force Front Rangemunicipalities to consume evenless water.The Colorado River Compact isa 1922 agreement between theseven states in the Colorado RiverBasin requiring Upper Basin states(Colorado, New Mexico, Utah, andWyoming) to deliver water at a rateof 7.5 million acre-feet of water peryear on a 10-year rolling average toLower Basin states (Arizona, California,and Nevada). Since droughtbegan in 2000, the average annualflow has dipped below 10 millionacre-feet per year.If the 10-year rolling averagefalls below 7.5 million acre-feet,the Lower Basin states mayinstitute a forced reduction inUpper Basin water consumption,also known as a “compact
Colorado River Water Bank: Making Water Conservation Profitable 3The Colorado River Compact is a 1922 agreement among seven states in the basin of theColorado River.curtailment.” Junior water rightsestablished after 1922 (when theCompact was signed) would becut until the 10-year rolling averagewent back above the Compactminimum. Senior water rights onthe other hand, those perfectedbefore 1922, would be unaffected.Front Range municipalities holdprimarily junior water rights, rightsthat would be cut in the event of acompact curtailment. The potentialinability of these municipalities toprovide basic water and sanitationservice means government officialsare scrambling to find not just water,but long-term water solutions.Water Banking BasicsState governments typicallyrespond to water shortages byimposing water use restrictions,enforcing priority dates, mandatingwater conservation technology, orusing some combination of thesepolicies. But low flow toilets andlawn watering schedules havedone little to curtail Colorado’swater consumption. Indeed, wateruse has only increased due to thestate’s population growth and subsidizedwater rates. Water banksoffer a solution, one that promotesvoluntary conservation by harnessingthe incentives of water users.Markets as anideal toolWhen water users in westernColorado confrontedperhaps the biggest challengeto the future securityof water use in Colorado—acurtailment of water underthe multi-state Colorado RiverCompact of 1922—they envisionedwater markets as a keycomponent of the solution.The results: A proposal for aColorado River Water Bank.
4Water as a Crop SeriesThe compact divides the river basin into two areas, theUpper Basin and the Lower Basin.Water banks promote efficientwater use by facilitating agreementsbetween users who canreduce water consumption cheaply(sellers) and those who cannot(buyers). The potential profitsfrom conservation agreementsforce water users to consider theopportunity cost of their consumption,that is, whether the wateris more profitable diverted forirrigating water intensive crops orleft instream to meet the Compactrequirement. This contract-basedapproach allows water users ratherthan government agencies todetermine the most cost-effectivemeans of allocating scarce water.In this way, a water bank is similarto a cap-and-trade approach toreducing air emissions. 1Water banks also reduce transactioncosts, which include the timeand expense of locating contractingparties, negotiating agreementterms, and monitoring performanceunder those terms. Waterbanks can reduce these costs bystandardizing agreement termsand monitoring performance. Byreducing these costs, water banksexpand the room for negotiationbetween conservation buyers andsellers—meaning more water conservationdeals take place.This reduction in transactioncosts promotes not just economicefficiency, but also water conservationfor environmental purposes.Specifically, the water bank allowsenvironmental organizations concernedover low flows and dewateredstreams to purchase waterconsumption rights from westslope irrigators. Instead of consumingan offsetting amount, as woulda Front Range municipality, theenvironmental organization could
Colorado River Water Bank: Making Water Conservation Profitable 5“retire” the consumption right andleave the water instream for fishand other aquatic species.Market oPPortunitySeveral factors make waterbanking a viable strategy forColorado. First is the uneven distributionof senior Colorado Riverwater rights throughout the state.Senior water rights were perfectedbefore the Colorado RiverCompact was signed, so theyare impervious to curtailment.Of the 1.3 million acre-feet ofColorado River Basin (CRB) waterconsumed annually on Colorado’swest slope, more than 1 millionacre-feet come from senior waterrights. Conversely, of the FrontRange’s roughly 500,000 acre-feetin annual CRB water consumption,490,000 acre-feet or 98 percentcome from junior water rights.This unbalanced distributionin senior water rights means acompact curtailment would havea more significant impact on FrontRange water users than it would onwest slope water users. Purchasingwater consumption rights fromwest slope irrigators allows theFront Range water users to minimizethis exposure and west slopeirrigators to earn higher returns ontheir water.A second and related factor thatmakes water banking a viable optionfor Colorado is the differencein water prices on the Front Rangeand west slope. In irrigation, theestimated price per acre-foot rangesbetween $28 and $100, dependinglargely upon the crop in irrigation. 2But Front Range municipalitiescurrently pay between $9,000 and$15,000 per-acre foot for new watersupplies and would pay $15,000to $45,000 in acquisition costs forlarge water development projectscurrently under consideration. Thisdisparity in water values meanswater users on the Front Range andwest slope have flexibility when negotiatingmutually beneficial waterconservation contracts; the water’sCompact CallThe Colorado River Compactrequires Coloradoand the Upper Basin statesto deliver 7.5 million acre-feetof water per year on a 10-yearrolling average to the LowerBasin states. If the rolling averagedips below this amount, theLower Basin states have legalauthority to institute a “compactcall,” which would curtailwater consumption in the UpperBasin states.By facilitating trades betweengroups of water users, theColorado River Water Bankwill make it cheaper for UpperBasin states to send more waterdownstream. This reduces thecosts of compact compliance,the likelihood of a compact call,and the cost of curtailmentshould a compact call occur.
6Water as a Crop SeriesThe water bank idea came from west slope ranchers who understood that the value of their water couldbe higher in conservation than in irrigation.value in conservation for west sloperanchers will often be less than thewater’s consumptive value for FrontRange municipalities.Bank Structure andFunctionThe simplicity of the proposedwater bank structure is worth noting.No physical transfer of wateris required; instead, the FrontRange municipalities with juniorwater rights can simply pay thewest slope ranchers with seniorwater rights to use less water. Themunicipalities can then consumea proportional amount of waterwithout increasing the state’stotal consumption. 3 So long as theconservation to consumption ratiois greater than 1:1, the water bankwould increase the amount of waterflowing to Lower Basin statesand thereby function to preventa compact curtailment. 4 As such,the Front Range users and westslope irrigators would be tradingwater right seniority rather thanphysical water.The water bank could also functionto insure against losses in theevent that a compact curtailmentoccurs. Specifically, if the 10-yearrolling average dips below theminimum amount, junior waterrights would be curtailed until theminimum requirement was onceagain reached. Such a curtailmentposes great risk to Front Rangemunicipalities that hold few seniorwater rights but must still meetthe basic water and sanitationneeds of large populations. Bypurchasing non-curtailed (senior)consumption rights from westslope ranchers either directly orthrough option contracts, thesemunicipalities can use the water
Colorado River Water Bank: Making Water Conservation Profitable 7bank to minimize their exposureunder the Colorado Compact.Lessons fromAgriculture-MunicipalPartnershipsThe water bank idea did not comefrom Front Range municipalitiesdesperate to secure rights to additionalwater consumption. Instead,the idea came from west sloperanchers who understood that thevalue of their water could be higherin conservation than in irrigation.As revenue-cost margins shrinkon traditional ranching activities,the profits these ranchers standto make from water banking couldbe the difference that keeps someranchers on their property.Ranchers and farmers in otherregions can gain from this insightinto the dynamic value of water.Although many characteristics ofthe Colorado River Water Bank arelocation-specific, this program providesvaluable insights for landownersthroughout the country.1. Use Competition to Your Advantage.Identify willing buyers andestablish a competitive biddingatmosphere so that the contractprice for water conservationreflects the highest value of thatwater. Legal requirements mayhelp with buyer identification: askwhich water uses would be cutfirst and whether those users willpay something to avoid curtailment.A bidding process wherebyseveral water conservation buyerscompete for the conservationcredits (or for the water itself) willensure that conservation sellersget the best deal possible.2. Transfer Rights Instead ofWater. It is cheaper to supplywater consumption rights thanit is to supply water, so profitsfrom trading water right senioritycan be higher than profits forselling the physical water. Theobvious caveat here is that waterconsumption rights may or maynot be transferable in statesfollowing the riparian doctrine.But, even if physical delivery isunavoidable, one should still tryto minimize delivery costs whenselecting a water buyer.3. Maintain Flexibility. Short-termwater leases provide more flexibilityand protect current landuses better than do long-termleases or outright transfers.When water is severed from land,the land’s agricultural potentialis often lost. The Colorado RiverWater Bank’s structure allowsfor yearly deals between westslope irrigators and Front Rangemunicipalities and for rotationalfallowing agreements amongwest slope irrigators. Both featuresprotect ranching operationsfrom permanent water transfersand fallowing.4. Engage Stakeholders. Seasonalcrop fallowing influences otherindividuals and businesses in thecommunity. Hence, the indirectimpacts of fallowing on workers,retailers, and buyers shouldbe considered. These interests
8Colorado River Water Bank: Making Water Conservation Profitablemay oppose the water bankingprogram if there’s no provisionfor their lost revenues. Engagingthese stakeholders may be necessaryfor a successful program.5. Pursue Multiple Partnerships toMinimize Risk. Engaging conservationorganizations may increasethe number and profitability ofwater conservation agreements.Specifically, these groups maysupplement the price conservationbuyers are willing to pay—meaning more money for conservationsellers. They may also lendcredibility and political capital tothe water banking program.For groups considering waterbanking as one method to capturewater values beyond agricultural uses,the Colorado River Water Bankoffers an excellent learning opportunity.By treating water as a crop, thewater bank will facilitate voluntarytransactions between agriculturaland municipal water users, improvethe efficiency of water allocation inColorado, and create new profit opportunitiesfor west slope ranchers.Notes1. During the 1990s, cap-and-tradeprograms efficiently reduced totalemissions of the acid rain precursorsSO 2and NO xby allowing regulatedparties to trade emission permits.These permits gave regulatedparties the right to release certainquantities of emissions into theatmosphere each year, much likewater rights allow irrigators and municipalitiesto divert a certain amountof water each year. Regulatedparties who could reduce emissionscheaply sold their permits to partieswho could not, thus ensuring thatemission reduction progressed ascost-effectively as possible.2. Figures from Colorado StateUniversity, Extension Farm CropEnterprise Budgets, 2005–2008.3. The state of Colorado will mostlikely run the bank: the ColoradoDivision of Water Resources administerswater rights for the stateof Colorado, and the ColoradoWater Conservation Board of theColorado Department of NaturalResources administers most ofthe water conservation programsand intrastate water agreements.4. Whether the 10-year rolling averagewas above or below 7.5 million AF/year will determine the appropriateconservation to consumption ratio.This case study was done in partnership with the Sand County Foundation with support fromPERCthe Bradley Fund for the Environment and the M.J. Murdock Charitable Trust.2048 Analysis drive, Suite A – Bozeman, MT 59718 – www.perc.org