Folks in Colorado’s San Luis Valley are engaged in a bold experiment in western water management – charging farmers for the water they use. Jerd Smith explains:

A new rule approved by the area’s largest irrigation district, known as Subdistrict 1, and the Alamosa-based Rio Grande Water Conservation District, sets fees charged to pump water from a severely depleted underground aquifer at $500 an acre-foot, up from $150 an acre foot. The new program could begin as early as 2026 if the fees survive a court challenge.

The challenge in the valley is that, with climate change inexorably chomping at the Rio Grande, and the groundwater used to replace the river’s dwindling irrigation supplies, there simply isn’t enough water to keep farming all the acreage they’ve got up there.

The valley is operating under the same two constraints that we see up and down the river – less water flowing in, and requirements established in the Rio Grande Compact to pass some of what does come in to folks downstream – Colorado can’t use it all, but must pass some water along to water users in central New Mexico. Those of us in central New Mexico’s “Middle Rio Grande” (the stretch from Cochiti through Albuquerque to Socorro) get to use some, but must pass some of on to farmers in Southern New Mexico. Under the deal now pending before the U.S. Supreme Court, the southern New Mexican’s (the Elephant Butte Irrigation District and Las Cruces area) must then pass some water across the border to people in Texas and Mexico.

Paying to Reduce Use: Private v. Public Goods

In each of those stretches – Colorado, central New Mexico, and southern New Mexico – we face the challenge of reducing use in order to meet downstream obligations.

In New Mexico, our approach to problems like this has been to treat the water as a private good, and pay its users to not use the water. This year, for example, a pipeline of money from the federal government, through the state, to our local water agency, the Middle Rio Grande Conservancy District, is paying irrigators $700 an acre to not irrigate.

The approach in the San Luis Valley is different. There, farmers who want to pump groundwater (recognizing that groundwater and surface water are an interconnected part of a single system, and that as river flow declines farmers have been pumping groundwater to replace it) have to pay for it. If you want to pump more, you have to pay more. And as it gets scarcer, the price needs to go up.

The legal terminology involving the notion of property rights here is tricky, but as a practical matter this suggests two very different approaches. In New Mexico, we are treating the water as the irrigators property, and paying them to forego its use. In Colorado, they’re treating it as public property, and requiring them to pay if they want to use it.

The Coasian Solution

Students of the Berrens-Fleck Lab will recognize this as a version of the classic problem of assigning the property right, as laid out by Ronald Coase in his classic 1960 paper The Problem of Social Cost. Overuse of water in a climate change-constrained system is a classic “externality” – a burden pushed off onto others, rather than the people who get to benefit from the use of water.

Coase’s answer – “assign the property right!” – has made his paper one of the most-cited papers in the history of papers, and won him a Nobel prize. Coase’s argument is that by assigning the property right, and starting from that point to figure out who pays and how much to solve the problem, we can converge on solutions. You can either make the people being harmed pay to stop the harm, or the people causing the harm pay to stop the harm.

We can, for example, require the factory polluting our river pay the cost of installing pollution control equipment. Or we can make the folks downstream, or the community as a whole, pay. Either way will work. The question of which approach we take is an ethical and political question.

Colorado has chosen (or at least is trying to chose – this’ll end up in court) one approach. New Mexico has chosen another.

Cartoon Coase

This is a cartoon of Coase’s argument. In the paper (which is a terrific read) he’s making a more nuanced argument involving transaction costs. In both the New Mexico and Colorado cases, the cost of setting up the payment system makes actually carrying out the policies we need super hard. But the cartoon helps frame our approach to western water management challenges more broadly.

This image is fake. There also is no Large Container Ships Full of Money Act. I made that up too. It’s really the “Build Inflation Better Act” or something, I can never get that right.

The Colorado example – charge more to use water! – is rare. In the Lower Colorado River right now, we’re paying farmers, through their agricultural districts, giant container ships full of money to reduce their use – the New Mexico approach. We’re treating the water as their property, and paying them not to use it. This is an ethical and political (and possible legal?) choice.

But the key difference between the New Mexico/Lower Colorado approach and the classic Coasian cartoon is who’s doing the paying. In both cases, at least for now, we’re using Other People’s Money (OPM), via the recently passed Large Container Ships Full of Money Act (LCSFMA). Those of us in the West have somehow worked a racket where folks in Maine and Georgia and elsewhere are paying to bail us out of our mess. (To be fair, I’m sure we’re bailing them out in some way too.)

The processes by which we have to figure out how to move all this money and water around – to pay people to not use water, or to charge them for the water they use – are a great example of the power of the deeper insights in Coase’s 1960 paper. Working out the ways things don’t match up to Cartoon Coase is where the real value of the intellectual framework is found.

Sources and Methods

Two huge thanks. First, to Daniel Rothberg, whose Western Water Notes alerted me to the issue. And to Jerd Smith and the Colorado Sun, for supporting and publishing the great water journalism we all need to understand these issues. If you can, I’d encourage you to contribute to one or the other or both, to support the fundamental underlying knowledge base we all need to move forward on climate change and western water issues.