Incremental Water Market Development: The California Water Sector 1985-2004

The paper surveys the incremental development of water markets in California over the past two decades. California water markets differ from others in the western United States in that they facilitate the transfer of large amounts of annual water, but very few permanent water rights. In addition, marketable water is subject to several restrictions to minimize environmental and third party impacts. The data from the developing spot and option water markets suggest that in a situation of fluctuating supplies and changing demands, water markets based on leasing rather than permanent transfer can reconcile the need for water reallocation between uses and sectors. The effects of local controls on water exports, and the growing demand for environmental water, are demonstrated in the paper.