The above figure shows the extent and major subdivisions of the great Edwards Aquifer of Central Texas. Why is a blog post on the Rule of Capture and Economic Inefficiency preceded by a map of the Edwards? The aquifer is a prominent factor in two of three references cited below.
Recently, an attorney who specializes in environmental law wrote to inquire about an observation I have often made that the Rule of Capture (ROC) is an impediment to the development of efficient water markets in Texas. I wrote back to tell him that my observations were based on the following: (1) Documented sales and leases of southern Edwards Aquifer groundwater rights compared with sales and leases of groundwater in ROC areas of the State, and (2) economic theory. Data supporting Point No. 1 will be developed and posted within a couple of weeks. (I am putting together a PowerPoint presentation on groundwater transactions for the Texas Bar Association's April 2009 Conference on Water Rights. The presentation is intended to illustrate that the development of a robust market for Edwards water rights evolved only after the approval of legislation that made it possible for landowners with property overlying the southern Edwards Aquifer region to be granted transferable permits to groundwater by the Edwards Aquifer Authority. A second components of the presentation will be to demonstrate that market values of Edwards water rights have far outstripped the market values of groundwater transactions in areas of the State where rights to groundwater have not been recognized and assigned.) Point No. 2 (the role of economic theory) can be found in one form or another in a variety of papers, especially those dealing with water economics and water marketing. It is Point No. 2 that is the focus of this post.
In my response to the attorney, I cited a concise summary of problems underlying the ROC, as found in Chapter 9 ("Protecting the Edwards Aquifer: an Efficient and Ecological Alternative," authors - Ben F. Vaughn IV and Peter M. Emerson) of Water Marketing - the Next Generation (eds. Terry L. Anderson and Peter J. Hill; Rowman & Littlefield Publishers, Inc., Lanham, Maryland, 1997). The nine chapters of the book are designed (according to a summary on the back cover) to "demonstrate why antiquated government regulations inadvertently encourage the waste of our most vital resource by preventing the evolution of property rights to water marketing." Antiquated government regulations can mean absolute control by the State or a free-for-all system with no provisions for assigning and enforcing well-defined rights to groundwater and/or surface water. In Chapter 9, Vaughn and Emerson propose a market-based solution, rather than one based on heavy-handed regulation by the State or a continuation of the ROC to the management of one of Texas' most significant aquifers.
The Edwards Aquifer is a major source of water for cities (the largest of which is San Antonio), agriculture, springs, streams, recreation, and unique fauna and flora in Central Texas. Scarcity caused by overuse of the aquifer and drought is a matter of concern to all who rely on the Edwards.
It is the opinion of Vaughn and Emerson that any management system that fails to address the problem of scarcity is inadequate to ensure that water will be available when and where it is most needed. Landowners should be granted quantifiable, secure and transferable rights to groundwater; and the State should encourage marketing as a means of allowing groundwater to "flow" to higher valued end-uses. Regulations that prohibit transboundary transfers of groundwater or that compel landowners to restrict the use of groundwater to support "traditional" uses of water are causes of inefficiency and devaluation. In similar fashion, a system based on the English doctrine of Absolute Ownership (e.g., the ROC) promotes inefficiency and devaluation. With regard to the ROC, Vaughn and Emerson write:
The property right in Texas groundwater is the common law rule of capture. Under this law, a landowner has the right to pump an unlimited quantity of water from any aquifer underlying his land (Todd, 1992). The landowner, however, has no right to the water until it is withdrawn from the aquifer. Furthermore, he has no right to protection against well interference or aquifer depletion by any other user and he has no right to pump water for the purpose of storing it for future use. This rule applies throughout the state, with the exception of aquifers included in groundwater districts and certain protection against damage from subsidence caused by groundwater pumping. Also, in Texas groundwater may be pumped for sale to a third party whose use is not on the overlying tract.
This system works well enough when water is not scarce, but with scarcity and no social or legal limits on water use, a "tragedy of the commons" arises. Economic rent associated with water is dissipated, and overexploitation of the resources results as all pumpers race to exercise their rights. Increased pumping costs caused by a declining water level eventually impose a limit on extraction in a deep aquifer. In a shallow aquifer, however, the problems may be more serious, resulting in permanent depletion of the aquifer, the intrusion of poor quality water, and land subsidence.
The problem is that under the common law rule of capture, the property right lacks the characteristics - the rights to use, exclude, and transfer - needed for efficient allocation of resources. The right to use is secured only by contemporaneous use, but there is no right to exclude other users. Hence, the ability to transfer is constrained by one's ability to capture the good before others do. Under these conditions, a market cannot develop nor will water be used efficiently.
The failure of the ROC to form the basis of an efficient system of groundwater marketing is further explained by Kaiser and Phillips (1998):
Water markets differ from other natural resource commodity markets for a variety of reasons, including the long tradition of subsidized water, the concentration of large amounts of public water held by private entities, the equally long tradition that water must support a wide variety of collective public values and the distribution impacts on parties who are not part of the decision process. Thus, unregulated markets do not exist for water transfers, as transfers are directed and controlled by state regulatory agendas. In reality, water transfers more often resemble diplomatic negotiations than simple commodity transactions.
Water markets develop when a combination of economic, legal, institutional and technical factors converge so that buyers can obtain a more certain, consistent and predictable water supply relative to other options and sellers realize greater net benefits by transferring the water than by keeping it in an existing use. The classic economic rationale of gains from trade motivates most water transfers, however, legal, institutional and technical barriers can vitiate transfers.
Finally, R.C. Griffin cuts to the quick in his discussion of The Instruments of Water Marketing (see Chapter 7 [7.1] of Water Resource Economics - the Analysis of Scarcity, Policy, and Projects with the following:
Water markets are enabled by the full or partial adjudication of natural water resources among agents, with the crucial characteristic of transferability included. As long as individual agents possess private property in natural water, they will be able to exchange water for money or other property. Ideally, these rights are severed from the land on which they are originally used, meaning that water can be exchanged separately from land. Such water rights are necessarily quantified, so that a solid basis is established for monitoring water use and enforcing water rights. Unless enforcement is consistent and accurate, water rights can be circumvented, and the incentive to trade will be injured. People don't buy things that can be readily taken from them or that "can be had for the taking."
To be continued in Post No. 8.
Best Regards,
aquadoc
Southwest Groundwater Consulting, LLC
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