Colorado River deal forever changes the price of water in the West
For the first time in this drought-stricken century, a new price for water in the West has been set – and it’s 25 times higher than what farmers have paid for the last 75 years.
Arizona, Nevada and California recently agreed to reduce their water consumption from the Colorado River by 13% through 2026. The federal government will pay their irrigation districts, Native American tribes and cities $521 for each acre-foot of water they don’t use.
This agreement is the start of the end of agriculture as we know it in the West, but not just agriculture. For every drop of water used, industries – from farms and ranches to data centers and power plants to ski resorts and golf courses – must determine whether it pays more to use the water, or to avoid using it.
And the price of using it will only increase.
Some businesses will become more water-efficient. Some will move. Some will close.
What was the price of water, anyways? It depends on both the source and the use. If water comes from a river or lake, it’s zero. If water comes from an aquifer in the ground, it’s the cost of pumping the water up. And despite the enormous infrastructure required, water delivered from reservoirs behind large dams (as promised by the federal Bureau of Reclamation) has historically cost farmers no more than $20 per acre-foot, which is enough to cover a full acre one foot deep.
This water costs much more to deliver, with the difference subsidized by federal taxpayers. For example, in the Imperial Water District, the destination for 80% of all Colorado River water delivered to California, water for irrigation costs farmers that $20 per acre-foot even though the water is stored (in Lake Mead, behind Hoover Dam) and transported (through the All-American Canal) by mega-projects paid for by federal taxpayers.
In the Westlands Water District of central California, taxpayers subsidize farms at $2,200 per acre. For California farmers who receive water from the Central Valley Project, taxpayers contribute $416 million annually.
With the price signal of water now reset to $521 per acre-foot, the math for water users will change, starting with agriculture. Food generates more than $50 billion annually across the lower Colorado River basin states, and the industry rests on the foundation of $20 water promised by the Bureau of Reclamation.
With this new agreement, every use of water must exceed the value of not using it.
Take the most-grown crop in the Colorado River basin: alfalfa. This grass is exported worldwide and fed to livestock, mostly cows. Alfalfa sells for $230 per ton in California. With 3 acre-feet of water, an acre of alfalfa will yields around 6 tons of product. So, at $20 per acre-foot of water, a farmer would spend $60 in water for $1,380 of alfalfa, leaving plenty of money for labor and equipment and profit. At $521 per acre-foot of water, the farmer pays $3,126 for water alone for that same $1,380 in alfalfa, losing over $1,700 per acre.
By contrast, the farmer could make $3,126 from the federal government for growing nothing and avoiding the water consumption altogether.
The math for most other crops is not much better.
Although the agreement only runs through 2026, water price signals are here to stay. And the price of water – or the value of avoided water use – will only increase. Because of global warming, the flows of the Colorado River will drop by half by 2100, making the current cuts almost seem painless.
Carbon credits set the price for carbon dioxide emissions, with the avoided emission of one ton of carbon dioxide fetching a firm, trusted price. Over the last decade, as this price has started to come into focus, carbon-intensive industries have reexamined their businesses, analyzing if their products or services would remain profitable if they paid the market price for emissions.
The price of a water credit is now set, with the avoided consumption of one acre-foot of water worth $521. Over the next decade, similarly, water-intensive industries will reexamine the water liability of their businesses. For every use of water, they will have to consider what will happen if the price of water doubles, triples or more. For every drop of water used, they will have to weigh whether it is worth using it at all.
The water reckoning is here, and the West will never be the same.
Grayson Zulauf is the CEO of Resonant Link. He holds a PhD in electrical engineering from Stanford University and is a Forbes 30 Under 30 honoree for energy.
This article originally appeared on Palm Springs Desert Sun: Colorado River deal forever changes the price of water in the West
