Covid Pandemic Economic Recovery Initiative

By Russ Freeman, PE Retired

Special to The Digest

Governments at all levels will face a double-edged economic recovery dilemma driven by business closures and job losses: (1) loss of income, sales and property taxes; and (2) a significant increase in demand for services such as food, shelter, and healthcare. One possible answer lies in a rebranding of what have long been valued as free natural resources:

• Land – given away to help populate the western United States;
• Resources – made available by grant to assist growth and development;
• Water – provided upon “appropriation” or by granting of use-rights; and
• Assimilative/transformation capacity of land, air, and water.

For the most part, these policies persist today. But, as Kenneth Boulding observed in his monograph, “The Economics of the Coming Spaceship Earth”, published in 1966 (an excerpt):

Economists have failed to come to grips with consequences of transition from the open to a closed earth. An open system implies a structure maintained in throughput from inputs to outputs. In a closed system, the outputs of all parts of the system are linked to the inputs of other parts. The closed earth of the future requires economic principles which are somewhat different from those of the open earth of the past. — The earth has become a single spaceship, without unlimited reservoirs of anything, either for extraction or for pollution, and in which, therefore, man must find his place in a cyclical ecological system which is capable of continuous reproduction of material form – even though it cannot escape having inputs of energy.

The Author worked with the California Air Resources Board (CARB) and the Governor’s Office in the 1970’s to establish an early example of such a transformation, the first Emissions Offset Program. Though widely discussed, and critiqued, that program is not well understood. It was based on established rules governing property law, to ensure that any investment in an “offset” would be tradable and accepted without question under offset program rules.

The bottom line, however, was an intent to make offsets tradable as if they were a real property. The policy encouraged participation by the private sector through a market-based incentive. The Governor’s office even created an offset bank to help early applicants get funding for creation of “offset assets”. From this early beginning, the State has evolved this program, first to what is known as “cap and trade, and then by addition of a Carbon Capture Initiative (CCI). CCI involves capturing a portion of the upside from trades in off-sets by investing the proceeds in carbon reduction through modification or adaption of Sate run programs.

According to the Annual Cap and Trade report to the legislature (p.2), in pursuing and evolving this initiative, the California Climate Investments program extends its reach by securing support from federal, state, local, or private sources. Cumulatively, $5.3 billion in implemented Greenhouse Gas Reduction Fund (GGRF) capital has leveraged an additional $21.7 billion from other sources, not including leveraged support for the State’s High-Speed Rail project. The report also notes that sale of allowance-options has raised $12.5 billion in capital for the GGRF, and more than 20 state agencies are involved in some sixty-eight different climate related programs.

The foregoing illustrates the potential of market-based approaches to managing scarce resources. The question is whether there are other potential opportunities for capturing additional value quickly to assist in funding economic recovery from the pandemic while also edging the economy toward sustainability.

Two examples:

Expanding Emissions trading to a Carbon Cap and Trade Market:

California has begun moving toward carbon balance with the CCI initiative. This demonstrates one pathway to a Carbon economy based on repurposing carbon already in the natural carbon cycle. Such repurposing is an alternative to mining new fossil carbon and landfilling wastes, and thus represents on example of the essential transformation prescribed by Kenneth Boulding.

Water Bank enabled marketing of water presently governed by use rights:

This is another example on which the author worked with State and Federal interests during the late 1960s. It is an example of an early offset program for water. The challenge was establishment of water quality standards for mineral ions, collectively known as salinity. In this case, the author’s focus was the challenged with setting such standards for the seven that share in water from the Colorado River system. A commonly understood conflict was that many beneficial uses of water entail removal in a way that leaves some or all salinity behind. That causes degradation of water downstream from the point of such use. This applies both to trans basin diversions of water from headwaters areas, evaporation from storage, or irrigation and cooling which involve return flows required to maintain salt-balance. The negotiated solution was for each of the seven basin-states to adopt non-degradation policies in their water standards packages. In return, federal interests would delay establishment of salinity standards while also initiating a program for removal of salinity in parallel with planed water development.

Adoption of non-degradation has since become universal. However, there has been no parallel demonstration of value from this initiative. This illustrates an important factor which is key to success. Historically, land granted under the various policies from land grants to homesteads and minerals claims, included eventual transfer of land ownership. This has seen land ownership become one of the principal factors separating the U. S. from other countries of the world. The Californian emissions offset program had a similar basis.

However, consider Colorado as an example of western water ownership. Under existing rules, the state maintains ownership and grants “use-rights”. If such a use ends, the right expires. “State” water becomes freely available for appropriation by others. Savings from conservation are treated the same way. This means that if a rights-holder were to proposes an alternative, there would be no avenue for that party to participate in any related value-increase. However, there would be every reason to expect that such a transformation would involve a significant uncompensated cost increase as well as likely loss of any savings from their use-based-right. So, rights-holders can seldom be convinced to consider either self-improvement , or a value gain from sale, rental or leasing of water they have a right to use. There are other complications which also hinder such value-added exchanges.

In one case within the State, the federal Colorado Big Thomson Project, water is held in project interests and such interests can be traded within a local service area. Sales of such interests does occur, and value thereby established is currently in the range of $37,000 per acre foot. This may be a bit high as there is a significant demand and an extremely limited supply and a there is a buyer-preference for the certainty of outright ownership. However, free market prices should be in that value range, as a free market would also open other avenues to high value uses.

When Exxon was proposing to bring a $2 billion oil shale development program to the State, the author worked with local interests, the State and Colorado State University to arrange a limited-market deal to supply water for the Exxon project. Through this deal, Exxon would have paid enough to create sufficient water conservation from near-by agricultural users to more than meet the needs of their proposed development. This strategy was practical due to proximity which simplified the process. However, either State legislative or water court approval would have been needed. We expected little difficulty with that, as the proposal was popular – providing a way to preserve local agriculture with some upside to irrigators while also allowing significant economic growth. Unfortunately, that program went away when Exxon suddenly cancelled the Colorado oil shale project. However, with the Big Thompson experience, these cases demonstrated what transition to a market-based economy could unleash.

Together, such experiences demonstrate that there is significant potential to be realized from even a limited market-based approach to water management.

Conclusions and Recommendations

State and local governments in Western States should consider environmental market initiatives as a means of creating value to underpin economic recovery and to transition toward a sustainable closed-earth economic model. The suggested model for a Colorado Water Bank is to emulate the California emissions-offset bank. Water rights could be exchange with State-run bank for bank shares, with such shares being tradable like real property. The State could capture a transaction cost like the emission offset. Such an exchange would allow bank shares to quickly replace the body of water rights, and permit both the existing holders and the State to gain from a market valuation. Such transfers would need to be authorized by legislation establishing the bank.

Important outcomes from a property-based approach would be:

1. Market value would be established by ingenuity of the private sector, and not by decisions of government institutions which necessarily favor stability over innovation;
2. Financial markets would provide capital to support transactions; and
3. The water market would see an immediate, if somewhat discounted overall valuation with overall value then rising as understanding of the impeding “closed economy” materialized.

This article was written by Russ Freeman, PE Retired. He can be reached via email at [email protected] or phone at 970 946 6615.