Should We Legislate or Ban Water Futures? A Closer Look.

  • Posted on 7 March 2022
  • By Bill Martin - Co-Chair, Sierra Club California Water Committee
About a year ago, I reported on a new water futures market on the Chicago Mercantile Exchange. The market is based on an index, which is based on the sales  transactions of actual water in CA, including statewide and in 5 sub-basins in the  Southern CA area. The index price is reset weekly, and that reset influences the prices of the water futures. No actual water changes hands; these futures contracts are settled only in dollars.  
As of 2/24/22, index price rose to $790 ACF from $529 ACF. It’s been steadily rising for the past year. This is a one-year increase of almost 50%. Note that this price increase in the index indicates that the actual price of water in the 5 areas the index tracks have gone up. This is very likely the result of the current drought. I strongly doubt this price would have increased if we were having a wet winter, or even what used to be a ‘normal’ winter.  
Partially in response to this new water futures trading, Senator Elizabeth Warren of  MA and Congressman Ro Khanna of CA have jointly proposed legislation banning the trading of water futures. The bill itself is quite short and simple: it just adds water futures to a list of items which are currently banned from futures markets in the US. Therefore, the buying and selling of water futures would be banned,but not the buying and selling of actual water. This legislation was just recently proposed. The Sierra Club has not yet taken an official position on this bill.  
I spoke about this issue at the National Water Sentinels meeting in Feb. 2022. I understood the Water Sentinels group to be strongly in favor of this legislation, and desirous of our CA Water Committee to get on board in support.  
Some of you may be aware of the controversy regarding Nestle’s previous ownership of water rights in the San Bernardino mountains. A website called “Who, What, Why” published an article about this issue in June 2021. Nestle, faced with a lot of opposition to its using as much water as it had been doing for pennies on the dollar, sold its rights to a private equity  firm. According to the article, the water rights sold go all the way back to 1865.  
The article also mentions a water bottle brand called Poland Springs, which taps an aquifer in rural Maine. A book was published, which I read, about the fight local citizens went through to ensure that the aquifer remained a viable source of water for the community. I think these events show that the water futures issue here in CA is only one part of the bigger picture. 
So, while we could say that the CA water futures trading and the sale of water rights are related, at this point they are not very close cousins. Banning the sale of water futures without regulating the buying and selling of actual water is confusing to me. One way to think about this is to think about symptoms vs. causes. I would argue that the CA water futures are a symptom, not a cause. They arose because of a perceived  need by system participants. To be truly effective, we need to analyze the causes of those needs, addressing those in legislation and regulation.  
One possible contributing cause is the subsidizing of corporate agribusiness at the expense of sustainable agriculture. In my view, reforming the agricultural system in the US would have a much greater positive effect on the environment than banning the sales of water rights and futures.  
As a committee, we should probably support the Warren/Khanna bill, but I for one would suggest we train our sights on something that could have a positive environmental impact now. Example: two professors involved in a proposal to modernize water rights were interviewed by PPIC and the interview was published on Monday 2/28/22. (The PPIC link has an embedded link to the Planning & Conservation League Foundation’s Water Rights Proposal). The group who wrote the proposal say they’ve  provided their proposals to the CA legislature and the governor. I’d consider our current system of water rights, both in CA and nationally, to also be a cause of this problem that could be addressed both in legislation and in regulation. Maybe we should see about supporting this legislation, as well.  
A committee member asks: ‘to what degree is water future trading harmful  to the environment?” Or to phrase it somewhat differently, to what degree will banning water futures trading be beneficial to the environment?  
In my view, working to change our system of water rights has the potential of a greater impact on CA’s environment than working to ban the trading in water futures. 

Bill Martin is Co-Chair of the Sierra Club California Water Committee 

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We could "...change our system of water rights" AND ban trading in water futures. That too is an option worth investigating. Note that the CME trading program is specifically tied to California water, not - for example - to that of Illinois.

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