During some of the SNEP team meetings, we had some lively discussions about the philosophy and practicalities of reinvesting in resources, particularly water. The need to develop new sources of funding for watershed management directed our thoughts toward the economic benefits of water from the Sierra Nevada. The ecosystem reinvestment notion merely suggests that resource users who benefit from natural resources and ecosystem services should provide some financial support for maintaining and restoring (where necessary) the natural processes and lands that provide the resources and services. The concept is readily applied to water and watersheds because of the tremendous benefits to society from water generated in upland catchments. However, there has not been any economic link from the downstream users back to the source areas that produce high-quality water. Unfortunately, our discussions only yielded a few paragraphs in the SNEP reports (e.g., Vol. 1, pp. 55-57, 133, and 169). A poster on this topic was presented at the 1994 Watershed Management Council conference in Ashland.
SNEP's economic assessment (Stewart, 1996) found that water accounted for more than 60 percent of the approximately $2.2 billion worth of commodities and services produced from the Sierra Nevada. Despite this enormous economic value, virtually none of it is reinvested in maintaining or improving the watersheds that produced it. Although water is often described as the most valuable product from forest lands, its generation is both incidental and subsidized. Besides the absence of economic transactions for producing runoff, there is no financial accounting for resources degraded by diversions from natural channels. Those who benefit economically or otherwise from water diversion have paid directly (water and power charges) or indirectly (property taxes) for impoundment and delivery of water, but they have not paid for the water itself or for the act of diversion.
Taxes on water diversions could be an effective and relatively painless means of capturing some of the economic value of water and returning it to the source. Although it would be inappropriate to charge water users for the exercise of their property rights in water, there are legitimate opportunities to tax the act of diversion (which should be broadly understood to encompass impoundment for power production and other purposes as well as direct diversion). Precedents for a tax on water diversion exist in the form of severance or yield taxes for other natural resources such as minerals and timber. Recent imposition of a surcharge on all water and power produced by the federal Central Valley Project to finance restoration of some of the project's environmental effects provides a recent example of a fee attached to developed water.
There are two basic philosophical approaches to taxing water to finance conservation and restoration of watersheds: those who damage resources should pay some restitution (i.e., a pollution tax) and those who benefit from high quality water should pay to keep it that way (i.e., a use tax). These approaches could be combined as a diversion tax that generates funding for regional watershed restoration on the basis of removing water from a natural system. Although there could some geographic disconnections between where water was diverted and taxed and where restoration activities were funded, such a program could have great benefits for improving stream and watershed conditions throughout the Sierra Nevada.
Related references:
Allen, J. 1992. Liquid assets: The potential for water use fees. unpublished paper prepared for the California Policy Seminar and Senate Office of Research, Sacramento.
Kattelmann, R. and H. Dunning. 1996. Diversion taxes on water to finance watershed management. in: McDonnell, J. J., J. B. Stirling, L. R. Neville, and D. J. Leopold (eds) Watershed Restoration Management: Physical, Chemical, and Biological Considerations. American Water Resources Association, Herndon, VA, pp. 237-244.
Stewart, W. 1996. Economic assessment of the ecosystem. SNEP Vol. 3, chapter 23, pp. 973-1063.
