The researchers at the UC Davis Center for Watershed Sciences wrote an insightful blog on “Considerations for Developing An Environmental Water Right in California.” However one passage jumped out at me that has troubling economic implications:
The potential for abuse is particularly troubling when the State is using public funds to buy water, which technically belongs to the people of the state and which the State can already regulate to achieve the same aims.
It’s not helpful to refer to the fiction that the somehow the state can award water rights, on which entities make economic investments based on private uses, and then turn around and try to claim that the state can just take those rights back without any compensation. That’s a foolish perspective that will lead mispricing and misallocation of water use. It is reasonable to assert that the state can claim a right of first refusal on transactions or even that a rights holder can’t withhold sale of a water right to the state, but in either case, the rights holder does receive compensation. The state’s right can easily be interpreted as that of a landlord who has a long term lease agreement with a tenant, and the tenancy agreement can be terminated with compensation to that tenant.
Economics Outside the Cube 
This may be how an economist believes the world should work, but thankfully it is not how California law works. There is no taking or eminent domain when the State acts to reduce water diversions to protect the Public Trust and/or prevent unreasonable use, since these are background principles of state law that implicitly or explicitly condition all water rights in California,
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And my point is that the state coming in to restrict or even take back water rights without compensation creates unnecessary, and even insurmountable, political opposition because those water users have made other investments that are reliant on that water supply. The state should acknowledge that private, and even community through water agencies, investment creates an implicit vested right (essentially prescription which is another legal concept) that should be compensated in some fashion. The “bull in the china shop” approach will just make a viable solution even less likely to succeed. What is de jure may not be de facto given the political balances.
Fortunately there are people at NRDC and other environmental organizations that think along these lines and are looking for successful solutions to these seemingly intractable problems. TNC’s BirdReturns programs is one such type of solution. The Audubon Society is thinking in similar terms. The state’s environmental water bank is a similar type of approach.
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