[eru]

Why do they even need cap-and-trade? That would at most be a second best.

Just make water rights fully tradeable.

Of course, you might also want to remove grandfathered water rights. Good luck getting that past the lobbyists.

But even with the existing silly initial distribution of water rights, making them fully tradeable would increase efficiency:

The almond farmer would still get lots of water, but at least he'd turn into a former almond former and just sell his water on the market to someone with a better use.