As California’s farmers adjust to restrictions on groundwater pumping under the Sustainable Groundwater Management Act (SGMA), tools to foster adaptation can be a big help. Groundwater markets are one promising tool, but how can groundwater sustainability agencies (GSAs) design groundwater markets to protect those who might be affected by trading?
Why markets?
A well-designed market gives participants a way to navigate uncertainty. In California, surface water supplies can vary significantly from year to year. It can make a big difference to a grower’s bottom line if they’re able to trade for additional water during the growing season. And for growers who manage their water carefully, selling extra water can provide extra revenue.
To be effective, however, markets must be transparent, low cost, and easy to use. And along with simplicity, clear rules must protect other water users, rural communities, and the environment. But there are downsides to trading that must be managed, including the effects of concentrated groundwater pumping and impacts to the local economy.
Preventing negative effects of groundwater pumping
There are multiple ways to trade groundwater. The first way, which is rarely used, involves pumping groundwater out of the basin—but nearly all California basins restrict the ability to trade groundwater outside of the basin. Second, a grower may trade surface water out of the basin and replace it with groundwater pumping; this was a serious concern in the pre-SGMA era when there were no regulations on groundwater use. Third, groundwater can be traded within the basin.
The biggest problems occur when trading results in too much groundwater pumping in one area. This could exacerbate the very issues SGMA was designed to address, including subsidence (sinking lands), dry wells, and saltwater intrusion. GSAs can establish “special management areas” where trading is still allowed, but additional pumping is prohibited. Users within the special management area can lease or sell pumping rights outside the area, shifting pumping from a high-risk area to a low-risk one and diminishing the negative effects of overpumping.
This same approach can protect domestic wells and disadvantaged communities by creating buffer zones where no net increase in pumping is allowed. Similar methods can also safeguard areas where pumping might threaten ecosystems that depend on groundwater. Because groundwater impacts are localized, smart zone-based rules can make markets safer and more equitable.
Protecting the local economy
Some fear that water trading could harm local economies. These concerns are understandable: power imbalances exist within communities, and groundwater governance is a work in progress. Several growers in the same area, for instance, may choose to sell water and fallow land, threatening the jobs of both farmworkers and local farm-related businesses.
A new water market can expose these issues, but the solution is not necessarily to avoid markets altogether. Rather, where there is interest in exploring markets, GSAs should engage in careful market design and a slow rollout, working closely with the local community to address issues as they arise.
In cases where jobs are threatened, market rules could create a compensation fund with revenue raised from fees on those selling the water. Similarly, an investment fund could support the local economy through projects like water conservation programs, irrigation upgrades, or community recharge infrastructure.
Making markets work for everyone
The flexible, decentralized nature of markets makes them powerful, but they can be unpredictable. Groundwater markets need clear rules that support SGMA, prevent overpumping, and reduce local economic impacts. Good market design requires careful thought, planning, and communication with farmers and the broader community.
In addition, GSAs and market administrators should start small, building out and stress-testing the system (through simulations or other means) first and implementing a set of rules to prevent bad outcomes.
In upcoming posts, we’ll hear from farmers and people working to implement water markets in California and beyond. We’ll hear what’s working, what the challenges are, and how these efforts are evolving.
