Highlights

The Sustainable Groundwater Management Act (SGMA) requires local water users to bring their groundwater basins into balance by the 2040s.
Water markets could play a key role in helping communities adapt to SGMA and stave off the worst effects of reduced groundwater pumping.
Good design is key to creating effective and responsible water markets that support low-cost trading and banking while protecting third parties from harm.
Water markets are currently hampered by a range of stumbling blocks, but thoughtful, concerted action can address these challenges and help the state build resilience.

Many of California’s groundwater basins are severely overdrafted

Until recently, groundwater use in most of the state was largely unregulated. Many basins have experienced long-term overdraft—where pumping has regularly exceeded replenishment. This has resulted in a suite of undesirable impacts—including sinking lands, dry wells, degraded water quality, and harm to wetlands and streams.

The Sustainable Groundwater Management Act (SGMA) was enacted in 2014 to remedy this situation. It mandates that local water users bring their groundwater basins into long-term balance by the early 2040s, while addressing the undesirable results of pumping along the way.

SGMA will ultimately bring benefits, including building up groundwater reserves vital for managing droughts. But getting to sustainability will entail costs. In particular, groundwater use will need to decline in many overdrafted basins. This will mean taking some farmland out of production—which can have economic impacts on local and regional communities. Finding ways to manage the transition effectively will be key to success.

Carefully designed water markets could help bring groundwater into balance

Two related market-based tools may prove essential as Californians adapt to the new regime: water trading and water banking.

California has experience with water markets: since the early 1990s, parties have actively traded surface water across much of the state, and groundwater markets have sprung up in some adjudicated basins.

The state also has some of the most sophisticated groundwater banks—dedicated underground water storage—in the world. SGMA offers the possibility of expanding existing water markets and developing new ones to help meet the ambitious goal of bringing groundwater basins into balance.

Market-based approaches offer several advantages over more rigid approaches to managing scarcity, such as across-the-board groundwater cutbacks. Trading can:

Incentivize water users who have rights to more ample supplies and lower-value uses to sell or lease water to those with more limited supplies and higher-value uses—in agriculture, cities and towns, or the environment.
Lessen the costs of temporary shortages during droughts and support long-term shifts in water use patterns.
Help society adapt to the hydrologic realities of both SGMA and the changing climate, which is bringing more volatile precipitation and hotter, more intense droughts.
Facilitate groundwater banking—formal projects that store water underground on behalf of specific parties. This is an important risk management strategy that will likely prove key for both SGMA and climate adaptation.

How can we improve water markets in California?

A combination of aging infrastructure and complex, conflicting regulations is currently hampering the expansion of water banking and water trading. Multiple actors at the local, state, and federal levels can drive reforms to streamline these practices while protecting other parties from harm. (See the table below for a list of reforms and key actors.)

First, good market design is key. Effective and responsible markets include five essential features:

clearly defined, secure property rights;
reliable measurement, reporting, and verification;
hydrologic connections among trading parties;
transparent market information; and
mechanisms for addressing impacts on third parties.

It’s also important to support low-cost trading and banking while protecting third parties from harm. Overpumping can impact both water supply and water quality and cause land subsidence. Surface water transfers and groundwater transfers and banking, if not well-regulated, can have the same impacts. Also, land fallowing can impact neighboring farmland, wildlife, and air quality. A well-designed market should craft mechanisms for addressing impacts where they are significant.

Currently, groundwater sustainability agencies and other actors face several hurdles that make it difficult to fully utilize water markets, including gaps in groundwater governance and infrastructure, and tensions in the approval process.

Swift action to establish and enforce groundwater allocations, avoid or mitigate undesirable effects of pumping, adopt effective and responsible approval strategies, and refine regulations will help the state bring its groundwater basins into balance and improve its resilience for years to come. Most of the recommended changes can be accomplished within existing agency authorities, without new legislation. But leadership—and a willingness to take risks and push boundaries—will be essential to success.

Priority reforms to support effective and responsible water markets

NOTE: Responsible parties are priority actors; others will likely be involved in this work as well.

Authors

About the Authors

Andrew Ayres is a research fellow at the PPIC Water Policy Center. He is an environmental and natural resource economist focused on questions related to the design, development, and effectiveness of legal and economic institutions for managing the environment. His work often involves applied economic modeling and econometric analysis. Previously, he worked in Germany and the United States on projects to inform policy-making related to topics such as climate change, energy, river restoration, and water pricing. He holds a PhD in economics and environmental science from the University of California, Santa Barbara, and a BA in economics from Pomona College.

Ellen Bruno is an assistant cooperative extension specialist in the Department of Agricultural and Resource Economics at UC Berkeley. She conducts research and outreach on economic and policy issues relevant to California’s agriculture and natural resources, with a particular focus on groundwater. She holds a PhD in agricultural and resource economics from UC Davis and a BS in management science from UC San Diego.

Joy Collins is a research associate at the PPIC Water Policy Center. Her research interests include climate, water, and health policy interactions; groundwater management; and social determinants of health. Prior to joining PPIC, she worked in Cape Town, South Africa as a lecturer on climate change, violence, and infectious disease, and as a researcher studying the influence of urbanization on the climate and culture of the Guangdong Province of China. She previously worked in Washington DC as an intern at the Agency for International Development, and as an environmental resilience extern at the Aspen Institute. She holds a master’s degree in public health from the University of Virginia School of Medicine and a BA in global studies with a minor in environmental science from the University of Virginia.

Alvar Escriva-Bou is a senior fellow at the PPIC Water Policy Center. His research explores integrated water, energy, and environmental resources management. Since joining PPIC in 2015, his research has explored the options and consequences of transitioning to groundwater sustainability in the San Joaquin Valley, analyzed California’s water accounting system, studied urban drought resilience, and investigated energy and climate policies related to water use, among others. Previously, he worked as a civil engineer, managing and developing large infrastructure projects for local and regional governments and consulting firms in Spain. He holds a PhD and MS in water and environmental engineering and a BS in civil engineering from the Polytechnic University of Valencia in Spain, as well as an MS in agricultural and resource economics from the University of California, Davis.

Greg Gartrell is an adjunct fellow at the PPIC Water Policy Center. He retired from his position as assistant general manager at the Contra Costa Water District (CCWD) in California, where he managed CCWD’s planning, Delta projects, water resources, and watershed and lands departments. His accomplishments include environmental permitting and engineering design for more than $350 million in projects. He was responsible for developing and implementing a 50-year strategic plan for improving the water supply reliability of CCWD, and he managed CCWD’s recreation and watershed programs. He is the recipient of the Association of California Water Agencies (ACWA) Lifetime Achievement Award, the ACWA Excellence in Water Leadership Award, and the Lorenz Straub Award for his doctoral thesis. He holds a PhD in environmental engineering science from the California Institute of Technology.

Brian Gray is a senior fellow at the PPIC Water Policy Center and professor emeritus at the University of California, Hastings College of the Law in San Francisco. He has published numerous articles on environmental and water resources law and coauthored a variety of PPIC reports, including the 2011 interdisciplinary book on California water policy, Managing California’s Water: From Conflict to Reconciliation. He has argued before the California Supreme Court and the US Court of Appeals in cases involving wild and scenic rivers, water pricing reform, takings, and water rights and environmental quality. He is a recipient of the William Rutter Award for Excellence in Teaching and the UC Hastings Outstanding Professor Award. He holds a JD from the University of California, Berkeley, and a BA in economics from Pomona College.

Ellen Hanak is vice president and director of the PPIC Water Policy Center and a senior fellow at the Public Policy Institute of California, where she holds the Ellen Hanak Chair in Water Policy. Under her leadership, the center has become a critical source of information and guidance for natural resource management in California. She has authored dozens of reports, articles, and books on water policy, including Managing California’s Water. Her research is frequently profiled in the national media, and she participates in briefings, conferences, and interviews throughout the nation and around the world. Her other areas of expertise include climate change and infrastructure finance. Previously, she served as research director at PPIC. Before joining PPIC, she held positions with the French agricultural research system, the President’s Council of Economic Advisers, and the World Bank. She holds a PhD in economics from the University of Maryland.

Gokce Sencan is a research associate at the PPIC Water Policy Center. Her research interests include water markets and climate-water policy interactions. Prior to joining PPIC, she worked on several projects, including water purchasing opportunities for environmental flows from retiring coal-fired power plants and the financial benefits of reducing carbon dioxide emissions through land-use interventions in California. She previously worked as an intergovernmental affairs intern at the United Nations Environment Programme in New York and as a climate change research intern at Istanbul Policy Center. She holds a master’s degree in environmental science and management from the Bren School at the University of California, Santa Barbara, and a BS with a double major in chemical-biological engineering and molecular biology from Koc University, Istanbul.