Trading water: Can water shares help save California’s aquifers?

A farmer thinks this is the solution to depleting water levels.
Converting aquifers into valuable assets aims to encourage people to use less water. Image: Shutterstock

California is by far the United States’ most populous state, as well as its largest agricultural producer. Increasingly, it is also one of the country’s most parched places.

But Edgar Terry, a fourth-generation farmer in Ventura County, just outside Los Angeles, thinks he has a key to reversing worsening water stress: establishing tradeable rights to shares of fast-depleting groundwater aquifers.

Doing so would turn aquifer water into a more valuable asset that could be traded on a market, similar to “cap-and-trade” systems that have been set up to regulate air pollution, conserve fisheries and manage other such common resources.

Such a system would put a price on what has essentially been a free resource, and create a powerful incentive to use it more sparingly, backers say.

“If you can buy and sell stocks, why not trade water? It’s an asset, we can’t live without it, and I can’t grow without it,” Terry told the Thomson Reuters Foundation by phone.

“When you assign something a value, you tend to take care of it much more,” he said.

An incipient local initiative spurred by Terry’s idea — the Fox Canyon groundwater market – is set to become the first such system created under landmark state water legislation passed in 2014.

It is set to start formally trading next month.

At first the market will be open only to farmers within a single groundwater basin, but eventually it could extend to towns and cities and throughout the three areas that drain into the Fox Canyon aquifer.

Under the market, participants will receive long-term shares to draw from the aquifer based on previous pumping needs and monitored by cutting-edge meters that gauge their use in almost real-time.

Going underground

US water regulations have long focused almost exclusively on surface water – rivers, streams and lakes – rather than groundwater water. Hidden out of view, groundwater has tended to flow under the public radar as well, water experts said.

But as pressures on water supplies from climate change and rapid urbanisation grow, along with data showing that groundwater aquifers are quickly being depleted across the globe, that has begun to change.

The Fox Canyon project is the tip of a burgeoning public discussion in California, after the state in 2014 mandated that water districts be sustainable by 2040.

Initial plans to ensure that sustainability are due by January.

Previously the state was one of the most unregulated in the parched US West on groundwater, said Karina Schoengold, an associate professor of agricultural economics at the University of Nebraska.

While water markets are just one potential strategy for conservation, they are receiving major interest across the state — and that in turn is drawing attention nationally, she said.

“It’s a big change that could really drive changes in how we think about managing groundwater,” she said.

Effective groundwater markets are complicated to set up, and Schoengold estimated that fewer than 10 “true” systems exist in the United States or abroad.

But technological advances and other changes mean they are increasingly feasible, and “are going to becoming really important in the future”, she said.

One primary obstacle remains scepticism of the fairness of such systems, particularly among agricultural producers keen not to allow outside control over their ability to grow a crop.

“We have to show that this is something that has benefits for the people who are using groundwater. And we’re not at that point everywhere,” she said.

Higher property value

Economists in California feel they now have new evidence for one important benefit – higher land values.

In a working paper published in September, economists with the University of California’s Bren School of Environmental Science and Management found that establishing groundwater markets appears to have major positive effect on property values.

Three researchers looked at a groundwater market set up in the 1990s in the state’s Mojave Desert, one of the driest places on the continent and, with its intensive agriculture, “a poster child of inefficient water use”, said co-author Kyle Meng.

By 1980, a fifth of the area’s aquifer had been depleted, the paper noted.

In the following decade courts introduced an early version of a water trading market in which users could trade pumping rights on a yearly basis, though without the formal, anonymous exchange of the Fox Canyon project.

“Not only did the water table stabilize, but it had enormous benefits in terms of land value,” Meng said.

Land values were 280% higher inside the area with groundwater property rights than outside, the study found.

That’s important, Meng and his co-authors say, because the value of agricultural land will go down if water rights are restricted — but it appears that can be offset as farmers sell water they’re not using to other farmers or even thirsty cities.

Looking at the larger economic gains from trading water “can bring holdouts on board,” said Andrew Ayres, another co-author of the study now with the Public Policy Institute of California.

In the Mojave, he said, a group of farmers who initially challenged the court decision later voluntarily joined the effort “when they realized what these tradable pumping allocations were going to be worth on the market”.

Fox canyon experiment 

In Ventura County, the Fox Canyon project may prove a model for California – and beyond.

In the 1980s, the area was designated a special agricultural zone, prompting the creation of a groundwater management agency,said Matthew Fienup, executive director of the Center for Economic Research and Forecasting​​​ at California Lutheran University.

Later, water metering and an allocation system were set up, he said.

Today, Ventura County has some of the most expensive agricultural land in the country — all of it overwhelmingly dependent on groundwater, particularly during the droughts the state has increasingly struggled with, Fienup said.

The new state water sustainability law will require groundwater pumping in the area to fall by close to half — translating into potential losses of hundreds of millions of dollars for farmers, he said.

“Everyone understands that with the cuts coming to groundwater extraction in California, water users are going to need markets in order to get by,” he said.

To find a solution, he has been convening farmers — including Terry, who also works with him at the university – as well as representatives of cities, environmental groups and other organizations to create the new market.

Around 300 participating farms now have the most advanced groundwater monitoring anywhere in the United States, Fienup said, and testing on an electronic trading system began in July.

The Nature Conservancy, a global conservation group and local landowner that also leases land to farmers, participated in the process, in part out of interest in restoring groundwater-dependent wetlands.

The market does not reserve water shares for nature, but it will be open to third parties such as environmental users, according to a prospectus.

Camarillo, a town of about 70 000 in Ventura County, gets 40% of its water from groundwater and the rest it has to import from area water agencies, said Lucia M. McGovern, deputy public works director.

During the recent drought, the city was required to cut its water use by around 30%.

She hopes that farmers able to sell excess water under the Fox Canyon pilot water trading effort could help find a “permanent solution” for the city.

“We are excited because it’s an additional tool and resource we could tap into if we’re looking at demand, and availability of water is pretty limited.”


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