Richael Young here, senior economist at ERA Economics. I’ve learned a lot about groundwater allocations over the past decade, from studying them in grad school to developing software to help growers manage their real allocations. I got the opportunity to present some of these insights at the 2022 Western Groundwater Congress. That talk has been adapted into this blog.
Groundwater allocations are among my favorite topics to nerd out on. Why? Because I believe allocations are among the most important policies that groundwater agencies develop. What’s more, the way in which they’re developed can have profound implications on incentives (good or bad!) and financial outcomes for water users.
Many people think setting allocations is as simple as taking the total water available, such as a groundwater basin’s “sustainable yield,” and dividing it by the total acreage. It’s a lot more complicated than that.
That’s good news, because the tools inside our “Allocation Toolbox” help us provide more flexibility, over space and time, in a way that helps meet water management objectives while minimizing economic impacts.
Goal-Based Groundwater Allocation Design
The best way to start with developing a groundwater allocation is to be explicit about why it’s being developed, and what goals it should help achieve. Those developing allocations should ask themselves, “What goals are important for a groundwater allocation?” These could include compliance with the law, fairness, flexibility, and more.
Now let’s think about the inverse of that. “What outcomes should an allocation prevent or avoid?” This helps us think about what could go wrong, including the ripple effects of a new allocation. These might include lawsuits, drying up of domestic wells, subsidence, and more.
What we’re doing here is starting at the end. We’re imagining our best- and worst-case scenarios and working backwards to design an allocation to achieve our best-case scenario and avoid our worst-case scenario. Now, every groundwater agency is unique, so there isn’t a one-size fits all approach or a single list of goals or preventable outcomes. These need to be workshopped with local stakeholders.
Toolbox for Groundwater Allocations
Following a goal-setting exercise, agencies will be ready to customize building an allocation that best suits their agency and stakeholder needs. There are many tools available for allocation design, which are modular, meaning that they can be combined to give a unique allocation design. Understanding how the different tools interact together is important, particularly within the context of the local agency. For example, if not enough data is available about the total sustainable yield, it’s possible that the initial allocation is higher than historical pumping. If an agency also allows a carryover policy, water users are not only unconstrained by the allocation, they can carry over water that they would not have pumped anyway. As an agency ratchets down the allocation, water users may simply dip into their carryover, and/or transfer it if allowed, and ultimately increase consumptive use. I can’t state this enough: allocation design must be done thoughtfully, and with a strong understanding of the physical and economic risks. These risks will be region-specific, as they depend on the unique combination of the hydrologic and economic characteristics.
Note that each of these “tools” is its own toolbox, which is to say that there are many nuanced ways each of these can be developed. Think of each “tool” as being customizable and multidimensional. For example, even a simple single-year allocation can be developed in different ways, such as based on historical use (an appropriative approach), through a more even distribution across land (a correlative approach), a blend of those two approaches, or more.
Finally, our Allocation Toolbox:
- Single-year allocations are a limit on how much a user can pump in a single year, e.g., 12 inches per year (one acre-foot per irrigated acre). Single-year allocations are very common across the west. For groundwater, this can be especially useful for regions with an acute pumping risk, such as subsidence or seawater intrusion. Surface water rights are almost always on a single-year allocation. For groundwater, Arizona Active Management Areas, and groundwater rights across Kansas, New Mexico, and Idaho are all based on single-year allocations.
- Multi-year allocations are a multi-year limit on pumping. Perhaps instead of 12 inches per year, users would get 36 inches per 3 years or 60 inches per 5 years. While each alternative seems the same on face value, they’re quite different. The multi-year provision gives a large amount of inter-annual flexibility to pump more in dry years and less in wet years–especially if users have access to surface water. If a region is not concerned by pumping impacts in any single year, they might consider a multi-year allocation. The downside to a multi-year allocation is that users could potentially pump a lot of water in a dry year. If that’s a concern, an agency might want to adopt a blended allocation, in which users are subject to both a single-year allocation and a multi-year allocation, to reap the benefits of each. Multi-year allocations are less common but used a fair amount in the High Plains, such as the North Platte and South Platte Natural Resources Districts in Nebraska, the Local Enhanced Management Areas of Groundwater Management District #4 in Kansas, and more.
- Carryover, sometimes called banking, allows the user to take some portion or all of their unused allocation to the following allocation period. This allows a user inter-annual flexibility and creates incentives to conserve. Carryover is a common provision in allocation policy, such as in the Upper Republican Natural Resources District and the Mid-Kaweah GSA.
- Borrowing is the reverse of carryover, letting users dip into the following year’s allocation, perhaps with some ratioed penalty (e.g., for every 1 inch of overage, 1.5 inches are deducted from the following year).
- Ramp down, or glide path, slowly ratchets down the allocation over time to a more sustainable level. This is beneficial if a region has higher historical water use and/or the agency recognizes the capital investments that users have made in the land. A ramp down gives users time to divest and adjust to a lower allocation. One example of a ramp down is in Mojave Basin of California.
- Pooling allows users to move allocation around within their farming operation. This policy can go by many names; for example, in Madera County GSA, this is called a “Farm Unit”. Pooling is also common in Nebraska, Kansas, and elsewhere.
- Transferability, a.k.a. “water markets” or “water trading”, allows users to move allocation to or from others’ farm operations. The ability to transfer allocation may create financial incentives to conserve and move water to higher-value uses. Transferability exists in Nebraska, Kansas, the Texas Edwards Aquifer, the Mojave and Chino Basins of California, and more. Transfers range from informal to formal processes.
- Earning credits, perhaps through a recharge program, incentivizes participation in projects.
- Monitoring and enforcement encompass a large number of tools that affect how well the allocation is managed and how seriously the allocation is viewed by users. Measurement quantifies pumping, which is important not only for the agency, but also for growers who need to manage their allocations. Enforcement, on the other hand, addresses compliance. Enforcement might include a mix of allowances and penalties. For example, bypassing a meter or going over an allocation can result in penalty fees, being turned off for one or more years, or even losing the water right and allocation altogether.
- Interactions with other Projects and Management Actions (PMAs). Finally, it’s important to consider how the allocation policy interacts with PMAs. They can be synergistic, e.g., development of an on-farm recharge project. Alternatively, they can be at odds with one another, e.g., prematurely developing a groundwater market before a meaningful allocation is in place.
The examples above focus on agricultural applications, but can be applied to non-agricultural settings as well.
Economics of Allocation Design
Allocations are often informed by physical sciences alone–but what can we learn from considering the economics of allocations? That is, how will the affected users and businesses respond to different allocation designs? I may be biased, but this question is critical. Allocation design creates incentives (good or bad!) and impacts financial outcomes. These incentives and impacts may work against long-term management objectives. For example, a multi-year allocation can provide flexibility (a good outcome), but result in acute pumping impacts such as subsidence (a bad outcome). Carryover or transfers can create incentives to save water (a good outcome), but may result in increases in consumptive use if the allocation is improperly set (a bad outcome).
These questions of allocation design, monitoring and enforcement, and project interactions have strong connections to economics. Ultimately, these relationships and outcomes will be region-specific depending on the combination of hydrologic and economic characteristics, as well as the projects under consideration. Economic modeling can help to answer some of the questions about how users and businesses will respond to an allocation. Using field-level crop information, commodities prices, and hydrologic interactions, economic models can test alternative allocation designs to evaluate outcomes and inform decisions. Leveraging physical sciences and economics together can inform the design of the allocation in a way that minimizes costs to users while meeting groundwater management objectives.
Drop me a line if you want to talk more about allocation design for your area. Our team at ERA Economics leverages field-level data and economic modeling to assist water agency staff, technical consultants, and water users for developing groundwater allocations.