Groundwater is an interesting concept from both a legal and economic perspective. Scientifically, it is an extension of the water cycle. However, groundwater has long been the safety net of major agricultural economies. With less visibility than surface water, it went largely ignored for decades as the scarce and valuable resource that it is.
Ignorance is not bliss. In California, groundwater pumping went largely unregulated until 2020, when the landmark Sustainable Groundwater Management Act (SGMA) to effect for the critically overdrafted groundwater basins. The Overdrafted basins were designated as such due to decades of over pumping resulting in high risks of aquifer collapse, subsidence, and permanent damage to a vital resource.
While it is critical that California take groundwater sustainably seriously, SGMA is largely a supply side management club that doesn’t focus on the remaining demand from large municipalities like Los Angelas, or the 500 billion dollar ag industry in the Central Valley. Should these important pieces of California, and the United States, economy shrink their economic contributions because they are stuck without water?
There is a solution: groundwater markets. Groundwater markets are in the category of flexible water management options, which allow for water managers and water users to adapt to changes in the environment and regulatory arena without suffering the brunt of extreme events like drought, or policy that lacks data and understanding of the implications of strict rules around water transfers. By allowing for adaptation, governments can let innovation from private, non-profit, and even their own agencies surface to implementation.
What is a groundwater market?
A groundwater market is like many markets out there that you interact everyday. Imagine a Facebook Marketplace or Craigslist landing page. People come to these sites as either buyers or sellers. Some need something, others need to get rid of something. Simply a market provides a mechanism for exchange.
Groundwater markets are not too different. They are a place where those with water are looking to sell that water to those that need it. What makes groundwater markets complex and different, is that the groundwater is difficult to perceive until extracted and the extraction of groundwater has a financial and environmental cost. Add a patchwork of rules and ambiguities, and you have market, but one with high friction.
To facilitate transactions with a resource that is difficult tor perceive and move, most markets operate with the concept of groundwater credits. Credits allow someone to pump more from their well, but the movement of groundwater does not actually occur. The groundwater credits are then priced based on the market for them. A similar program for air pollution, cap and trade, utilizes a similar concept of credits, pricing, and trading of credits.
Why flexible water management tools like groundwater markets are necessary.
Water management is a precarious endeavor. The weather is a challenge to predict, specially now due to climate change. There are regulations and financial constraints that must be balanced with the needs of the water users. All of this rigidity of it all begs for options that are flexible and efficient.
Constrained water supply is the new normal in California.
Whether you call it a mega-drought or extended drought, there is enough evidence that something is wrong. Snowpack in the Sierra Nevadas is in jeopardy due to less snow and too much snowmelt, too early in the year. Timing and quantity disruption is causing devastating impacts to California’a agricultural economy and the communities it supports.
Unfortunately, this not a one-time event or even a prolonged natural disaster. If that were true, California agriculture would not need to change much. Alas, climate change is here to stay and behavioral change is critical to building resiliency into agriculture.
A behavioral change is in order: status quo rigidity in water management is outdated.
Friction in business is something to be avoided. It is expensive and time consuming. Creating an effective system to manage water is no different. The more friction created by inefficient regulations, the more challenging it is to introduce innovation to the water space. Current water regulation makes moving water cumbersome.
Currently, if you want to transfer water from one part of the state to another, you need to follow a rigid transfer process. There are permanent and temporary transfers depending on the circumstances. Permanent transfers are much more difficult to achieve. At a basic level, there is a requirement for transfers to refrain from harming other legal water users along the various conveyance systems that may be needed to deliver the water. For an overview of water transfers, check out the California Department of Water Resources website. For a deeper dive into water transfers, you can review the State Water Resources Control Board’s Water Transfer Guide.
You can imagine how the level of complication increases the further water is transferred. For example, a transfer from one farmer to another in the same county may be easier due to less legal water users impacted by the transfer. However, often there is the need for large amounts of water from the wetter Northern California. This means there are more water users impacted by the movement of that water. To make things more challenging, there are environmental requirements in the Sacramento Delta that add further complication to moving water south of the Delta.
Practically, agricultural operations in the Central Valley that wish to purchase water from north of the Delta may not be able to actually use that water for a year or more. That is the very definition of friction in a market. This approach is outdated and untenable in the face of an unpredictable climate future.
Climate change is unpredictable.
For decades there has been a general understanding that water arrives in March and April due to rain and snowmelt, and then the agricultural community can predict water availability for the remainder of the growing season. What we have seen in the last decade is the disruption of that understanding. Water is melting and flowing in January and February, which is too early for the crops to fully use that water.
Can we simply adjust to the new pattern? It’s unknown. We are unsure if there is a new pattern or if there is simply a pattern of disruption. We do now there are more frequent extreme weather events and that agriculture in California has yet to catch up.
The technology is here, policy needs to catch up to enable widespread adoption of groundwater markets.
There is a sense of doom and gloom when you look at climate change trends and the long-term existential threats posed to the world economy. However, innovation is the spark of hope for a better, resilient future. It is in water markets that we can see innovation, political hurdles, and the path forward.
Databases, sensors, and GIS.
The innovation I work in every day is a mix of boring technologies with outsized impacts, and the promise of machine learning and artificial intelligence to save the day.
First the boring. Utilizing Geographic Informations Systems (GIS) to understand location based data from a mix of sensors and human reporting that is then organized and stored in a database is a key foundational component to facilitating groundwater markets. These are not new technologies but they are newly matured enough to make it cost effective to implement.
Now the unproven but exciting. Machine learning allows computers to learn from large amounts of human cleaned and fed data. Its is not perfect, but it does allow for rapid experimentation due to the speed of computations. Beyond machine learning is artificial intelligence (AI). AI allows computers to learn and make decisions. Imagine an entire network of AI powered water managers. Scary and intriguing at the same time.
Due to the maturity of the boring technology, data collection is becoming cheaper and making connections between data points is beginning to come down in cost as well. Tech giants Google and Amazon allow for running machine learning tasks in their cloud infrastructure at a fraction of the cost of past methods of using dedicated server time on an advanced server. As machine learning computational tasks become cheaper, the experiments will increase and innovation will continue to increase.
For groundwater markets, that means realtime prices, buying and selling, and utilization of blockchain technology to secure these important and high value transactions.
There is hope for water in the West from a technical perspective. Now if only those pesky humans would listen.
Fears of “Buy and Dry” ignore the capacity to build rules into groundwater market trading.
The fear of multiple bad actors draining communities is real. Wall Street is now in the water business and that is freaking people out. County governments throughout California have ordinances preventing surface water transfers outside of county lines and also restrictions on intra-county transfers. Now that Groundwater Sustainability Agencies are formed in California, there is potential for restrictions on groundwater sharing. The madness must stop.
In any market, there are guardrails to keep the market participants safe. In the context of groundwater markets, participants include all stakeholders including disadvantaged communities, aquatic species and plants, land dwelling animals and their habitat. These participants must and will be safe with a proper water market policy in place.
These guardrails are most effective when they are as simple as practical and understood by all market participants.
Data and Transparency are key to effective groundwater market policy.
So we arrive to the groundwater market evolution with a pile of data. Data and the technology to make it useful to essential, but, and this is equally important, is transparency into the data and mechanisms that power the groundwater market. Often technologies become a “black box” and market participants are unable to trust in the system. Without trust, a market is doomed.
This is why private-public partnerships are key in the development and proliferation of water markets. Water markets need private sector technical innovation and growth engines, but groundwater markets need the policy makers and stakeholders to support the market. Without support, the tech will gather dust.
Transparency will lead to trust, and trust will lead to effective markets that provide flexible water management in an unpredictable climate future.
California can lead the march towards groundwater market adoption in the west.
Hollywood, Silicon Valley, and Haight Street are some of the innovations and cultural revolutions unique to California. That same know-how has to be part of the solution to the new normal of dry conditions broken up by extreme flooding.
California’s groundwater markets.
California has groundwater markets today. For example, The Nature Conservancy worked in Southern California on the Fox Canyon Groundwater Market. The groundwater market is the first created under California’s Sustainable Groundwater Management Act (SGMA). If it is successful in providing a solution to the struggling groundwater basin, it could translate into greater adoption of groundwater markets to reach SGMA’s requirement that the local Groundwater Sustainability Agency bring the basin into sustainability in 20 years.
However, many of the surface and groundwater markets out there rely in proprietary technology solutions, which can hinder their scalability. Fortunately, there are groups out there that recognize this and are working towards a solution.
A scalable solution is just around the corner.
The Environmental Defense Fund worked with the Rosedale-Rio Bravo Water Storage District to pilot an open source groundwater market. If successful, this project could be the path to groundwater market proliferation in California. With the right mix of boring and cutting edge technology, the open source tech will provide a cost effective way to bring groundwater basins into sustainable operations.
Open source is a great step forward, but there will need to be government funding to back the adoption and communication around new markets. We discussed the need for stadholder trust, which means the markets will need to be technically solid, secure, and accompanied by stakeholder support. It is up to both private a public sectors to make this work. Climate change is not going away.