An Evaluation of Policy Instruments for Sustainable Groundwater Management PDF Download

Author: Ellen Marie Bruno
Publisher:
ISBN: 9780438627680
Category :
Languages : en
Pages :

Get Book

Book Description
Many groundwater basins worldwide have seen significant reductions in the water table over time, and this is increasingly problematic in the face of climate change. Climate change is expected to cause more variability in precipitation and thus more variable surface water supplies. Groundwater acts as a buffer to fluctuations in surface water supplies, and is a critical resource in reducing the costs of climate change to agriculture. Concerns over groundwater management are particularly strong in California. The state passed the Sustainable Groundwater Management Act in 2014 to provide a statewide framework for local agencies to manage groundwater. The act identifies overdrafted basins in the state and requires local groundwater agencies to correct groundwater overdraft conditions. Importantly, the groundwater law gives these local water agencies new authority to measure extraction, charge fees for pumping, and facilitate the trading of property rights for pumping. To inform water policy, I conduct an evaluation of the economic impacts of three policy instruments to manage groundwater resources: cap and trade, excise taxes, and command and control. In general, market-based instruments are more likely to obviate efficiency losses relative to command-and-control policies. Of these, cap and trade may be particularly appealing to water agencies that must eliminate overdraft because markets remove the uncertainty in reaching a management goal. However, market power in permit trading is a concern in this setting, and, if present, will reduce the efficiency gains from markets and potentially cause large distributional effects. In my evaluation of groundwater cap-and-trade, I account for the likely presence of market power in groundwater trading. Knowledge of how market power impacts the gains from trade is important for understanding the performance of markets relative to taxes in this setting. Since many water agencies restrict the export of groundwater outside basin boundaries, future groundwater markets will likely be spatially isolated. The exercise of market power may be a defining component of these markets due to the presence of large grower-shippers, the formation of coalitions among buyers and sellers, and/or competition among a few water agencies on a shared basin. To analyze the potential gains from trade in a groundwater permit market and evaluate the impacts of market power on both the magnitude and distribution of benefits, I develop a theoretical model of agricultural groundwater use and trading. The gains from trade in equilibrium are a function of five features of the model: the heterogeneity in demand for groundwater across users, the price elasticity of groundwater demand, the total allowable extraction on the basin, the allocation of permits among users, and the degree of market power. Using a flexible model framework that can reflect any degree of buyer or seller market power in the permit market, I identify the relationship between market power and the efficiency of water trading. I show that the overall efficiency impact of market power (by either buyers or sellers) is small, with a deadweight loss of at most 11% of the surplus under perfect competition. The distributional impacts, however, can be large. I evaluate the distributional impacts of market power by simulating how seller surplus and buyer surplus change as market structure varies. The flexible model of one-sided market power allows us to see how surplus measures change with any degree of market power. I show that the gains from trade accrue rapidly to those with market power. To evaluate the price sensitivity of groundwater users, I empirically estimate the price elasticity of groundwater demand with monthly, well-level groundwater extraction and groundwater price data. The data come from a basin in southern California that underlies the Coachella Valley, a major production region for citrus, dates, grapes, and vegetable row crops. Attaining reliable estimates of the groundwater demand elasticity has been challenging because micro-level data on groundwater extraction is uncommon and groundwater itself is typically free of charge. The Coachella Valley Water District is unique because it deploys a location-based volumetric pricing scheme for groundwater. Exploiting temporal and cross-sectional variation in groundwater extraction prices, I estimate a price elasticity that is the first of its kind to not rely on estimates of pumping cost for price. I report results from an OLS regression of the log of groundwater extraction on the log of prices, controlling for well and month fixed effects and conditioning on a rich array of observables, including weather, surface water use, and artificial groundwater recharge. With a statistically significant price elasticity point estimate of -0.17 that is robust to alternative specifications of the model, results suggest that increases in price modestly reduce extraction. This suggests that a tax on agricultural groundwater pumping will have small effects on basin-wide groundwater extraction, while significantly raising farming costs. Combining this estimate of the groundwater demand elasticity with estimates of the other model parameters, I estimate the gains from groundwater trade for the Coachella Valley. Results show that the gains from introducing water markets are large; economic surplus with trade is about 50% greater than under a command-and-control regime. Given an initial allocation of permits based on land holdings, the cost of compliance from a 20% reduction in basin-wide groundwater extraction can be reduced by 59% with trade. Furthermore, simulations show that the gains from trade remain large over a reasonable range of parameter values, meaning results are likely to generalize to other basins where trading might occur. The gains from trade remain large as the demand elasticity, the cap, the initial permit allocation, and the degree of heterogeneity in demand among users vary. Despite the potential efficiency losses due to market power, total economic surplus under cap-and-trade is still significantly larger than under command and control.In evaluating different policy instruments to manage groundwater for agriculture, my research contributes to the discussion of how best to manage this resource in groundwater-dependent regions around the world. In particular, I shed light on the role of markets to manage water in the presence of imperfect competition. Since the gains from groundwater trade are large even in the presence of market power, the potential of market power should not be used as an argument against the formation of markets.