In summary

Water banking and trading are essential tools for managing the state’s groundwater, and we urgently need to make them work better.

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By Andrew Ayres

Andrew Ayres is an economist and research fellow at the Public Policy Institute of California’s Water Policy Center.

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Ellen Hanak, Special to CalMatters

Ellen Hanak is an economist and director of the Public Policy Institute of California’s Water Policy Center.

The San Joaquin Valley town of Corcoran is sinking. 

It’s fallen as much as 11.5 feet in some places, damaging drinking wells, changing the town’s flood zones and undermining critical infrastructure. The story is so dramatic that the New York Times covered it recently. 

The culprit here, though, is no ordinary villain – it’s the overpumping of groundwater. 

Corcoran’s story, while extreme, is not unique. Groundwater is an increasingly important – and threatened – resource in California. The 2014 Sustainable Groundwater Management Act seeks to remedy that. But the state’s water market – a key tool to help implement the law – is struggling to expand.

Our new report draws on the experiences and recommendations of dozens of stakeholders to detail how we could improve the state’s water market to aid  adaptation to the groundwater act.

Future of trading and the groundwater act

The groundwater act mandates local water users to bring their groundwater basins into long-term balance by the early 2040s. This means making up heightened pumping that typically occurs during droughts by pumping less, and recharging more, in other years. Water trading and banking (i.e., underground storage) can lessen the economic costs of this shift. Done well, these tools can foster cooperation and boost resilience across all sectors. 

Water trading can lessen the costs of temporary shortages during droughts while also supporting long-term shifts in water use patterns.

Surface water trading has helped on both fronts since the early 1990s. As an example, Sacramento Valley rice growers are currently leasing water to other farmers and coastal urban communities to help alleviate shortages during the ongoing drought. And as some San Joaquin Valley cities have grown, they’ve worked with local agriculture to secure long-term water transfers. 

Groundwater trading has been more limited to date. But in a few Southern California basins – with court-established caps on groundwater use and allocations of pumping rights – markets have provided these same benefits to water users and local economies. The groundwater act opens up the potential for new local groundwater markets statewide as a way to manage demand flexibly.

Groundwater banking – formal projects that store water underground on behalf of specific parties – will improve the supply side of the groundwater balance sheet. Banks require many of the same accounting and approval processes as trading, and they often rely on trading to acquire water. California boasts some of the world’s most sophisticated groundwater banks – in Kern County and Southern California – and the groundwater act creates opportunities for more.

What will it take to make trading and banking work better?

Seizing the potential of water markets to help boost resilience will require overcoming some bottlenecks and stumbling blocks. Upgrading infrastructure will help to facilitate moving water at the right times. But even more important is improving oversight processes. 

Trading and banking require approvals to ensure that shifting when and where the water is used does not cause significant harm to other users, including the environment. But current approval processes are often complex, slow and hyper-cautious – to the point of hindering beneficial market transactions. It’s possible to streamline these processes, while maintaining protections for users and the environment.

Smart, streamlined oversight processes are also essential for new groundwater markets. Establishing and enforcing groundwater allocations, and strong systems for avoiding or mitigating undesirable effects of pumping, are important for successful groundwater act implementation and prerequisites for well-designed markets. 

Multiple actors at the local, state and federal levels can drive reforms. And the good news? 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.

Implementing the Sustainable Groundwater Management Act will be hard, particularly because it requires reducing groundwater pumping in some of the state’s most productive agricultural regions. But the current drought underscores the need to protect California’s groundwater – our most important reserve to get through extended dry times. Water banking and trading are essential tools for stewarding our groundwater, and we urgently need to make them work better.

Join the PPIC Water Policy Center for a virtual panel discussion on California’s water market at 11 a.m. Thursday, Sept. 23.


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