Skip to content

California

Groundwater Markets

A river winds alongside a plain on one side and a rugged bluff on the other.
Santa Clara River The Santa Clara River in California. © Barbara Wampole

California’s Sustainable Groundwater Management Act (SGMA) requires local agencies to bring groundwater subbasins into long-term sustainability. Often, this will require investing in and implementing demand management actions that will significantly reduce groundwater pumping, especially in critically overdrafted subbasins. One approach gaining attention is groundwater trading programs, or groundwater markets, which allow users to buy and sell groundwater allocations within a subbasin.

Why Consider Groundwater Markets?

Some Groundwater Sustainability Agencies (GSAs) have chosen to develop groundwater allocations, or the amount of groundwater a particular user is allowed to pump in a given year, as part of their SGMA implementation efforts. These allocations are based on a subbasin’s sustainable yield and water budget, which are developed as part of the local groundwater sustainability plan. Allocations place a cap on pumping and may significantly reduce the amount of groundwater available for use. When groundwater demand exceeds the available supply, this scarcity becomes the primary driver for creating a groundwater market.

By allowing the price of water to reflect its true value, markets can incentivize conservation and efficiency. This flexibility can help ease the economic burden of pumping reductions: farmers who fallow land can generate new revenue streams by selling unused allocations, while others can purchase water to maintain operations. Trading can reduce economic disruption by shifting water to where it is most needed, and it promotes efficient water use, freeing up water for ecosystems, future needs, and supporting subbasin-wide resilience. These benefits make water markets an appealing option, but they must be carefully designed to avoid causing unintended consequences. 

In times of water scarcity, water markets bring financial stability, flexibility, and sustainability to agriculture and nature alike.
WATER MARKETS In times of water scarcity, water markets bring financial stability, flexibility, and sustainability to agriculture and nature alike. © TNC

The success of water markets depends on strong foundations and thoughtful design. Below are key elements and considerations for creating effective and equitable programs.

 

Fundamentals of a Well-Designed Groundwater Market

  1. Well-Developed Groundwater Sustainability Plans

    Markets must be developed from the basis of a scientifically-sound, well-developed GSP that meaningfully considers all beneficial users of groundwater when establishing protective groundwater thresholds. The market design should align with and aid in the achievement of subbasin-wide groundwater sustainability goals.

  2. Inclusive Stakeholder Engagement

    Designing a water market must be a public process, with robust engagement from all stakeholders, including vulnerable users such as small and medium sized farmers, local communities and drinking water advocates, and environmental representatives. Vulnerable groundwater users should have a voice and vote in decision making, and the group should reach consensus on market design and policies that address the concerns of each groundwater user group.

  3. Accurate and Timely Data Reporting

    Automated meters on groundwater wells provide accurate, verifiable data on water use, which is essential to a functioning water market. Water allocations must be based on the best available data on water levels and subbasin conditions.

  4. Transparent Governance

    Clear rules, consistent enforcement, and accessible information build trust among market participants and with vulnerable stakeholder groups, such as local disadvantaged communities, who must rely on the market design and administrator to avoid negative impacts to their drinking water supplies and quality.

  5. Easy, Secure Transactions

    Online platforms with blind matching and public reporting of prices and volumes promote fairness and allow buyers and sellers to make informed decisions.

VENTURA COUNTY FARM
VENTURA COUNTY FARM Avocado farm in Somis, CA © USDA

Case Study: California’s First Groundwater Market

The Fox Canyon Groundwater Management Agency (FCGMA), in western Ventura County, was the first GSA to pursue a groundwater market as a tool to decrease water demand when implementing its GSP. Learn more about the enabling conditions for market creation and lessons learned from the early years of groundwater trading.

Considerations and Risks of Groundwater Trading

Poorly designed markets, or markets in subbasins without well-developed Groundwater Sustainability Plans, can worsen groundwater conditions and harm vulnerable users. Key concerns include concentrated pumping drawing down water levels and creating localized declines that cause shallower drinking water wells to go dry, depleting interconnected surface waters or dewatering groundwater dependent ecosystems, or exacerbating issues with groundwater contaminants and areas of poor water quality. 

It is essential for GSAs considering a groundwater market to address these concerns for vulnerable users who also may have less market power, including disadvantaged communities, the environment, or small to medium sized or tenant farmers. Markets should be designed with protective safeguards in place, such as special management areas around vulnerable users with directional trading rules, buffer zones where trading is prohibited to avoid exacerbating existing groundwater issues, and mitigation plans for addressing any unintended negative impacts. 

For an additional resource on this topic, explore the 2022 report from the California Water Commission: A State Role in Supporting Groundwater Trading with Safeguards for Vulnerable Users: Findings and Next Steps

For information, contact Bridget Gibbons and Sarah Heard.