Hydroeconomic modeling of sustainable groundwater management

In 2014, California passed legislation requiring the sustainable management of critically over-drafted groundwater basins, located primarily in the Central Valley agricultural region. Hydroeconomic modeling of the agricultural economy, groundwater, and surface water systems is critically important to simulate potential transition paths to sustainable management of the basins. The requirement for sustainable groundwater use by 2040 is mandated for many overdrafted groundwater basins that are decoupled from environmental and river flow effects. We argue that, for such cases, a modeling approach that integrates a biophysical response function from a hydrologic model into an economic model of groundwater use is preferable to embedding an economic response function in a complex hydrologic model as is more commonly done. Using this preferred approach, we develop a dynamic hydroeconomic model for the Kings and Tulare Lake subbasins of California and evaluate three groundwater management institutions—open access, perfect foresight, and managed pumping. We quantify the costs and benefits of sustainable groundwater management, including energy pumping savings, drought reserve values, and avoided capital costs. Our analysis finds that, for basins that are severely depleted, losses in crop net revenue are offset by the benefits of energy savings, drought reserve value, and avoided capital costs. This finding provides an empirical counter example to the Gisser and Sanchez Effect.