Incentive-based Instruments for Freshwater Management

Pacific Institute | December 1st, 2015

This new synthesis report from the Pacific Institute and the Foundation Center provides a review of existing evidence about the use of incentive-based instruments worldwi

This new synthesis report from the Pacific Institute and the Foundation Center provides a review of existing evidence about the use of incentive-based instruments worldwide. Based on case studies, evaluations, journal articles, and white papers, the authors provide a detailed review of three incentive-based instruments: water trading, payment for ecosystem services, and water quality trading. The report and interactive tool highlight the importance of finding the right fit between a community’s water goals and the water management tool(s) it might choose and, perhaps most importantly, characterize the conditions required for their effective implementation. Originally commissioned by The Rockefeller Foundation, all of the results from this project: the synthesis report, interactive tool, and digital collection are freely available for funders, practitioners, and researchers to use, contribute to, and build on in their work.

Legal Change and Water Market Transaction Costs in Colorado

American Geophysical Union (AGU) | January 29th, 2020

Water markets are commonly described as failing to achieve efficient water management because of transaction cost barriers to trade. In the western United States, two sou

Water markets are commonly described as failing to achieve efficient water management because of transaction cost barriers to trade. In the western United States, two sources of legal conflict frequently drive transaction costs: (1) negative externalities of trading and (2) uncertain property rights. Conflicts arise because water law applies a no‐injury rule that prevents water transfers from modifying water available to third‐party water rights and defines water rights by historical water use, among other reasons. Existing literature suggests many legal changes to reduce transaction costs, but no studies in the western United States quantify transaction costs under proposed future changes. Here we developed statistical models of transaction costs for water transfer proponents under four specific legal changes in the state of Colorado. Two legal changes would modify the no‐injury rule, and two aim to clarify property rights. Colorado hosts active markets and has recently experienced debate over such legal changes. By surveying 100 legal and hydrologic experts, we elicited transaction cost estimates and rankings of which legal changes were most likely to increase third‐party injury. The legal changes that aim to clarify property rights had significantly lower likelihoods of increasing injury. One of these legal changes, which would not limit transferable water to historical use in certain circumstances, also had the greatest reductions in proponents' transaction costs. Meanwhile, the legal changes that directly modify the no‐injury rule project substantial transaction cost savings but much higher likelihoods of increased injury. The results demonstrate trade‐offs between reducing transaction costs and increasing third‐party effects.

Measuring Cost-Effectiveness of Environmental Water Transactions

Klamath Riverkeeper | August 4th, 2016

The diversion, storage and consumptive use of water in the western United States (US) has drastically altered streamflow, water quality and a raft of ecological, social a

The diversion, storage and consumptive use of water in the western United States (US) has drastically altered streamflow, water quality and a raft of ecological, social and economic goods and services. Over the last fifty years, western states have begun to address this problem through a range of approaches. Water quality regulations, endangered species protections, application of the public trust doctrine to water allocations and other regulatory approaches reflect an effort to prevent further degradation of streamflow and associated values. For example, in Oregon, minimum streamflow requirements created in the 1950s were converted into full-fledged instream water rights in the 1980s and 1990s to limit further appropriations of water for out-of-stream use. Unfortunately, as junior (or low) priority rights, these rights do not serve to restore flow to already dewatered streams. In other cases, both large and small, regulatory enforcement has led to real improvements in water for the environment. In California, the protections afforded to Mono Lake water levels and the re-dedication of contract water to environmental uses under the Central Valley Project Improvement Act, are but two examples. However, the controversy, costs and lengthy time span of dedicating water to the environment through litigation and regulatory approaches are unappealing to some conservation groups, particularly those that prefer to collaborate and purchase water rather than litigate to achieve streamflow restoration. An alternative approach to meet streamflow restoration needs is to proactively negotiate in the “water market” for the acquisition of existing out-of-stream rights or for changes in water use and management in order to benefit the environment. These transactions result in “environmental flows,” including the dedication or protection of water instream or the provision of water to Roughly 80% of California’s developed water supply is used for agricultural irrigation.*

Optimization of environmental water purchases with uncertainty

American Geophysical Union (AGU) | August 5th, 2006

Water managers are turning increasingly to market solutions to meet new environmental demands for water in fully allocated systems. This paper presents a three-stage pr

Water managers are turning increasingly to market solutions to meet new environmental demands for water in fully allocated systems. This paper presents a three-stage probabilistic optimization model that identifies least cost strategies for staged seasonal water purchases for an environmental water acquisition program given hydrologic, operational, and biological uncertainties. Multistage linear programming is used to minimize the expected cost of long-term, spot, and option water purchases used to meet uncertain environmental demands. Results prescribe the location, timing, and type of optimal water purchases and illustrate how least cost strategies change as information becomes available during the year. Results also provide sensitivity analysis, including shadow values that estimate the expected cost of additional dedicated environmental water. The model’s application to California’s Environmental Water Account is presented with a discussion of its utility for planning and policy purposes. Model limitations and sensitivity analysis are discussed, as are operational and research recommendations.

Quantification Settlement Agreement and Related Agreements and Documents to which Southern California Agencies are Signatories

California Natural Resources Agency (CNRA) | October 10th, 2003

Recent California Water Transfers: Implications for Water Management

Natural Resources Journal (University of New Mexico) | January 3rd, 1995

The 1991 and 1992 California Drought Emergency Water Banks were the first large water transfer programs in the nation in which the state served as the predominant broke

The 1991 and 1992 California Drought Emergency Water Banks were the first large water transfer programs in the nation in which the state served as the predominant broker for water trades. Although the state-sponsored Water Banks have drawn widespread attention, there have been a great number of water transfers and exchanges taking place in California independently of the state. These transfers illustrate well the widespread applicability of transfers in managing water resource systems, as well as the multiple mechanisms available for effecting water transfers. This article focuses on California's recent experiences with water transfers, and offers a series of potential lessons for federal, state, and local managers for integrating water transfers in regional water resource systems.

Recent California Water Transfers: Implications for Water Management

Natural Resources Journal (University of New Mexico) | December 1st, 1995

The 1991 and 1992 California Drought Emergency Water Banks were the first large water transfer programs in the nation in which the State served as the predominant

The 1991 and 1992 California Drought Emergency Water Banks were the first large water transfer programs in the nation in which the State served as the predominant broker for water trades. Although the State-sponsored Water Banks have drawn widespread attention, there have been a great number of water transfers and exchanges taking place in California independently of the State. These non-State transfers illustrate well the widespread applicability of transfers in managing water resource systems, as well as the multiple mechanisms available for effecting water transfers. This paper focuses on California's recent experiences with water transfers, and offers a series of potential lessons for federal, state, and local managers for integrating water transfers in regional water resource systems.

SGMA’s First Groundwater Market: An Early Case Study from Fox Canyon

Nature Conservancy | May 1st, 2019

In 2014, amid California’s most recent drought, the state passed the Sustainable Groundwater Management Act (SGMA). This new law regulates groundwater at scale for th

In 2014, amid California’s most recent drought, the state passed the Sustainable Groundwater Management Act (SGMA). This new law regulates groundwater at scale for the first time, requiring the state’s largest source of stored water to be managed for long-term resilience. SGMA delegates the responsibility of achieving sustainable groundwater management by 2040 to local Groundwater Sustainability Agencies (GSAs). GSAs must achieve sustainability for their groundwater basins by developing and implementing Groundwater Sustainability Plans (GSPs). Balancing groundwater basins to achieve sustainability will require increasing water supply to the basin and/or decreasing water demand. The Fox Canyon Groundwater Management Agency (FCGMA), in western Ventura County, is the first GSA to pursue a groundwater market as a tool to decrease water demand when implementing its GSP. This white paper outlines FCGMA’s experience—the steps taken and lessons learned—in developing the first groundwater market to emerge under SGMA. It is a combined effort of The Nature Conservancy (TNC), California Lutheran University’s (CLU’s) Center for Economic Research and Forecasting (CERF) and FCGMA, with the support of local growers and the Farm Bureau of Ventura County (Farm Bureau). This document is meant to serve as a resource for GSAs and other public agencies, organizations, practitioners and stakeholders involved in water resource management and contemplating the creation of groundwater markets to meet SGMA’s sustainability mandate. This report focuses on the design and testing of the Fox Canyon groundwater market; a companion report will likely follow to evaluate the performance and share additional lessons learned once the market has launched.

Sharing Groundwater: A Robust Framework and Implementation Roadmap for Sustainable Groundwater Management in California

Nicholas Institute for Energy, Environment & Sustainability (Duke University) | January 1st, 2017

This working paper offers a framework and roadmap for development of a robust groundwater-sharing system consistent with California’s Sustainable Groundwater Management

This working paper offers a framework and roadmap for development of a robust groundwater-sharing system consistent with California’s Sustainable Groundwater Management Act, which requires communities in priority areas to prepare groundwater sustainability plans. The proposed system draws on global experience. Robustness is its signature feature. Opportunities are maximized by a suite of robust local governance, allocation, and administrative arrangements. Additionally, the proposed system incentivizes innovation, stimulates investment, and facilitates low-cost adjustment to changes in groundwater demand. Among the dynamic components underlying this sharing system are a share register that records ownership and transfers of ownership in the basin’s available shares. These unit shares are fungible; each represents a proportional stake in access to the basin’s groundwater resources. Volumetric allocations are made in proportion to the number of shares held during determined periods throughout the water year. These allocations are recorded in bank-like water accounts, affording account holders an efficient means to manage their resource but also ensuring that they cannot use more than is available. Unused water can be saved for later use. At the start of the transition to the new system, users are given an allocation buffer so that they have flexibility and time to adjust. Those who want to can make quick non-contestable trades at low cost.

Strawberry Case Study: What If Farmers Had to Pay for Water?

New York Times | December 29th, 2023

While American farmers elsewhere have watered their crops by freely pumping the groundwater beneath their land, growers in Pajaro must pay hefty fees for irrigation water

While American farmers elsewhere have watered their crops by freely pumping the groundwater beneath their land, growers in Pajaro must pay hefty fees for irrigation water — making it one of the most expensive places to grow food in the country, if not the world. The cost: Up to $400 per acre-foot, a standard measurement equal to water covering one acre, one foot deep. The fees bring in $12 million a year, which is used to recycle, restore and conserve the region’s groundwater.