Advancements in Groundwater Trading Can Help Build a Water Resilient Future

Oct 1, 2020 | Blog

Groundwater trading has become an important tool for addressing the impact of water scarcity in agriculture as we enter an era of increased water stress. Although surface water rights are still the most frequently traded water asset in the U.S., groundwater rights are a close second – and the potential benefits can’t be ignored.

One study in the Mojave Desert reported that “land values were 280% higher inside the area with groundwater property rights than outside,” and that the introduction of a water trading market helped stabilize the water table in the region.


In 2015, California traded more water resources than any other state – $560 million, totalling 793,000 acrefeet – while Colorado traded $79 million and 73,000 acrefeet.


However, there’s still a long way to go before groundwater markets catch up to surface water markets and reach their full potential for improving water resiliency.


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What’s Wrong With Groundwater Trading Today?

Looking ahead to a future in which groundwater trading plays a key role in agriculture means being realistic about the challenges we face. Groundwater trading doesn’t yet have the full buy-in from farmers, lenders, and regulators that it needs, and is mostly being rolled out gradually from state to state.

We’ll take a look at three major issues facing groundwater trading today:

  • Regulation
  • Data Collection
  • Environmental Impacts

Following will be several ways that groundwater markets can be improved in the future:

  • Better Technology
  • Allocation of Resources
  • Virtual Water Trade



First, while regulation has a role to play in supporting groundwater markets, the lack of clarity around how water resources will be allocated and the uneven rollout of policies from region to region makes it hard for impacted parties to plan for the future.

In California, this regulation comes in the form of SGMA, the Sustainable Groundwater Management Act, which charges local Groundwater Sustainability Agencies, or GSAs, with rolling out appropriate policies for their region.

As the U.C. Berkeley School of Law points out in “Trading Sustainably”:


“The extent of a GSA’s jurisdiction will not necessarily correspond to the extent of a groundwater basin; some basins will be managed by a patchwork of coordinated GSAs, while some GSAs will manage all or parts of multiple basins.”


This complexity is why it’s so important for communities to develop policies that take all stakeholders into account, including both agricultural and municipal water users. In our e-book “Lending a Hand to California Agriculture,” we show how “lenders and farmers currently have an opportunity to shape the outcomes [of SGMA] by educating GSA decision-makers through accurate data collection and information sharing.”

Transparency in pricing has also been an issue that impacts groundwater markets. It is an issue that stands in the way of trading, proper allocation, and the success of the stakeholders involved. If pricing transparency in trading is monitored, groundwater markets’ ability to thrive would be increased.


Data Collection

A second challenge that groundwater markets face is a lack of up-to-date information on water rights and resources, and a reliance on obsolete trading systems.

As one example, the Environmental Defense Fund explains how “groundwater trading in western Nebraska actively happens through bilateral contracts, real estate brokers and auctions, the electronic bulletin board of Craigslist, and electronic clearinghouses.”

In many regions, the lack of a centralized marketplace makes it hard for rights holders and water users to find each other and make efficient trades. Lenders may struggle to understand regional differences in water rights and locate real-time information on the water risk of a specific borrower, increasing the time it takes to approve a loan.

While getting more accurate well data and enabling smart water markets can address some of these challenges, installing meters on groundwater wells is expensive, and some rights holders are resistant to having their water use monitored at all.


Environmental Impacts

A third challenge for groundwater markets includes unintended environmental impacts. Unlike surface water trading, groundwater trading doesn’t involve the physical transfer of water through canals and other infrastructure, and it’s usually done within the same basin, so in theory, the environmental impact can be greatly reduced.

However, too much pumping in a single area can have unintended consequences, such as “cones of depression” and contamination of nearby drinking water. For example:


“When groundwater trading first began in … South Australia, trades ended up concentrating pumping in certain areas, severely drawing down local groundwater levels and necessitating the introduction of special trading rules to mitigate the problem”


This doesn’t mean that groundwater trading isn’t a net positive for the environment, but it does make clear just how important it is to get the data and science right.

It also makes it clear that trading rules must be just and thoughtful in order to reduce negative consequences and externalities that excess groundwater pumping can cause, such as excess pumping in one region that impacts domestic use or habitats.



How We Can Improve Groundwater Trading in the Future

With all these risks and challenges in mind, what changes to groundwater trading are on the horizon? How can we benefit while also reducing the risks? Here are just a few ways in which new technologies and new ways of thinking can make a difference.


Better Technology

One way to improve groundwater trading is with more advanced technology, such as smart water markets that use algorithmic matching to facilitate trades. The Fox Canyon Groundwater Management Agency in Ventura, CA, is one example of a smart market that uses algorithms to match up buyers and sellers. As E.J. Remson explains:


“It’s essentially a cap-and-trade system built on matching the highest amount someone is willing to pay for water with the lowest amount someone is willing to sell it for.”


Not only does this introduce some flexibility into the system, but it allows for small and medium growers to have access to the same options as larger corporations.

Other technologies are being used to analyze water risk on a parcel-by-parcel basis, such as AQUAOSO’s Water Security Platform, which aggregates data from publicly available resources that would take years to put together manually.


Allocation of Resources

Along with these technological improvements, a range of incentives can be introduced to encourage responsible use of groundwater in agriculture. One concept is rotational fallowing, “which allows farmers to continue farming a portion of irrigated land while temporarily transferring a portion of their water rights to an urban user.”

This is key for regions that have a combination of both agricultural and residential water users, and need to maintain sufficient water supplies for drinking and irrigation.

Another option is to create incentives for recharging groundwater by using surface water more efficiently instead. The EDF suggests that credits “could be applied to the individual’s allocation or transferred and sold to another user in accordance with the trading rules.”

A third approach is “ratio trading,” which takes environmental impacts into account when pricing and allocating groundwater resources. In the Twin Platte region of Nebraska, the pumping of groundwater contributes to stream depletion along the Platte River.

To address these impacts, “Parties trading groundwater in the Twin Platte have to make proportionate changes in groundwater pumping depending on the comparative values of their stream depletion factors.” Other regions could account for different factors, such as soil type, seawater intrusion, and crop coefficients.


Virtual Water Trade

Another tool that may play a role in how we think about water stress around the world is virtual water trade. While VWT isn’t a market in the same way that groundwater trading is, it’s used to account for the hidden cost of water associated with agricultural goods, and can be helpful when predicting groundwater depletion and water scarcity.

As Earth Magazine describes it, “China is the world’s top soybean buyer, importing tens of millions of metric tons per year. And behind each ton is more than 2,000 cubic meters of water — either rainfall or irrigation — needed to grow, harvest, and prepare soybeans for use… This virtual water represents an enormous volume of real water that China need not pull from its own shrinking endowment.”

According to Nature, the U.S. is expected to be one of the key exporters of “nonrenewable groundwater to meet international demands.” This could have major implications on the rate at which aquifers are drawn and how future water resources are allocated.


How AQUAOSO Can Help

Navigating all of the scientific and regulatory complexities of groundwater trading can be a challenge, especially for ag lenders and investors doing business in multiple regions.

That’s one reason why AQUAOSO is committed to helping our users understand water risk at every level, from the macro to the micro. Our platform can help you cut down on research and make better investment decisions in any of the regions we serve.

 Contact us directly to find out more about what we do, or browse our resources to learn more about groundwater trading, SGMA, and other water security issues.

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