Want to preserve groundwater? Tax it.

February 02, 2024

During the early 1980s, farmers in the Pajaro Valley, a California region known for its ample apple orchards and strawberry fields, suffered an agricultural disaster. Years of overpumping groundwater created space for seawater to enter the coastal aquifer that farms and ranches relied on, devastating crops irrigated with this salty water.

In response, voters agreed to create the Pajaro Valley Water Management Agency to manage local water supplies and prevent future groundwater overdraft. The agency began metering groundwater in 1994 and charging based on usage. To avoid groundwater overdraft near the coast, the agency also began piping in irrigation water to certain areas known as the delivered water zone (DWZ). Beginning in 2010, agricultural customers who received water deliveries were required to pay an additional fee. 

Economists like Ellen Bruno, a professor of Cooperative Extension in Agricultural and Resource Economics, have long thought that charging for groundwater could incentivize customers to manage their water use more efficiently without mandating specific changes. Although such charges are rarely enacted in California, the Pajaro Valley’s separate charge for service in the DWZ gave Bruno the opportunity to study the effect of what amounts to a tax on groundwater.

After analyzing the 5 year periods before and after the implementation of the DWZ charge, Bruno found that groundwater demand in the Pajaro Valley shrank in response to long-term price increases. Specifically, DWZ customers who faced an average 21-percent increase in the price of groundwater reduced their average annual extraction by 22 percent.

These findings, which were featured in Bloomberg and the New York Times, could have significant implications for groundwater management in California, especially as local regulators face a 2040 deadline to achieve groundwater sustainability. 

Co-authors on the study are Katrina Jessoe, an associate professor in the Department of Agricultural and Resource Economics at UC Davis and W. Michael Hanemann, a professor emeritus in Berkeley's Department of Agricultural and Resources Economics, now on the faculty at Arizona State University.