Presentations 2016

Hydroeconomic Modeling of Sustainable Groundwater Management

ERA Economics, LLC

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In 2014 California passed legislation requiring the sustainable management of critically overdrafted groundwater basins, located primarily in the Central Valley agricultural region. Hydroeconomic modeling of the agricultural economy, ground, and surface water system is critically important to simulate the alternate transition paths to sustainable management of the basins. While the fundamental dynamic relationships of groundwater are fairly well established, unfortunately there are no mass balance checks that can be applied to human behavior. Accordingly, we argue that integrating response functions that represent the key biophysical relationships from a hydrologic model into an economic model of groundwater use is preferable to embedding the economic response in a hydrologic model as is more commonly done. We develop a dynamic hydroeconomic model using this approach for the Kings and Tulare subbasins of California’s Central Valley and evaluate three groundwater management institutions – open access, perfect foresight, and managed (sustainable) pumping. We quantify the costs and benefits of sustainable groundwater management, including the energy pumping savings and heretofore omitted benefits which we term the drought reserve value and avoided capital costs. Our analysis finds that short-run losses in crop revenue are offset by the long-run benefits of drought reserve value and avoided capital costs, which provides a counter example to the Gisser and Sanchez Paradox.