The Conservation Effects of a Variable Tax on Groundwater Withdrawal

In the United States, water resources have been historically plentiful, and groundwater consumption is generally not well-managed. However, as demand increases and the effects of climate change strain groundwater resources, the need to monitor consumption habits rises. Policymakers must undertake the challenge of striking a balance between economic performance of natural resources and their environmental protection. In the San Luis Valley of Colorado, the threat of rapidly diminishing water supplies due to irrigation demand prompted the local community to act by self-imposing a variable tax to curb withdrawals. A recent study by Smith et al. uses econometric methods to evaluate the effectiveness of this self-imposed tax and provides promising evidence of reductions in water consumption and changes in crop choice decisions.

Farmers in the western United States rely heavily on irrigation for agriculture and have historically operated under the prior appropriation doctrine, which grants water rights to the first individual to find beneficial uses for it. Over time, groundwater extraction across the United States has increased, rising from 10.8 cubic kilometers per year in 1999–2000 to an average of 23.8 cubic kilometers per year in 2000–2008. The San Luis Valley has accordingly followed suit due to its low annual rainfall. It relies on surface and groundwater irrigation to sustain a $319 million agriculture sector.

In response to evidence of the rapidly diminishing supply of groundwater, the Rio Grande Water Conservation District (RGWCD) sought to rein in withdrawals by dividing the San Luis Valley region into subdistricts. Within each subdistrict, stakeholders were tasked with developing water management plans. Subdistrict One was the first to implement a solution, employing a market-based approach that imposed a $45 per acre-foot pumping tax in 2011 and then a $75 per acre-foot pumping tax in 2012. They also provided subsidies for land that stopped using irrigation.

Smith’s study employs statistical models to quantify the benefits of Subdistrict One’s variable pumping tax. The analysis found that irrigators reduced withdrawals by more than 32 percent, withdrawing 83.14 fewer acre-feet of groundwater per unit on average across all crop types. Pasture experienced the largest reductions, followed by grains and alfalfa. The study examined alternative mechanisms to reduce water usage and found that irrigators of certain crops reduced water consumption by over 50 percent in the short-term because as farmers adjusted to the tax, their costs were directly impacted by how water-intensive their crops were. As a result, total acreage of alfalfa, one of the most water-intensive crops grown in the valley, decreased by 24.21 acres on average. This suggests that farmers either planted less of the crop or switched to crops requiring less water to grow. Interestingly, these reductions occurred while the market price for alfalfa rose.

The analysis concludes that employing a variable tax on groundwater withdrawals yields net decreases in overall water consumption while allowing irrigators the flexibility to find their own methods of reducing usage. Engineering reports from the RGWCD provide an encouraging picture that the aquifer might be stabilizing, even during a time of surface water drought, although it cannot conclude that the policies have led to an aquifer recharge in absolute terms. However, the adoption of a variable water usage tax has led to increased water conservation in the San Luis Valley, and potential adoption of similar policies by other communities may have a similar impact in incentivizing the conservation of fresh water resources.

Article source: Smith, Steven M., Krister Andersson, Kelsey C. Cody, Michael Cox, and Darren Ficklin. “Responding to a Groundwater Crisis: The Effects of Self-Imposed Economic Incentives.” Journal of the Association of Environmental and Resource Economists 4:4, (2017).

Featured photo: cc/(Elenathewise, photo ID: 121369895, from iStock by Getty Images)