Is groundwater trading the future of California water?

A summit in Fresno last week was upbeat on a dour topic: the megadrought of the American West.

If the recent blockbuster report about civilization exceeding nearly all of Earth’s natural limits was harsh, the summit – thrown at Fresno State’s newest building, the Resnick Center, named after Stuart Resnick, California’s wealthiest farmer – was the more relaxed counterpart to this fact.

Water district managers and policy makers talked about the future of the San Joaquin Valley’s groundwater aquifers – whose collapse has long been the poster child for an industry growing beyond the provisions of rivers and aquifers.

The cream of the state’s water policy experts said their expectation of drought and climate change was rosy.

At the meeting, a new vision of water in the valley emerged.

As climate change and regulations threaten to fallow farmland, early experiments show that a new water stockpile for the state’s most valuable farmland is possible, leaders at the meeting said.

This could happen by using the force of free markets to harness climate change’s wild swings of drought and flood into a multi-billion dollar bonanza.

Through an expanded groundwater trading market, more water could be shifted to the state’s lucrative nut orchards, and away from vegetables and field crops, according to a new report presented at Wednesday’s meeting by the Public Policy Institute of California, a think tank based in San Francisco.

By expanding the supply of water that can be bought and sold, the Valley’s agricultural economy could defy climate change and drought, and grow by $1 billion dollars by 2040, instead of the alternative – a $4 to 6 billion shrinkage over the same time span if water trading isn’t utilized.

To get more groundwater trading done between farms, and from agriculture to cities, the state needs a new water rights system, said Karla Nemeth, director of the California Department of Water Resources.

California groundwater trading requires the state to “modernize our water rights system,” Nemeth told Fresnoland. “There’s got to be a new kind of trading partnership between urban and agricultural users.”

Water markets decide which fields go dry

Expanding groundwater trading in the future would primarily work by growers converting captured floodwater during wet years into groundwater credits that can be cashed during periods of drought – when people need the water most.

While good for economic growth, the groundwater trading would put small farmers at an increased risk for land fallowing, according to the PPIC report. This is because they would likely sell their water to bigger agribusiness corporations.

“It’s not a mystery: we have a market that is very dominated by bigger organizations that are more sophisticated,” Nemeth said about the state’s water trading markets.

DWR’s groundwater banks have been criticized in the past for unfairly helping the state’s wealthiest growers.

In the mid-1990s, DWR set up California’s largest water bank in a series of hidden meetings in Monterey. The bank became controlled by entities associated with Stewart Resnick, who used the bank’s water to help double his nut acreage.

According to Wednesday’s PPIC report, a larger water market in the valley would cause a similar outcome.

The Valley’s nut empire would be the primary beneficiary.

Overall, fewer pistachios and almonds orchards would be lost, and a greater portion of the 500,000 – 1 million acres of lost farmland over the coming years would be vegetable and field crops.

“One of the key things to take away is that trading is not affecting the total amount of fallowed land,” said Andrew Ayres, a research fellow at PPIC and one of the lead authors on the report.

Instead, the California groundwater trading market “allows you to move that water from crop applications that are less profitable to ones that are more profitable,” which prevents the richest agribusiness operations from going bust during drought, Ayres added.

These new water solutions could be a breakthrough, said Allison Febbo, the general manager at Westlands Water District – home to some of the biggest pistachio and almond orchards in the world.

“It’s important for our district that our land re-purposing is long-term, but temporary,” Febbo said. “We may be able to bring some of that land back into irrigation at some point.”

The riches of flood: an idea born in crisis

When the floods came earlier this year, an awakening happened, panelists at the meeting said.

With record snowpack, a million acre-feet of water could have been stopped from reaching the Pacific Ocean, said Sarah Woolf, a farmer who owns roughly 30,000 acres of farmland in Fresno County.

She said that water could have been put underground in the Valley, to be pumped up later on.

“That is a big amount that…if it’s in the ground, we can use years later,” she said.

“We get a real sense of catastrophe during these dry periods and then we had 2023 to help remind us that there’s a lot we can do,” said Nemeth, California’s top water official.

“We’re not quite ready to make the best use of those moments like we need to be,” she added.

Eric Averett, CEO of Atlas Water LLC, said groundwater banks could use these floods as a bulwark for private equity firms in the San Joaquin Valley.

Wildland habitat restoration projects along the San Joaquin River are a potential opportunity to farm these newfound groundwater credits, he said.

“We go in, we’ll acquire the ground, and develop a groundwater banking project so that we can bring in additional [flood]water in, generate the credits, and monetize them.”

Once traded, water commodities will be central to the private sector’s revenues on the climate transition in the San Joaquin Valley.

For solar projects in the San Joaquin Valley, the primary money generator is selling off the water rights of the newly fallowed land, Averett added.

A new water supply

“That trading thing is a very fun, controversial idea. It’s got everything all bundled into one.” said Aaron Fukuda, general manager of the Tulare Irrigation District.

By certifying floodwater as recharged groundwater, Fukuda said an aquifer monitoring network from SGMA has helped farmers grow the amount of groundwater they can pump.

“We figured out that the same tool that was a detriment became an incentive, now that the [SGMA] water dashboard was giving credit to growers,” said Fukuda. “The market opens up these windows.”

Don Cameron, a manager of a 6,000-acre ranch 15 miles south of Fresno that relies entirely on groundwater, said groundwater trading is gaining more traction along the Tulare Lake Basin.

“In the Kings sub-basin, we’re starting to see more cooperation,” said Cameron, who is also president of the California State Board of Food and Agriculture. “There’s a lot of potential to move water within the basin.”

The possibility of finding a new, one million acre-foot water supply fundamentally changes the conversation over the San Joaquin Valley’s climate transition, said Ann Hayden, vice president of climate resilient water systems at the Environmental Defense Fund.

“We can’t be talking about demand reduction…without also talking about the [water] supply augmentation that is possible,” she said.

Unknown risks of California groundwater trading

Last year’s Nobel Prize lecture, however, pours cold water over the idea of well-designed water markets anytime soon.

Stanford professor Paul Milgrom – a 2020 Nobel laureate who created key trading schemes in telecommunications – said water markets in California are one of the most daunting challenges he has encountered.

“Water is not like other commodities. It’s not like oil, for example,” Milgrom said. “The externalities that are inherent in water are different from anything else I have ever seen.”

Milgrom said that the unknown downstream effects of trading water – a key ecosystem resource – made water trades difficult to account for without a major overhaul of the state’s water regulations.

Political risks are also plentiful, according to a paper from 2020.

The researchers said that deciding the fate of farming communities — for example, sacrificing a small vegetable farm for a hedge fund’s almond speculation — could lead to backlash.

“[I]f water transferred out of a region results in impacts on local employment and income, such third-party effects can lead to transfers being politically unattractive (and lead to limits on transfers),” the paper said.

The lone person to push back on the water trading idea was also one of the only people of color who was invited to speak at the summit on Wednesday.

“Water markets are going to serve the purpose of profit,” said Sonia Sanchez, senior community development specialist at Self-Help Enterprises. Sanchez, however, stopped short of opposing groundwater trading entirely.

Instead, she said she hoped agribusiness would work with low-income communities to balance the industry’s groundwater contamination with their groundwater trading.

When small town’s local groundwater supplies become contaminated by agriculture run-off, Sanchez said, “we don’t want to have low-income communities buy their water on the market.”

Sanchez also said that putting all this floodwater underground, instead of into the ocean, could concentrate unknown types, and amounts, of toxic chemicals into local groundwater supplies.

At the summit, this risk was mentioned in passing as something to look into the future.

Klemeth said the department of water resources is looking into the problem.

“I do think when we’ve got these bigger recharge projects that are underway, getting constructed, getting ready for operations, it does have to come with a more complete water quality program, Klemeth said.

“The groundwater sustainability agencies are working on that, and that really has to be hand-in-glove.”

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