Nicholas Institute for Environmental Policy Solutions
October 2016

Benefits, Costs, and Distributional Impacts of a Groundwater Trading Program in the Diamond Valley, Nevada

Benefits, Costs, and Distributional Impacts of a Groundwater Trading Program in the Diamond Valley, Nevada

In Nevada’s Diamond Valley, unsustainable groundwater pumping has decreased the aquifer’s water level, raising irrigators’ pumping costs and threatening the viability of existing wells and springs. Continued extraction in excess of natural recharge will trigger a legally required curtailment of water rights in the valley, which was recently declared a critical management area (CMA). The extent of rights curtailment is not mandated, but it could be as high as 64%, the amount required to reach the estimated natural recharge rate. The default policy for curtailment of water rights will occur according to the principle of prior appropriation, whereby rights are revoked in reverse order of their date of issuance. Rights granted most recently will be canceled first, and the revocation will proceed in order of increasing seniority until the government’s desired level of total water extraction is reached. Nevada law requires this intervention to occur within 10 years of the CMA declaration. By law, irrigators and other stakeholders can propose alternative policies for reducing groundwater over-extraction. Because sudden rights curtailment could have detrimental economic impacts, such policies are under discussion. This report analyzes the economic outcomes of sudden and alternative curtailment policies. Using a hydro-economic model tailored to conditions in the region to examine alternative extraction scenarios, the analysis finds that, with no action, the depth to the water table will exceed 200 feet by 2045; with policy action, aquifer levels can be stabilized at 170–180 feet and at higher depths with more gradual curtailment. Across all policy scenarios, net agricultural profit is lowest under the default curtailment policy, and it increases with more gradual curtailment. Under curtailment, allowing parties to trade rights to extract water modestly increases economic benefits relative to no-trade alternatives.