September 23, 2022 · 11:00 am - 11:45 am

September 29, 2022 · 11:00 am - 11:45 am

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Andrew Ayres, Ellen Hanak, Brian Gray, Gokce Sencan, Ellen Bruno, Alvar Escriva-Bou, and Greg Gartrell, with research support from Joy Collins

Supported with funding from the S. D. Bechtel, Jr. Foundation, the Water Foundation, and the Water Funder Initiative Water Campaign

The Sustainable Groundwater Management Act mandates that local groundwater users bring their groundwater basins into balance by the 2040s, a process that will ultimately help individual users and their communities build resilience in an era of climate change. As groundwater sustainability agencies and others face a future of pumping reductions and subsequent land fallowing, water banking and water trading may prove important tools to help manage this transition. However, a combination of aging infrastructure and complex, conflicting regulatory structures currently hinders the expansion of banking and trading. Multiple actors can drive reforms to streamline these practices.

Groundwater is a vital resource in California—accounting for more than a third of all water use on average, and more in dry years (Department of Water Resources n.d.). Until recently, groundwater use in most of the state was largely unregulated, and many basins have experienced long-term overdraft—where pumping has regularly exceeded replenishment. This has resulted in a suite of undesirable impacts—including sinking lands, dry wells, degraded water quality, and harm to wetlands and streams.

The Sustainable Groundwater Management Act (SGMA) was enacted in 2014 to remedy this situation. It mandates that local water users bring their groundwater basins into long-term balance by the early 2040s, while addressing the undesirable results of pumping along the way.

SGMA is spurring major changes in water management across California. The first groundwater sustainability plans for the most overdrafted basins—submitted in early 2020—emphasize achieving balance by augmenting water supplies.  Yet reducing water use—and taking significant amounts of farmland out of production—will also be necessary in many basins where pumping regularly exceeds recharge (Hanak et al. 2020). Two related market-based tools may prove essential as Californians adapt to the new regime: water trading and water banking.

California has significant experience with water trading. Since the early 1990s, parties have actively traded surface water across much of the state, and groundwater markets have sprung up in some adjudicated basins, where programs to address overdraft were already in place before SGMA’s enactment. California also has some of the most sophisticated groundwater banks—dedicated underground water storage—in the world. SGMA emphasizes the possibility of expanding existing water markets and developing new ones to help meet the ambitious goal of bringing groundwater basins into balance.

Advantages of trading and banking. Market-based approaches offer several advantages over more rigid approaches to managing scarcity, such as across-the-board groundwater cutbacks. Trading provides incentives to water users who have rights to more ample supplies and lower-value uses to sell or lease water to those with more limited supplies and higher-value uses in agriculture, cities and towns, and the environment. By creating a path for water to find its highest-value uses, trading can lessen the costs of temporary shortages during droughts and support long-term shifts in water use patterns. It can help society adapt to the hydrologic realities of both SGMA and the changing climate, which is bringing more-volatile precipitation and hotter, more intense droughts (Mount et al. 2018). Trading can also facilitate formal groundwater banking projects that store water underground on behalf of specific parties. This is an important supply augmentation and risk management strategy that will likely prove key for SGMA and climate adaptation.

Effective and responsible trading and banking. Shifting water use can also have negative consequences for parties other than the buyers and sellers—often known as “third parties” (Hanak 2003). These include physical impacts on water resources. For example, when surface water trading changes the timing or location of diversions from a river, this may reduce flows available for other water users and the environment. Likewise, when groundwater trades or banking change the location or timing of pumping within an aquifer, this may threaten drinking water if it causes nearby wells to go dry or contaminants to migrate towards these wells.  Under some circumstances, trading can also reduce incomes and jobs in places that fallow farmland to sell water, even as it supports overall economic activity.

Finding ways to minimize the cost of bringing basins into balance, across all parties, will be important for a successful transition to groundwater sustainability.  It is also important to design programs that both limit impacts to third parties and support beneficial water trading and banking. This is a difficult balance to strike, but a range of policies already exist to do just that: much of the legal structure around water trading and banking in California is designed to guard against unreasonable physical impacts, and some policies also address the local economic consequences of significant land fallowing. SGMA adds a new set of protections against significant third-party impacts from groundwater use that will act as guardrails on future trading and banking programs. For example, SGMA’s requirement that groundwater users address significant and unreasonable harm to surface water uses and groundwater-dependent ecosystems brings California water law more in step with the hydrologic reality that most groundwater and surface water systems in the state are connected.

About this report. This report explores how water users and other stakeholders can use existing market institutions—and design new ones—to support SGMA’s mandate of groundwater sustainability while providing the broadest benefits for the economy, communities, and the environment. To ground-truth the analysis, we sought input from a diverse set of more than 90 stakeholders—including representatives from federal, state, and local water agencies and agricultural, urban, environmental, and water justice communities—during an April 2019 workshop and focus group meetings in the spring and summer of 2020.

We begin with some basics: how do trading and banking work, what benefits can they bring, and how could they promote SGMA implementation in different parts of the state? We then review the requirements for establishing effective and responsible markets, and how SGMA creates new opportunities in this regard. The following two sections assess key stumbling blocks for market expansion, and highlight what stakeholders at the local, state, and federal levels can do to make markets work better.

Accompanying this report are two new fact sheets that summarize trends in water trading (Hanak et al. 2021) and groundwater banking (Escriva-Bou et al. 2021), and several technical appendices with a more detailed analysis of legal considerations for water trading and banking (Technical Appendix A), trends in surface water trading and groundwater banking (Technical Appendix B), and a case study of groundwater trading in the Mojave Basin (Technical Appendix C).

In California, water trading and banking are not new, but SGMA is heightening interest in their expansion. Surface water trades now account for roughly 4 percent of agricultural and urban water use (Hanak and Stryjewski 2012; Hanak et al. 2021; Schwabe et al. 2020). Yet the volumes traded have barely grown since the mid-2000s, reflecting a complex approval process involving federal, state, and local restrictions. Groundwater markets have been slow to develop because tradable rights to pump are still rare. A handful of adjudicated basins—where such rights do exist—contains useful examples, and new approaches are being piloted in response to SGMA. Groundwater banking projects already provide important drought reserves in some locations, but poorly defined groundwater rights and a complex set of administrative rules are also limiting their expansion (Escriva-Bou et al. 2021).

Expanding this suite of market-based tools—trading both surface and groundwater, and banking water underground—will be important for attaining groundwater sustainability. Here we provide an overview of how these tools work. We then describe the benefits they can bring, and how they could be useful as part of SGMA implementation.

Water trading involves the transfer of rights to use water on a temporary, longer-term, or permanent basis. Although some sellers trade water they have stored in reservoirs or underground, water usually becomes available for trading when sellers forego their own uses during the term of the agreement. Buyers generally make financial payments to sellers, but they sometimes also repay in water at a later date.

In California, there are three main types of water transfers:

Short-term (typically annual) and longer-term leases are the most common types of transfer in California, but some permanent sales of water rights and contracts also occur. Although outright transfers are the most common form of agreement, water users have also experimented with “dry-year options”—upfront agreements that lay out conditions under which sellers will make water available during droughts. This approach can help parties plan for how they will manage hydrologic risk. Across all types of transfers, most sales are from agriculture—reflecting that sector’s predominance in current water use—and buyers include other farms and agricultural water districts, urban water agencies, and environmental water managers.

Groundwater banking refers to storing water underground on behalf of specific parties for later extraction. What distinguishes banks from other recharge projects is formal accounting for water put into and withdrawn from the bank. Those storing water typically leave some behind (especially when the bank is in a different basin), and pay fees to cover project costs (including infrastructure for delivering and storing water, and the pumping costs of extracting it).

Banks and other recharge projects typically store surface water from local, imported, and developed sources; the water is recharged into the aquifer by spreading it on the land and other methods (Hanak et al. 2018a). It is also possible to store native groundwater that naturally replenishes the aquifer. There are legal distinctions among these sources from a water rights perspective, which matter for both trading and banking programs (Box 1). In particular, the extent to which the water can be transferred to parties outside of the basin depends on the source.

Today, California’s most well-known groundwater banks are in Kern County. They store various types of surface water and use dedicated extraction wells to deliver water to the parties who bank it, both locally and in other basins (Technical Appendix B; Escriva-Bou et al. 2021). As SGMA improves accounting systems, other types of banking could grow significantly as well. This includes recharge programs designed entirely for local use—where parties have accounts and access the water through their own pumps. SGMA also opens up opportunities for individual users to carry over native water from year to year and “bank” it. Our definition of banking also includes well-managed groundwater substitution transfer programs because they potentially, with good accounting, could incentivize individual users to use storage space efficiently and creatively by “borrowing” from recharge in future wet years.

Water trading and banking are closely related activities. Banking projects go through many of the same approval processes as water transfers. In addition, transfers are an important source of water for recharge, and water stored in banks is sometimes sold to other parties.

Groundwater is commonly thought of as a single resource, but California law recognizes several types of groundwater and groundwater rights. The following categories are especially important for trading and banking:

In general, the right to extract and use native groundwater arises either as a result of the ownership of land that overlies the aquifer (overlying rights) or by the act of appropriating the groundwater and putting it to a beneficial use (appropriative rights). In contrast, non-native groundwater is the exclusive property of the importer or developer, if that party intends to reclaim the water following its initial use and does not abandon that claim. Whereas native groundwater held under an overlying right cannot be transferred out of the basin, this restriction does not apply to native water that is held under an appropriative right or to non-native groundwater.

The groundwater in most of the state’s aquifers is a blend of native and non-native supplies. But many of the local, state, and federal rules related to water trading and banking have been applied without clear distinctions among these sources, often treating everything as native groundwater. This creates ambiguity and can reduce incentives to invest in trading and banking programs. As accounting systems develop under SGMA, identifying the different categories of groundwater, and developing a consistent method to measure and account for each category, can provide clarity on ownership and transferability. This also can facilitate market-based programs that could augment supplies and manage demand at a lower cost.

A final category of groundwater is often referred to as “transitional water.” This is native groundwater that is temporarily available for allocation and use, but which will be diminished (and ultimately eliminated) over time as aggregate extraction rights are reduced to comply with SGMA’s sustainability directive. Some groundwater trading programs may allow within-basin trading of this water; the Mojave Basin is one such case (see Box 2).

For more information, see Technical Appendix A (Introduction).

Trading and banking can provide an array of economic benefits to both market participants and society at large. These transactions allow for the cost-effective reallocation of water and the development of water infrastructure, as well as improved management of hydrologic risk. Done well, they can foster cooperation in managing water-related challenges and boost resilience.

Trading allows water users facing shortages to pay other users for making some of their water available. These voluntary transfers are often preferable to the alternatives. The first of these, requiring water to remain locked in its current uses, can result in worse economic outcomes than allowing water to be put to other uses. The second alternative, attempting forced reallocations of water rights established many decades ago, can lead to protracted legal battles.

In California’s surface water market, sellers often have senior water rights, which are more reliable and abundant during dry years, and buyers often have more junior, less reliable rights. But a key requirement for voluntary trades is that water must have a different economic value in different uses: the value of the water to the buyer must be greater than its value to the seller. If sellers make water available by fallowing cropland, they need to be compensated enough to offset at least the loss of income. When water moves to higher-value uses, this also can generate broader benefits because these uses often create more jobs and related economic activity than lower-value uses.

Short-term water leases—occurring within a year—are especially valuable to help manage temporary, drought-related shortages. Multi-year leases and permanent sales of water rights or contracts help accommodate long-term shifts in demand from population growth and changing economic activity (such as a shift from annual to perennial crops, which require water every year). Long-term changes in supply also increase the demand for water purchases. For instance, water trading has helped urban communities in Southern California and perennial crop farmers in the San Joaquin Valley adapt to reductions in surface water deliveries since the 1990s. Likewise, in many basins, new groundwater pumping limitations under SGMA will also increase demand for water purchases.

For those facing shortages, voluntary purchases can be much less costly than developing new water supplies,  which can entail building new storage, treatment, and conveyance structures—expenses that can be cost-prohibitive for water users. Trading and banking also facilitate cost sharing on water investments and make it possible to use water infrastructure to its full potential. California already has numerous examples of trading and banking partnerships that have worked in this way, and there is potential for more in the state’s changing supply and demand landscape. Leveraging opportunities to make the most of water investments can help keep water affordable in both urban and rural areas. For water districts with senior water rights, revenues from trading can help fund local infrastructure that benefits both local growers and the broader community.

California has the most variable climate in the country, and hydrologic risk is a fact of life. Much of the state’s annual water supply arrives in just a handful of storms, and one or two large storms can spell the difference between a wet year and a dry year. One tool that helps water users manage this hydrologic risk is dry-year option trades. These trades enable water users with consistent demands but unreliable supplies to lock in purchases of water during drought from those with more senior, reliable water rights at a pre-arranged price. These trades, which don’t require a permanent transfer of rights, can improve predictability for both buyers and sellers, while also allowing water to remain in other (predominantly agricultural) uses when not needed. Single-year option contracts have not been widely practiced in California, but some longer-term arrangements suggest the promise of trading focused on dry-year reliability.

Groundwater banking is another risk management tool that has been growing in popularity in California. To date, banks have mainly focused on storing surface water from wet years underground for use in dry years. SGMA has heightened interest in capturing and storing additional unclaimed flood flows to augment overall supplies (Hanak et al. 2018a; 2020). Water users we interviewed also noted growing interest in using groundwater banks to store water even in non-wet years, as a hedge against the more severe droughts expected with the changing climate. Groundwater banking requires close connections in the management of —and accounting for—surface and groundwater, so rules governing the transfer and storage of both resources will be critical to the growth of this practice.

Today, water trading and banking are already helping Californians manage shifting demands and variable water supplies. Surface water purchases are improving supply reliability for farms, communities, and the environment in many regions (Hanak and Stryjewski 2012; Hanak et al. 2021). Groundwater trading has helped water users bring their basins into balance cost-effectively in several adjudicated basins in Southern California. And groundwater banks are helping cities and farms manage supply risks in some adjudicated basins and some locations within the Central Valley (Escriva-Bou et al. 2021).

Although market-based tools have not been at the forefront of most early SGMA planning efforts, they are likely to become more prominent as groundwater sustainability agencies (GSAs) implement both demand and supply strategies in their sustainability plans. Yet the specifics are likely to vary considerably. Basins differ in many respects—the extent of groundwater overdraft, the risks of undesirable results from pumping, the portfolio of other water resources available, the degree of connectivity to water conveyance, the mix of users, and other factors—all of which affect both the need and the opportunities for solutions.

Here we provide a brief overview of how basin conditions could shape opportunities for trading and banking across the state. It is useful to distinguish between basins in the Central Valley—a vast contiguous area connected to California’s extensive surface water grid—and other basins subject to SGMA that are more isolated, both from each other and from major surface water infrastructure (Figure 1).

SOURCE: Developed by the PPIC Water Policy Center using information from the California Department of Water Resources. See also Escriva-Bou et al. (2019).

NOTES: “Taf” is thousands of acre-feet. Map A shows 85 priority basins subject to SGMA, and 43 areas where groundwater is already formally managed through adjudication (34 basins) or other special management arrangements (9 basins) as of August 2019. Plans for the 21 critically overdrafted basins were due in January 2020, and plans for the remaining priority basins are due in January 2022. Map B shows 63 surface reservoirs with storage capacity greater than 100 taf, scaled to size. Their combined capacity is 36.6 million acre-feet (maf). The lines show rivers in blue (scaled roughly by annual flows) and built conveyance infrastructure facilities (canals, aqueducts) colored by ownership. Not shown are more than 1,400 smaller reservoirs (with a total capacity of less than 7 maf).

The Central Valley is California’s main farming region, with more than 6 million acres of irrigated cropland. The region also contains significant urban centers and hundreds of small rural communities that depend mainly on groundwater. The region is also home to diverse freshwater ecosystems, and its wetlands and rivers are affected by groundwater use.

Central Valley groundwater basins are large, and they extend over a contiguous area stretching from north of Redding to south of Bakersfield (Figure 1A). Many of these basins are hydrologically interconnected. Much of the region is also connected through the state’s main surface water grid—including the federal Central Valley Project (CVP), the state-run State Water Project (SWP), and numerous local projects (Figure 1B).

Surface water is a significant share of total supplies, particularly in the Sacramento Valley and the Delta. In the San Joaquin Valley, both local and imported surface water is important, but less abundant, and most basins are critically overdrafted. Overdraft is particularly significant in the southern San Joaquin Valley, which receives less rainfall and has fewer supplies from local rivers; recent declines in the reliability of supplies imported by the CVP and the SWP—a result of regulatory changes and drier conditions—have increased the severity of overdraft (Hanak et al. 2019).

Surface water availability also varies considerably within many basins—including those where overall surface water abundance has helped limit overdraft. Even in some relatively water-rich basins such as Colusa in the northwest or Modesto and Turlock in the southeast, some farmland has relatively abundant surface supplies, while other farms depend entirely on groundwater (Figure 2).

SOURCE: Developed by the PPIC Water Policy Center using surface water deliveries from various sources and cropland from the Department of Water Resources 2016 land use layer. For details, see Ehrens et al. (2021) and Jezdimirovic et al. (2020a).

NOTES: Af/acre is acre-foot per irrigated acre. Although irrigation requirements vary somewhat by crop, irrigation method, and other factors, areas with less than 3 af/acre of surface water will generally need to use some groundwater to meet crop water needs. Areas shown in grey include urban areas, managed wetlands, and other open space in all maps; in the perennial crops map, this also includes annual crops, and in the annual crops map, it also includes perennials. Surface water deliveries are averaged for 2010–19 for the Sacramento Valley (with some exceptions due to data availability) and 2001–15 for the San Joaquin Valley (both periods with a mix of wet and dry years).

The water grid connections make it possible to trade and bank water both locally and at greater distances. Surface water trading is already active within both the Sacramento and San Joaquin valleys; relatively water-rich farmers are the main sellers, and farms, cities, and environmental managers are the buyers. Especially during dry years, Sacramento farmers also send water through the Delta to farmers in the San Joaquin Valley as well as to cities in the Bay Area and Southern California. Groundwater banks—located mainly in Kern County in the southern San Joaquin Valley—store water for local users and others in the region and in Southern California and the Bay Area.

SGMA implementation in this region can benefit from continued market-based cooperation among water users, both within and across basins. On the supply side, many groundwater sustainability plans emphasize capturing and recharging additional surface water—particularly from high-flow storms.  Formal groundwater banks can help incentivize these investments, especially where banked water stored underground can be sold to other pumpers. Since the best storage locations—those with good soil characteristics and connections to conveyance networks—will often be offsite (including in other basins), market-based exchanges will also facilitate the use of storage capacity.

The trading of both surface and groundwater is also likely to be broadly helpful within many basins, given the stark disparities in surface water availability across agricultural lands (Figure 2). In particular, many lands with limited surface water are planted with high-value perennials that would be very costly to fallow.  Within the San Joaquin Valley, earlier PPIC research found that by allowing irrigation water to move from lower- to higher-value crops within basins, local trading of surface and groundwater could reduce the regional economic costs of pumping cutbacks by 40 percent. Likewise, trading surface water across basins could keep more higher-value crops in production, reducing costs by another 20 percent and providing additional economic benefits (Hanak et al. 2020).

Despite some early signs of competition over the limited supplies, within-basin cooperation on trading and banking is likely to expand. Several San Joaquin Valley GSAs have begun piloting local groundwater trading, and water users in many basins are exploring ways to cooperate on groundwater recharge and on capital expenditures to extend delivery of surface water to areas where it is lacking. Expanding across-basin cooperation may be more challenging, despite the hydrologic connections that make it possible and the potential economic benefits. Concerns about meeting SGMA’s sustainability requirements—along with local resistance to land fallowing and restrictive local trading policies—could discourage the export of water to other basins, even if there are willing sellers and willing buyers, and the trades could be accomplished without harming other water users or the environment. As we discuss below, much will depend on the rules and practices of the local agencies that oversee transfers and banking.

Most other basins subject to SGMA are more isolated, both from each other and from the statewide water grid. Some—like Paso Robles in San Luis Obispo County or Borrego Springs in San Diego County—have little or no surface water. Absent significant new investments in water conveyance infrastructure, their SGMA solutions will mainly entail managing groundwater demand. Local groundwater trading, along with carrying over and banking groundwater allocations, can help do this cost-effectively. The Mojave Basin, which has one of the most active groundwater markets in the state, provides important insights (Box 2).

In other basins, local surface supplies may be part of the solution. For instance, recharging with local storm runoff and recycled water is likely to be important in parts of the Central and North Coast regions. Groundwater trading and banking can help incentivize water users to manage their demands flexibly and invest in storage in ways that work best for their own bottom lines. The Fox Canyon Basin in Ventura County is an early pilot of groundwater trading in a relatively isolated basin. It is starting small, with annual groundwater trades among farmers—but with the goal of including partnerships with urban agencies, which can broaden the supply portfolio with recycled water.

In the 1990s, groundwater users in the Mojave Desert undertook a court adjudication process that would redefine groundwater rights and create a market to trade them. Today, the Mojave Basin has one of the most liquid groundwater markets in California. Its experience contains insights about groundwater market design that could aid SGMA implementation.

The adjudicated area of the Mojave is large—at approximately 3,400 sq. miles, it is larger than any of the Central Valley’s sub-basins. Along with undeveloped and agricultural land, this area includes the cities of Victorville, Hesperia, and Barstow. The number of users is not particularly large: approximately 450 large-scale pumpers hold volumetric pumping rights. (Domestic well owners are classified as de minimis water users, and their rights are not quantified beyond an annual cap of 10 acre-feet.) Nonetheless, each year hundreds of trades take place—mostly one-time annual leases of pumping allowance, but also the permanent transfer of rights to pump.

Before adjudication, pumping was predominantly for agricultural purposes. Similar to experiences in other adjudicated basins, falling water tables and growing urban water demands prompted interest in limiting pumping to stabilize the water table and ensure the long-term reliability of supplies. Many GSAs may consider the approach that was adopted: an initial allocation of volumetric pumping entitlements, followed by a progressive ramp-down. As pumping allowances declined, trading reallocated water from agricultural to urban and other uses. Farmers received market rates for their water, and today most water pumped in the basin is not for agricultural use. This trading provides real value to both buyers and sellers: A recent analysis suggests that the adjudication resulted in over $500 million in cumulative net economic gains, primarily through reallocation to higher-value uses (Ayres et al. 2021). Besides ag-urban trading, some compensated transfers have also provided water for stream flows, riparian habitat, and other environmental uses.

Several design features of Mojave’s market may inform local planning elsewhere:

Sources: Technical Appendix C (general) and Technical Appendix A, Box 5 (ecosystem-related issues).

Reaping the benefits of water trading and banking programs requires attention to design. Well-designed programs foster an atmosphere of widespread trust in the system, enable beneficial transactions to occur easily, and contain safeguards to address significant harm to third parties. Here we present five essential features of effective and responsible markets. We describe how well California is positioned in each area, and how SGMA is bringing changes that can help fill key gaps.

As with other markets, one fundamental requirement of water markets is a legal system with well-defined, quantifiable, secure rights to the assets that are being traded. The definition of property rights determines what is tradeable and where and when transfers may occur. Sellers must be able to describe the asset for sale, and buyers must have a clear understanding of the rights and expectations to which a purchase might entitle them.  In California, the situation has been quite different for surface water and groundwater.

Most surface water is held under appropriative water rights, which are generally well-defined—and tradeable—under California law. Rules that enable trading are also well established, if complex—often involving multiple layers of review. State Water Board approvals are required for transfers of rights permitted since 1914, and the environmental review requirements of the California Environmental Quality Act (CEQA) apply to all transfers that may have significant environmental impacts—including transfers of the more senior “pre-1914” water rights. In addition, entities that hold rights to water on behalf of their members—including the CVP and SWP as well as local water districts—set rules for the trading of this water. The CVP, the SWP, and various local entities also have rules on how parties may use their storage and conveyance infrastructure to transfer water.

The allocation of well-defined rights to pump groundwater has typically not occurred outside of adjudicated basins, located mainly in Southern California (Figure 1A). Groundwater trading is an important tool for managing water scarcity in some of these basins (for Mojave, see Box 2); in the many other basins now subject to SGMA, a functioning groundwater market will require allocations.

SGMA provides a new legal framework for this: it authorizes GSAs to establish and enforce pumping allocations for individual wells, and to allow these allocations to be traded and stored. In cases where water users are unable to agree on the terms of pumping allocations, companion legislation enacted in 2015 authorizes streamlined basin-wide adjudication of groundwater rights.

Establishing allocations will entail a sea change in local groundwater management. Discussions are generally still in the exploratory stage, and furthest along in several areas that face extreme pumping deficits. Although GSAs will have some flexibility on the design of allocations, these need to rest on a solid legal footing to survive potential challenges (Garner et al. 2020). Tying allocations to explicit delineations between the different types of groundwater—native, imported, and developed—will help in this regard, while also laying the foundation for a strong set of actions to end overdraft, including trading and banking programs (Box 1). One area of continued uncertainty is how GSAs may craft allocations of native groundwater for “dormant” claimants—those who own overlying land but have not pumped.

Reliable measurement, reporting, and verification underpin the type of comprehensive and robust accounting systems that are essential to establish trust in market transactions. All water users must trust that the system is accurately measuring and tracking water. For example, for trading, it’s key to ensure that a seller is only selling water to which they have valid rights of use, and not water that belongs to another party. For groundwater banking, measurement and monitoring are important to protect the assets of the parties depositing water in the bank, as well as other parties who use the aquifer. In both cases, well-designed accounting systems that enable water rights tracking are paramount.

Establishing effective, low-cost systems for tracking market transactions is part and parcel of a strong water accounting system. While there is still room for improving surface water accounting in California, the biggest gaps have been in groundwater accounting outside of adjudicated basins (Escriva-Bou et al. 2016). Most basins subject to SGMA have been investing heavily in understanding local supplies and demands—a key step in establishing sound pumping allocations and determining how much water is tradable. Understanding how water moves within the aquifer is also essential for establishing successful groundwater banking programs.

As noted earlier, water trading and banking also require hydrologic connections between transacting parties. Groundwater purchases and sales within the same basin typically do not require physically moving water from one party to the other; tracking them just requires good record-keeping. In contrast, surface water transactions—both for sales and for banking underground—often require moving water through conveyance systems, including rivers, canals, and pipelines. Water exchanges that allow parties to substitute one source of water for another can reduce the need to move water physically, lowering transaction costs (Escriva Bou et al. 2020). California’s extensive grid of water storage and conveyance infrastructure has enabled parties to trade and bank with each other, even across long distances (Figure 1B). Yet capacity constraints are a growing concern in light of changing hydrology, including more volatile precipitation and earlier spring runoff. Other sources of strain on the system include the physical loss of capacity in critical regional and local conveyance infrastructure due to subsidence, and the increased demand for trading and banking under SGMA. In addition to establishing rules for trading and banking, many areas are finding it necessary to establish or adapt rules for use of conveyance capacity.

Although trading can happen without it, transparency about market rules and conditions is an essential feature of well-designed water markets. Transparency helps build trust among market participants and the wider community by clarifying a number of important questions. For instance, how much water can be traded under different circumstances? What information must be submitted to receive approval for a trade? What rules apply regarding the quality of water to be moved from one location to another? While larger market participants—such as water agencies and large farms—have the capacity to gather all the relevant information on their own, information costs can be a barrier to entry for smaller water users. Easily accessible information on volumes sold and market prices can also improve market function.

California’s current system for surface water trading is not especially transparent. Most trading is conducted by large agencies, and even they sometimes complain about the opacity of the approval process. While providing specific information about individual growers’ transactions could make it harder for them to compete, having overall information about market trends for quantities and prices could be broadly helpful; such information is currently very limited. Numerous stakeholders we interviewed stressed the importance of establishing transparent processes when launching new groundwater markets under SGMA. At issue is less the particular trading system or platform used to help buyers and sellers find each other, but more that the transacting rules are clear and that parties can easily ascertain when, where, and how much water is moving.

Market rules that cannot support easy, low-cost trading and banking will do little to reduce the societal costs of managing water scarcity and hydrologic risk. But trading and banking programs need to consider the potential negative impacts on third parties that result from changing where and when water is used. A central challenge for market design is crafting processes that can take these impacts into account—and mitigate when necessary—without stifling market activity.

There are two distinct types of third-party impacts: physical impacts on water and related resources used by others, and economic impacts in communities that are fallowing land to sell water (Hanak 2003; Hanak and Stryjewski 2012). Addressing significant physical impacts is important to ensure not only that water markets are fair, but also that they are actually providing the intended benefits. Addressing the economic impacts of land fallowing in source regions can be important for ensuring the well-being of local communities and for obtaining their buy-in.

California law addresses both types of impacts, and most trading and banking programs require consideration of third-party harm as part of the approval process—though not always consistently or effectively. SGMA is a game changer for considering physical impacts because it introduces a comprehensive framework for designing protections against potential undesirable results of groundwater use (Box 3). Under SGMA, basin activities and programs, including trading and banking, need to demonstrate the avoidance of these results.

Here we review these impacts, their respective legal requirements, and the mitigation actions available. The following section discusses some of the challenges of addressing these impacts effectively while facilitating beneficial market activity.

SGMA introduces a comprehensive set of protections against six undesirable effects of groundwater use: (1) drawing down water levels too far, (2) depleting storage in the aquifer, (3) degrading water quality, (4) allowing seawater intrusion, (5) causing land to subside, or (6) using groundwater in ways that reduce other people’s surface water or harm ecosystems.

Groundwater sustainability plans must avoid or mitigate these effects when they are “significant and unreasonable.” While there is some room for interpretation on where this threshold lies, ensuring these protections is fundamental to complying with SGMA. These protections are especially important for limiting how and where continued overdraft can be allowed in the first 20 years of plan implementation, when basins are still transitioning to sustainability. They also set guideposts for addressing third-party impacts from trading and banking projects. Key issues include:

Source: Technical Appendix A (Part 1).

Reallocating water can cause negative physical impacts—such as reduced water supply or quality for other water users. These types of effects are sometimes known as externalities; when they are significant, they need to be prevented or mitigated.  The potential issues vary with local conditions and the source of water.

Potential impacts. A key concern is that transfers may reduce the volume of water available for downstream water users or the environment. This can occur if parties transfer the entire volume of water they would have used—or their “applied water use”—rather than the smaller, net volume of water they would have consumed (or “consumptive use”). The difference between these two quantities is known as “return flow”—the water that returns to a watercourse or a groundwater basin after application, such as irrigation drainage or treated wastewater (Escriva-Bou et al. 2016). Harm can occur because return flow is often reused downstream; if a seller transfers the entire applied water use, this return flow might not be available to those users.

Legal requirements. Water transfers generally must not cause unreasonable harm to the environment and other third parties (Hanak and Stryjewski 2012). It is also common for the State Water Board, and other state and federal agencies with jurisdiction over water transfers, to require that parties mitigate or avoid significant, unavoidable third-party impacts.

Mitigation actions. To prevent parties from selling water to which someone else has a right, surface water transfers are generally limited to the consumptive use portion of applied water—particularly if the water is being moved outside the local area.  If changing the timing and place of use affects water quality—for instance by changing water temperatures in rivers or streams—transfer volumes may be subject to additional restrictions.

Potential impacts. If trading results in localized declines in water levels, it can reduce groundwater availability for other users. Localized declines—or “cones of depression”—can also cause contaminants to migrate within the aquifer, affecting water quality.  In some areas, localized increases in pumping can also accelerate land subsidence, potentially damaging infrastructure. Finally, in areas where groundwater and surface water are hydrologically connected, increased groundwater use can reduce streamflow, potentially harming surface water users and the environment. Groundwater substitution transfers (that is, selling surface water rights and pumping groundwater to make up the difference) can raise similar concerns. Groundwater banking projects can also cause localized impacts—particularly when banks draw down reserves in dry years.

Legal requirements. Unlike surface water, the state does not directly regulate most groundwater rights, and it has been much less involved in setting groundwater trading policies. Once California’s water market took off in the early 1990s, the lack of comprehensive state “no injury” protections led many counties to adopt ordinances that provide some safeguards for local groundwater users, by restricting groundwater substitution transfers and direct groundwater exports.  SGMA’s broad requirements to avoid or mitigate significant undesirable results of groundwater use (Box 3) go much further, filling an important gap in state protections.

Mitigation actions. These various impacts can be addressed with careful measurement and monitoring; programs that provide affected parties with alternative water supplies; and rules that avoid harm such as requiring well spacing (Brozović et al. 2006), restricting trading to specific zones, setting trading ratios that give lower credit to pumpers in locations where there are surface impacts, or limiting groundwater purchases in vulnerable areas.

It is important to recognize that unmanaged groundwater use can cause harm—such as dry drinking-water wells or infrastructure damage from land subsidence—regardless of whether trading or banking occur. Indeed, well-designed trading and banking programs can help water users reduce overdraft and its negative impacts. Although SGMA has significantly increased protections against the negative impacts of groundwater use under state law, there is limited confidence that local GSAs will provide these protections. This has heightened sensitivities around the potential negative impacts of trading and banking. In the San Joaquin Valley—a critically overdrafted region where drinking water wells have already experienced supply and quality impacts from pumping—the first sustainability plans have significant gaps in protections for domestic wells. These planning gaps—along with uncertainties about how much groundwater will be allocated to small, well-dependent communities—reduce communities’ confidence in the GSAs’ ability to administer effective and responsible trading and banking programs, even though these communities could benefit from trading (Box 4). As described further below, this issue requires more attention and a focused commitment to reform.

Concerns have been raised that low-income, groundwater-dependent communities are at risk of harm from groundwater markets (Ores et al. 2020). With shallow wells and limited resources to drill deeper wells or access alternative supplies, these communities are among the most vulnerable to the effects of overdraft. Indeed, nearly 3,000 domestic wells—mostly within overdrafted basins in the San Joaquin Valley—were reported dry during the 2012–16 drought, when increased groundwater pumping for irrigation caused groundwater levels to fall rapidly (Mount et al. 2018). And roughly 150 small community water systems—half in the San Joaquin Valley—needed emergency assistance during the drought. Water quality problems—such as higher levels of arsenic—have also been aggravated by this pumping (Smith et al. 2018).

Groundwater trading and banking programs will need to address potential injury to these communities (for possible mitigation actions, see main text). Yet it is also important to recognize that unrestricted groundwater pumping, rather than trading, is the principal cause of well impacts. SGMA’s requirement that local groundwater agencies bring basins into balance should benefit these communities. But there are well-founded concerns that the pace of progress will be too slow to prevent shallow wells from going dry, and that plans do not adequately describe how they will address significant impacts to these wells from continued overdraft, which could again become an acute problem during the unfolding drought (Escriva-Bou and Pauloo 2021; Vad 2021).

Another concern relates to the process for allocating groundwater pumping rights to these communities, which have limited financial and technical capacity to engage. To date, there has been considerable uncertainty about how this process will unfold, and stakeholders we spoke with indicated that the initial proposals were all over the map—ranging from no explicit allocation to an acreage-based allocation far below existing water use, or allocation based on current use. If allocations come in below current water use—or if these communities expand and need additional supplies—they could struggle to purchase water on the market or afford fees applied to pumping in excess of their allocation.

It is essential to address potential risks to drinking water supplies. However, water markets could provide substantial overall benefits to low-income rural communities in overdrafted areas by helping maintain local economic activity. Within the San Joaquin Valley, allowing surface water and groundwater used for irrigation to go to higher-value crops could save thousands of farm-related jobs as the region implements SGMA (Hanak et al. 2019). To ensure that this trading does not simultaneously cause harm to vulnerable drinking water supplies, GSAs will need to establish adequate mechanisms to address negative impacts from pumping and trading, and establish reasonable allocations. Transparent processes and strong community inclusion and engagement will be key to building trust.

Potential impacts. Water transfers that result in land fallowing can cause physical impacts beyond those discussed above—for instance on neighboring farmland, wildlife, or air quality—for which mitigation may be required. But a central concern with these transfers is that they could reduce local economic activity. Transfers compensate landowners who fallow fields for the crop revenues they forego, but local businesses, workers, and governments do not automatically receive compensation for related slowdowns in economic activity. Such impacts may occur as part of overall improvements in economic outcomes from moving the water to higher-value uses.

Legal requirements. Although state law does not require mitigation for economic spillovers, it does require review of these impacts under some circumstances.  And concerns over local economic impacts loom large in local policies around water trading.

Mitigation actions. Even when not legally required, it is generally prudent for participants in transfers that result in land fallowing to consider these concerns, especially if the transfer involves large acreages and the water is moving far enough away that the local economy will not see the benefits. Trading parties have experimented with establishing mitigation or community development funds to support the local economy in large ag-to-urban transfers of Colorado River water.  Such programs may yield lessons for addressing community concerns in places where SGMA could cause significant land fallowing.

Our discussions with stakeholders revealed considerable optimism about water marketing’s potential to help California transition to more sustainable groundwater management and build resilience to the changing climate. But we also heard numerous concerns about the challenges that lie ahead. Some concerns relate to the difficulties of creating effective new structures for groundwater governance. In addition, the broader context in which GSAs will be doing this work poses challenges. Bottlenecks in the physical infrastructure that connects water users and enables trading and banking partnerships are an issue. Stakeholders also mentioned stumbling blocks and missed opportunities related to the complex suite of rules and procedures for approving water trading and banking at the federal, state, and local levels. Here we summarize some of the key issues raised; the following section outlines approaches for overcoming these constraints.

SGMA requires new forms of collaboration and coordination among water users, and difficult collective decisions about how to set up rules around pumping, trading, storage, and more. In most places, the GSAs put in charge of sustainability planning were entirely new governance structures, and any governance structure needs time to develop trust. This planning began with inadequate information about basin conditions, groundwater use, well characteristics, and other factors—all of which are key to avoiding undesirable results of overdraft and developing successful trading and banking programs. The early years of plan implementation will be a time of capacity building on both information and governance. We should not expect to see rapid completion of groundwater allocations and the launch of new groundwater trading platforms and banks. Instead, this will be a time of experimentation, pilots, trial and error, data gathering and aggregation, and incremental progress.

Although California has significant conveyance capacity compared with other western states, the system also has several major bottlenecks. Physical pumping capacity, as well as regulatory requirements to meet salinity and other environmental standards, limits water users’ ability to move surface water through the Sacramento–San Joaquin Delta. This can inhibit trading and banking from the wetter northern and eastern parts of the state to points west and south in most years (Gartrell et al. 2017). Land subsidence has also reduced the capacity of several major canals within the San Joaquin Valley—a particular constraint on moving high-flow water into groundwater banks in that region and Southern California. Local and regional conveyance may also be inadequate to facilitate water banking and trading arrangements in many regions. Conveyance may become an even greater constraint as the climate warms and becomes more volatile, making it necessary to capture even larger amounts of water for banking and recharge during wet periods just to maintain existing supplies (Mount et al. 2018; He et al. 2021; Alam et al. 2020).

Various state and federal reforms were adopted in the 1980s and early 1990s to encourage trading, while also clarifying “no injury” protections for the environment and other third parties (Hanak and Stryjewski 2012). Resolving the tensions between these two objectives is a recurring theme in ongoing efforts to improve trading rules.

Although water trading and banking typically require approvals from multiple state and federal agencies, the entities central to many transactions are the two large projects: the federally owned CVP and the state-owned SWP. They hold the water rights for a majority of surface water used in the Central Valley, and they own and operate the infrastructure that other parties rely on to move water through the Delta and within regions. Both projects have made progress in facilitating water trading and banking since the early 1990s, but some challenges remain.

Among other state and federal processes, stakeholders highlighted the following three as posing significant challenges for trading and especially banking—particularly when water needs to move through the Delta.

The new GSAs are just one of several types of local entities involved in trading and banking approvals. Lack of flexibility and discriminatory treatment of transfers are important concerns.

Managing groundwater sustainably is essential for California’s economic, social, and environmental well-being. But getting there will not be easy. Expanding water trading and banking can help lessen the economic and social costs of implementing SGMA and aid adaptation to the changing climate.

Growing effective and responsible water markets will require overcoming some obstacles, to be sure. Indeed, the list of bottlenecks and stumbling blocks described above may seem daunting, but California is well-poised to meet the challenge. The state can draw from significant market experience, including several decades of extensive surface water trading, active groundwater markets in some adjudicated basins, and some of the most highly developed groundwater banks in the world. Another asset is a comprehensive—if complex—suite of laws and regulations that seeks to address the key policy tension for water markets: promoting flexibility, while preventing significant harm to third parties. SGMA itself should be seen in this light; it provides a new set of authorities for local management agencies to create trading and banking programs, along with a new set of protections against significant third-party impacts from groundwater use.

Here we recommend ways to seize the opening afforded by SGMA to improve existing water markets and develop new ones. In Table 1, we summarize key areas of reform and recommended actions, alongside primary responsible parties. We explore these recommendations in more depth below. The frontline responsibility for reform rests with a variety of local governments and stakeholders, as well as state and federal agencies. Most of the recommended changes can be accomplished within existing agency authorities, without new legislation. But leadership—and a willingness to take risks and push boundaries—will be essential to success.

NOTE: Responsible parties are priority actors; others will likely be involved in this work as well.

To reap the benefits of groundwater trading and banking, the underpinnings of groundwater markets will need to be set up correctly. This will include establishing broadly accepted and legally defensible methods of setting and enforcing groundwater pumping allocations, a trusted system for tracking transitions and storing data, and a fair and technically based process for addressing significant undesirable effects of groundwater use. Who’s responsible: GSAs, in conjunction with their members (mainly agricultural water districts, urban utilities, and counties) and other interested parties (growers, small communities, environmental managers, and local businesses).

Groundwater allocations are not required under SGMA, but they will be invaluable for limiting pumping in basins where demand exceeds supply. Well-defined allocations and a strong monitoring and enforcement system are also essential features of well-designed groundwater trading and banking programs (Babbitt et al. 2017). These actions are key:

A fundamental SGMA requirement involves avoiding or mitigating six significant undesirable results of groundwater use (Box 3, above). This is also an essential feature of effective and responsible markets. Key actions include:

Resolving the tensions between facilitating beneficial market transactions and protecting third parties from significant harm has been an ongoing theme in policy discussions at the local, state, and federal levels. Stakeholders we spoke with highlighted three distinct but related types of tradeoffs:

Despite the challenges, there are better ways to manage some key tradeoffs. Adopting well-designed approval strategies, adapting the process for reviewing transactions that move through the Delta, and developing comprehensive approaches to the issues associated with land fallowing all can help.

Solutions entail finding ways to streamline reviews while maintaining protections against injury, and expanding the place of use for water:

Because the Delta is such an important hub for moving surface water from wetter to drier regions, the approval process for trading and banking is especially important. Key actions include:

By enabling water to move to the most productive lands, trading can help reduce the local, regional, and statewide economic impacts of having less irrigation water. But land fallowing raises numerous concerns: it reduces economic activity, and it can cause negative physical impacts, such as increased pests and weeds and impaired air quality from dust and higher fire risk. The concerns about fallowing go well beyond localized impacts to broader regional concerns about SGMA in areas facing large groundwater deficits. Developing strategies to soften the blow of fallowing will be important both to facilitate beneficial trading, and more broadly to ensure long-term SGMA success. Local and regional action will be essential, but state and federal agencies could provide support. Key actions include:

Transparent information and a trusted data and transaction system around water market rules and performance are other essential features of well-designed markets; they help to build trust and broaden access. In addition, more equitable rules will level the playing field and create opportunities for more beneficial trading. Local, state, and federal entities can all make improvements:

Hydrologic connections are an essential feature of water markets, and California currently has significant conveyance bottlenecks for water trading and banking. Key actions include:

Trading and banking show how local and regional collaboration can help Californians meet the challenges of managing groundwater sustainably and adapting to a changing climate. Effective and responsible markets require agreements between the transacting parties and attention to the broader impacts on communities and the environment. Collective efforts will also be necessary to make smart infrastructure investments and to plan for the best possible farmland transitions in areas with large groundwater deficits—both of which are key to successful trading and banking. None of this will be easy, and the forces pulling parties into hyper-local solutions and competition over scarce resources are also strong. State and federal agencies can help incentivize collaboration through financial and regulatory incentives. These include:

Bringing groundwater back into balance under SGMA will help California’s water users improve the water system’s resilience and find new, more reliable ways to meet the needs of agriculture, cities, and the environment. However, this transition will come with growing pains; as local agencies implement SGMA, water availability will decline in many parts of the state. Well-designed water markets will be an important tool to help California manage future scarcity.

Though California has some of the most active surface water trading and groundwater banking programs in the world, considerable work lies ahead to enable such programs to meet today’s needs. Priorities include laying the foundation for new local groundwater markets by establishing groundwater allocations and working to address undesirable effects of groundwater use. In addition, local, state, and federal agencies—in cooperation with other stakeholders—will need to adopt effective and responsible approval strategies, refine existing regulations, and provide transparent water market information. Californians will also need to make smart infrastructure investments that support flexible water management, while addressing the local and regional impacts of land fallowing—an unavoidable consequence of growing water scarcity.

Fortunately, this work is largely achievable under the current regulatory structure. It also comes at an important time: in addition to preventing further land subsidence, dry wells, and other harm from unsustainable pumping, bringing groundwater back into balance will also help California’s society, economy, and environment adapt to the growing effects of climate change.

While the obstacles are considerable, so are the opportunities. Collaboration and innovation will be key to successfully meeting the challenges ahead.

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Andrew Ayres is a research fellow at the PPIC Water Policy Center. He is an environmental and natural resource economist focused on questions related to the design, development, and effectiveness of legal and economic institutions for managing the environment. His work often involves applied economic modeling and econometric analysis. Previously, he worked in Germany and the United States on projects to inform policy-making related to topics such as climate change, energy, river restoration, and water pricing. He holds a PhD in economics and environmental science from the University of California, Santa Barbara, and a BA in economics from Pomona College.

Ellen Bruno is an assistant cooperative extension specialist in the Department of Agricultural and Resource Economics at UC Berkeley. She conducts research and outreach on economic and policy issues relevant to California’s agriculture and natural resources, with a particular focus on groundwater. She holds a PhD in agricultural and resource economics from UC Davis and a BS in management science from UC San Diego.

Joy Collins is a research associate at the PPIC Water Policy Center. Her research interests include climate, water, and health policy interactions; groundwater management; and social determinants of health. Prior to joining PPIC, she worked in Cape Town, South Africa as a lecturer on climate change, violence, and infectious disease, and as a researcher studying the influence of urbanization on the climate and culture of the Guangdong Province of China. She previously worked in Washington DC as an intern at the Agency for International Development, and as an environmental resilience extern at the Aspen Institute. She holds a master’s degree in public health from the University of Virginia School of Medicine and a BA in global studies with a minor in environmental science from the University of Virginia.

Alvar Escriva-Bou is a senior fellow at the PPIC Water Policy Center. His research explores integrated water, energy, and environmental resources management. Since joining PPIC in 2015, his research has explored the options and consequences of transitioning to groundwater sustainability in the San Joaquin Valley, analyzed California’s water accounting system, studied urban drought resilience, and investigated energy and climate policies related to water use, among others. Previously, he worked as a civil engineer, managing and developing large infrastructure projects for local and regional governments and consulting firms in Spain. He holds a PhD and MS in water and environmental engineering and a BS in civil engineering from the Polytechnic University of Valencia in Spain, as well as an MS in agricultural and resource economics from the University of California, Davis.

Greg Gartrell is an adjunct fellow at the PPIC Water Policy Center. He retired from his position as assistant general manager at the Contra Costa Water District (CCWD) in California, where he managed CCWD’s planning, Delta projects, water resources, and watershed and lands departments. His accomplishments include environmental permitting and engineering design for more than $350 million in projects. He was responsible for developing and implementing a 50-year strategic plan for improving the water supply reliability of CCWD, and he managed CCWD’s recreation and watershed programs. He is the recipient of the Association of California Water Agencies (ACWA) Lifetime Achievement Award, the ACWA Excellence in Water Leadership Award, and the Lorenz Straub Award for his doctoral thesis. He holds a PhD in environmental engineering science from the California Institute of Technology.

Brian Gray is a senior fellow at the PPIC Water Policy Center and professor emeritus at the University of California, Hastings College of the Law in San Francisco. He has published numerous articles on environmental and water resources law and coauthored a variety of PPIC reports, including the 2011 interdisciplinary book on California water policy, Managing California’s Water: From Conflict to Reconciliation. He has argued before the California Supreme Court and the US Court of Appeals in cases involving wild and scenic rivers, water pricing reform, takings, and water rights and environmental quality. He is a recipient of the William Rutter Award for Excellence in Teaching and the UC Hastings Outstanding Professor Award. He holds a JD from the University of California, Berkeley, and a BA in economics from Pomona College.

Ellen Hanak is vice president and director of the PPIC Water Policy Center and a senior fellow at the Public Policy Institute of California, where she holds the Ellen Hanak Chair in Water Policy. Under her leadership, the center has become a critical source of information and guidance for natural resource management in California. She has authored dozens of reports, articles, and books on water policy, including Managing California’s Water. Her research is frequently profiled in the national media, and she participates in briefings, conferences, and interviews throughout the nation and around the world. Her other areas of expertise include climate change and infrastructure finance. Previously, she served as research director at PPIC. Before joining PPIC, she held positions with the French agricultural research system, the President’s Council of Economic Advisers, and the World Bank. She holds a PhD in economics from the University of Maryland.

Gokce Sencan is a research associate at the PPIC Water Policy Center. Her research interests include water markets and climate-water policy interactions. Prior to joining PPIC, she worked on several projects, including water purchasing opportunities for environmental flows from retiring coal-fired power plants and the financial benefits of reducing carbon dioxide emissions through land-use interventions in California. She previously worked as an intergovernmental affairs intern at the United Nations Environment Programme in New York and as a climate change research intern at Istanbul Policy Center. She holds a master’s degree in environmental science and management from the Bren School at the University of California, Santa Barbara, and a BS with a double major in chemical-biological engineering and molecular biology from Koc University, Istanbul.

This research would not have been possible without the generous contributions of more than 90 local, state, and federal agency representatives and other stakeholders who participated in workshop and focus group discussions about water marketing and banking opportunities and constraints. In addition, data for analysis in the appendices was provided by the US Bureau of Reclamation, California Department of Water Resources, WestWater Research, and various local water managers (Technical Appendix B) and the Mojave Watermaster (Technical Appendix C).

We also thank the following individuals whose reviews of an earlier draft of this report greatly improved this final version: Stephanie Anagnoson, Eric Averett, Christina Babbitt, Thad Bettner, Kimberly Brown, Peter Kavounas, Dale Melville, Mike Myatt, Jon Reiter, and Valerie Wiegenstein. In addition, thanks for very helpful reviews of Technical Appendix A to Christina Babbitt, Eric Garner, Nell Green Nylen, Peter Kavounas, Russ McGlothlin, Roger Patterson, Leon Szeptycki, and to Valerie Wiegenstein, who reviewed Technical Appendices A and C. Finally, special thanks to Sarah Bardeen, who provided expert editorial support, and to Jeff Mount, who served as lead reviewer and provided overall guidance to the team. The authors alone are responsible for any remaining errors or omissions.

This publication was developed with support from the S. D. Bechtel, Jr. Foundation, the Water Foundation, and the Water Funder Initiative Water Campaign. Research publications reflect the views of the authors and do not necessarily reflect the views of our funders or of the staff, officers, advisory councils, or board of directors of the Public Policy Institute of California.

Steven A. Merksamer, Chair Of Counsel Nielsen Merksamer Parrinello Gross & Leoni LLP

Mark Baldassare President and CEO Public Policy Institute of California

Louise Henry Bryson Chair Emerita, Board of Trustees J. Paul Getty Trust

Chet Hewitt President and CEO Sierra Health Foundation

Phil Isenberg Former Chair Delta Stewardship Council

Mas Masumoto Author and Farmer

Leon E. Panetta Chairman The Panetta Institute for Public Policy

Gerald L. Parsky Chairman Aurora Capital Group

Kim Polese Chairman ClearStreet, Inc.

Cassandra Walker Pye Executive Vice President and Chief Strategy Officer Lucas Public Affairs

Helen Iris Torres CEO Hispanas Organized for Political Equality

Gaddi H. Vasquez Retired Senior Vice President, Government Affairs Edison International Southern California Edison

Celeste Cantú, Chair San Diego Water Quality Control Board

David Puglia, Vice Chair Western Growers

Linda Rosenberg Ach The Rosenberg Ach Foundation

Mark Baldassare Public Policy Institute of California

Lauren B. Dachs S. D. Bechtel, Jr. Foundation

Dan Dunmoyer California Building Industry Association

Dave Eggerton Association of California Water Agencies

E. Joaquin Esquivel State Water Resources Control Board

Debbie Franco Governor’s Office of Planning and Research

Phil Isenberg Former Chair, Delta Stewardship Council

Sandi Matsumoto The Nature Conservancy

Cannon Michael Bowles Farming Company

Jonathan Nelson Community Water Foundation

Allison Harvey Turner Water Foundation

Dee Zinke Metropolitan Water District of Southern California

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