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The Economic Value of Groundwater in Obama

Worldwide, freshwater is important not only for direct consumption but also for its role in the production of a variety of goods and services. For example, water is used for cooling nuclear reactors and as an input for the production of energy via hydroelectric processes. Freshwater also is essential for the production of food, including crops and livestock. Recognizing these synergies and identifying tradeoffs are key components of water-energy-food (WEF) nexus research (Taniguchi et al., 2013; Loring et al., 2013; Giampietro et al., 2014). In this study, we focus on Obama City, Japan, where groundwater is used directly for domestic and commercial consumption and for melting snow. Stored groundwater also provides an indirect benefit: submarine groundwater discharge (SGD) from the aquifer supports the nearshore ecology, including a locally important fishery. Using this case study, we document some common challenges that arise when undertaking WEF research and outline an example of an integrated approach that combines multiple modes of analysis to overcome those obstacles.


Benefit-Cost Analysis of Watershed Conservation

The objectives of this report are (1) to review studies that estimate the relationship between watershed conservation activities and groundwater recharge in Hawai‘i and (2) to estimate the volume of freshwater yield saved per dollar invested in conservation at several sites on Hawai‘i Island. We conclude from the literature review that more work should be done to integrate information from smaller-scale studies of invasive-native water use differences into regional water balance models. This would help to inform decisions related to watershed conservation activities statewide. Using budget information obtained from the Nature Conservancy and the Division of Forestry and Wildlife as well as publicly available landcover and evapotranspiration (ET) data, we estimate the gallons of freshwater yield saved per dollar invested in watershed conservation. Under baseline conditions—a 3 percent discount rate and a 10 percent rate of spread for existing invasive plant species—roughly 400 gallons are saved on average across management sites per dollar invested. In other words, about $2.50 in present value terms is required to protect every one thousand gallons of freshwater over a 50 year time horizon. Annual benefits increase continuously as the avoided loss of freshwater yield rises over time, while conservation costs tend to be front-loaded, as a result of high fence installation and ungulate removal costs. Thus, it is important to consider the long run when comparing the benefits and costs of conservation activities.

working paper

Incentivizing interdependent resource management: watersheds, groundwater, and coastal ecology

Managing water resources independently may result in substantial economic losses when those resources are interdependent with each other and with other environmental resources. We first develop general principles for using resources with spillovers, including corrective taxes (subsidies) for incentivizing private resource users. We then analyze specific cases of managing water resources, in particular the interaction of groundwater with upstream or downstream resource systems.

Published version: Burnett, Kimberly, Sittidaj Pongkijvorasin, James Roumasset, and Christopher A. Wada. "Incentivizing interdependent resource management: watersheds, groundwater and coastal ecology". Handbook of Water Economics. Cheltenham, UK: Edward Elgar Publishing, 2015. Print.


Groundwater Economics without Equations

In many parts of the world, irrigation and groundwater consumption are largely dependent on groundwater. Minimizing the adverse effects of water scarcity requires optimal as well as sustainable groundwater management. A common recommendation is to limit groundwater extraction to maximum sustainable yield (MSY). Although the optimal welfare-maximizing path of groundwater extraction converges to MSY in some cases, MSY generates waste in the short and medium term due to ambiguity regarding the transition to the desired long-run stock level and failure to account for the full costs of the resource. However, the price that incentivizes optimal consumption often exceeds the physical costs of extracting and distributing groundwater, which poses a problem for public utilities facing zero excess-revenue constraints. We discuss how the optimal price can be implemented in a revenue-neutral fashion using an increasing block pricing structure. The exposition is non-technical. More advanced references on groundwater resource management are also provided.


The Good, Bad, and Ugly of Watershed Management

Efficient management of groundwater resource systems requires careful consideration of relationships — both positive and negative — with the surrounding environment. The removal of and protection against “bad” and "ugly" natural capital such as invasive plants and feral animals and the enhancement of “good” capital (e.g. protective fencing) are often viewed as distinct management problems. Yet environmental linkages to a common groundwater resource suggest that watershed management decisions should be informed by an integrated framework. We develop such a framework and derive principles that govern optimal investment in the management of two types of natural capital — those that increase recharge and those that decrease recharge — as well as groundwater extraction itself. Depending on the initial conditions of the system and the characteristics of each type of natural capital, it may make sense to remove bad capital exclusively, enhance good capital exclusively, or invest in both activities simultaneously until their marginal benefits are equal.


Optimal Joint Management of Interdependent Resources: Groundwater vs. Kiawe (Prosopis pallida)

Local and global changes continue to influence interactions between groundwater and terrestrial ecosystems. Changes in precipitation, surface water, and land cover can affect the water balance of a given watershed, and thus affect both the quantity and quality of freshwater entering the ground. Groundwater management frameworks often abstract from such interactions. However, in some cases, management instruments can be designed to target simultaneously both groundwater and an interdependent resource such as the invasive kiawe tree (Prosopis pallid), which has been shown to reduce groundwater levels. Results from a groundwater-kiawe management model suggest that at the optimum, the resource manager should be indifferent between conserving a unit of groundwater via tree removal or via reduced consumption. The model’s application to the Kona Coast (Hawai‘i) showed that kiawe management can generate a large net present value for groundwater users. Additional data will be needed to implement full optimization in the resource system.


Optimal groundwater management when recharge is declining: a method for valuing the recharge benefits of watershed conservation

Demand for water will continue to increase as per capita income rises and the population grows, and climate change can exacerbate the problem through changes in precipitation patterns and quantities, evapotranspiration, and land cover—all of which directly or indirectly affect the amount of water that ultimately infiltrates back into groundwater aquifers. We develop a dynamic management framework that incorporates alternative climate-change (and hence, recharge) scenarios and apply it to the Pearl Harbor aquifer system on O‘ahu, Hawai‘i. By calculating the net present value of water for a variety of plausible climate scenarios, we are able to estimate the indirect value of groundwater recharge that would be generated by watershed conservation activities. Enhancing recharge increases welfare by lowering the scarcity value of water in both the near term and the future, as well as delaying the need for costly alternatives such as desalination. For a reasonable range of parameter values, we find that the present value gain of maintaining recharge ranges from 31.1million to over1.5 billion.

Published version: Burnett, K. and Wada, C.A., 2014. Optimal groundwater management when recharge is declining: a method for valuing the recharge benefits of watershed conservation. Environmental Economics and Policy Studies. In Press.


Integrating Demand-Management with Development of Supply-Side Substitutes

Sustaining water availability at current prices in the face of growing demand and declining resources is not possible, and scarcity is further exacerbated by falling recharge levels due to climate change, urbanization, and watershed depreciation. We discuss an integrated approach to water-resource development based on principles of sustainability science. In addition to demand management such as pricing, we consider supply-side substitutes such as desalination and wastewater recycling. The importance of integrating demand- and supply-side approaches is especially evident in the case of watershed conservation as climate adaptation. Watershed conservation reduces scarcity by improving groundwater recharge. Yet, incorrect pricing can waste those potential gains. We discuss a joint management strategy, wherein block prices for groundwater consumption and co-determined prices for watershed conservation incentivize and finance efficient profiles of both.


Ordering Extraction from Multiple Aquifers

Optimal groundwater extraction satisfies the condition that the marginal benefits of water consumption equal the full marginal cost of extraction in each period, including the opportunity cost of future benefits foregone. But how should this well-known condition be generalized when there are multiple aquifers available? We provide an extension of the “Pearce equation” to guide the optimal ordering of resource extraction and an illustrative application wherein it is optimal to extract from the “leakiest” aquifer first, letting another aquifer increase in volume. This generalized least cost-first principle contrasts strongly with the sustainable yield approach. By including spatial dimensions, the model provides the marginal valuations of water at each time and place, such that full marginal cost pricing can incentivize users to implement the efficient program. While an untrammeled water market would fail to provide the optimal solution, regulators can facilitate efficient water trading by setting appropriate exchange rates.


How Have Catch Shares Been Allocated?

 A unique database was created that describes the methods used to allocate shares in nearly every major catch share fishery in the world. Approximately 54% of the major catch share fisheries in the world allocated the Total Allowable Catch (TAC) solely on the basis of historical catch records, 3% used auctions, and 6% used equal sharing rules. The remaining 37% used a combination of methods, including vessel-based rules. These results confirm the widely-held belief that nearly all catch share programs have “grandfathered” private access to fishery resources: 91% of the fisheries in the database allocated some fraction of the TAC on the basis of historical catch. This publicly available database should be a useful reference tool for policymakers, academics, and others interested in catch shares management in Hawai‘i and across the globe.

To suggest edits or additions to the database, please email lynham@hawaii.edu.

Working PaperDATA FILE (XLSX)

A dynamic approach to PES pricing and finance for interlinked ecosystem services: Watershed conservation and groundwater management

A theory of payment for ecosystem services (PES) pricing consistent with dynamic efficiency and sustainable income requires optimized shadow prices. Since ecosystem services are generally interdependent, this requires joint optimization across multiple resource stocks. We develop such a theory in the context of watershed conservation and groundwater extraction. The optimal program can be implemented with a decentralized system of ecosystem payments to private watershed landowners, financed by efficiency prices of groundwater set by a public utility. The theory is extended to cases where land is publicly owned, conservation instruments exhibit non-convexities on private land, or the size of a conservation project is exogenous. In these cases, conservation investment can be financed from benefit taxation of groundwater consumers. While volumetric conservation surcharges induce inefficient water use, a dynamic lump-sum tax finances investment without distorting incentives. Since the optimal level of conservation is generated as long as payments are correct at the margin, any surplus can be returned to consumers through appropriate block pricing. The present value gain in consumer surplus generated by the conservation-induced reduction in groundwater scarcity serves as a lower bound to the benefits of conservation without explicit measurement of other benefits such as recreation, biodiversity, and cultural values.


Published Version: Roumasset, J., Wada, C.A., 2013. A dynamic approach to PES pricing and finance of interlinked ecosystem services: Watershed conservation and groundwater management. Ecological Economics. 87, 24-33.




The Economics of Groundwater

We provide synthesis of the economics of groundwater with a focus on optimal management and the Pearce equation for renewable resources. General management principles developed through the solution of a single aquifer optimization problem are extended to the management of multiple resources including additional groundwater aquifers, surface water, recycled wastewater, and upland watersheds. Given an abundant (albeit expensive) substitute, optimal management is sustainable in the long run. We also discuss the open-access equilibrium for groundwater and the conditions under which the Gisser-Sanchez effect (the result that the present value generated by competitive resource extraction and that generated by optimal control of groundwater are nearly identical) is valid. From the models and examples discussed, one can conclude that optimization across any number of dimensions (e.g. space, time, quality) is driven by a system shadow price, and augmenting groundwater with available alternatives lessens scarcity and increases welfare if timed appropriately. Other rules-of-thumb including historical cost recovery, independent management of separate aquifers, and maximum sustainable yield are inefficient and may involve large welfare losses.

Working Paper

Efficient Management of Coastal Marine Nutrient Loads with Multiple Sources of Abatement Instruments

Pollution management based on marginal abatement costs is optimal only if those abatement costs are specified correctly. Using the example of nitrogen pollution in groundwater, we show that the marginal abatement cost function for any given pollution source can be directly derived from a social-welfare maximization problem, wherein controls include both abatement instruments and inputs to pollution-generating production of a good or service. The solution to the optimization model reveals that abatement instruments for each source should be used in order of least marginal abatement cost, and the sources should in turn abate in order of least cost. The least-cost result remains optimal, even when the abatement target is exogenously determined.

Working Paper

Ordering Renewables: Groundwater, Recycling and Desalination


Optimal recycling of minerals can be thought of as an integral part of the theory of the mine. In this paper, we consider the role that wastewater recycling plays in the optimal extraction of groundwater, a renewable resource. We develop a two-sector dynamic optimization model to solve for the optimal trajectories of groundwater extraction and water recycling. For the case of spatially increasing recycling costs, recycled water serves as a supplemental resource in transition to the steady state. For constant unit recycling cost, recycled wastewater is eventually used as a sector-specific backstop for agricultural users, while desalination supplements household groundwater in the steady state. In both cases, recycling water increases welfare by shifting demand away from the aquifer, thus delaying implementation of costly desalination. The model provides guidance on when and how much to develop resource alternatives.


Optimal Provision and Finance of Ecosystem Services: the Case of Watershed Conservation and Groundwater Management

Payments for ecosystem services should be informed by how both the providing-resource and the downstream resource are managed. We develop an integrated model that jointly optimizes conservation investment in a watershed that recharges a downstream aquifer and groundwater extraction from the aquifer. Volumetric user-fees to finance watershed investment induce inefficient water use, inasmuch as conservation projects actually lower the optimal price of groundwater. We propose a lump-sum conservation surcharge that preserves efficient incentives and fully finances conservation investment. Inasmuch as proper watershed management counteracts the negative effects of water scarcity, it also serves as adaptation to climate change. When recharge is declining, the excess burden of non-optimal watershed management increases.

working paper


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