The August meeting of the California Water Commission featured a panel discussion on groundwater trading, which has emerged as a promising tool to help basins achieve sustainability while mitigating the economic impacts of reduced water use. However, designing and implementing effective groundwater markets is a complex process that requires careful planning, stakeholder engagement, and robust accountability systems. From the lessons learned in Fox Canyon and Mid-Kaweah to the development of an interagency workplan and state-supported tools, the discussion highlighted both the opportunities and challenges of groundwater trading.
In early 2021, the California Water Commission was tasked by state agencies to implement Action 3.6 of the water resiliency portfolio. This initiative aimed to enable GSAs to trade water within basins and promote groundwater markets, while protecting natural resources, small and medium-sized farms, and disadvantaged communities’ water supply and quality. The Commission hosted public events to gather input, culminating in the 2022 release of a white paper outlining next steps for state involvement in groundwater trading programs.
The white paper found that groundwater trading is a valuable tool for meeting the goals of SGMA. Groundwater trading can soften the economic impact of reducing overall water use. Groundwater trading is locally designed and led; the role of the state is limited. If well implemented, groundwater trading can provide a voluntary, flexible, and community-driven tool to help alleviate the socio-economic burden associated with reduced groundwater availability.
INTERAGENCY WORKPLAN
State agencies have developed an interagency workplan to implement the Commission’s recommendations, involving collaboration among the Department of Water Resources, the State Water Board, Fish and Wildlife, and the Department of Food and Agriculture.
While creating the workplan, the team noted that SGMA and its regulations do not explicitly address enforcement or safeguards for vulnerable users who may be potentially impacted by groundwater markets. Under SGMA, sustainability is broadly defined as avoiding undesirable results and aligning basin-wide pumping with sustainable yield. From a state oversight perspective, as long as undesirable results are avoided and basin conditions remain stable, the nuanced impacts of a market may not be fully captured in GSP implementation reporting.
In contrast, broader demand management actions are more likely to have noticeable effects on vulnerable users. Groundwater markets represent a niche and advanced form of demand management under SGMA. Supporting general demand management actions may serve as a foundational step toward enabling well-managed markets.
Local control and flexibility remain central to SGMA. “Issues such as allocations, which is essentially how that pie gets divvied up, really gets at the heart of what local control is,” said Andrew Morgan (CHECK). “So we do want to be mindful of that and tread lightly when we talk about how prescriptive we might get on certain actions, such as developing guidance, because we do not want to undermine that local control.”
The work plan builds on the actions outlined in the Commission’s white paper, providing a framework for implementation. It focuses on SGMA-related oversight, including reviewing reports, monitoring projects, and ensuring GSAs consider beneficial uses in decision-making. Tracking and monitoring emerging groundwater markets is also key, as trading remains rare, with only a few GSAs actively participating. The plan emphasizes convening GSAs, experts, and practitioners to exchange ideas and assess the need for state involvement, while also engaging community and environmental representatives to incorporate diverse perspectives. Additionally, it includes developing a guidance document on groundwater trading and demand management, prioritizing transparency and safeguards, and exploring technical assistance and financial incentives to support implementation.
STATE ACTIONS TO SUPPORT GROUNDWATER MARKETS
Projects and Management Actions Module on the SGMA Portal: The new module centralizes data from every project and management action into a sortable, filterable database, offering a statewide view of activities that were previously buried within individual GSPs. This tool provides much-needed transparency and accessibility, making it easier to track what’s happening across California. The module’s annual update feature, launching next year with the April annual report submissions, will provide critical updates on PMA trends, including the emergence of allocation programs and groundwater markets. This resource is not only valuable for state oversight but also for GSAs and practitioners. As a publicly available tool, it allows users to search for similar projects, learn from others’ experiences, and even connect with GSAs undertaking comparable initiatives. For more information on how to use the module, visit the SGMA portal’s resources page at https://sgma.water.ca.gov/portal/resources, where you can find a user manual, FAQ, and video tutorial.
Groundwater accounting platform: DWR and the State Water Board have been funding the development and ongoing enhancement of the platform, which was created by the Environmental Defense Fund and the California Water Data Consortium, along with other partners. Designed to be user-friendly and cost-effective, the platform helps measure and track groundwater use. While its use is not mandatory—some GSAs may choose to develop their own systems—it addresses a critical need for GSAs considering demand management programs to monitor, track, and account for water usage. Additionally, the platform includes a built-in trading component to support groundwater markets.
Drinking well mitigation programs: The Commission’s groundwater trading white paper noted that mitigation programs may serve as a safeguard for vulnerable users in a groundwater market. In many cases, GSAs are developing mitigation programs to supplement their plans, which protect drinking water wells affected by groundwater pumping. Some agencies are mitigating for water quality impacts, in addition to impacts from chronic lowering of groundwater levels and subsidence, to ensure that people have access to safe drinking water. Although GSAs are not responsible for all well failures in a basin, the most successful programs anticipate problem areas, advertise programs broadly, provide timely and comprehensive help, and simplify applications and other administrative processes.
Interim plans are unlikely to include groundwater markets: The State Water Board develops an interim plan for a GSA when a Groundwater Sustainability Plan (GSP) is deemed inadequate, the GSA fails to act within 180 days after a probationary designation, and local efforts to fix deficiencies fail. The SGMA statute references several options for corrective actions in interim plans, including demand management and physical solutions. Sarah Sugar, Senior Environmental Scientist at the State Water Board, stated that basic demand management is the most likely corrective action that will be implemented in the Board’s interim plans. It’s the quickest option, which makes it the logical choice. Since interim plans are meant to be temporary, it is also unlikely that the State Water Board will design groundwater markets for basins with GSAs under state intervention. She noted there’s still a benefit to continuing to build out their own projects and management actions. The board would integrate parts of existing plans into any interim plan, provided those parts comply with or help meet the sustainability goal for the basin. Physical solutions can be methods of supply augmentation; however, due to the temporary nature of an interim plan, it would likely not include these options.
BUILDING A GROUNDWATER MARKET: The Mid-Kaweah experience
“We are in the Kaweah subbasin,” began Aaron Fukuda. “We are the poster child for SGMA. We’ve got pretty much all the undesirable results. As I like to say, the bigger the challenge, the bigger the reward. And we live that every day.”
The Mid-Kaweah GSA spans 441,000 acres within the Kaweah subbasin, which is home to three GSAs: East Kaweah, Greater Kaweah, and Mid-Kaweah. The Mid-Kaweah GSA encompasses the Tulare Irrigation District, the City of Visalia, and the City of Tulare.
The Mid-Kaweah GSA’s journey toward establishing a water marketing strategy began, as most initiatives do, with securing funding. This funding was provided by the Bureau of Reclamation and the Department of Water Resources through their facilitation services. As a Bureau of Reclamation contractor, they applied for and were awarded a grant in 2019, which set the stage for developing the water marketing strategy. The goal of this grant was to create what they describe as an “instruction manual”—a step-by-step guide for anyone looking to establish a water market within our basin.
“That was important because our team didn’t dictate what the market would look like,” said Mr. Fukuda. “They dictated the process to get to the market.”
To oversee the development of this strategy, the Kaweah Subbasin Water Marketing Strategy Committee was formed. This team included a consulting group, a legal team, and an engineering team. Their role wasn’t to dictate the specifics of the water market but to guide the process of its creation. This distinction was key. The committee ensured that the process was inclusive and representative, with 11 members selected to reflect all beneficial groundwater users in the subbasin—ranging from disadvantaged communities and environmental interests to agriculture, industry, and larger municipalities. The goal was to ensure that all groundwater uses were acknowledged and integrated into the market framework.
The committee brought together a wide range of perspectives, both in terms of market philosophy and geographic representation. Meetings were well-attended, and all who attended had the opportunity to contribute to the discussions.
A critical component of any water market is the establishment of an allocation and tracking system. This is like setting up a bank account for water, enabling trading and accountability. They tackled this challenge head-on by simultaneously addressing demand management. In 2022, an allocation and demand management system was implemented, which laid the groundwork for the tracking infrastructure. This system includes an online water dashboard accessible to each landowner, where they can view their allocations, monitor usage, and, with the water marketing strategy in place, trade surplus water with others in the market. Having this system operational as the strategy was being developed was a significant advantage.
In crafting the strategy, they researched water markets across California, as well as in other states such as Kansas and Nebraska, and internationally in places like Australia. They found that not all markets trade water directly; some trade crops, which indirectly equates to water, while others trade water credits that can even extend beyond local boundaries—for example, trading credits between Sacramento and another region.
Based on this research, they developed the “water market guiding principles,” which served as the foundation for all decisions related to the market. Every component of the water market had to align with these principles before being approved. Mr. Fukuda said that developing these guiding principles was undoubtedly the most challenging aspect of the entire process.
He recalled how one of the public meetings to develop the guiding principles was held in the shop at the office on a day when the weather was 90 degrees. “The shop was very hot. Tempers were hot, and at one point, people were shouting at each other. We said, ‘Let’s take a 15-minute break. ‘Maybe we can just cool off a little bit. And for some reason, I had a two-pound box of See’s Candy. So we broke out the See’s Candy. Everybody enjoyed the See’s Candy. We reminisced about having See’s Candy. We returned to the table, and half an hour later, we had reached a unanimous decision on all these guiding principles. And I think what people had to do is get their issue out on the table, resolve it through these guiding principles, have a piece of candy, and then vote on it.”
The unit of trade is an acre-foot of allocation, which essentially represents evapotranspiration, as Mid-Kaweah GSA’s system is based on evapotranspiration measurements. These trades are one-time transfers with a limited amount available. To participate, individuals must be landowners within the GSA.
“We’re actually using the markets to provide the protections that SGMA may not have had for the environment and the disadvantaged communities,” said Mr. Fukuda. “We watch the levels around disadvantaged communities, and if we see that the levels are dropping, you’re not allowed to transfer any water into that area. We don’t want to increase pumping around a disadvantaged community, but you are allowed to transfer a credit out into a safe area.”
Last year, a pilot project was launched that integrated the online trading platform into the existing water dashboard. Growers primarily utilized a mobile app to track their available water for trade. The pilot project’s results showed a modest activity level, with a total of 98 acre-feet sold at an average price of approximately $200 per acre-foot.
“Basically, it’s a midpoint sale trade,” said Mr. Fukuda. “So you’re matching the seller and the buyer in the middle, so the seller gets a little bit more, and the buyer gets it at a lower price, and everybody’s happy.”
He noted that, initially, the agricultural community was hesitant to make information public. However, by the end, they recognized the importance of transparency, understanding that pricing data is essential for making informed buy-sell decisions. As a result, trade outcomes are now published after each transaction, with all names kept confidential.
A survey was conducted among all participants, including those who chose not to engage, to understand their reasons for not participating. The findings revealed that the overarching demand management system is effectively functioning within the subbasin. The key takeaway was that the water market primarily serves as a safety net for those facing challenges. Otherwise, most individuals are relying on demand management strategies to conserve and minimize pumping as much as possible.
“They don’t want to sell a credit that’s going to increase pumping,” said Mr. Fukuda. “They want to hold on to it because they may need it during a drought period. So between our allocation system and our water marketing strategy, we think we have a good path moving forward.”
RECOMMENDATIONS FOR GROUNDWATER MARKETS
Dr Matthew Fienup, Chief Executive Officer of Environmental Marketing Specialists, served as the Exchange Administrator for the Fox Canyon water market for more than five years prior to working on the design and implementation of the water market in the Mid-Kaweah GSA.
The Fox Canyon Water Market, which launched for basin-wide trading in 2020, achieved immediate success. It garnered broad support from stakeholders across environmental, municipal, and agricultural sectors. At its inception, over 80% of eligible participants enrolled in the market, with more than half actively engaging in trading by submitting bids and offers for groundwater allocations.
Key insights from the Fox Canyon experience are detailed in the article, “The First SGMA Groundwater Market is Trading: The Importance of Good Design and the Risks of Getting it Wrong,” co-authored by Dr. Fienup.
He detailed three conclusions outlined in the paper from the Fox Canyon experience:
It’s critically important that market design be stakeholder-driven, and although this process can be challenging, it can also be very rewarding. In both Fox Canyon and Mid-Kaweah, stakeholders reached unanimous agreement on the guiding principles for market design, as well as on the specific structures, rules, and operating mechanisms. While engaging stakeholders is undoubtedly challenging, it can yield highly rewarding outcomes, resulting in thoughtfully designed markets that earn broad support and buy-in from all involved parties.
“The stakeholder input in both basins, Fox Canyon and the Kaweah subbasin, resulted in markets that look different in very, very important ways. There’s no off-the-shelf solution for market design. You can’t just pick up a market from Fox Canyon and air-drop it in the Kaweah subbasin. That markets need to be responsive to local conditions. It’s actually local stakeholders who have the best insight into what the potential adverse impacts are, the unintended consequences, and incorporating those will produce markets that look different in different places, and that’s exactly how it should be.”
Adequate capacity and funding for development are necessary. Accurately measuring and accounting for water allocations and usage over time is essential, but while measurement is relatively straightforward, long-term accounting proves far more challenging.
The Nature Conservancy secured a $1.8 million Natural Resource Conservation Service grant for Fox Canyon, which enabled the installation of telemetry on every well in the basin, allowing for real-time water use monitoring and data transmission to the cloud, where it is accessible to water users, the exchange administrator, and the agency.
However, accounting complexities posed significant hurdles. Allocation systems with carryover provisions—allowing users to save unused water for future years—create substantial challenges in tracking allocations over time. Following the 2022 water year, Fox Canyon encountered issues with users who were allowed to aggregate wells into a single account, which complicated the tracking of carried-over water. This accounting difficulty has temporarily halted the groundwater market until the system is resolved.
The Kaweah subbasin faced similar challenges due to the complexity of allocation systems. During its water market pilot, significant effort was devoted to validating the accounting system to ensure the accurate tracking of water available for trade and to make proper updates to all accounts during transfers. Resolving these issues required extensive time and effort, highlighting the critical need for resources to support basins in developing well-designed markets with robust measurement and accounting systems.
“Investments in that infrastructure will not only help well-designed markets to function, but they will, very importantly, help basins to better implement their GSPs to sustainably manage groundwater,” said Dr. Fienup. “I think the process of designing a market actually improves groundwater management if it’s done with sort of the carefulness that Aaron and his team exhibited in the Kaweah subbasin.”
Transfers of groundwater allocation require accountability, whether they occur within a formal market or through other provisions in a basin’s GSP. Groundwater trading typically does not involve the physical movement of water; instead, these are often in-kind transfers, where one party reduces pumping in one area, allowing for increased pumping elsewhere. While this approach lowers transaction costs by eliminating the need to physically move water, it also increases the potential for adverse third-party impacts. In-lieu transfers of pumping can create unintended consequences, making it essential for GSAs to remain accountable for the outcomes of allocation transfers.
In conclusion, “I think well-designed water markets are really a worthy undertaking,” said Dr. Fienup. “They can strengthen basin management at the same time that they give flexibility to water users. They can be designed in a way that produces universal buy-in among environmental and urban water users as well as disadvantaged communities and other vulnerable stakeholders. The hard work is worth being undertaken, and funding and accountability are things that the state can provide in order to make sure that that continues to happen in an orderly way.”
