By Ellen M. Bruno, UCANR
The Sustainable Groundwater Management Act (SGMA) opened the door for groundwater markets to emerge in much of California. Groundwater markets refer to the voluntary, compensated transfer of the right or allowance to pump groundwater, as well as the rules and institutions that govern trading. Many groundwater sustainability agencies expressed initial interest in developing groundwater cap-and-trade schemes under SGMA, and a handful have made actionable progress towards implementing them. While groundwater markets have potential to substantively reduce the costs of groundwater conservation, they also carry the possibility of unintended consequences. Additionally, these markets may not be equally accessible by all participants.
Identifying Challenges and Opportunities
On November 4, 2025, a group of 30 researchers, lawyers, agency managers, and growers with subject-matter expertise met in Davis to discuss the challenges and potential opportunities for small farmers to participate in groundwater markets that are currently developing under SGMA. The goal of this roundtable was for both practitioners and researchers to communicate their current state of knowledge and jointly identify areas for further work.
Through presentations and open discussion, the group identified and discussed key challenges. Among the issues raised were identifying ways of addressing equity concerns, preserving the vitality of small farmers, mitigating any negative labor and employment effects of markets, and preventing forms of market influence that could disadvantage small farmers.
How to Allocate Rights is a Key Decision
The first session featured opening remarks by UC Davis ARE Professor Eric Edwards on the initial allocation of pumping rights and implications for equity. Dr. Edwards emphasized that allocations – which are distinct from the ability to trade – are often assigned based on past use. This carries important equity implications, because it gives a greater share of the pie to those who have used more groundwater in the past.
The group asked: Can farmers be compensated to achieve equity goals? Could regulators distribute a greater share of allocations to those that are small/disadvantaged so that they possess an asset? What are the pros and cons of allocating non-tradable pumping rights to those using only a small volume of groundwater with the goal of preserving small farms? The discussion largely centered on the structural challenges facing small farmers under SGMA and the role of trading versus the initial allocation of tradable permits.
Many participants noted that multigenerational family farmers think about managing the land for long-term sustainability. This was expressed in contrast with corporate or investor-owned agricultural operations, which may focus more on short-term profits. Locally owned farming operations are often thought to provide greater community benefits through regional purchasing behavior.
Employment Implications of Groundwater Markets
The second session featured a presentation by UC Davis postdoc Sandy Sum on the employment effects of groundwater trading. Dr. Sum’s work suggests that, across agricultural regions in California, groundwater markets would lead to a shift in production towards certain high-value crops. For example, her model predicts that acreage of berries and vegetables would increase. Since berries and vegetables employ more labor than other cropping systems due to limits on mechanized harvesting, the model predicts an overall increase in farm employment relative to a no-trade scenario. Simultaneously, her model predicts an overall reduction in the number of farms, suggesting that markets will lead to the exit of some small farmers on average.
The discussion pointed to several challenges for this kind of modeling exercise:
- Data limitations may prevent researchers from capturing the realities of employment on small farms that utilize family labor.
- Models necessarily build in assumptions about when users would buy or sell groundwater, that is, it predicts reallocation such that limited water resources would increase farm profits by the greatest amount. But of course, farmers often have other objectives in mind as well.
- Finally, the exercise leaves us with an unaddressed tradeoff between total farm profits, employment, and the number of small farming operations, three things that society cares about. How should we make the tradeoff between increasing total farm profits for a region at the cost of eliminating thousands of farms?
Insights from Existing Groundwater Markets in California
Session 3, led by UC Berkeley Cooperative Extension Specialist Ellen Bruno, presented analysis of the Mojave groundwater basin, which is home to California’s most active and long-standing groundwater market. In this groundwater market, buyers and sellers must find each other and negotiate a price – there is no centralized system for connecting traders. Its rich trading history makes it an ideal case study for learning lessons for SGMA.
Dr. Bruno presented work on the market’s impact on water rights consolidation and small farmers, and the potential for certain market participants to influence the market price. Participants noted concerns about transparency and transaction costs and the challenges for small farmers to participate in the market. If trading is not anonymous, it enables the possibility of coordination by large players, further disadvantaging small sellers. Participants argued for anonymous and formalized trading as the best path forward to reduce potential price manipulation and the need for trading brokers who may charge large commissions.
Challenges in Implementing Groundwater Markets under SGMA
Session 4, led by economist and market facilitator, Matthew Fienup, focused on the practical implementation of water markets under SGMA, drawing primarily from the experiences of the Fox Canyon groundwater market and the development of the Mid-Kaweah GSA water marketing strategy. Dr. Fienup highlighted the necessity of stakeholder-driven market design, the crucial role of accurate water accounting, and the limits of local control.
Participants raised concerns about tenant farmers possibly losing their livelihoods if landowners decided to sell their water. But in at least one basin, pumping entitlements were actually allocated to the tenants. Clearly, landlord-tenant conflict may arise from the allocation of rights to one or the other.
Takeaways for the Future
While water markets are a highly effective tool for reallocating water and generating large aggregate economic gains relative to a no-trade cutback scenario, their economic gains are often not shared equitably. Their impacts depend heavily on the political and legal decisions made in setting the initial allocations and designing the governance rules. Water managers must keep in mind that those who are allocated a greater share of the pumping rights will be best positioned when a market is introduced. Accurate and timely water accounting as well as anonymous and centralized matching algorithms may limit the ability of large players to manipulate market outcomes, increasing the chance of successful groundwater markets in California.
The roundtable discussion was organized by Ruth Dahlquist-Willard, Ngodoo Atume, and Ellen Bruno, with support from UC ANR’s California Institute for Water Resources and USDA Secure Water Future (SWF) grant (Agriculture and Food Research Initiative Competitive Grant no. 2021-69012-35916 from the USDA National Institute of Food and Agriculture). Liz Saunders and Prema Narasimhan contributed to hosting the event and helped in preparing this summary.
Ellen Bruno is an Associate Professor of Cooperative Extension in the Department of Agricultural and Resource Economics at UC Berkeley. She is an economist who evaluates the potential for and effectiveness of different policies for managing water resources. She can be reached at ebruno@berkeley.edu.
