Water We Doing?

Deep Dive: Dr. Ellen Bruno, California Water Economics, The Fight for Groundwater

• David Evans • Season 2 • Episode 4

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In today's episode we speak with Dr. Ellen Bruno from UC Berkeley all about the economics of groundwater. Groundwater is water located in aquifers deep beneath the earths surface. We regulate the amount of water people can take from surface waters (lakes, rivers, etc) but underground it's a different story. Tune in to learn how economists like Ellen are working to add some ground rules to make sure we manage this resource sustainably. 

Interested in learning more or getting involved? See below for Dr. Ellen's recommendations on how to get involved:

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David Evans:

Welcome to today's deep dive episode. Today we're talking with Dr. Ellen Bruno from the University of California Berkeley campus. Dr. Ellen studies, water economics, specifically looking at groundwater and agriculture and how the heck they can produce so many crops in California. She'll take us through some of the examples of how they're actually using water in California, what the future kind of looks like, and what are the tools that economists can use to help improve the allocation of water use across a huge state like California? Are you bored yet? Well, you shouldn't be we're gonna make it fun, sit back, relax and get ready to learn a little bit more about groundwater economics. water we doing? And how can we do better? Your one stop shop for everything water related from discussing water, its use and the organisms that depend on it for all the global issues that you really never knew all had to do with water. I'm your host, David Evans from the aquatic biosphere project. And I just want to ask you something. What are we doing? And how can we do better? Welcome to another deep dive episode of the what are we doing podcast, I'm still excited to learn all about the interesting, world changing topic of agricultural economics. So would you mind introducing yourself, and just tell us a little bit about what you do?

Dr. Ellen Bruno, UC Berkeley:

Sure, I'd be happy to. Thanks for having me, Dave. My name is Ellen Bruno. I'm a assistant professor of Cooperative Extension at UC Berkeley in the Department of Agricultural and Resource Economics. And so what that means is I get to do fun, applied research. But instead of classroom teaching, I do public outreach. So I try to do research that's meaningful to the California Public, particularly the Agricultural and Resource communities within California. My specialty is on water resources, and particularly in agriculture. And so I study water policies both proposed and implemented and potential water policies and what that might mean for Californians.

David Evans:

Very cool. Very cool. So can we start off with maybe painting a picture of what water use is like in the state of California?

Dr. Ellen Bruno, UC Berkeley:

Yeah, absolutely. It's really important for trying to think about the economics of water use in California. What is that underlying structure. The main users of the water in California are we have agriculture, which is about 80% of the water use. And then, you know, drinking water residences and urban water uses, which is about 20% of water use, the water is supplied, it's a mixture of both surface water and groundwater. And that fluctuates from year to year. You know, California is known for its droughts and variability in surface water. And that gap is then made up with groundwater. But on an average year, to the extent California has one groundwater makes up about 40% of the water use. We have this. It's pretty interesting. In the state of California, where you have a bunch of the population in the southern part of the state, you have agriculture primarily in the center of the state. And that's separate from where the precipitation falls. So most of our precipitation falls in the form of snowpack in the Sierra Nevadas, which is not where we're demanding the most of the water, and also at a different time of year if we think about how agriculture is, you know, happening in the summer, and we get the bulk of our precipitation falling between December and March. So we've kind of engineered our way out of this disconnect through like this big system of canals and reservoirs that we've built in the state. So as the snowpack runs off, when when it warms up in the springtime, we're capturing that water in reservoirs, and then moving it around the state and canals so that agriculture can get the water in the summer. And you know, the thirsty Los Angeles population can continue drinking water all year round. And Then, let's see. Two other things I think are important to mention for thinking about our sort of water infrastructure in the state, we have this intricate system of water rights, that determines the allocation of the water. So the surface water is, you know, allocated with these, what we call appropriate of rights that are like the first in time first and right. And the majority of those are held by like irrigation districts or the water districts, but some are held by individual farmers as well. So that sort of determines the surface water. But groundwater is different, it's more of a free for all, historically, it's been this open access resource where there are very little constraints on who can pump it. And that's led to a host of issues that I'm I'm sure we're gonna get into as we keep talking. And then because I have a feeling you're gonna ask me about water markets. The last thing I'll mention is that we do have a somewhat limited surface water market in California. And so some of these these first in time, first and right, surface water rights get traded voluntarily, from year to year. But you know, it's subject to the infrastructure constraints and other regulatory constraints. And so it's pretty small amount of water, but that that does exist as well. So I'll stop there.

David Evans:

All right. Where do I go next? Yeah. I mean, it's complicated. Exactly, exactly. Yeah. So okay, let's let's just dive into. Yeah. What are some of the issues with pumping up groundwater as you're kind of saying it's a bit of a free for all? So is it really as easy as you just dig a well bring up the water, and you're just good to go? You're off to the races?

Dr. Ellen Bruno, UC Berkeley:

Pretty much. I mean, I haven't tried this myself, I'll say that. But you do. And you do need a permit. But essentially, if you own the, if you own the land, then you own the right to pump the groundwater underneath the land. But aside from that, historically, groundwater pumpers have had, they faced very few constraints on well drilling and well pumping, although that's changing in California. Aside from that, there are still costs to pumping the groundwater even when you don't have constraints on pumping it and you can drill a well and pump. You know, it's still it takes energy to draw that water from below, you know, waters heavy, right? So there's at least those those energy costs associated with using the groundwater that farmers face.

David Evans:

Okay, so it's not as easy as just yet we've got a whole you still have to bring it up. So there are some costs associated. So I guess we've already kind of established that there's no price on that water. But you think it's important to have a price on water, whether that'd be surface water or groundwater? And if it is important, then how do you go about doing that? Because it's a communal resource, and we have water rights. And it sounds very complicated.

Dr. Ellen Bruno, UC Berkeley:

Yeah, for sure. Thanks for asking this question. I mean, this is kind of getting at the heart of what my research has really been focused on so far, particularly on groundwater. So let me try to explain like, you can think of groundwater as this common resource where nobody owns it, yet everyone has access to it. And one person's use of it means that there's less for everyone else now. And in the future, right. It's this dynamic resource. And so it's not just today's pumpers. But tomorrow's pumpers. And so a number of issues can arise in this kind of common pool, open access resource situation. When pumpers are pumping the groundwater, those groundwater levels get drawn down increasingly over time. And so this can increase the costs for everyone to access the groundwater, which is what economists call a negative externality. I'm using this term costs, like pretty broadly, it includes higher energy costs from pumping the groundwater from below. But it can mean other types of costs as well, including like degraded groundwater quality or depleted streams, because in some cases, the groundwater and the surface water are interconnected. And if you pump groundwater right next to the stream, it's going to come out of the stream. So that can hurt the fish or other, you know, groundwater dependent ecosystems. And so, ideally, you're thinking about all these potential costs, because they're all important. And they're all, you know, negative externalities, and sort of leading to what we might call this tragedy of the commons kind of situation.

David Evans:

My listeners are sick of hearing me talk about that.

Dr. Ellen Bruno, UC Berkeley:

Good, so they're already familiar with it. And so yeah, you've already alluded to this. But in this kind of situation, we would want to correct those negative externalities. That's what economists would call a market failure. And one of these times where we would want to intervene because in the absence of intervention, we're getting an outcome, that's that's suboptimal for everyone. And so one option for that is putting an explicit price on the water. And this sort of tax, if it's set, right could correct for these issues by making the groundwater more costly and causing pumpers to sort of internalize the negative cost they're imposing on others, and incentivize them to pump slightly less. And so you know, yeah, so that'll help the neighbors and the future generations and sort of correct for those those problems. I want to mention, too, I mean, you were asking sort of how we should go about doing this. I mean, you could think about, you know, the local irrigation districts setting a tax on groundwater and just sort of explicitly raising the price that way. But it could also be achieved in a different way by, for example, setting a cap on how much groundwater could be pumped, and allowing trade of the groundwater within that cap. And that's an indirect way of imposing a higher price on that groundwater. And that could, in theory, you know, be designed in such a way that you achieve an equivalent outcome.

David Evans:

Absolutely. My favorite thing of of what you said was usually explained that it's sub optimal. And it just seems like the most politically correct way of saying like, it's not good out there. But

Dr. Ellen Bruno, UC Berkeley:

yeah, it's a very, very economic C way of saying it.

David Evans:

Yeah, yeah, exactly. So it sounds like there might be some water markets that are actually working. So do water markets react as you would expect a normal market? Should so supply meets demand to determine a specific price? Or is it complicated? Since everyone needs water, groundwater resources are being depleted surface water availability can fluctuate wildly? So like in a famously, water stressed areas such as California? Have water prices increased? And if so, have you seen any changes in agriculture to planting less water intensive crops or less water use in urban areas?

Dr. Ellen Bruno, UC Berkeley:

Yeah. Okay. So that's a pretty loaded question. And I think I'm gonna try to take it in pieces. So I guess, sorry, was a mouthful. No, no, it's good. So yeah, water markets don't really operate in kind of the simple textbook way, because the trade of water is regulated. And it should be because water is not the same as any other commodity. It's different. For example, the surface water market in California, while it is regulated to protect third parties, and it is subject to, you know, infrastructure constraints, where can we actually move it around in the state that's going to really limit how and where water can be traded, despite that the price in the water market in any given year is still going to fluctuate based on supply and demand forces. And in that sense, it does work like a normal market. And so you brought up the fact that surface water availability can fluctuate wildly. And, and that's part of why we see fluctuations in the price in the surface water market during drought years, when water is more scarce, water will be selling at a higher per acre foot rate. And it reflects that scarcity. And that sort of we would expect that right? And then sort of trying to answer your your follow up question about California agriculture and how agriculture has been adapting to higher prices. It's interesting, because actually very little of the water used in the state is traded on a market, I sort of mentioned that before, like there is a surface water market, but it's a very small percentage of the amount of water that's used in the state, right, for the most part, you know, the water is allocated through this surface water rights system that we have that's pretty like rigid and inflexible. And in that sense, there's less variability in that explicit price of water. But of course, yeah, farmers are still adapting to changing water prices. It's hard to actually say, when you're looking at the agricultural landscape and looking at changes in it over time, it's very hard to say how much of that is due to changing water prices? Because agriculture Yeah, as adapting to all sorts of market forces, like probably more so the price of the crops that they're growing, and California crops are shipped all over the world like these are, these are global markets, and they're driven by a global supply and demand forces. I will mention though, I mean, I have working on on one study with co authors, Katrina Jessa, and Michael Hanuman, who are other water resource economists. And we've been studying how water prices are affecting California agriculture, like specifically from this, this question of land use, and we're just looking at a very small area on the California coast, but it's this really unique setting where we observe a price increase that we can sort of credibly separate from the other economic forces that are affecting land use. We've observed that farmers do in fact shift to their crop mix in risk. ponds to a rising water price. And this is intuitive if we assume farmers are profit maximizers and they're going to adjust their operations in response to higher prices, than we would expect them to shift crops, you know, to growing ones that yield a higher profit per acre foot of water required to grow those crops. But yeah, like I said, when you're looking at sort of statewide, or, or nationwide, you know, on these bigger scales, there are so many other forces driving the crop choice that it's really hard to tease out, you know, what's happening due to like changes in the water landscape.

David Evans:

Right? Yeah, absolutely. I can only imagine how much noise there is in that data set, trying to understand or even quantify crop choices and such a large landscape. But that's really interesting that on a small scale, that you've actually been able to discern some changes, and been able to quantify that. Yeah, that's really cool. So within the last few years, you touched on this earlier as well, water futures began being traded on the stock exchange. So help me out here, what does trading futures mean? And should we all be locking in a water delivery? 10 years from now?

Dr. Ellen Bruno, UC Berkeley:

Yeah, yeah. So yeah, you're right. And I think it was in December of 2020, the CME Group launched, you know, the world's first futures market for water. And what this is, is a financial instrument that's intended to help farmers like Buffer water price risk. So it's really about risk. And it's essentially a form of insurance. And it's different than, you know, what we've been talking about so far in terms of a market for the physical water, right. So as we all know, the American West has always been plagued with oscillating periods of dry and wet years. And this creates, you know, variability in the price of water from year to year. And so it makes sense water users are naturally facing a certain amount of risk and uncertainty. So this financial instrument is intended to help them reduce this risk associated with the price. And so in a futures market, participants can trade contracts that lock in the sale of a commodity on a specified future date, at a price that you set today. And so it gives you that assurance that you're going to get it in the future at a certain price that you know, you're going to be good with. And that helps with planning, for example, and if you're particularly when you're thinking about, Okay, do I want to plant a almond orchard that can be productive for 20 to 30 years, you know, what's the price of water gonna be in 10 or 20 years? But yeah, in terms of actually, like the benefits of this futures market for hedging price risk, that's really geared towards the participants who rely on the physical product, like the California farmers, and so you can participate as a, but you'd be a speculator in this market. And it's kind of like, you know, more of a gamble for you. And it's not about hedging your price risk, because this doesn't affect the, you know, the reliability or the affordability of urban drinking water.

David Evans:

Oh, I drink a lot of water. So. Yeah. Yeah. That's really Yeah, that's really interesting, because I think that's something that maybe not many people are that aware of. And in when you hear it might have a knee jerk reaction to hearing water trading on the stock market? And like, how can we be doing that with with something so precious? And we're already in water stress times in many areas of the world? Absolutely. You don't have to worry, we're just putting prices on it. It's not actually sending water in places, because just the price of that transportation alone will probably exceed the cost. Yeah. I've heard of some areas of the world where controls over water markets are handled by private companies with little government oversight. So do you have any thoughts on if there might be efficiencies to be had by privatizing water distribution versus basically handing over the keys of our most precious resource from government bodies to private corporations?

Dr. Ellen Bruno, UC Berkeley:

Yeah, thanks for this question. It it sort of gets at why I find water such a fascinating subject to study. And I think relates to what you were just saying about the water futures market. And the idea, like a lot of people are unnerved by the fact that water could be trading in a futures market, like other commodities that aren't essential to human life and sort of, how do we how do we handle both of these things? And so the way I think of it is, I mean, water is really different in different contexts. In agriculture, it is a commodity, right? It's an input to production, and it's treated and managed like a commodity, but to the rest of us, it's essential to human life as our drinking water supply. And we don't want to trade it around by private actors with profit incentives. So we Need to protect the reliability, the quality and the affordability. First and foremost, like those are really important to us, you know, as people who depend on drinking water. So I wanted to elaborate a little bit more on on sort of how it works in California, because it really is treated separately. And I think when thinking about it, that way, it kind of helps to sort of stomach this idea of a water futures market, or other ways that water is treated like a commodity. So the majority of drinking water in California is managed and distributed through centralized water systems, like your water, your local water agency that manages the pipes that deliver it to your house. And most of those are public water agencies. But actually, a third of them are private agencies, private water companies, but they're heavily regulated as as they should be, right, because a water system like a railroad or even like social media, there, it's a natural monopoly that relies on infrastructure, in a way that, you know, we only actually want one provider of that infrastructure, it would be, like nonsensical to have two different sets of pipes and whatnot. And so it naturally leads to a monopoly type of setup, which and we know monopolies are bad for consumers. And so with something as important as water, it's important that those private water companies are regulated so that we can look out for the affordability of the water. And so that's the case in California. And with that regulation, it's not that, you know, private water companies, water rates aren't substantially higher than the public water agency's water rates. I don't want to get too far on a tangent in in answering your question, but

David Evans:

I know, a tangent away.

Dr. Ellen Bruno, UC Berkeley:

Not everyone in California is a part of a water system like this. And because of that there are different communities that have different water outcomes that I think is important to mention. Because there are small communities, particularly in the central valley that depend on groundwater wells for drinking water. And they've had their wells run dry during the drought, as there's been more, you know, agricultural pumping, because there's been less surface water, just this chain reaction, obviously, like that's unacceptable to have your water supply, go dry. And I think it's something that deserves more policy attention. So this is like, yeah, that's, that's sort of my tangent, because in thinking about this sort of private public question when it comes to water, because for the areas where there are centralized networks and water agencies delivering residential water, there's a mix of public and private, and you know, it appears to be working very well. And where it's actually not working well, are areas that aren't covered by a water agency. And it doesn't have to do with the fact that the agency's private or public, it has to do with the fact that these small unincorporated communities are dependent on groundwater for their drinking water supplies. And the groundwater levels have been so depleted that those supplies have run dry. Yeah, so what I meant to say, going, going back to the original point is water is different in different contexts. So like, that's sort of the urban water space. But then in agriculture, water is an input to production. And in that sense, it's a commodity. And so I think it's okay for water futures to be traded, for example, when thinking about water as a commodity, and helping agriculture buffer the price risk associated with water, you know, that's not going to threaten the reliability, quality and affordability of drinking water, as that's like operating in a separate space. Does that make sense?

David Evans:

Absolutely. Yeah. I've been giving you some hard hitting questions. So I apologize for that. But I just I just have, I just want to know, I just want to know from the experts here. So yeah, thank you for for going into that. And you have to kind of separate it out on the commodity versus the drinking water when we interact with water as an input to agriculture versus an input into our daily lives. And it's kind of two separate views on the same resource. Yeah, it's very convoluted. That's why we have people like you working on it. So that's wonderful. So if you could look into your crystal ball and see where water markets would be 10 years from now. What do you think will have changed?

Dr. Ellen Bruno, UC Berkeley:

Yeah, good question. I think change happens very slowly in the water world. And in 10 years, to be honest, I don't know that it'll be that different from what we see today. That would be my guess. Um, to the extent that things are changing, I think it will, we'll see the biggest change in the groundwater space, because there was a legislation that was passed at the end of 2014, to require local groundwater agencies to manage their groundwater. And so I think what we'll see, slowly, we might start to see more active groundwater trading emerging over the next 10 years. Because, you know, prior to this legislation, there's been no, no reason to restrict groundwater. And now, it's actually been mandated to like set a cap on that groundwater. And so, you know, hopefully we'll see groundwater levels start to like, stabilize and recover, and we'll see more more active management of groundwater going forward.

David Evans:

That's good. That's, that's positive. That's, yeah. So for anyone who's listening to this podcast, and who just gets really excited, or they they feel really passionately about economics of water and and would like to learn more or potentially get involved, what would you say to that listener, even if, even if they're up here up in the frozen north, nowhere near California, even if you're wanting to get involved in their local area?

Dr. Ellen Bruno, UC Berkeley:

Okay, yeah, I have three recommendations, but they are all California focus. So I apologize for that. That is the world that I that I live and breathe.

David Evans:

So problem there.

Dr. Ellen Bruno, UC Berkeley:

The first one is the Public Policy Institute of California has a Water Policy Center. That puts out a lot of blogs and reports that are really interesting and informative about California water. There's one in particular called improving California's water market, which is a report on how trading and banking can support groundwater management in the state. They make great policy recommendations for improvements to the to the system, and it's always very readable stuff. And I highly recommend another source for keeping an eye on the Sustainable Groundwater Management Act of California and and developments there is mavens notebook, which you can access at mavens notebook.com. And it's an aggregator of all things California water when their conferences and record reports that come out. Yeah, it's really cool. And so you can even get like a digest email that will keep you up to date with just like headlines and California water and like where you can get more information. So I highly recommend that. And then the last one doesn't have to do with economics. But if you're interested in getting to know more about California water, and particularly groundwater and how it interacts with agricultural development of the Central Valley, I would recommend the book the drempt land, perhaps it's something you've read before it's by Mark Airex. Really look into it. Yeah. He grew up in the Central Valley and wrote a great, really interesting book about ag and the development of water in the Central Valley. So I would recommend that as well.

David Evans:

Very cool. Yeah, though. So I'll be putting links to all of those in the show notes. Yeah, those are great recommendations. So one more another question for you is, how did you find yourself in this position becoming so focused on water? What like, what, what led you to where you are today?

Dr. Ellen Bruno, UC Berkeley:

Oh, a bunch of different things. I guess, the two most influential things that led me on my current path of water economics, or one, my mom worked as a manager of a water utility in Los Angeles where I grew up. Wow. So I was just interested in water stuff through through her. Yeah. And then in college, I was studying economics. And I took this fisheries economics class. And fisheries are also this sort of same Commons problem where you could deplete the fishery from overfishing. And I remember solving this model of a fishery in class where you could, you could show how if all the fishermen fish less, it could rebound the population, they could actually make more money, they're putting in less effort catching more fish. And it was just this like, win win. And I thought, like, that's so cool. You can use economics to both protect the environment and people who make their livelihood off of the environment. And I just thought that was awesome and got interested in groundwater. And of course, that leads you to agriculture when you're in the state of California. Yeah. Yeah.

David Evans:

So cool. I saw on your website that you are also part of a jazz group. Would you like to put in a plug here for your group?

Dr. Ellen Bruno, UC Berkeley:

Sure. I mean, we're just a bunch of amateurs. But yeah, I play jazz on the side with a handful of friends. So we call ourselves peche located in Berkeley, and yeah, it's a lot of fun.

David Evans:

Awesome. Well, thank you so much for speaking with me today. I feel like I've had so many questions answered and need to do some more digging on groundwater. But it's been really cool speaking with you. And so Thanks for Thanks for speaking with the podcast.

Dr. Ellen Bruno, UC Berkeley:

Thank you so much, Dave.

David Evans:

Thank you so much for tuning into today's episode all about the economics of water, a big topic that we've just taking a little slice of today. Thanks again to Dr. Ellen Bruno for jumping on the podcast. Sorry, it took so long to actually produce the episode, but I'm so glad it's finally out there. To learn more about what Dr. Ellen Bruno researches, you can check out her website at Ellen dash bruneau.com. I'm the host and producer David Evans. And I just like to thank the rest of the team, specifically Paul Polman, Lee Burton, and the rest of the aquatic biosphere board. Thanks for all of your help. And to learn more about the aquatic biosphere project and what we're doing right here in Alberta telling the story of water, you can check us out at aquatic biosphere.ca. And we also have launched our new media company, a b n aquatic biosphere network, which you can find that the public place dot online and search for the aquatic biosphere network channel, where we will actually be posting all of the video episodes that we're going to be creating this year. So tune in. They will be out for the next little while, but very excited to start sharing video content as well as our interviews. If you have any questions or comments about the show, we'd love to hear them. Email us at conservation at aquatic biosphere.org. Please don't forget to like, share and subscribe. Leave us a review. It really helps us out. Thanks and it's been a splash

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