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Cap and trade markets for groundwater: Efficiency and distributional effects of the permit allocation mechanism

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  • Gao, Yang
  • Williams, Ryan Blake
  • Mitchell, Donna M.

Abstract

Agricultural production on the Texas High Plains is heavily dependent on the Ogallala Aquifer, which accounts for approximately 95 percent of groundwater pumped. Rapid groundwater depletion has been observed in the Ogallala Aquifer, which is attributed to low recharge rates and high water withdrawals. In an effort to manage this limitedly-renewable water resource, High Plains Water Conservation District (HPWD) No.1 has established a rule to reduce pumping 1.25 acre-feet per acre per year for all groundwater users within HPWD. This research evaluates the efficiency and distributional effects of a “cap and trade” mechanism for the HPWD region under alternative methods of allocating the allowable groundwater use: an equal distribution rule and a uniform percentage reduction rule. Marginal abatement curves are derived from producer profit functions, which include four irrigated and three rain fed crops. Optimal cropping choices, water use, water permit trades, and water permit prices are estimated simultaneously by maximizing producer profits. The relative efficiency of the programs are evaluated by comparing total producer profits. The results shows that the equal distribution cap will result in a more efficient use of groundwater resources, while the uniform percentage reduction cap will result in less wealth redistribution.

Suggested Citation

  • Gao, Yang & Williams, Ryan Blake & Mitchell, Donna M., 2016. "Cap and trade markets for groundwater: Efficiency and distributional effects of the permit allocation mechanism," 2016 Annual Meeting, February 6-9, 2016, San Antonio, Texas 230015, Southern Agricultural Economics Association.
  • Handle: RePEc:ags:saea16:230015
    DOI: 10.22004/ag.econ.230015
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    References listed on IDEAS

    as
    1. Peterson, Jeffrey M. & Marsh, Thomas L. & Williams, Jeffery R., 2003. "Conserving the Ogallala Aquifer: Efficiency, Equity, and Moral Motives," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 18(1), pages 1-4.
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    7. Zekri, Slim & Easter, William, 2005. "Estimating the potential gains from water markets: a case study from Tunisia," Agricultural Water Management, Elsevier, vol. 72(3), pages 161-175, April.
    8. Eli Feinerman & Keith C. Knapp, 1983. "Benefits from Groundwater Management: Magnitude, Sensitivity, and Distribution," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 65(4), pages 703-710.
    9. Peck, J. C., 2007. "Groundwater management in the High Plains Aquifer in the USA: legal problems and innovations," IWMI Books, Reports H040052, International Water Management Institute.
    10. Wheeler, Erin A. & Segarra, Eduardo & Johnson, Phillip N. & Johnson, Jeffrey W. & Willis, David B., 2006. "Policy Alternatives for the Southern Ogallala Aquifer," 2006 Annual Meeting, February 5-8, 2006, Orlando, Florida 35269, Southern Agricultural Economics Association.
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