By Fiona Burlig, Louis Preonas, Matt Woerman
About the authors: Fiona Burlig is an assistant professor at the Harris School of Policy and Energy Policy Institute at the University of Chicago and a faculty research fellow at the National Bureau of Economic Research. Louis Preonas is an assistant professor of Agricultural and Resource Economics at the University of Maryland, College Park. Matt Woerman is an assistant professor of resource economics at the University of Massachusetts Amherst.
This summer, around the world, we didn’t just read about climate change; we lived it. Extreme heat baked the usually temperate Pacific Northwest. Wildfires raged in the Western United States, Canada, the Mediterranean, and Siberia. Heavy rains flooded Germany and Manhattan. The next victims of a changing climate may be our favorite foods and our wallets, as water scarcity hits American farmers.
Water shortages currently affect more than 3 billion people worldwide. In the United States alone, nearly half the country is experiencing a drought after the hottest summer on record, exceeding even that of the Dust Bowl. The drought in the West is also persistent. The last 20 years have been drier than any similar period over the last 1,200 years. The effects are showing. This summer, Lake Mead—the country’s largest reservoir, formed by the Hoover Dam—recorded its lowest level since first filling in the 1930s, 200 feet below normal. This puts the Western U.S. in uncharted territory. The federal government has declared the first-ever shortages in the Colorado River, triggering water cuts through much of the seven-state water-sharing compact that has been in place for nearly a century.
Water cuts have a ripple effect throughout the economy. Farmers take the biggest direct hit, since they are responsible for two-thirds of total U.S. groundwater use, and greater total water use than any sector besides electricity generation. As climate change increases the frequency of both droughts and hotter temperatures, U.S. corn and soybean yields could fall by up to 20%. Moreover, many of our favorite foods—including almonds, avocados, rice, dairy, and meat—require a lot of water for production, making them particularly susceptible.
With severe droughts becoming the new normal, we need to start making an effort to reduce water consumption and allocate our scarce water resources toward the highest-value uses. The most efficient way to achieve this goal is through market-based regulation, such as a water-use fee. This approach avoids picking winners and losers. Instead, it ensures that water users—from farmers to downstream consumers of agricultural products—pay the full price for their water use. This empowers all consumers to decide for ourselves which uses of water are worth it and which are not.
California, one of the world’s most valuable agricultural regions, is in the process of setting up this type of regulation on farmers’ use of groundwater, under the framework of the state’s Sustainable Groundwater Management Act. The act aims to achieve long-run sustainability by 2042, with a target of reducing groundwater use by 20% to 50%. In new research, we investigate whether this goal is achievable and measure the impact that these groundwater regulations are likely to have on the farmers growing some of the economy’s most valuable crops.
Using data on over 10,000 individual groundwater pumps spanning more than a decade, we find that California farmers indeed pump a lot less groundwater when doing so becomes more expensive. A 10% increase in the cost of groundwater causes farmers to reduce groundwater use by more than 10%, a much larger response than previously anticipated. We also discovered that farmers’ primary means of reducing groundwater consumption has been switching crops. For the same 10% increase in groundwater costs, we estimate that farmers increase land in high-value fruit and nut perennials (like grapes and almonds) by 1%, and reduce land in annual crops (like wheat) and low-value perennials (like alfalfa) by 1%. The shift toward high-value crops makes economic sense: As irrigation costs increase, farmers will need to earn more revenue per acre-foot of water in order to stay afloat.
As California looks to lower its groundwater usage, to what extent would an extraction fee alter the state’s agricultural landscape? We estimate that under a $10 per acre-foot fee on groundwater extraction (roughly 25% of the average pumping cost), farmers would reduce their groundwater use by 27%—primarily by reallocating 3.9% of cropland to other crops or out of crop production altogether. Because farmers are so responsive to water costs, the state’s long-run sustainability targets can be achieved using a groundwater fee that would be much more modest than many previous projections suggested. This is great news from a conservation perspective.
It is also great news if you like grapes and almonds. Even with regulations to achieve groundwater sustainability in the coming decades, high-value perennial crops should remain plentiful in grocery stores in the United States and worldwide. On the other hand, other foods could see prices increase. Such price fluctuations due to increased water scarcity would actually be a sign that the market is working. If food prices do rise, the economic burden of California droughts would not disproportionately fall on local farmers, but rather be spread across the world’s consumers. This is a way of getting consumers to take the full costs of agricultural production into account when choosing what to put into our grocery carts—getting all of us to pay our fair share for a sliver of climate change’s impacts.