Author(s): Lan N. Le

These four market-based approaches can preserve precious groundwater

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Market-based mechanisms could address the alarming scarcity of groundwater in developing countries.

The world is experiencing a depletion of groundwater because of rapid population growth, more frequent droughts, and agricultural expansion. This has had adverse socio-economic and environmental impacts, including higher pumping costs, reduced agricultural outputs, and damaged ecosystems dependent on groundwater.

There are basically two approaches to address the impacts: manage supply or demand. The first approach often involves investments in infrastructure and technologies to increase water supply. Examples include dam construction, water-saving irrigation infrastructure, recycled water treatment, desalination plants, and aquifer recharge technologies.

The second approach requires “soft” interventions, such as educational campaigns, legislation and regulation, and economic instruments (incentives and pricing) to reduce groundwater extractions.

Among water-demand management strategies, setting up groundwater markets has proven to be a cost-effective approach. Both buyers and sellers are better off by trading with each other, and groundwater is used at its highest value.

Despite the potential benefits of market-based mechanisms to manage groundwater, their application is still limited in developing countries. More often supply-oriented approaches are taken, which do not reflect the actual preferences and behaviour of water users.

For example, government subsidies for water-saving irrigation technologies are supposed to reduce water use in agriculture; however, evidence shows this in fact increases agricultural water use. In many countries, groundwater is often freely accessible, or can be accessed at low cost

In other countries, the extractive rights of groundwater are embedded with riparian lands, making it difficult to transfer or trade. These underdeveloped management regimes, together with the development of new drilling technologies, have led to severe overexploitation of the resource.

Despite the potential benefits of market-based mechanisms to manage groundwater, their application is still limited in developing countries.

Although there is no formal market for groundwater in developing countries, informal groundwater markets exist in parts of South Asia. In India, groundwater is extracted using deep tube wells and traded via cash or in-kind payment. These informal markets present an opportunity for formal markets to be developed. However, unregulated groundwater extraction, together with subsidised electricity, encourage sellers to maximise groundwater sales, thus intensifying exploitation of aquifers.

Based on experiences from groundwater markets in Australia and the United States, the following key steps should be taken to establish market-based mechanisms for groundwater management in developing countries:

  • Improve understanding of hydrological characteristics of aquifers, including groundwater flows, sustainable rates of water extraction, impacts of extraction on the aquifer itself and other dependent ecosystems, including surface water. To obtain this information, investments in groundwater modelling research and science are essential.
  • Good quality information provides a strong foundation to establish well-defined property rights, which enable trading. By defining ownership and providing clear information about groundwater products to buyers and sellers, market creation is encouraged. The right to groundwater extraction must specify the volume and timeframe during which groundwater can be extracted.
  • Setting up reliable monitoring and enforcement schemes is particularly important to assess the conditions of groundwater resources, so that timely adjustment can be made and compliance ensured with rules and regulations through measures like positive incentives or sanctions for misconduct. Price information should be transparent and easily accessible to the public, helping buyers and sellers to achieve equitable and efficient trade, while minimising excessive variations in groundwater prices.
  • Last, community engagement and involvement in designing institutional reforms for groundwater are essential to reflect and incorporate social and cultural values of groundwater and minimise the risks of political opposition.

With the support from development aid organisations, investing in market-based mechanisms for groundwater management needs to be considered to address the scarcity of this precious resource in developing countries.

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