Conserving groundwater: Why irrigators chose to tax themselves

At the turn of the century, irrigators in San Luis Valley (SLV), Colorado confronted a reality of precipitously dropping water levels of their shared groundwater resource stemming from their collective overextraction. Rather than continuing with business as usual—risking further declines and potential state intervention—they decided to self-organize and agreed to adopt a pumping fee, substantially increasing the cost of water—one of their key agricultural inputs. This innovative approach to conservation departs from those commonly championed by many groundwater stakeholders, who tend to favor conservation policies that decrease—not increase—costs, such as subsidizing more efficient irrigation technology or paying farmers to fallow their land. Despite few empirical examples of the introduction of a pumping fee, there are sound economic reasons to consider this approach. In this article, we review the adoption of this home-made policy, discussing the process and reasoning behind the stakeholders’ choices, the economic theory that supports it, and some of the agricultural, hydrological, and social outcomes that have resulted from it. The case study illuminates the potential benefits of a groundwater fee but also highlights that policy choices are multifaceted and what works in one scenario does not imply it is a panacea. The article concludes with a discussion of a recent and surprising policy move: SLV farmers have decided to increase the primary groundwater pumping fee exponentially to $500 per acre-foot (10 times the original fee in 2009). We discuss how this new policy represents a shift from a Pigouvian tax structure to what resembles more of a cap-and-trade system. While the results of this latest policy innovation are still unknown, the eventual results promise to be instructive not only to SLV but also to other areas facing similar water scarcity issues.