Taxing Water Is the Only Way to Limit Use and Reduce Depletion

Tax policy has the power to limit overexploitation of finite resources, and water is the most finite resource we have. But judging from the massive US groundwater depletion since 1900, we’re running out.

As climate change shifts the allocation of freshwater resources, dumping too much in some areas and casting others into drought, tax policy may provide an answer. A tax on every gallon of groundwater pumped would simultaneously spur users to conserve water while compensating society for the depletion of a collective good.

Pajaro Policy

The efficacy of a tax on water in reducing usage isn’t idle speculation; it’s been tried and effective in the Pajaro Valley, near California’s Monterey Bay.

The valley’s proximity to the ocean gave rise to the inventive water policy, after over-pumping its freshwater aquifers caused salt water to infiltrate the water table and destroy crops. The valley can be viewed as a microcosm or fractal of the wider world—overexploiting groundwater leads to destruction.

Considering this, the Pajaro Valley Water Management Agency enacted what amounts to a water tax—calculated either based on actual usage using well meters or based on estimated usage keyed to property size and crops grown. They found a tax that raises the cost of groundwater 20% results in a 20% decrease in extraction—a promising result, to be sure.

The Pajaro Valley water policy has implications for other drought-stricken regions and, if the latest data on groundwater depletion is accurate, perhaps the country more generally.

Overuse of aquifers is about more than just depleting water reserves, as extreme depletion can lead to aquifer failure from soil or saltwater intrusion. Repairing failed aquifers isn’t always possible. And even when it is, it’s complex and expensive.

A device to measure overflow in a rain garden used to return storm water runoff captured from rooftops back into the aquifer, at a residential front yard in Los Angeles.

Photographer: Robyn Beck/AFP via Getty Images

Tragedy of the Commons

One goal of tax policy is to compel parties to pay for resources they might otherwise shift the cost of onto others. An oft-cited metaphor to illustrate the effect of externalities on shared and limited resources is the tragedy of the commons, which describes the tendency of individuals with unlimited access to a common good to overexploit that good.

Groundwater use is the clearest real-world example of this effect in action. Every gallon of water pumped from the aquifer by a given farm will net 100% of profits from the crops grown, yet will divide the cost and risk of depleting the water reserve across all neighboring farms. The benefits accrue entirely to the pumper, and the detriments are shared by all.

This is where tax policy shines brightest: compelling extractors to internalize the cost of a gallon of water and all the appurtenant damage caused by its extraction.

Absent policy intervention, the cost of pumping groundwater is limited only to the energy required to do so and some hypothetical future depletion scenario. Tax policy steps in to hang a price tag on a resource that was previously, and unsustainably, treated as a free-for-all.

Locus for Investments

To the extent a tax on water would deter overuse, applying and administering the tax would suffice. Wise investment of the revenue raised by the tax, however, would be necessary if society’s compensation for water pumped were put to good use.

Hydropanels are a promising technology that amount to solar panels “generating” water instead of generating electricity. Basically, they provide clean drinking water from thin air. One panel can extract around a gallon of water per day, but the technology is expensive and cumbersome in terms of space requirements.

Given current restraints on the technology, hydropanels may be a replacement for water consumed, but it can’t replace tap water for other household uses—and it certainly can’t provide irrigation. Further investment through subsidies can offset the cost of purchasing hydropanels for areas with the direst needs and, perhaps, lead to technological breakthroughs in efficiency and cost.

The bulk of revenue generated by a water tax should be invested in existing infrastructure. By investing in modern, more efficient water transport, storage, and recapture systems, we can curtail water loss and reduce the need to extract groundwater.

Existing technologies such as desalination, water recycling, and new methods of water storage and transport that are more durable and less prone to contamination will benefit from an influx of revenue through a water tax.

Funding research grants and public-private partnerships can accelerate the development of new technologies and be a shot in the arm for existing ones. The challenge is to prioritize projects for investment that could offer the most sustainable benefits, while balancing the need for immediate repairs and incremental upgrades to existing infrastructure.

Outlook

The Pajaro Valley water tax demonstrates the effectiveness of tax policy in managing a resource as vital as water.

Tax policy can deter overuse and compel us to reckon with the true cost of groundwater extraction. The revenue generated from such a tax could open avenues for investment in groundbreaking technologies and infrastructure development in much the same way electric vehicle subsidies have helped take a fringe technology to a salable consumer good in the last decade.

The numbers speak for themselves—the alarming rate of groundwater depletion is a call for action. We have a federal gas tax that reflects the societal need for reduced fossil fuel usage and infrastructure maintenance.

Similarly, a groundwater tax could be structured to mirror the environmental and societal costs of water extraction. The adoption of such a policy would signal a shift from consumption to stewardship, ensuring the sustainable management of this most necessary resource.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and adjunct professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

Read More Technically Speaking