22. Controlling Groundwater Exploitation Through Economic Instruments: Current Practices, Challenges and Innovative Approaches

One of the main challenges faced by water managers attempting to control groundwater use is the lack of information regarding the hydrology of the aquifer and the abstractions. More specifically, well developed and calibrated models are not usually available, which does not facilitate estimation of the stock and recharge levels. In Chile, for example, there is little to no knowledge of the aquifers south of Central Chile. Moreover, the number of abstraction points, their location, the average volume pumped and the period at which the pumping takes place are often unknown. Indeed, the control of groundwater – a three-dimensional system – is more complex than for surface systems (one-dimension). The existence of undeclared or illegal wells remains an issue even in developed countries, both in the urban and agricultural sectors. When abstraction points are known, meters are not always installed or they can be temporarily removed or tampered with. This is illustrated with several agricultural and urban case studies selected in southern Europe such as in Spain or in France (de Stefano and Lopez-Gunn 2012; Montginoul and Rinaudo 2011), and elsewhere in the world.

In such contexts, groundwater abstraction control policies have focused on circumventing the monitoring problem by using readily observable information that can be used as a proxy for groundwater abstraction. Four different levels of information can be targeted depending on the effort made.

Based on Salzman’s classification, five instruments can be used to control groundwater abstraction (Salzman 2005): (1) command and control; (2) penalty (including tax); (3) payment (including subsidies); (4) appropriation (tradable property rights); and (5) persuasion. Some of them are incentive-based instruments (2-3-4), others aim to manage groundwater abstraction through an administrative or concerted share of available water, or through influencing withdrawers taking into account psychological and social aspects. Although this chapter is primarily dedicated to economic instruments, these five instruments are presented here because they can be combined to increase the efficiency of incentive-based instruments or are in competition.

In France, as in many other EU countries, groundwater development has occurred in an institutional setting that imposed few if any limits on groundwater use. Until the 1992 water law, existing regulation mainly focused on surface waters and on objectives related to minimum in-stream flow and aquatic ecosystems protection. Few constraints were imposed on groundwater development until the 1990s. Wells were not always notified and authorized discharges were not complied with. A rapid development of agricultural groundwater use ensued. Since 2000, half of the total agricultural irrigated area in France depends on groundwater (Garin et al. 2013). In several parts of France, this has resulted in declining water tables, with significant impacts on dependent rivers and ecosystems.

The situation started to evolve with the 1992 water law which strengthened the well licensing system and imposed the use of meters. The law also established the concept of “water scarcity zones”¹ where local regulators could ban the construction of new wells and restrict pumping through allocating individual abstraction ceilings (in volume per year). This new regulatory framework was implemented in several groundwater basins (Fig. 22.1), the most well-known being the Beauce aquifer in central France.

Public water utilities were given priority over other uses in water allocation. Concerning agriculture, the allocation of individual volumes was made by governmental agencies, based on environmental impact considerations, after consultation with the Chamber of Agriculture. The State kept the sole responsibility for enforcing water allocation, although it lacked the human and financial resources to conduct the required controls. Conflict resolution relied fully on judicial procedures, but court cases were often abandoned and penalties charged to offenders were not dissuasive. Overall, this “command and control” institutional set-up established by the 1992 law did not succeed in averting over-exploitation. The frequency of water crises increased and temporary restrictions and even total irrigation bans were promulgated every year in many groundwater basins.

The regulatory framework was again reformed in 2006 with the promulgation of a new Law on Water and Aquatic Ecosystems. In aquifers considered at risk of over-exploitation, hydrogeological studies need to be conducted to assess the total maximum volume that can be abstracted (capping procedure). This volume (which can be much lower than current aggregate use) must then be shared among users. Urban water supply is still given priority. Concerning agricultural use, Groundwater User Associations² (GWUAs) must be established locally to share the available amount of water among farmers (Fig. 22.1). GWUAs also have the option to raise water fees, and to implement new instruments to enforce allocation. This opens an interesting space for testing innovative instruments, inspired from theoretical research and from on-going experiences in other countries.

This brief historical description shows two main transformations underlying groundwater policy reform. First, the focus is shifted from command and control to a decentralized management approach. The State is progressively transferring responsibilities to farmers, through the establishment of micro-institutions which are “inserted between global rules that circumscribe the environmental context on the one hand, and agents, organizations and contractual agreements they are tied with on the other hand” (Ménard 2003). Such intermediary institutions adapt general institutional rules to effective local organizations and allow transaction costs to be reduced. As for groundwater, it is assumed that a locally-designed institution will be more efficient than the government at enforcing a groundwater quota system. The second transformation relates to allocation procedures. The establishment of individual quotas can be considered as a first move towards an appropriation approach. In theory, quotas are very far from being property rights, since they can be reduced or even suppressed without any compensation. In practice, administrative pumping authorizations remain attached to the land in the case of land transactions, which implies that the land price reflects the value of the rent attached to the water quota. Appropriation is well underway, although this is not recognized officially.

As shown in the previous section, groundwater allocation is mainly driven by command and control instruments, including temporary restrictions and individual quotas in “water scarcity zones”. And since the 1964 Water Law an abstraction tax is also charged by Water Agencies. The main objective of this tax is not to signal scarcity, but to raise revenues that can be used to subsidize water related projects. The tax level is regulated by the National Parliament which sets a maximum level for different uses (see Table 22.1). Tax levels are far too low to provide any real incentive to reduce groundwater extraction. For instance, the average rate charged for irrigation (traditional gravity systems excluded) is only 3.6 € per thousand cubic meters. Although it is doubled in “water scarcity zones”, it does not signal water scarcity. Moreover, the abstraction fee is not recovered from small water users (less than 10,000 m³ per year). Small economic enterprises and domestic users who directly pump groundwater are therefore exempted from the tax.

The main problems and policy issues in current groundwater policies are now covered in this subsection. The first problem relates to law enforcement. Since 1997 all wells and borewells should be declared and equipped with meters. There are however still a number of places where this does not happen. Field investigations conducted by the authors in the Roussillon plain, Southern France, showed that only 1 % of domestic boreholes and 40–63 % of agricultural boreholes have been declared (Montginoul and Rinaudo 2009; Desprats et al. 2011). In that case study area, the Chamber of Agriculture collects the information on wells from farmers but they withhold it fearing that it can be used against them in the future. And when wells are declared, farmers prefer continuing to pay the flat rate abstraction fee to the Water Agency rather than declaring the volumes they actually used, even though this would clearly be favorable to them. The situation persists because sanctions are not dissuasive, the probability of control is too low, offenders are not systematically prosecuted (many cases are abandoned in overburdened courts), and due to a general lack of political will.

The second problem relates to water allocation efficiency. Water quotas have generally been granted based on records of historical use. In certain areas, like in the Tarn et Garonne county, the “use it or lose it” rule that should theoretically prevail in France, where water is considered as a public trust, is not applied. This results in situations where farmers may keep control over water quotas which they do not use, at the expense of other farmers who are queuing-up to obtain a quota from the government agency in charge. The corollary is a progressive feeling of private appropriation of water by farmers (and other users) who have been benefiting from a quota for years. The value of land reflects the existence and the magnitude of the attached water quotas, meaning that the water rent is appropriated by the land owner. This trend reflects current administrative practices which are in contradiction with the foundations of the 1992 and the 2006 water laws, both stating that water is a Nation’s common heritage.

The third problem is that of perceived (un)fairness of water allocation. Many of the farmers in various French basins contest current water allocation which they find unfair and not equitable. They particularly contest the priority given to urban areas first before environment and agriculture. Another issue of controversy is around the rules for sharing water among farmers. The grandfathering principle, advocated by those benefiting from a quota based on historical use, is contested by other users who would like to enter the groundwater economy. This is nicely shown by a survey on water allocation rules conducted in five French regions, where the diversity of positions defended by farmers on this issue can only be understood by analyzing self-interest economic motivations jointly with ethical beliefs and values (Chap. 11).

Last but not least, groundwater policy reform is somehow blocked by lobbying efforts made by agricultural stakeholders who try to obtain public subsidies to construct small reservoirs as a substitute for groundwater use.

In France, policy makers are at a crossroads where three different approaches can be chosen to develop national groundwater regulation.

Considering a 20-year time horizon, the three paths represent alternative feasible options, provided significant evolution of the legal framework occurs. However, future evolution may be strongly determined by social expectations. A series of workshops conducted with 80 farmers and 44 institutional stakeholders suggest that there is a strong social preference for decentralized solutions and cooperative arrangements, while economic instruments like taxes and market are strongly rejected mainly based on ethical considerations (Figureau et al. 2015; Rinaudo et al. 2014). Similar conclusions were reached by Montginoul and Rinaudo (2009) from a survey conducted in southern France by Rinaudo et al. (2014). Overall, water remains perceived as a free access good and implementing economic instruments is considered to be a drastic shift in paradigm. Transition towards a mature water economy will necessarily take place as climate changes and demand increases, but this will take time.

In the United States, the connections between groundwater pumping, local economies, and freshwater ecosystems that are fed by groundwater have been the subject of extended study and litigation over the last decade (e.g. Hathaway 2011; Van Kirk and Naman 2008; Scanlon et al. 2012; Gleeson and Cardiff 2013; Steward et al. 2013). Importantly, there is no national water policy related to groundwater use in the United States (see also Chaps. 6, 7, and 8). Instead, groundwater regulations are often set and implemented locally and not at a state or federal level. Changes in regulations are primarily driven by legal impositions on local groundwater management districts, or by a desire to preserve a rural way of life for future generations.

Common concerns about the sustainability of groundwater use may be divided into three broad categories: concerns over aquifer depletion (Konikow 2013; Laukaitis 2013; Steward et al. 2013; Terrell et al. 2002; Wines 2013), concerns over damages to transboundary surface water resources resulting from surface water-groundwater interaction (Kuwayama and Brozović 2013; McCarl et al. 1999), and concerns over damages to groundwater-dependent ecosystems and endangered species from surface water-groundwater interaction (Van Kirk and Naman 2008).

As a result, there is a very fine-scale heterogeneity of regulations related to groundwater use. Whereas large portions of the United States do not have any meaningfully binding restrictions on groundwater use, there is also a growing number of areas where quantification, monitoring, and enforcement of pumping rights have been implemented. Moreover, there are also examples where markets in groundwater pumping rights are emerging. Finally, in at least one case, voluntary changes in water rights that allow binding reductions in agricultural groundwater pumping have occurred (Kuwayama and Brozović 2013; NE DNR and MRNRD 2010; NE DNR and TBNRD 2012; NE DNR and URNRD 2010; Thompson et al. 2009). In the remainder of the section, we will focus on describing some of these recent, innovative approaches to groundwater management.

The High Plains aquifer system is one of the largest groundwater aquifers in the world (McGuire et al. 2012; Fig. 22.2). It supports endangered species, ecosystems, and rural economies in an area covering multiple states (Gutentag et al. 1984; Rosenberg et al. 1999; Dennehy et al. 2002) and a variety of hydrologic and climatic settings. As a result, both the management concerns and institutional responses to these concerns vary enormously across the region.

Each state above the High Plains aquifer has its own groundwater administration areas. These areas are called Natural Resources Districts (NRDs) in Nebraska, Groundwater Management Districts (GMDs) in Kansas, and Groundwater Conservation Districts (GCDs) in Texas. All three categories of groundwater-related conflict discussed in the previous section are observed in the High Plains (Fig. 22.2). First, the major concern over groundwater may be related to declining well yields as pumping reduces saturated thicknesses (e.g. Northwest Kansas GMD#4, North Plains GCD). Second, stream depletion related to groundwater pumping may lead to conflict between groundwater users and downstream surface water users (e.g. the Upper and Middle Republican NRDs, Big Bend GMD#5). Finally, stream depletion may negatively impact endangered species and instream habitat (e.g. the Twin and Central Platte NRDs).

Effective groundwater management requires monitoring and enforcement of groundwater use. In the High Plains region, a large portion of the states of Kansas and Nebraska requires that all irrigation wells are metered and pumping reported annually. Meters are less common in Texas, but some groundwater management districts such as the North Plains Groundwater Conservation District are now phasing-in meter installation.

As noted above, monitoring of groundwater use is only meaningful to resource management to the extent that there is enforcement when violations occur. Where reporting of metering data is voluntary and without sanction, there is little incentive to provide timely or accurate readings. Conversely, in some groundwater management districts, paid district employees do the meter reading, with fines for broken meters and severe penalties for violators. For example, in 2010, the Upper Republican Natural Resources District in Nebraska revoked groundwater pumping rights, estimated to be worth in excess of $3 million, for several groundwater users who had attempted to increase their water use illegally through bypassing their well flow meters.

Note that even without metering of groundwater use, it is possible to estimate groundwater use, and depending on the situation, imperfect monitoring may be sufficient for management. For example, some natural resources districts in Nebraska quantify and enforce the right to irrigate a certain area of land, but do not meter water use (e.g. the Twin Platte and Central Platte NRDs). If crop water demands on a per-area basis are similar, then the estimation error from not metering may be small. Thus, depending on the goals of groundwater management, it may be preferable to avoid the potential difficulties associated with metering. However, there is still a need to enforce limits on the irrigated areas for such systems to succeed.

Policies that seek to reallocate groundwater pumping rights must deal with a number of issues. While some of these are well-known from markets for surface water rights (Chong and Sunding 2006; Saliba 1987; Young 1986), others are specific to groundwater pumping. Groundwater pumping leads to several kinds of spatial and intertemporal externalities (Brozović et al. 2010; Kuwayama and Brozović 2013). Indeed, groundwater management schemes that reallocate water between alternate pumping locations are often explicitly designed to change the distribution and magnitude of pumping externalities. Reallocation may be designed to minimize unwanted impacts on third parties or to encourage trades that reduce the magnitude of externalities (Palazzo and Brozović 2014; Brozović and Young 2014).

Externalities arising from groundwater pumping depend on local hydrologic properties and are spatial and intertemporal (Brozović et al. 2010). In principle groundwater pumping produces well interference and induces drawdown in adjacent wells. However, to date interference between adjacent wells with different ownership has not obviously restricted groundwater trading in the High Plains region. One possible explanation is that existing well spacing regulations are enough to prevent significant well interference between adjacent wells. Because trading of the right to pump groundwater changes the location of pumping but does not involve the physical transfer of water above ground, in general no water conveyance system is needed. Note that this is different to most surface water markets, where the need for water conveyance may be a major limitation to trading. Moreover, in groundwater management areas where there are already binding restrictions on groundwater use, water users that are looking to purchase additional pumping rights often have excess pumping capacity and may be able to use any permits they purchase without needing any further capital investment.

Existing groundwater permit trading schemes typically use applied water, rather than consumptive water use, as the unit of trade. Again this is in contrast to surface water markets, where it is common for only consumptive water use to be tradable. The main reason for the difference is likely pragmatic. Well metering quantifies applied water rather than consumptive use and represents a unit of transfer that is politically acceptable to water user groups. Moreover, in many cases both buyers and sellers of groundwater use rights have the same irrigation technology (typically centre pivot systems in the High Plains region of the United States). Consequently, differences in consumptive use between buyers and sellers may be negligible. Conversely, in surface water markets where water is moved outside of basins, or between agricultural and urban water users, the need to quantify consumptive use is much greater.

Management of groundwater in Nebraska is undertaken by Natural Resources Districts (NRDs). The NRDs are operated as local government agencies but may be thought of as large groundwater user associations. The NRDs have a relatively large amount of autonomy, and determine their rules and regulations in consultation at the state level through the Nebraska Department of Natural Resources. As a result, a wide variety of groundwater management institutions have evolved at an NRD level, reflecting local concerns about water use (Fig. 22.2). For example, (NE DNR and MRNRD 2010; NE DNR and TBNRD 2012; NE DNR and URNRD 2010) in the Platte River Basin in Nebraska, groundwater regulation is driven by stream depletion impacting endangered species habit for fish and migratory birds (Fig. 22.2). There is currently no metering of wells in the NRDs within the Platte River Basin. The Twin Platte, Central Platte, and Tri-Basin (Platte River portion) NRDs currently allow transfers of groundwater pumping rights. Each of these NRDs uses certification of irrigated acres to place an upper bound on the land area that can be irrigated. Then, transfers of certified irrigated acreage are allowed. Stream depletion is calculated over a 50-year horizon and, depending on the NRD, transfers may be adjusted if acreage is transferred to a location with higher stream depletion than the original location. There are also additional spatial limits on trading, such as constraints that trades cannot move water upstream (Twin Platte and Central Platte NRDs) or outside of specified zones (Tri-Basin NRD). Note that the use of certified irrigated acres as the unit of transfer corresponds to an imperfect monitoring of groundwater pumping. However, when the primary concern is stream depletion, encouraging trading to move water further from the river is desirable and, over short to medium management timescales, the benefits of this spatial reallocation may outweigh modest increases in total pumping.

Conversely, groundwater regulation in the Republican River Basin of Nebraska has been driven by interstate litigation between Kansas, Nebraska, and Colorado over the allocations of surface water to each state from the Republican River (McKusick 2002; Figure 2). As a result of a long litigation between the states, all wells in the Nebraska portion of the Republican River Basin are metered, with mandatory annual reporting and moratoria on new wells. The Upper Republican NRD completed metering in 1982, and the remaining NRDs completed metering in 2005. There are pumping quotas in place with complex and changing intertemporal carry forward provisions that allow banking of unused rights for future use. Current updates of the integrated management plans for three of the NRDs in the Republican River Basin, the Upper (UR) and Middle (MR) Republican and Tri-Basin (TB) (Republican River portion) NRDs, allow for some trading of groundwater pumping rights.

The Republican River Basin NRDs that allow trading each have slightly different rules that constrain trading. For example, in the Upper Republican NRD, trades must stay within an area equal in size to a township (36 mile² or around 90 km²). In the Middle Republican NRD, trading is limited to groundwater users within certain distances from streams. In years in which the Middle Republican NRD is concerned about meeting its stream depletion targets under the Republican River Compact, trading may be suspended at the discretion of the NRD. In each of the NRDs, there is an adjustment for differences in stream depletion if pumping rights are transferred to a location where stream depletion is greater than the original pumping location. However, if pumping rights are transferred to a location with lower stream depletion than the original location, no adjustment to the rights takes place.

Kansas is unusual in having appropriative, rather than correlative, rights for groundwater. This complicates any policy that seeks to reallocate groundwater pumping between users as any transfer must not demonstrably impact any senior rights holders. Thus, it is possible that concerns over well interference might restrict the potential applicability of groundwater trading schemes. Despite this, groundwater trading has been established in two areas of the state. First in the Big Bend Groundwater Management District (GMD) No. 5, the Wet Walnut Creek Intensive Groundwater Use Control Area is metered with pumping allocations, and transfers are allowed, though they have not yet occurred. GMD No. 5 also operates a groundwater bank through which transfers may occur, subject to large conservation offsets and regulatory complexity. One trade has occurred in the bank.

Second, in the Northwest Kansas Groundwater Management District No. 4, a portion of the district (the Sheridan-6 area) was designated a Local Enhanced Management Area (LEMA) in early 2013. This is the first such area in the state. The LEMA is self-regulating, and has chosen to equalize the seniority of its water rights and reduce the total water allocation by 20 % relative to historic use. Trading is allowed and will be on a volumetric basis without adjustment, as the primary concern is aquifer depletion and not stream depletion.

Although metering is slowly being introduced to groundwater conservation districts in Texas, conveyance is an impediment to trading in Texas. Under current groundwater law, trading is allowed but the buyer is expected to pump the water at the location of purchase, on the seller’s land. Portions of land overlying the Edwards Aquifer (not a part of the High Plains Aquifer) are an exception to this rule, where trading is allowed to change the location of pumping as it is assumed that the area encompassing all potential transfers is small enough that impacts on third parties will not be altered significantly by transfers. The Edwards Aquifer Authority in Texas has implemented well permitting and metering programs and allows transfers of the right to pump up to 1 acre-foot/acre of certified irrigated land (EAA 2012). Both permanent transfer and lease markets exist.

The first Chilean text to regulate the use of water is an 1819 Executive Decree which defined the dimensions of an irrigation water use right and responsibility for water intakes. The 1855 Civil Code was the first legal instrument to define that “the rivers and all waters running within natural channels are national goods of public use.” In addition, it establishes that access to water is obtained by means of water-use rights (WUR) “granted by the competent authority.” The concept of WUR was further developed in the 1930 Water Code proposal and 1951 Water Code. The latter code defines WUR as follows: “A water use right is an actual right that falls on publicly owned waters which consists in the use, possession and disposal of such waters fulfilling the requirements and in accordance with the rules prescribed herein” (Hearne and Donoso 2005). The 1967 Water Code, implemented in a more centralized political context, reinforces the concept of water as being within the public domain and changed the legal nature of WUR, stressing that these were administrative rights where the State grants the use of the waters, subject to public regulation. These WUR could expire, and the process of water reallocation was to be based on regional water-use plans executed by means of studies that determined the rate of rational and beneficial use (Hearne and Donoso 2005).

The Water Code of 1981 (WC 1981) maintained water as “national goods of public use,” but granted permanent, transferable WUR to individuals so as to reach an efficient allocation of the resource through market transactions of WUR. The holder of the WUR is the owner of the right in perpetuity, ownership that is protected constitutionally. However, it is important to note that granted WUR do not constitute a transfer of ownership of the water. The WC 1981 allowed for freedom in the use of water to which an agent has WUR; thus, WUR are not sector specific and can be transferred between sectors as well as within economic sectors. Similarly, the WC 1981 abolishes the water use preferential lists, present in the Water Codes of 1951 and 1967. Additionally, WUR do not expire and do not consider a “use it or lose it” clause.

The WC 1981 specifies consumptive and non-consumptive WUR for both surface and groundwater. Non-consumptive use rights allow the owner to divert water with the obligation to return the same water unaltered to its original source. Consumptive use rights do not require that the water be returned once it has been used. Consumptive and non-consumptive WUR are, by law, specified as a volume per unit of time. In addition, consumptive and non-consumptive rights can be exercised in a permanent or contingent manner and in a continuous, discontinuous or alternating mode. Permanent use rights are rights specified as a volume per unit of time, unless there is water scarcity in which these WUR are recognized as shares of water flows. Contingent rights are specified as a volume per unit of time and only authorize the user to extract water once permanent rights have extracted their rights. Continuous rights are those use rights that allow users to extract water continually over time. On the other hand, discontinuous rights are those that only permit water to be extracted at given periods. Finally, alternating rights are those in which water extraction is distributed among two or more persons.

Groundwater in Chile is regulated in Book I, Title VI of the WC 1981 in Articles 58–68. In addition, groundwater is administratively regulated by Resolution No. 425 of the Dirección General de Aguas (DGA – General Water Directory) approved in 2008. Article 58 establishes that any person can explore in order to find groundwater on their property. Exploration on public property requires an authorization by the DGA; should two or more petitions for exploration be presented for the same geographic area, the DGA will define who receives the exploration right based on an auction. If groundwater is found, the user can petition the DGA for a new groundwater use right. The groundwater use right petition must meet the following requirements:

The administrative procedure requires that this WUR petition be published in the Diario Oficial, in a daily Santiago newspaper, and in a regional newspaper, where applicable. Previous to the WC 1981 reform of 2005, the DGA could not refuse to grant new water rights without infringing a constitutional guarantee, provided there was technical evidence of the availability of water resources and that the new use would not harm existent rights holders.³ At present, if the petition is found to be for speculative reasons the DGA can refuse to grant the solicited WUR. If there is competition for solicited water rights, they are to be allocated through an auction with an award to the highest bidder. This allocation rule between competing WUR petitioners allows water to be allocated to its highest use value.

The Law N^o. 20,017 of 2005 amended the procedure to grant new WUR of the WC 1981 and introduced a non-use tariff (patente de no-uso). Due to the difficulties of monitoring the effective use of all WUR, the non-use tariff is applied to all consumptive permanent groundwater WUR that do not count with water intake infrastructure, and to all non-consumptive WUR that do not have water intake and return infrastructure (Law N^o. 20,017 of 2005, art. 129 bis 4-6).

Groundwater resources can be classified as: free, under restriction, and under prohibition. A groundwater resource classified as free implies that new WUR can be granted to petitioners. Groundwater declared under restriction⁴ only allows provisional WUR to be granted; meanwhile, if it is under prohibition,⁵ no new WUR can be granted.⁶ In Chile, the possibility of limiting withdrawals has been contemplated since 1983 (Res DGA 207 of 1983). However, this resolution does not indicate how these restricted groundwater resources were to be managed. DGA Res 186, which establishes that groundwater user communities (GUC) will manage restricted groundwater resources, clarifies this in 1996; additionally, DGA Res 186 establishes that all restricted groundwater resources must have a GUC. At present Res 341 of 2005, Article 63 of the WC 1981, and Article 39 of Resolution 425 of the DGA establishes that GUC are responsible for the management of groundwater resources and of water extractions.

Approximately 70 % of Chilean territory presents no restrictions for groundwater exploitation. There are at least 50 aquifers with a declaration of restriction, all located from the Region of Arica and Parinacota to O’Higgins (Fig. 22.3). There are only two aquifers under prohibition: the first is the aquifer of San José de Azapa in the Region of Arica and Parinacota and the second is the aquifer of Copiapó in the Atacama Region. Even though there could be over 50 GUC, only two GUC exist at present in Chile; one manages groundwater in the restricted aquifer of Copiapó Province and the second one can be found in the Yali sector of the Melipilla Province of the Metropolitan Region.

The WC 1981 established that WUR are transferable in order to facilitate WUR markets as an allocation mechanism. Although private water use rights existed in Chile prior to 1981, the previous water codes restricted the creation and operation of efficient water markets. The framers of the 1981 Water Code sought to achieve the efficiencies of market reallocation of water, “the objective of the governmental action in this field was to create solid WUR in order to facilitate the proper operation of the market as an allocation mechanism” (Buchi 1993, pp. 85–87). Thus the WC 1981 was designed to protect traditional and customary WUR and to foster economically beneficial reallocation through market transfers (Bauer 2004; Buchi 1993; Hearne and Donoso 2005).

Although market reallocation of water has not been common throughout most of Chile, the existence of water markets has been documented. As Donoso (2012) concludes, studies have shown active trading for WUR in the Copiapó aquifer where water is scarce with a high economic value, especially for the mining sector and the high valued agricultural export sector (CNR 2012). Inter-sectoral trading has transferred water to growing urban areas in the Elqui Valley (Hearne and Easter 1997) and the upper Mapocho watershed, where water companies and real estate developers are continuously buying water and account for 76 % of the rights traded during the 1993–1999 period (Donoso et al. 2002). Other studies have shown limited trading in the Bío Bío, Aconcagua, and Cachapoal Valleys (Bauer 1998; Hadjigeorgalis and Riquelme 2002).

A key conclusion of these studies is that water markets are driven by demand from relatively high-valued water uses, and facilitated by low transactions costs in those aquifers that the DGA has declared as restricted or protected and where there are GUCs present that assist in the transfer of water. For example as Fig. 22.4 shows, in the Copiapó basin, the volume of water and number of WUR traded began to increase as of 1994, when the DGA declared the aquifer under protection (CNR 2012). There was a second increase as of 2002 when the DGA maintained the prohibition for Sectors 1–4 and declared restrictions for Sectors 5 and 6. This resolution reinforced the signal to water users that new WUR were not available for the Copiapó aquifer and, thus new water demands must be satisfied through the market for WUR.

In the absence of these conditions, trading has been rare and water markets have not become institutionalized in most aquifers. It should be noted that during the 2000s, the market was more active than in the previous two decades, that is in the 1980s and 1990s (Donoso 2012).

The WC 1981 did not pay much attention to the sustainable management of groundwater because at that time groundwater extraction was marginal during the early 1980s. Recognizing the need to improve groundwater management regulation due to increased groundwater pumping, the 2005 amendment of the WC 1981 introduced procedures to reach a sustainable management of underground water resources. The main provisions are: (a) extraction restrictions when third parties are affected; (b) authorization for the DGA to impose the installation of extraction measurement equipment in order to monitor extractions effectively; (c) the establishment of areas subject to extraction prohibitions and restrictions; and (d) the need to consider the interaction between surface water and groundwater when analyzing petitions for new surface or groundwater WUR.

However, a World Bank study (2011) concluded that there exist various problems associated with groundwater management. A major concern is the general lack of information about groundwater and insufficient knowledge about its dynamics, in particular its interaction with surface waters. There are significant gaps in the registry of wells, extraction and quality measurements, recharge balances, and identification of pollution sources. In general, information systems are not linked to the measurement and monitoring of aquifers to estimate groundwater withdrawals. An effective information system is a prerequisite to be able to control and sustainably manage an aquifer.

The sustainability of northern aquifers is compromised due to the over-provision of WUR related to the practice of allocating WUR based on foreseeable use. The foreseeable use considers the probable effective water extraction of different sectors when analyzing whether there is sufficient water to grant new WUR. For example, an agricultural WUR does not extract water in winter months, whereas a mining WUR extracts water all year round. In this case, the authority would consider a lower pressure on water resources of an agricultural WUR with respect to the pressure of a mining WUR. This practice commits the mistake of not considering the transferable nature of WUR. Thus, when water scarcity increases and inter-sectoral WUR transactions increase, water resources will be overexploited and unsustainable. Additionally, the over-provision of WUR gave rise to increased water conflicts as WUR are transferred to users with a more intensive water use, such as from agriculture to mining in the northern basins.

An additional challenge for a sustainable groundwater management is the fact that at present ground and surface waters are managed independently despite their recognized interrelations even though the 2005 reform of the WC 1981 establishes that surface and groundwater must be jointly managed. This implies that at present there is no conjunctive management of surface and groundwater, which has proven to be an effective adaptation mechanism for climate change.

There are, in general, no GUCs that manage groundwater user rights; the only exception is in some sections of the over-exploited Copiapo aquifer. There should exist a GUC at least for all aquifers that have a restriction or prohibition declaration by the DGA. The fact that users have not yet organized themselves in GUCs to take over the management of groundwater reflects the lack of understanding of a large proportion of users of the long term effects that uncontrolled exploitation of aquifers may cause. In the absence of GUCs, the WC 1981 establishes that the DGA is responsible for controlling and monitoring groundwater withdrawals. Evidence has shown that the DGA does not have the necessary resources (human, technical, and financial) to monitor all groundwater extractions.

There is an incentive for the adoption of water saving technologies by farmers (Law No. 18,450). This program subsidizes small scale, private irrigation investments. It has supported much of the installation of drip irrigation systems in the dry north and spray systems in the humid south. However, there has been no assessment of the impacts of this incentive instrument on groundwater recharge and sustainability. Hence, it is essential to strengthen the coordination between sectoral policies and water management policies.