Effect of Hydrogeologic and Climatic Variability on Performance of a Groundwater Market.

Incentive‐based policies, such as the cap‐and‐trade system, have been shown to be useful in the context of groundwater management. This study compares the performance of a groundwater market with water quotas when assumptions of perfect information are violated due to climate change and hydrogeologic heterogeneity and explores how changes in future climate affect market performance. A subbasin of the Republican River Basin, overlying the Ogallala aquifer in the High Plains of the United States, is used as a case study. Building on a previously developed model, a multiagent system model simulating a groundwater market is developed where self‐interested agents can trade water use permits to maximize individual benefits subject to irrigation and land constraints. This economic model is coupled with a calibrated physically based groundwater model for the study region that allows for an evaluation of streamflow depletion impacts, which has been the focus of management efforts in the basin. Results show that trading of permits between farmers results in increased economic benefits and, in some cases, reduced environmental violations. However, the benefits of a groundwater market are distributed unequally resulting in "winners" and "losers" across the system. Future changes in climate are shown to significantly influence farmers willingness to pay for groundwater and thus increase the variation in groundwater price and pumping. These findings emphasize the importance of addressing hydroclimatologic variability and change in the design of groundwater markets. Key Points: Heterogeneous economic and environmental benefits of groundwater trading are quantified and spatially illustratedClimate change increases the price elasticity of groundwater and leads to increased variation in groundwater price and pumpingGroundwater overdraft is sensitive to changes in both precipitation and temperature, with a higher sensitivity to changes in precipitation [ABSTRACT FROM AUTHOR]