Performance of a uniform proportional “cut” to manage declining groundwater in Western Australia

Globally, the agriculture sector is the largest user of groundwater, and to manage declining groundwater resources, reducing groundwater extraction by the agriculture sector is an active policy objective in many jurisdictions. Estimating the cost to agriculture in terms of lost gross margin due to the implementation of exogenously determined water extraction restrictions has been an active research area. This research contributes to the literature on groundwater management by developing a hydro-economic farm optimization model that allows us to internalize the environmental externalities associated with groundwater extraction and compare outcomes with various levels of uniform proportional cuts to agricultural groundwater extraction rights. Our case studies are three sub-areas within Western Australia's most important groundwater system: the Gnangara Groundwater System. We find evidence that: (i) once environmental externalities are accounted for, the optimal water use by horticulture falls by between 26% and 38% across the three sub-areas; and (ii) compared to a uniform proportional cut policy, spatially and temporally flexible policy mechanisms achieve higher environmental gain with a lower cost to horticulture