Energy, backstop endogeneity, and the optimal use of groundwater

To meet the growing demand for freshwater, many regions have increased pumping of groundwater in recent years, resulting in declining groundwater levels worldwide. A promising development is technical change regarding groundwater substitutes such as desalination and wastewater recycling. However, because these technologies are energy intensive, optimal implementation also depends on future energy price trends. We provide an operational model for the case of reverse-osmosis seawater desalination. In an application to the Pearl Harbor aquifer in Hawaii, we find that allowing the cost of desalination to increase at an average annual rate of 2.4 percent over the next century results in a substantially steeper efficiency price path for water. The higher prices decrease optimal groundwater extraction and induce a slower head drawdown over a longer period of time, delaying the transition to desalination by over 30 years. Because the rise in energy costs exacerbates efficiency losses from under-pricing, any delay in implementing efficiency pricing will cause either a greater future increase in prices or the need for rationing. Reforming prices sooner rather than later may be more politically feasible, given that consumers may be more amenable to a gradual rise in prices today than, say, a sudden doubling or tripling of prices ten years from now. With this foundation, we outline a research agenda for extending the framework to other groundwater substitutes and for adaptation to climate change.