The economic impact of regulatory water policy tools

Water scarcity becomes a more persistent and complex challenge in agricultural regions across the United States and globally, regulatory water policy tools are drawing increasing attention. With rising competition for limited water supplies and growing pressure to ensure long-term sustainability, policymakers are exploring new ways to manage water more effectively. For farmers and irrigation professionals, understanding the economics of these tools is essential — not just for managing risk, but for uncovering opportunities that build more resilient and profitable operations.

Although the primary objective of regulatory frameworks is to protect water resources, these tools often raise concerns among producers. Regulations that monitor or limit water use can feel restrictive, especially when they are perceived as increasing production risk or reducing flexibility in decision-making. In some cases, such rules may be viewed as reducing profitability or negatively impacting the value of agricultural land, particularly in regions where irrigation is critical for maintaining stable yields.

One frequently discussed water policy tool is groundwater allocations, also known as groundwater use quotas. Groundwater allocation systems set defined limits on the volume of water that can be withdrawn from aquifers, helping to prevent overuse and long-term depletion. However, the design of allocations can significantly influence their impact on agricultural operations. Fixed annual limits, such as 13 inches of water per year, can constrain producers during dry periods when crop water demands are high. In contrast, multiyear allocations, such as 60 inches over five years, on average, provide the same average water availability but allow for much more flexibility. This approach allows farmers to reduce production risk by adjusting their water use year to year in response to weather conditions, crop choices and irrigation needs.

To be effective, regulatory tools should aim to minimize risk, be flexible and offer pathways for farmers to remain profitable while conserving water.

In addition, recent research from the Daugherty Water for Food Global Institute at the University of Nebraska evaluating the effect of Nebraska’s multiyear groundwater allocation on farmland values suggests that such policies do not negatively impact the value of land. This finding supports that allocations, when designed carefully, can be an effective tool for meeting both goals: water conservation and production output.

Another important tool in regulatory water policy is groundwater use metering. Though often associated with regulatory compliance, metering can be a valuable management resource. Accurate, real-time data on water use enables farmers to better understand their irrigation needs and patterns. In some cases, metering reveals overirrigation, presenting opportunities to cut back without sacrificing yields. Adjusting irrigation practices in response to this information can lead to significant savings in input costs, especially energy used for pumping, and improve overall water use efficiency. Additionally, reducing excess water use helps advance broader water conservation goals.

Beyond allocations and metering, the overall design of the regulatory framework is essential. To be effective, regulatory tools should aim to minimize risk, be flexible and offer pathways for farmers to remain profitable while conserving water. Achieving this balance requires careful consideration of how water policies interact with the diverse needs of agricultural operations, the challenges posed by weather variability, and the changing needs for other water use purposes, such as environmental protection and urban development. Importantly, successful policy design take a long time to build, and they are collaborative, ensuring that producers and other key agricultural players are part of the process.

Renata Rimšaitė, PhD, is a senior program manager for the Daugherty Water for Food Global Institute at the University of Nebraska. Views or opinions expressed in this column do not represent her employer.