The Effect of Discounting on the Formulation of an Aquifer Management Policy Based on Groundwater Trading

Abstract

Optimal groundwater management is a necessary condition for achieving the objective of sustainable development, which is directly linked to issues of intergenerational equity. Thus, groundwater management policy shaping has to consider such issues, in particular through the implementation of appropriate discounting methods. The existing literature in the field of groundwater management focuses on a single discount function (DF), the exponential one, without considering the impact of different DFs on the results obtained. At the same time, tradable water rights (TWR) systems have been suggested as policy instruments for more efficient and sustainable water use. This paper focuses on the impact that different DFs have on the formulation of groundwater management policies based on TWR. To this end, a dynamic model is formulated, which concerns groundwater pumping from an aquifer by two groups of users participating in a TWR system and four different DFs are considered to calculate the present value of social welfare: no discounting, exponential, hyperbolic and Gamma discounting. The results of simulations based on data for an aquifer in Northern Greece show that there is a high sensitivity of the results to the DF, which has a direct effect on social welfare from groundwater consumption, aquifer’s hydrological behavior and TWR system intertemporal economic efficiency.