Comparing Alternative Policies for Modification of Energy Subsidies: The Case of Groundwater Pumping for Irrigation

The present paper studies the effects of alternative modifications of a subsidy for electricity used to pump groundwater on the behavior of profit maximizing groundwater users. It proposes a stylized model for groundwater extraction, and then numerically derives general results by simulation. The model is applied to aquifers in Leon, Guanajuato, Mexico and Kern County, California. The performance of two traditional policy intervention measures-subsidy elimination and reduction-are compared to a new, innovative modification policy, namely, decoupling the subsidy from the electricity bill; this policy is arguably more politically acceptable. The results of extensive simulations suggest that the rate of aquifer water extraction, and the consequent level of water in the aquifer, can be improved significantly by changing the subsidy structure.