Bottom-up capping (BUC) policy under bargaining techniques for inter-sectoral groundwater trading: a case study from Iran

Cap-and-trade (C&T) policy has led to environmental benefits in some groundwater markets by restricting and economically reallocating water permits. However, top-down approaches for capping permits may face resistance from every affected stakeholder. This paper presents an efficient policy framework to improve the implementation of C&T policies in a real shared aquifer in Iran. To this end, groundwater permits for water-selling farms are capped through a bottom-up capping (BUC) policy. A policy analysis that employs static and dynamic bargaining techniques incorporates farms' utilities. Results reveal that the bargaining techniques propose more acceptable capping strategies than the top-down approach. The BUC policy analysis introduces the proposed strategy by dynamic bargaining as the tradable groundwater permits. The effects of irrigation water sales to the industry sector, evaluated using a cooperative game-based optimization model, show that with the fair reallocation of water trading benefits, the current net benefits of agriculture and industry sectors increase by 55 and 27%, respectively. Furthermore, farms reduce their groundwater withdrawals by 35% compared with the current mode. Therefore, the BUC policy for inter-sectoral groundwater trading under dynamic bargaining can lead to the sustainable use of limited groundwater resources by facilitating the capping strategies and improving the water permits productivity. HIGHLIGHTS Bottom-up capping (BUC) policy under bargaining techniques is presented to facilitate cap-and-trade policies in groundwater markets.; Policy analysis reveals that proposed capping strategies by the bottom-up approach are more acceptable than the command-and-control approach.; A cooperative game-based optimization model fairly reallocates water trading benefits among market participants.