We might be running a Ponzi Scheme for groundwater extraction

This blog is compiled and edited by Shashank Kumar Anand (Associate Editor, Highwire Earth; Graduate Student, Department of Civil and Environmental Engineering, Princeton University). It is based on the work of Sara Cerasoli and Amilcare Porporato that appeared in the Journal of Hydrology early this year (See the peer-reviewed article here)

In the 1920s, Charles Ponzi gained notoriety for running a fraudulent scheme that now bears his name. Imagine a magic trick where someone promises to turn a small amount of money into a fortune in no time. This sounds amazing, right? Well, that is the trick a Ponzi scheme plays – except it is not magic; it is deception. 

Here is how it works: Imagine you meet someone who says they have a fantastic investment opportunity. They say that if you give them $100, they will double it in just a few weeks. That sounds like an incredible deal, doesn’t it? You might think, “Why not? I will get back $200 so quickly!” 

Now, to make this trick seem real, the person might even show you some “proof” by giving you $200 after a few weeks. But here is the trick – that $200 did not come from any real investment or profit. Instead, they used money from new people who joined the scheme after you. So, when new folks give them $100 each, they use that money to pay you back. It looks like you made a profit, but they just used someone else’s money to do it. 

This is where the trick gets tricky. People who got paid back tell their friends and family about this amazing investment. More people join, each giving their money, and they are also paid with money from the newcomers. This cycle continues, with the person at the center collecting money from new members to pay off the earlier ones. It creates an illusion of profit and success, and more people become attracted, hoping to get rich quickly. 

Now, if one starts thinking about this cycle of the Ponzi scheme, it is unsustainable as it relies on an ever-growing number of new members to keep paying off the earlier ones. But as more people join, there comes a point where it is impossible to find enough new members to cover the payments. When that happens, the scheme collapses. The person running the scheme might disappear with whatever money is left, leaving many people who invested with nothing but empty pockets. This can be seen as “an example of market failure with an unsustainable economic trajectory”. 

Cerasoli & Porporato draw a parallel to this investment fraud with groundwater extraction, in which over-exploiters of groundwater from past generations play the role of the early investors, profiting from excessive overdraft and gaining in terms of higher agricultural productivity simply because more water input results in more agricultural output. But if one thinks about the next generation, this over-extraction of water will eventually leave more and more depleted aquifers for the next generation (the late investors). This means that if we only focus on the short-term benefits of maximizing agricultural output for a few years, in the long term, we might be on an unsustainable path that can only end with the exhaustion of the water resource. Using the case study of Kern County in California, the authors suggest that we might be in a Ponzi scheme of groundwater extraction. This finding resonates with the news that we have been hearing regarding the Central Valley groundwater depletion crisis (1,2). Just imagine how many more Kern County we might have around the world that we may not know of! 

The original Ponzi scheme collapsed after nine months. In that sense, we are fortunate that aquifer dynamics operate on much longer time scales, giving us time to take timely action. The question hence arises: what can be done to ensure that we get out of this dangerous path? The authors suggest that there can be two different policy approaches based on their optimality framework of groundwater extraction. 

The hard policy scenario assumes that state/federal regulations immediately reduce pumping rates to a value lower than the natural recharge. On the environmental side, the plus is a speedy recovery of water tables. The cumulative profit over several decades from the hard policy path is the highest. Still, the challenges are obviously human adaptation, which does not seem plausible, and at the same time, the investment to make that change now may not be very practical.  

The soft policy option is a more realistic approach to tackle the Ponzi scheme of groundwater extraction. Pumping rates are gradually decreased by some percentage, say 5% of current values each year until they reach the long-term sustainable pumping rate by some year, say 2040 so that we reach the long-term sustainable path slowly but eventually. 

Whether we will manage to escape this scheme is a question that can only be addressed if we first realize that the short-term gain can hurt in the long term. The challenge also arises because the best, or rather, the long-term optimal way of extracting groundwater will result in initial lower gains. To safeguard the interests of future generations, it will require us, to avoid being our own Ponzi

Authors of the scientific publication:

Sara Cerasoli is graduate student from the Department of Civil and Environmental Engineering at Princeton University

Prof. Amilcare Porporato is affiliated with the Department of Civil and Environmental Engineering and High Meadows Environmental Institute at Princeton University.

Highwire Earth: Princeton University’s new publication on sustainable development

Written by the Editorial Board

How can we achieve a minimum standard of living for the world’s growing population, while reducing our carbon emissions to curb climate change and limiting our impact on the planet’s ecosystems to stop the current mass extinction? How can we protect and manage our natural resources such that people across nations and generations have a more equitable access to them? How can we create a more inclusive and pluralistic society that provides equal access of opportunities to all of its members? These are some of the questions that we have posed ourselves as a society as we work to reduce poverty and inequality, acknowledge the impacts that we have had on the planet, and develop strategies to correct them and move forward.

“Cada cabeza es un mundo” (“Each mind is a world of its own”) says a Mexican proverb — each of us is the primary actor of our own life with our own dreams and struggles. Yet there are over 7 billion of us and counting, and we have realized that our collective actions can have global consequences — both good and bad. We have created an interconnected world where we can often forget that physical, political, and language boundaries exist, but we have also breached many of the planet’s environmental boundaries leading to worldwide consequences. This is why on September 2015 the United Nations agreed on a set of global goals to which we shall strive in the upcoming years: the Sustainable Development Goals or SDGs. An improvement from the Millennium Development Goals, they acknowledge the importance of framing these issues in the context of a planet with limited resources, whose climate we can affect, and that is inhabited by many other living beings aside from us.

The 17 Sustainable Development Goals (2015–2030). Credit: United Nations

To capture all aspects of sustainable development, including the opportunities for synergies, we will need to create more interdisciplinary, inter-institutional, and international partnerships. The solutions will lie throughout engineering, the natural sciences, the social sciences, and the humanities, as much as in government, industry, NGOs, and academia. Furthermore, global collaborative efforts will be required to coordinate, scale up, and share the solutions that we develop. However, working towards achieving these interdisciplinary and multilateral efforts will require constant communication amongst us, as well as patience, humility, and commitment to spend the necessary time listening and learning from those outside of our fields of expertise. This is why we created Highwire Earth.

“[…] working towards achieving these interdisciplinary and multilateral efforts will require constant communication amongst us, as well as patience, humility, and commitment to spend the necessary time listening and learning from those outside of our fields of expertise. This is why we created Highwire Earth.”

The purpose of this publication is to act as a platform for members of the Princeton University community, namely students, research staff, faculty, visitors, and alumni, on which they can share the insights that they have gained on topics related to sustainable development through their coursework, research, and work experiences. We seek to engage the academic community across disciplines in a conversation that will teach each of us how our work is related to that of others and how together we can begin to form solutions. Similarly, we want to engage with the general public to develop and improve our communication skills and habits, and to share the insights that we have gathered through our academic work in a more accessible and useful way. By no means do we pretend to have all the answers as individuals or as a group. Yet, a great deal of the work done by members of the Princeton University community can contribute with pieces of the solutions.

Through this publication we invite both readers and writers to think of topics such as water, energy, food, biodiversity, health, education, and poverty as belonging to larger, interconnected systems. We encourage you to explore the broader aspects of your topics of interest, which we will aid by means of broad categories and sections. Finally, we also invite you to constantly think about the underlying assumptions and ethics of the efforts made towards sustainable development. Being aware of the motivations and values that drive our moral decision-making process on these topics and how they match or clash with those of others will help us work towards consistent solutions that respect all forms of life around the planet.

The Editorial Board

Julio Herrera Estrada, Co-Founder and Editor-in-Chief

Matt Grobis, Co-Founder and Managing Editor

Greta Shum, Co-Founder and Communications Director

Arvind Ravikumar, Co-Founder and Associate Editor

Special thanks to our friends at Atte. Design for helping us with our graphic design needs.