The groundwater depletion in Iran is becoming an irreversible catastrophic challenge, calling for an
integrative approach combining socioeconomic, technological, and political factors. This study investigates the effect of conservation policy on Iran’s groundwater depletion. The adopted spatial panel model includes economic and environmental variables as well as spatial externalities. The results indicated that the gradual removal of energy subsidies for agricultural activities is an effective policy to mitigate water depletion. However, in Iran where water depletion is
a serious challenge, a small increase in energy price through the removal of energy subsidies would not lead to a
significant reverse in the water depletion. Also, the results demonstrated that irrigation technology subsidies have an undesired effect on water depletion. Taking advantage of these technologies to gain more profit, farmers expand their cultivated area and thus extract more water. Finally, it was found that there is a spatial correlation in the groundwater depletion in different provinces. These correlations should be taken into consideration for adequate policy design. Several
policy recommendations were concluded from the results, including restriction of agricultural land in plains with
the critical groundwater situation, conductivity of smart water monitoring system in the land equipped with modern
irrigation technologies, the codification of drought rehabilitation program, management of agricultural commodity prices in the short run, an increase in energy prices for agricultural activities concerning the inflation rate and water utilization based on a mutual agreement between neighbor beneficiaries in provincial borders with the common aquifers.
Key Words: spatial panel econometrics, spatial spillover, water conservation