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(Bloomberg) — The US government released a plan on Friday that for now staves off catastrophic cuts to the water supply in Arizona, California and Nevada as the Colorado River climate crisis leaves reservoirs at record lows, threatening a resource supporting 40 million people and more than $1 trillion in gross domestic product. 

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The federal government will determine the size of specific reductions in water allocations for the next two years before October, but its plan is based on a proposal from the affected states that sought to avoid deep cuts. 

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Experts have described the proposed curtailments as a short-term fix amid rising temperatures and plummeting precipitation. But the plan  noted that cuts nearly twice as large as those advocated by the states could be necessary. 

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“Such reductions would devastate Arizona’s water users and its economy,” the Arizona Department of Water Resources said in a statement. 

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Sharon Megdal, director of the Water Resources Research Center at the University of Arizona, said she expects litigation over the plan if it ultimately orders bigger cuts than the states proposed.

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A century-old compact divides the Colorado River’s flow among four states in the upper basin — Colorado, New Mexico, Wyoming and Utah — and the three downstream states bracing for cuts from the US Bureau of Reclamation, which oversees management of the river. 

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“Under critically dry futures, even large and unprecedented reductions may be needed,” the agency said on Friday.

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Those will reverberate through the economy in the years ahead, affecting agriculture, real estate, mining and data centers. “A $1 trillion regional economy is exposed, with risks that can ripple through supply chains,” according to a May report from Bloomberg Intelligence. “Consumers across California, Arizona and Nevada may face shortages.”

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California produces most of the nation’s winter vegetables while Arizona is a hot spot for the AI data center boom and home to major semiconductor manufacturing facilities. Unless consumption is slashed across the seven-state basin, river flows could be so diminished by 2050 that two giant reservoirs, Lake Mead and Lake Powell, would be unable to supply water or electricity to Phoenix, Las Vegas, Los Angeles and other cities, according to a 2025 study. 

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“We need a permanent reduction in demand and that is really the only path we have to stabilizing the Colorado River,” said Sarah Porter, director of the Kyl Center for Water Policy at Arizona State University.

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With the region suffering a historic 26-year drought, the states have been unable to agree on a replacement for an existing accord on handling water shortages that expires this year. That’s forced the Bureau of Reclamation to step in with a plan to recalculate water allocations every two years for the next decade. 

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Colorado River flows have declined 20% since 2000 and 35% since 2020, according to Brad Udall, a senior water and climate research scientist at Colorado State University. In 2025, the states consumed 978 trillion more gallons of water than flowed through the river, further draining the reservoirs.