Coordinating water conservation efforts through tradable credits: A proof of concept for drought response in the San Francisco Bay area

Abstract

AbstractWater utilities are increasingly relying on water efficiency and conservation to extend the availability of supplies. Despite spatial and institutional interdependency of many utilities, these demand‐side management initiatives have traditionally been tackled by individual utilities operating in isolation. In this study, we introduce a policy framework for water conservation credits that enables collaboration at the regional scale. Under the proposed approach, utilities have the flexibility to invest in water conservation measures that are appropriate for their specific service area. When utilities have insufficient capacity for local cost‐effective measures, they may opt to purchase credits, contributing to fund subsidies for utilities that do have that capacity and can provide the credits, while the region as a whole benefits from more reliable water supplies. This work aims to provide insights on the potential impacts of a water conservation credit policy framework when utilities are given the option to collaborate in their efforts. We model utility decisions as rational cost‐minimizing actors subject to different decision‐making dynamics and water demand scenarios, and demonstrate the institutional characteristics needed for the proposed policy to be effective. We apply this model to a counterfactual case study of water utility members of the Bay Area Water Supply and Conservation Agency in California during the drought period of June 2015 to May 2016. Our scenario analysis indicates that when the institutional structure and incentives are appropriately defined, water agencies can achieve economic benefits from collaborating in their conservation efforts, especially if they coordinate more closely in their decision‐making.