Cap-and-trade systems are most notably used for controlling pollution, particularly related to climate change and greenhouse gas emissions. The idea has never yet been implemented when it comes to water conservation. But that could change.
Cap-and-trade refers to a system in which a legislature sets goals, or caps, of how much pollution can be emitted by companies or local governments, and those entities can either meet those goals themselves, or they can buy credits from other entities that have reduced their emissions.
Four years ago, Newsha Ajami, the director of Urban Water Policy at Stanford University’s Water in the West program, and her lab began exploring how such a system might work for water. At that time, many districts were being forced to cut water consumption by up to 25 percent. By working closely with water districts around the San Francisco Bay Area, Ajami eventually developed a regional system that would allow water districts that share water sources to work together to bring down consumption below the goal, and finance the creation of new water sources.
Since the drought officially ended in 2016, Ajami’s cap-and-trade system has yet to be used in the real world. But if a future drought spurs the state once again to set water conservation goals, Ajami says that districts will at least have this new tool in their back pocket.
Water Deeply spoke with Ajami and Patricia Gonzales, a PhD candidate at Stanford University’s Department of Civil and Environmental Engineering, about developing the water cap-and-trade system, and how it might be implemented in the future.
Water Deeply: Can you describe this cap-and-trade system as you imagine it working for water users?
Newsha Ajami: Basically, this is providing a platform for a set of communities to engage in a coordinated way to conserve water. They can work together, come up with the most cost-effective and socially effective water conservation plans in order to reach a regional goal and try to go with that portfolio.
Water Deeply: And they do that by, essentially, buying credits that can contribute to the region as a whole?
Ajami: It is a platform that would allow them to create a resource exchange opportunity. So they would be able to either invest in conservation and try to make up part of the cost, or float the full cost by trying to sell those credits to members of the regional community, or if they have already done a lot [of conservation work] and don’t have many low-hanging fruits left to pick, they can hope that there will be sellers in the market, and they can go and buy credit in order to reach their original goal.
Water Deeply: What prompted you to pursue this idea?
Ajami: We have been working on this idea for the past four years. Originally, the idea came because in California we have this independent system operator for energy, which creates a way for people to trade renewables through the system. We wanted to do something similar, but water is heavy, and physically is not easy to move from the north to the southern part of the state or the eastern part. We decided the right scale for this would be something on a regional scale.
Patricia Gonzales: When we started this, it was the start of the drought. Water systems are so independent and decentralized, from a management perspective, every city was kind of looking at what each of them needs to do to cope with drought, not knowing what was ahead. So, we said, well what if we broke some of those barriers and allowed them to work together more effectively?
Ajami: We approached this in a very bottom-up kind of way. We looked at what these communities look like, how many water supply options they have, how diverse their demand is. We were interested to see what kind of adaptation strategies they have in their pockets. And after we did an extensive study of the region, we decided to build something that would allow them to consider some of these opportunities, and through that, help them to engage with each other and share their resources.
This was a first step toward our bigger goal of building a water-trading scheme, which is called HydroTrade, which we’re hoping to roll out in a few months. We’ve had a broader goal of allowing for water supply diversification within a region through something like this.
Water Deeply: Why do you think this kind of cap-and-trade system for water hasn’t been done before?
Ajami: Water is a local resource. It’s managed in a very top-down manner. Every change in a resource distribution system requires some sort of trigger, and we haven’t had as many triggers in the past that would help us think differently about our resources.
Water Deeply: When you are talking about regions, how do you define a region? I can imagine a region could be as big as a watershed.
Ajami: Yes, it can be as big as a watershed or as small as a neighborhood, so it depends on how these systems are set up. There is no limitation to the size and scale – you can just set these things up however you want.
Water Deeply: How did you end up focusing on conservation? Could this cap-and-trade system work for other water goals?
Gonzales: That was taking advantage of the drought and the fact that you had these conservation mandates. It is not that far out there to think about when you might cap water, because it happened during the drought. That gave us a chance to see how things could have been done differently and how utilities could have this incentive, and use it as an opportunity to work together.
Ajami: These systems are built around goals and objectives. You can’t just say, “We’re going to do cap-and-trade.” What are we doing it for? That is why we built the conservation one, because we had the conservation goal. Everybody had to reach the 25 percent conservation mandate, and we were just trying to demonstrate how they can reach their goal as a region, potentially faster, easier and with a higher economic value and lower social cost.
Now it could be the same thing if they want to do cap-and-trade for water supply diversification. When you talk about water supply diversification, if you have a goal that everybody needs to aim to, like with renewable energy, you want to have 30 percent renewable energy by 2030. Everybody has a goal that we are aiming for. These systems work the most effectively in that kind of setting.
Water Deeply: For this to be implemented, either in the Bay Area or across the entire state, what would need to happen?
Ajami: We don’t have any conservation mandates, but we do have some water efficiency rules and regulations that are, I think, right now in the pipes, and I hope will be coming out of Sacramento soon. That kind of mandate can trigger or create an opportunity for something like this as a tool for a region to use to work together.