Testing Policies That Use Continuous Nutrient Sensing by Drinking Water Utilities to Reduce Non-Point Source Pollution under Climate Variability

More-frequent extreme weather events due to climate change are expected to increase operation costs for drinking water utilities, in part from increased non-point source (NPS) pollution from agricultural land. High-frequency, high-quality sensors can help utilities better monitor water quality and utilities could use this information in programs that subsidize upstream producers to improve the quality of water they receive. Such a subsidy could be based on ambient pollution—paying producers directly based on their pollution abatement—or targeted production—paying producers to implement specific practices that reduce pollution. This distinction has implications for the structure of contracts, distribution of payments, and, most notably, allocations of damage from extreme weather events to producers and the utility. Under an ambient-based subsidy, risks associated with weather are shared by producers. Under a production-targeted subsidy, the utility bears risk posed by severe weather. We use an economic experiment involving operational data from a municipal water utility to study producer responses to a theoretically equivalent ambient-based and targeted subsidy to improve water quality under various weather scenarios. We find that the level of risk associated with weather variability affects producers’ behaviors in response to subsidies. The results suggest that both types of subsidies lead to improved social welfare and decreased pollution and that production-based subsidies, which can be implemented using real-time sensing technologies, minimize the utility’s economic cost and the social cost of damage. We also find that both types of subsidies become more effective as weather variability and the likelihood of extreme events increase. Key Points: • By offering subsidies to upstream producers for watershed protection, drinking water utilities can decrease their costs. • High-quality data from continuous water-quality sensors can increase the effectiveness of subsidies by targeting individual producers • As the likelihood of extreme weather events increases, both ambient pollution and targeted production subsidies become more effectiveNational Science Foundation EPSCoR Track-2 Cooperative Agreement #IIA-1330406, Collaborative Research: North East Water Resources Networ