Trading Efficiency in Water Quality Trading Markets: An Assessment of Trade-Offs (original) (raw)
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The Structure and Practice of Water Quality Trading Markets
Journal of the American Water Resources Association, 2002
The use of transferable discharge permits in water pollution, what we will call water quality trading (WQT), is rapidly growing in the U.S. This paper reviews the current status of WQT nationally and discusses the structures of the markets that have been formed. Four main structures are observed in such markets: exchanges, bilateral negotiations, clearinghouses, and sole source offsets. The goals of a WQT program are environmental quality and cost effectiveness. In designing a WQT market, policy makers are constrained by legal restrictions and the physical characteristics of the pollution problem. The choices that must be made include how trading will be authorized, monitored and enforced. How these questions are answered will help determine both the extent to which these goals are achieved, and the market structures that can arise. After discussing the characteristics of different market structures, we evaluate how this framework applies in the case of California's Grassland Drainage Area Tradable Loads Program. (KEY TERMS: transferable discharge permits; nonpoint source pollution; water policy/regulation/decision making; water quality.)
Economics and environmental markets: Lessons from water-quality trading
Water-quality trading is an area of active development in environmental markets. Unlike iconic national-scale air-emission trading programs, water-quality trading programs address local or regional water quality and are largely the result of innovations in water-pollution regulation by state or substate authorities rather than by national agencies. This article examines lessons from these innovations about the "real world" meaning of trading and its mechanisms, the economic merits of alternative institutional designs, utilization of economic research in program development, and research needed to improve the success of environmental markets for water quality.
Transactions Costs and Point-Nonpoint Source Water Pollution Trading
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The implications of transactions costs for the performance of water pollution trading involving point and nonpoint sources are examined. The analysis focuses on the impacts of transaction costs on different classes of trading partners and its consequence on the trading equilibrium. The model of point-nonpoint water pollution trading in the context of the total maximum daily loads explicitly incorporates transactions costs for both buying and selling exchanges of nonpoint source and point source permits. Transactions costs unarguably reduce the optimal level of trades in both types of permits compared to the costless trade case.
Nutrient Credit Trading--a Market-based Approach for Improving Water Quality
2008 Providence, Rhode Island, June 29 - July 2, 2008, 2008
Imagine the day when you could gain financial rewards for implementing conservation practices on your farm. It is now possible because these practices can assist industrial users in the watershed meet regulatory requirements, thus reducing the overall pollutant discharge to a water body and improving its water quality. This is not a scenario of the future. Rather, it is currently being practiced and developed in many states around the United States, and it is called Water Quality Trading. Producers are getting paid for their stewardship in natural resource conservation activities. They are accumulating and selling credits earned through nutrient or sediment reduction by implementing conservation measures. Wastewater treatment plants are buying these credits to meet their regulatory requirements within the National Pollutant Discharge Elimination System (NPDES) permits. These permits restrict the amount of pollutants the plants can discharge from their facilities to the local water bodies. It provides an economic incentive for the agricultural sector as well as contributes to cleaner rivers and streams. Water quality trading leads to a mutually beneficial situation for all involved in the process. Treatment plants utilize a full suite of measures to meet their regulatory requirement. Purchasing water quality credits allows industries more flexibility in investment in new technologies; the producers get rewarded for their efforts, and the environment benefits in multiple facets including water quality, wildlife habitat, and carbon sequestration. This chapter reviews the approaches to water quality trading, its current status of implementation around the nation, and different tools (including the Nitrogen Trading Tool (NTT) being developed by the USDA/ NRCS) to facilitate in this process. 2. Introduction: Water quality trading is a market-based approach that pairs buyers of water quality credits with the people generating these credits through conservation and stewardship to achieve the best results for the least cost. For example, a downstream wastewater treatment plant needs to reduce the amount of pollutants it discharges to meet its NPDES permit requirements. Instead of spending huge amounts of money to upgrade or install new equipment on-site, it could fund less expensive agricultural conservation practice(s) upstream and achieve better quality of pollution control. These agricultural practices, also known as Best Management Practices (BMPs), would not only combat the pollutant
Water quality trading: A conceptual framework for incorporating ancillary benefits
International Journal of Sustainable Development and Planning
Water quality trading (WQT) has been proposed as a mechanism for improving surface water quality goals in an economically and socially responsible manner. however, to date, successful markets for WQT have been slow to develop with many interested parties pointing to the need for aggressive regulatory enforcement of standards as a key requirement in the trading process. As regulations in the United States and many other countries typically apply to impaired waterways, the inherent problem with this as the only driver for trades is that little to no value is prescribed to raising water quality to above minimum standards. Because numerous studies have shown the economic value of improved ecosystem services and our own work with public surveys that demonstrated the importance of water quality, we hypothesize that an informed public (as well as aquatic ecosystem managers) will place additional value on water quality conditions that exceed minimum values. We present a framework for incorporating this concept into the WQT process that already includes essential elements such as trading ratios, uncertainty, and evaluation. We demonstrate the framework approach using a Streeter-Phelps dissolved oxygen (DO) model to address a recognized DO problem in the Jordan River in Utah, USA. It is recognized that this work represents the initial discussion of the process and that adaptive management of the complex processes will be needed in order to maximize the sustainable of water resources.
Point-Nonpoint Trading for Managing Coastal Water Quality
A recent focus of wat6r quality policy discussions has been the trading of pollution abatement between point and nonpoint sources. Point-nonpoint trading would allow point sources to sponsor nonpoint source controls rather than install further controls of their own. If nonpoint source loadings are significant and the marginal costs of their control are lower than for additional point source controls, water quality goals could be met at lower cost with trading. We isolate difficulties particular to incentive policies such as point-nonpoint trading and then screen coastal watersheds for those satisfying conditions that play a major role in determining whether trading can improve water quality. We follow the recent Coastal Zone Act Reauthorization Amendments in emphasizing agriculture, the single largest cause of nonpoint source pollution. Our screening analysis provides an initial, empirical assessment of the feasibility of trading for managing agricultural land use to protect coastal water quality. We also illustrate the additional analysis required to quantify the potential for successful trading in those watersheds which meet our screening criteria.
Overcoming Third Party Effects from Water Trading [abstract]
2002
Developing an effective market for water entitlements is a potential mechanism to achieve sustainable water allocation. A successful market allows users to voluntarily reallocate water to the use where it will be most highly valued. However, designing and implementing a market for water entitlements that is efficient, equitable and sustainable, is very difficult. A simple system allowing people to buy and sell water with no outside intervention does not take account of issues such as losses incurred in supplying the entitlement at the new location, changes in security level or third party impacts such as return flows and environmental degradation. The cumulative effect of unconstrained trade could reduce the value of existing entitlements, decrease system reliability and jeopardize ecosystems. Many of these issues can be addressed through the design of an exchange rate system. Such a system would apply a conversion factor to the traded entitlement volume to account for the impacts c...
Comparing Water Quality Trading Programs: What Lessons Are There To Learn?
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Water quality trading is being widely explored and, as we show, increasingly imple-mented as a means of providing flexibility and lowering the costs of meeting water quality goals. A comparison between existing and evolving trading programs in Australia, New Zea-land and North America illustrates both differences and similarities among programs and identifies the main hurdles to trading as well as some key factors for program success. These can be used to design more effective programs.
2015
We examine the efficiency of emissions trading in bilateral and clearinghouse markets with heterogeneous, boundedly rational agents making decisions under imperfect and asymmetric information, and transaction costs. Results are derived using a stochastic agent-based simulation model of agents’ decision-making and interactions. Trading rules, market structures, and agent information structures are selected to represent emerging water quality trading programs. The analysis is designed to provide a strong test of the efficiency of trading occurring through the two market structures. The Differential Evolution algorithm is used to search for market trade strategies that perform well under multiple states of the world. Our findings suggest that trading under both bilateral and clearinghouse markets yields cost savings relatively to no trading. The clearinghouse is found to be more efficient than bilateral negotiations in coordinating point–nonpoint trading under uncertainty and transacti...
Multiple interactive pollutants in water quality trading
Environmental Management, 2008
Efficient environmental management calls for the consideration of multiple pollutants, for which two main types of transferable discharge permit (TDP) program have been described: separate permits that manage each pollutant individually in separate markets, with each permit based on the quantity of the pollutant or its environmental effects, and weighted-sum permits that aggregate several pollutants as a single commodity to be traded in a single market. In this paper, we perform a mathematical analysis of TDP programs for multiple pollutants that jointly affect the environment (i.e., interactive pollutants) and demonstrate the practicality of this approach for cost-efficient maintenance of river water quality. For interactive pollutants, the relative weighting factors are functions of the water quality impacts, marginal damage function, and marginal treatment costs at optimality. We derive the optimal set of weighting factors required by this approach for important scenarios for multiple interactive pollutants and propose using an analytical elasticity of substitution function to estimate damage functions for these scenarios. We evaluate the applicability of this approach using a hypothetical example that considers two interactive pollutants. We compare the weighted-sum permit approach for interactive pollutants with individual permit systems and TDP programs for multiple additive pollutants. We conclude by discussing practical considerations and implementation issues that result from the application of weighted-sum permit programs.