Transactions Costs and Point-Nonpoint Source Water Pollution Trading (original) (raw)
Related papers
Trading Efficiency in Water Quality Trading Markets: An Assessment of Trade-Offs
SSRN Electronic Journal, 2011
Declining water quality as a result of increased nutrient leaching is a serious and growing concern, both internationally and in New Zealand. Water pollution issues have traditionally been addressed with command-and-control type regulation, but market-based nutrient trading schemes are becoming more widespread. In New Zealand, a cap-and-trade system has been implemented in Lake Taupo and another has been designed for Lake Rotorua. Despite the importance placed on avoiding transaction costs in water quality trading markets, there has been little discussion in the literature of practical policies to decrease these transaction costs, or any real assessment of when it is and is not optimal to decrease transaction costs. This paper begins to address these issues. We find that strong efforts to control time-of-trade transaction costs are most likely to be worthwhile in schemes with heterogeneous participants and large expected values and volumes of trading. The trading inefficiency that results from search and bargaining, and trade registration costs can be minimised at some cost. Regulators can reduce trade approval costs if they establish baseline leaching levels for all participants and design standardised leaching monitoring systems as part of the setup of the system, and monitor all sources equally regardless of whether participants trade instead of estimating and approving changes in traders' leaching at the time of each trade (as occurs in a baseline-and-credit system). Finally we find that while regulators may be tempted to restrict trading or increase measuring and monitoring requirements to increase the environmental certainty of a scheme's outcome, environmental risk may be better addressed through a less certain but more stringent environmental target.
Point/nonpoint source pollution reduction trading: an interpretive survey
Natural Resources Journal, 1992
Nonpoint source water pollution controls may be necessary if the objectives of federal water pollution control legislation are to be met. Control of nonpoint sources is more likely to be cost effective if imposed in a decentralized manner. One option for expanding the regulatory scope to include nonpoint sources is to allow trading of discharge reductions between point and nonpoint sources. A body of research and experience suggests a capability for this policy alternative to lower control costs, but we know less about important issues such as monitoring costs, market power, distributive effects, incentives for innovation, and nonconservative pollutants.
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...
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.)
POINT-NONPOINT SOURCE WATER QUALITY TRADING: A CASE STUDY IN THE MINNESOTA RIVER BASIN
Journal of the American Water Resources Association, 2005
Contrary to the general trend of only a few actual trades occurring within point-nonpoint source water quality trading programs in the United States, two trading projects in the Minnesota River Basin, created under the provisions of National Pollutant Discharge Elimination System (NPDES) permits, have generated five major trades and numerous smaller ones. In this paper, these two projects are described to illustrate their origins, implementation, and results. It was found that several factors contributed to the relatively high number of trades in these projects, including the offsetting nature of the projects (hence a fixed number of credits that the point sources were required to obtain), readily available information on potential nonpoint source trading partners, and an effectively internal trading scheme used by one of the two projects. It was also found that long term structural pollution control measures, such as streambank stabilization, offered substantial cost savings over point source controls. Estimates of transaction costs showed that the total costs of the trading projects were increased by at least 35 percent after transaction costs were taken into account. Evidence also showed that in addition to pollution reduction, these two trading projects brought other benefits to the watershed, such as helping balance environmental protection and regional economic growth. (KEY TERMS: nonpoint source pollution; cost effectiveness; phosphorus pollution; erosion; load offsetting; transaction costs; water quality trading.) Fang, Feng, K. William Easter, and Patrick L. Brezonik, 2005. Point-Nonpoint Source Water Quality Trading: A Case Study in the Minnesota River Basin. Journal of the American Water Resources Association (JAWRA) 41(3):645-658.
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...
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.
Water Resources Research, 1994
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.
Water Trading: Locational Water Rights, Economic Efficiency, and Third-Party Effect
Water, 2014
Rivers flow downstream and unidirectionally. However, this fact has not yet been utilized in the institutional design for water trading. By utilizing this characteristic, we first designed a water trading system of "locational water rights." This new system is able to mitigate the return flow-related and instream flow-related third-party effects of volumetric reliability from water transfers. We provided mathematical proof of its economic efficiency. We then applied this water trading system to the case of the Choushui River basin in Taiwan. In this area, agriculture is highly developed while domestic and industrial water demands have increased rapidly. Using an agent-based model simulation, we estimated the potential economic benefits of implementing the system of locational water rights in the Choushui River basin.
A trading-ratio system for trading water pollution discharge permits
Journal of Environmental Economics and Management, 2005
The fact that water flows to the lowest level uni-directionally is a very specific and useful property of water. By utilizing this property, we design a trading-ratio system (TRS) of tradable discharge permits for water pollution control. Such a trading-ratio system has three main characteristics: (1) each zone's effluent cap is set by taking into account the water pollution loads transferred from the upstream zones; (2) the trading ratios are set equal to the reciprocals of the exogenous transfer coefficients among zones; and (3) permits are freely tradable among dischargers according to the trading ratios. This paper shows that the TRS could take care of the location effect of a discharge and could achieve the predetermined standards of environmental quality at minimum aggregate abatement costs. Problems with hot spots and free riding could be avoided, and the burdens on both dischargers and the environmental authority would be comparatively more modest.