Water Quality Trading David Roberts 28 March 06

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Water Quality TradingDavid Roberts28 March 06

• The answer to water quality woes?

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The Problem

• Continuing water quality impairment that is
  increasingly due to non-point source (NPS)
  pollution

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The Causes

• Large number of nonpoint sources (NPS)
• Industrialization of agriculture
• Differing regulatory approaches to point source
  (PS) and NPS pollution

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Leading Sources of US River and Stream Impairment
Source EPA, 2002
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(No Transcript)
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Poultry Production in the 1930s
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21st Century Poultry Production
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A Brief Introduction to Water Quality Problems
and Solutions

• Goals of the Federal Water Pollution Control Act
  Amendments of 1972, commonly known as the Clean
  Water Act (CWA)
• . . . restoration and maintenance of the .
  . . integrity of the Nation's waters
• elimination of discharge of pollutants into
  navigable water . . . by 1985
• prohibition of discharge of toxic pollutants in
  toxic amounts
• How to achieve goals
• PS and NPS reductions necessary
• NPDES permitting system for PSs
• Call for timely development and implementation of
  measures to curb NPS emissions
• Can marketable discharge permits help make this
  process cost-effective without altering the
  current regulatory structure?

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The resource and its users

• Is water quality a resource?
• Can it be used up/degraded?
• Nutrient/sediment assimilative capacity of water
  can be exceeded
• Point source polluters face regulatory standards
• Non-point sources are un-regulated (with few
  exceptions), and have lower MAC
• Waters assimilative capacity remains open access
  resource for most users (Property right poorly
  defined)
• Social trap
• Congestion

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Why trading?

• Coase The Problem of Social Cost
• Presents rights as factors of production (right
  to pollute, right to have clean water)
• Economic agents reciprocally harm each other
  through externalities
• Confectioners production requires noise,
  doctors practice requires peace and quiet
• Imposition of either condition harms the other
  agent financially
• Bilateral negotiations could optimally allocate
  the right to silence and the right to noise
  between the two
• Who pays who determined by original allocation of
  rights (which are sometimes not well defined)
• Amount of payment determined by relative values
  of the agents products

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On Regulation

• More Coase
• More economic agents, greater transactions costs
  harder to work out a deal
• Factory produces foul black smoke
• All citizens of the town harmed by smoke
• All want compensation, or all willing to pay for
  decreased emissions
• Who gets what share of the pie?
• Impasse no negotiations social welfare not
  optimized
• Government regulation in place of negotiation
• Effect reductions in discharges even when
  socially beneficial trades would be precluded by
  transactions costs
• High administrative costs to government as well
  as great control costs to polluters
• Social welfare not optimized

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Tradable Discharge Allowances A Hybrid System

• Hung and Shaw
• Social efficiency an impractical standard
• Heavy information burden on regulatory agency, or
• Negotiations hindered by transactions costs
• Cost-effectiveness a more practical standard
• Meet regulatory abatement requirements at lowest
  cost (The goal of WQT)
• Government sets maximum allowable aggregate
  discharge levels, making polluters reciprocally
  harm each other by using up discharge limits
• Negotiations between different polluters, rather
  than between polluters and individuals
• Reduced set of negotiators
• Reduced transactions costs

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A Potential Market Driver in Development

• CWA empowers EPA to establish system of total
  maximum daily loads (TMDLs)
• Pollutant budgets in which the total allowable
  discharge is allocated across PSs and NPSs
• Makes pollutant assimilative capacity of water a
  scarce (valuable) resource
• Developed only for waters not meeting ambient
  water quality standards after implementation of
  PS technology-based standards
• Recommend load reductions from sources deemed to
  be contributing
• PSs frequently assigned current discharge levels
• NPSs usually collectively assigned some
  percentage reduction, but what about
  implementation?

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EPA Endorsement of WQT

• Draft Framework for Watershed-Based Trading
  (1996) Supports offset trading
• PSs remain regulated, NPS abatement voluntary
• Regulated polluter purchases required discharge
  reductions from another polluter
• Offsite reductions inserted into regulated PS
  polluters NPDES permits
• Liability of PS for NPS reductions
• Contractual arrangements and transactions costs
• Technology-based discharge limits still binding
  on regulated polluters
• Limitations
• Nutrients, sediment and oxygen-related
  cross-pollutants only
• Not a cap-and-trade system but can function
  similarly in watershed-based markets

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Marginal Abatement Costs (MACs) and an Emissions
Standard
Emissions Standard or (Non-marketable) Permit
MAC2

MAC1
Units of Pollution Abated
0
1
3
2
5
4
7
8
10
9
6
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MACs and an Emissions Standard
Emissions Standard
MAC2
MAC2


MAC1
Units of Pollution Abated
0
1
3
2
5
4
7
8
10
9
6
10
9
8
6
5
4
2
1
0
7
3
Firm 1 ? ? Firm 2
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Least-Cost Attainment of Ambient Environmental
StandardsEquating MACs
Emissions Standard
MAC2


Cost Savings
MAC1
Units of Pollution Abated
0
1
3
2
5
4
7
8
10
9
6
10
9
8
6
5
4
2
1
0
7
3
Firm 1 ? ? Firm 2
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Issues faced by WQT policies

• Not all discharges are created equal
• Impacts of different polluters differ based on
• Geographical distance from impairments
• Hydrological factors (flow conditions)
• Impacts of same polluter can vary seasonally
• PS discharges are easily measured and controlled
• NPS discharges
• Difficult to measure
• Vary with weather
• Effectiveness of control technologies varies by
  site and weather

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NPS control technologies

• Agricultural best management practices (BMPs)
  designed to reduce agricultural nutrient loadings
• 23 foot switchgrass buffer reduced
• Sediment by 95
• Total nitrogen by 80
• Total phosphorous by 78 (Lee, Isenhart, Schultz)
• Strawberry farmers in Elkhorn Slough watershed in
  California would have net gains from installing
  buffer strips (Rein)
• Precision agriculture reduces nutrient use
• Terraces
• Cover crops
• Excluding livestock from streams
• Phosphorous based applications of manure

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WQT sounds good, but does it work?

• More than 15 major pilot project at some stage of
  implementation
• Trading between point sources is common
• PSNPS trades somewhat limited in general
• Risky for PS
• Often high transactions costs

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Notable Water Quality Trading Programs

• Tar-Pamlico Nutrient Reduction Trading Program
• PS discharger association
• Has collective caps on nitrogen phosphorous
• Has authority to allocate capped discharges among
  member dischargers
• Can purchase NPS credits by paying government
  operated BMP fund
• Has been able to remain below cap
• Has banked NPS credits for future use
• Problems
• NPS payments based on average cost, not marginal
  cost
• No trading ratios to equate impacts of
  site-specific reductions/increases

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Notable Water Quality Trading Programs

• Lower Boise River Effluent Trading Demonstration
  Project
• EPA-endorsed offset variety
• Trades in total phosphorous emissions
• Allows PSPS, PSNPS, NPSNPS trading
• PSNPS trades require
• Water quality contribution
• Installation and inspection of BMP and
  verification of load reductions prior to approval
  of trades
• BMPs installed post-1996 can create salable
  credits
• No trades as of 2006, despite development of TMDL
  expected to drive the market