Transcript IDENTIFYING AND ANALYZING POTENTIAL WATERSHED …

Water Quality Trading
David Roberts
28 March 06
The answer to water quality woes?
The Problem:
Continuing water quality
impairment that is increasingly
due to non-point source (“NPS”)
pollution
The Causes
 Large number of nonpoint sources (NPS)
 Industrialization of agriculture
 Differing regulatory “approaches” to point
source (PS) and NPS pollution
Leading Sources of US River and Stream
Impairment
Source: EPA, 2002
Poultry Production in the 1930’s
st
21
Century Poultry Production
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)
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“ . . . restor[ation] and maint[enance 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
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PS and NPS reductions necessary
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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?
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
 Water’s assimilative capacity remains open access
resource for most users (Property right poorly
defined)
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Social trap
Congestion
Why trading?
 Coase “The Problem of Social Cost”
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Presents rights as factors of production (right to pollute, right
to have clean water)
Economic agents reciprocally harm each other through
externalities
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Confectioner’s production requires noise, doctor’s 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
On Regulation
 More Coase
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More economic agents, greater transactions costs – harder
to work out a deal
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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
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Government regulation in place of negotiation
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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
Tradable Discharge Allowances: A
Hybrid System
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Hung and Shaw
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Social efficiency an impractical standard
1.
Heavy information burden on regulatory agency, or
2.
Negotiations hindered by transactions costs
Cost-effectiveness a more practical standard
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Meet regulatory abatement requirements at lowest
cost (The goal of WQT)
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Government sets maximum allowable aggregate
discharge levels, making polluters reciprocally harm
each other by using up discharge limits
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Negotiations between different polluters, rather than
between polluters and individuals
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Reduced set of negotiators
Reduced transactions costs
A Potential Market Driver in
Development
 CWA empowers EPA to establish system of total
maximum daily loads (TMDLs)
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“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?
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
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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
0 1 2 3 4 5 6 7 8 9 10 Abated
MACs and an Emissions Standard
$
MAC2
Emissions
Standard
MAC2
$
MAC1
Units of Pollution
0 1 2 3 4 5 6 7 8 9 10 Abated
10 9 8 7 6 5 4 3 2 1 0
Firm 1 
 Firm 2
Least-Cost Attainment of Ambient
Environmental Standards:
Equating MACs
$
MAC2
Emissions
Standard
$
MAC1
Cost
Savings
Units of Pollution
0 1 2 3 4 5 6 7 8 9 10 Abated
10 9 8 7 6 5 4 3 2 1 0
Firm 1 
 Firm 2
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
NPS control technologies
 Agricultural best management practices (BMPs)
designed to reduce agricultural nutrient loadings
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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
WQT sounds good, but does it work?
 More than 15 major pilot project at some
stage of implementation
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Trading between point sources is common
PS:NPS trades somewhat limited in general
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Risky for PS
Often high transactions costs
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
Notable Water Quality Trading
Programs
 Lower Boise River Effluent Trading Demonstration
Project
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EPA-endorsed offset variety
Trades in total phosphorous emissions
Allows PS:PS, PS:NPS, NPS:NPS trading
PS:NPS 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