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Watersheds on Wall Street?Water Pollutant Trading
Becky Shannon, Missouri Department of Natural Resources
Craig Smith, University of Missouri Extension
Water Pollutant Trading=
Water Quality Trading=
Effluent Trading=
Market-based Approachto Limit or Reduce Pollutant
Discharges
What is Trading?
• Establishment of an economic market for REDUCTION of pollution discharges
• Has been successfully used in limiting air emissions
• Assumes there are limits to the amount of pollutant that can be discharged in a watershed
• Becomes attractive when those limits would be exceeded by the pollutant discharges of a particular source
Market-based systems need BUYERS and SELLERS
Buyer= Pollutant source who needs to limit pollutant discharges, but doing so is at a relatively high cost
Seller = Pollutant source who can reduce pollutant discharges at relatively low cost
How Would It Work?
Watershed A has too much phosphorus
City B must decrease phosphorus levels in its effluent
Landowner C has no BMPs to control phosphorus runoff
Instead of investing in new phosphorus removal equipment, City B pays Landowner C to install BMPs
Market-based Approaches...
• Have the potential to reduce water pollution at a lower cost than traditional command and control regulation
• Allows for innovation
• Provide for voluntary approaches to water quality protection, but
• Must have “backstop” of regulatory limits
Case Studies
• Kalamazoo River Project, Michigan
• Tar-Pamlico Basin, North Carolina
• Northeast Kansas Watershed Study
Kalamazoo River Project
• Located in SW Michigan• High phosphorous levels mid-1990’s resulted in
dissolved oxygen violations in Lake Allegan• Point sources: municipal wastewater treatment and
paper mills• Nonpoint sources: industrial, municipal and agriculture• 1997: Project would allow PS to use voluntary NPS
phosphorous reductions to meet their permit limits
Kalamazoo River Project
• To establish equity trading ratios were developed for NPS
• Farms that had previously implemented BMPs received 1 lb. credit for every 2 lbs. reduction
• Farms that hadn’t previously implemented BMPs received 1 lb. credit for every 4 lbs.
• These ratios achieved equity while preserving the incentive to reduce phosphorous further
• In addition, other ratios were put in to account for distance, seasonality and equivalence
Kalamazoo River Project
• Results:– Makes economic sense– Publicity for farmers should be avoided– Farmers are concerned with profitabilty not credit
generation– During the span of this project 6 NPS banked credits
• No PS/NPS trades were executed• Downturn of paper industry could be to blame• Credits were retired from use
Tar-Pamlico Basin
• 1989, designated a Nutrient Sensitive Water due to low oxygen levels and fish kills
• North Carolina Environmental Mgmt. Commission suggested tech. based control
• PS formed an association• Phase 1: Efficiency study by Point Sources and water
quality modeling– P and N loads were reduced 20%
Tar-Pamlico Basin
• Phase 2: Incorporation of NPS• NPS can voluntarily bank credits with the State• If the association cannot meet their limits they must
purchase credits from the State at a set price• Non-association members must meet a technology limit
and offset any new discharges
Tar-Pamlico Basin
• Success up to this point: caps haven’t been exceeded and costs have been reduced
• Not a “true” water quality trading program– Best described as a load exceedance tax on PS with the
proceeds going to more cost effective abatement methods
NE Kansas
• Characteristics– Middle KS Subbasin (HUC 8: 10270102)
– 2160 mi2 area– Corn, soybeans, sorghum, and wheat – 32” annual precipitation
Study Region
Middle Kansas Subbasin (HUC 8: 10270102)
Data
• Point Sources: 30 wastewater treatment plants – Phosphorus loading and current treatment
system– Determined amount of P reduction required to
meet a “proposed” 1 mg/L P conc. limit– Derived control costs for each WWTP to
achieve limit
Data (con’t)
• Nonpoint sources: generated dataset of 500 agricultural fields– Size ranged from 25 to 200 acres– Current P loading from 0.74 to 2.9 lbs/ac– Native grass filter strips were utilized– Marginal control costs were derived
Results: 1:1 Trading Ratio
40,515790,5024
40,515860,4373
40,515800,1092
40,515860,4361
Credits TradedTotal Gains ($)Simulation
Results: 2:1 Trading Ratio
20,207410,8314
19,921461,4493
20,241413,9502
18,123468,4741
Credits TradedTotal Gains ($)Simulation
Conclusions
• Trading ratio had a significant impact on market performance
• Limited information does not appear to significantly reduce trading volume
• Other factors likely important in explaining lack of trading– Transactions costs– Intangible costs
Will Trading Work in Missouri?
• Challenges– Trading is motivated by watershed-based
limits; few watersheds in Missouri have that– How to enforce limits in a point source permit
that relies on nonpoint sources to take action?– Risk of hot spots– One area with particular appeal is nutrient
trading; Missouri doesn’t have nutrient criteria
Will Trading Work in Missouri?
• Opportunities– As TMDL’s are developed for areas with both
point and nonpoint source contributors, trading may become more attractive
– Regional limits, such as phosphorus limits in Table Rock Lake area, would encourage trading
– When nutrient criteria is developed, more opportunities for point source/nonpoint source trading may exist