watersheds on wall street? water pollutant trading becky shannon, missouri department of natural...

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