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