Water Quality Trading in the U.S.

Transcription

1 Water Quality Trading in the U.S. Richard Woodward Texas A&M University 1

2 Dales (1968) Land, Water, and Ownership p

3 WQ Trading a slow start Wisconsin - Fox River Established in 1981 First trade in 1995 Colorado - Lake Dillon Established in 1984 First trade in

4 Proportion of assessed water bodies deemed to be in good quality 70% 65% 60% Rivers 55% Lakes 50% 45% Estuaries 40% Source: USEPA. National Water Quality Inventory Report to Congress, various years. 4

5 Agriculture s role in water quality impairment Leading source of water impairment for rivers and lakes in the U.S. Contributed to problems in 48% of the impaired river miles Contributed to problems in 41% of the impaired lake acres Source: 2000 Water Quality Report, USEPA, 5

6 Factors favoring WQT Substantial cost-dispersion between polluters USEPA report: Trading could save between $700 million and $7.5 billion Example from Ohio Treatment plant upgrades: $62/lb Agricultural practices: $1 - $14/lb However, much higher costs for agricultural offsets in Virginia. 6

7 Central challenges for water quality trading No regulatory authority in the Clean Water Act. The Act s Total Maximum Daily Load approach is very slow and ambiguous. Small markets Monitoring & enforcement of nonpoint source emissions Buyer liability Non-uniform rights High transaction costs Additionality 7

8 WQ Programs in the U.S. More than 50 state or watershed level programs in existence or under development Source: USEPA 8

9 24 Programs in which trades have occurred Reality: Even the most successful programs have not resulted in vibrant markets & markets take a variety of very different forms. Source: Trading data from USEPA 9

10 Market types in the U.S. Cap & Trade Example: The Grassland Farmers Selenium trading program Cap on selenium releases into the San Luis Drain, a concrete lined canal Clearly monitored pumping stations (point sources in economic terms) Clear cap on aggregate loads Well-defined trading participants with quantifiable loads 10

11 Market types in the U.S. Common-Pool Management Programs Examples Neuse & Tar Pamlico Programs in North Carolina An Association of point sources jointly manages total load Trading among sources occurs, we think, allowing for more gradual upgrades Managed without direct regulator involvement in trades, only aggregate limit is monitored 11

12 Market types in the U.S. Tax-Subsidy program Connecticut Annual loads are calculated and compared to treatment plants fair share of total If a plant is over its limits, it is charged. If it is under, it is given a subsidy Limits are set so that payments to sellers is slightly greater than amount buyers are charged 12

13 Market types in the U.S. Baseline & credit programs Example: The Miami Conservancy District in Southwest Ohio Wastewater treatment buying credits in advance of nutrient limit on their loads Farmers are paid to reduce their nutrient loads Nonpoint source load reductions estimated using spreadsheet project evaluation tool Only program type that can involve agricultural Demand from load-limited point sources Non-capped sources are paid to abate 13

14 The problems with offsets A typical trade: A water treatment pays a farmer $3,000 to adopt conservation tillage, which is estimated to reduce nutrient loads by 1,500 pounds. Additionality. In a recent survey in Ohio 83% of farmers indicated they used conservation tillage. 18% reported having received payment to adopt this practice. Loads cannot be monitored Only predicted loads, not actual loads can be traded Trades have long lives The average project in the Ohio program had a life of 6.6 years. A farmer can sell credits once every 6 years 14

15 Market Structures Exchanges Sole-source offsets Clearinghouses Bilateral Negotiations 15

16 The structure of Pollution Trading markets: Sole-source offsets Analogous to a vertical integration low institutional transaction costs may not be least cost approach With regulatory support, more easily achieved within the context of existing laws Example: Boulder, Colorado wastewater treatment plant Riparian zone improvements 16

17 The structure of Pollution Trading markets: Exchanges Like the NYSE Uniform goods low transaction costs Observed prices The U.S. SO 2 market, or the European carbon market, but not water quality markets Goods traded must be uniform Markets must be thick 17

18 The structure of Pollution Trading markets: Clearing Houses Like a Supermarket non-uniform input uniform output low transaction costs clearing house bears many of the transaction costs Miami Conservancy District Program Agency plays the role of the clearinghouse 18

19 The structure of Pollution Trading markets: Bilateral negotiation Like the used car market non-uniform product (e.g. buyer liability) high transaction costs high contracting costs Examples: Statewide programs in Pennsylvania & Michigan 19

20 7 Lessons 20

21 Monitoring Lesson 1 You can t trade what you can t monitor. Lesson 2 Monitoring is a real cost that should be made explicit. Programs involving nonpoint sources pay for predicted pollution reductions, not actual load reductions, so you monitor the practice 21

22 Liability Lesson 3 Liability provisions will affect market fluidity Requirements that buyers monitor their credits hampers market activity Government certification adds certainty and uniformity to the market 22

23 Make sure there s demand Lesson 4 A market needs more than just supply. Government must create the need to reduce. Regulatory uncertainty can eliminate demand. 23

24 Transaction Costs Lesson 5 Transaction costs are real Lesson 6 Simple metrics make transactions easy The Fox River program was killed by transaction costs Minnesota trades required substantial agency time The Dillon Colorado program had very simple rules. They may not be precise, but they made a trade easy to carry out. 24

25 Market structure Lesson 7 The market will probably not look like a stock exchange, but that does not mean it has failed The Lake Dillon program had its first trade only after 15 years, but still resulted in benefits When trades involve nonpoint sources trades are usually infrequent 25

26 The End Richard Woodward 26

27 Sources: EPA, Office of Wetlands, Oceans, and Watersheds, Draft trading updates -- December (October 21, 1999). EPA, Office of Wetlands, Oceans, and Watersheds, TMDL Litigation by State, Summary of Litigation on Pace of TMDL Establishment (accessed on Dec. 2, 2007) Hahn, R. W. and G. Hester, Marketable Permits: Lessons for Theory and Practice. Ecology Law Quarterly 16: Hester, G. Water Quality Trading Guidance Manual: An Overview of Program Design Issues and Options. EPRI, November Jarvie, M. and B. Solomon. Point-Nonpoint Effluent Trading in Watersheds: A Review and Critique. Environ. Impact Assess. Rev. 18(March 1998). Woodward, R.T. "Lessons about Effluent Trading From a Single Trade. Review of Agricultural Economics (Spring/Summer 2003). Woodward, R.T., R.A. Kaiser, and A.M. Wicks. "The Structure and Practice of Water-Quality Trading Markets". Journal of the American Water Resources Association. (August, 2002). 27

28 Location specific solutions Lesson 8 Location-specific and stakeholder-specific designs tend to succeed Do we have to reinvent the process in each setting? Two programs in Colorado a very similar Two programs in North Carolina are very similar Two programs in Minnesota are very similar 28

29 Tar Pamlico Basin Association of point sources set an aggregate phosphorous cap. Beyond the association s cap, credits can be obtained by making a contribution to a state program that funds implementation of pollution reducing practices. No need to find the trading partners No need to negotiate the price 29

30 Lake Dillon, Colorado Established after a cap was placed on phosphorus in 1982 Permitted waste-water treatment facilities to purchase credits from NPS s Credits could not be purchased from PSs In 1999 a trade made possible a ski area expansion without violating phosphorus limit Prior to 1999 no incentive to address non-point loads 30

31 Central challenges for water quality trading Small markets Monitoring & enforcement of nonpoint source emissions Buyer liability Non-uniform rights High transaction costs Additionality Trading ratios 31