Selected Economic Aspects of Water Quality Trading

Size: px
Start display at page:

Download "Selected Economic Aspects of Water Quality Trading"

Transcription

1 Selected Economc Aspects of Water Qualty Tradng Rchard N. Bosvert Gregory L. Poe Yukako Sado Cornell Unversty Passac Rver Tradng Project Kckoff Meetng Cook College, Rutgers Unversty, New Brunswck, NJ January 17, 2006

2 Outlne 1. Identfy a polluton tradng system approprate for water (tradng rato system). 2. Dscuss a smple modelng demonstraton of potental polluton trades and cost savngs. 3. Identfy the data requrements for further emprcal analyss. 2

3 Components of Tradable Permt Systems to Meet Envronmental Qualty Objectves at Mnmum Cost 1. There must be substantal and transparent gans from trade after accountng for dfferental sources, costs, locaton, and fate and transport. 2. The nature of the pollutant and the regulatory condtons must be amenable to the establshment of a clear property rghts structure. 3. Only when these (and other) fundamental prerequstes are met can one consder establshng a market approprate for the partcular, undrectonal characterstcs of water polluton. 3

4 Tradable Permt Systems for Non-unformly Mxed Assmlatve Pollutants (NMAP) Alternatve tradable polluton permt systems wth the potental to acheve mnmum cost (cost-effectve) abatement have been suggested over the years. Ambent Permt System (Montgomery, 1972) Polluton Offset System (Krupnck, et al., 1983) Tradng-Rato System (Hung and Shaw, 2005) Smpler schemes, such as tradng of emssons permts wthn one or several zones: Can be vewed as modfcatons of the above systems. Are generally not cost-effectve for NMAP. A tradng-rato system has advantages for water polluton. 4

5 Tradng-Rato System: Crtcal Inputs 1. Total load standards can be derved drectly from water qualty standards n each zone. 2. Polluton flow s undrectonal, from upstream to downstream. 3. Must calculate pollutant transfer coeffcents between zones (contrbuton of one unt of pollutant dscharged from one upstream zone to a downstream zone). 4. Zonal load caps can be set one-by-one, workng from upstream to downstream zones, takng nto account: Background/natural polluton levels, Inflow from upstream sources adjusted for transfer coeffcent. 5. Need total and margnal abatement cost functons. 5

6 Tradng-Rato System: Economc Characterstcs 1. By settng permt tradng ratos equal to transfer coeffcents Sales of permts are always from upstream (sell) to downstream (buy), Values of permts between zones that trade dffer by the tradng ratos. 2. Each source mnmzes abatement costs subject to the constrant that actual emssons be less than or equal to: Permts ntally allocated to the source, (plus) Permts purchased from upstream weghted by tradng ratos, (mnus) Permts sold downstream (un-weghted). 3. If there are no transacton costs or strategc behavor, a tradng-rato system acheves a polluton target at mnmum cost. 6

7 Formal Model (one polluter per zone): The Objectve Functon Mn n E, Tk, Tk 0 = 1 C ( E 0 E ) E 0 = prmary effluent level of zone, E = fnal effluent level of zone, (E 0 E ) = amount abated n zone, C (E 0 E ) = total cost of abatement for zone. 7

8 Formal Model: The Zonal Load Cap Constrant E 1 d T + k k k = 1 k = + 1 n T k A Max, = 1, L, n. A Max = zonal load cap takng nto account background/natural levels of pollutant and nflow from upstream sources adjusted for transfer coeffcent, T k = Tradable dscharge Permts (TDPs) purchased by zone from zone k, T k = TDPs sold by zone to zone k, d k = transfer coeffcent (tradng rato) -- contrbuton of one unt from dscharger k to total effluent load for, 0 d k 1. Set ntal TDP allocaton for zone, T 0, equal to zonal cap: Max 0 A = T, = 1, L, n 8

9 Interpretng the Constrant n Terms of TDPs Owned Subject to E 1 n 0 T + dk Tk k = 1 k = + 1 T k, = 1, L, n. Fnal Effluent Level Intal TDP Allocaton + TDPs Purchased by weghted by Tradng Ratos TDPs Sold by - = Effectve TDPs Owned 9

10 Margnal Abatement Costs and Tradable Dscharge Permt Prces For the Mnmum Cost Soluton C ' ( E 0 E pt ) = λ = P C (.) = s post trade marg. abatement cost = shadow value of s ntal TDP, λ = s permt prce, P, P k d k P ( k < ) If >, then there s no trade between k and, P k = d k P ( k < ) If trade takes place between k and then P k = k s permt prce = tradng rato multpled by P for downstream. 10

11 A Stylzed Four-Zone Emprcal Example Passac Rver Dead Rver Zone A Zone B Zone C Zone D 11

12 Zone A Stylzed Emprcal Example Flow Prmary Load (E 0 ) Permtted Load (E ) (1000L/Y) (lbs/y) (lbs/y) A 2,387,371 20,924 1,522 B 432,096 4, C 461,787 3, D 1,214,261 6, Cost of abatement (proporton of prmary load abated) TC 0 0 β = α [ ( E E ) / E ], α > 0, β > 1 MC = αβ [( E 0 E ) / E 0 ] β 1 12

13 Margnal Cost / lb. Removed Margnal Cost ($/lbs) D C B A Phosphorus Removal (lbs) downstream upstream The order of these margnal abatement costs s conducve to tradng. 13

14 Four Scenaros No trade all tradng ratos zero. Rato 1--Lowest Rato Rato 2--Mddle Rato A B C D A B C D A B C D 1 1 All tradng ratos unty. 14

15 Four Scenaros The Trades Trade (lbs) No Trade Rato 1 Rato 2 1:1 A and B A and C A and D B and C B and D C and D Total Cost ($) 750, , , ,141 Total cost falls as tradng ratos rse. Maxmum tradng ratos 1:1. -Mnmum potental cost, -Maxmum benefts from trade. Maxmum savngs modest--cost functons dentcal. 15

16 Four Scenaros Prces and M. Costs No Trade Rato 1 Rato 2 Rato Unty M. Cost Prce M. Cost Prce M. Cost Prce M. Cost A B C D Note: The prce at a zone s always equal to or above margnal cost. 16

17 Concludng Observatons Factors conducve to polluton tradng Dfferental abatement costs, Low-cost stes upstream, Hgh tradng ratos. Some mplcatons Trades between dstant zones are unlkely, Explot opportuntes for trades wthn sub-watersheds or zones. Data needs are explct n the modelng framework presented Emprcal models wll be adapted to specfc characterstcs of the watershed system, assessment of cost savng due to polluton tradng wll begn at the sub-watershed level. 17

18 References Montgomery, D., Markets n Lcenses and Effcent Polluton Control Programs. Journal of Economc Theory, 5: Krupnck, A., W. Oates, and E. Van De Verg, On Marketable Ar-Polluton Permts: The Case for a System of Polluton Offsets. Journal of Envronmental Economcs and Management, 10: Hung, M. and D. Shaw, A Tradng-Rato System for Tradng Water Polluton Dscharge Permts. Journal of Envronmental Economcs and Management, 49: Unted Natons Envronment Programme (UNEP), Plannng and Management of Lakes and Reservors: An Integrated Approach to Eutrophcaton Techncal Note, Dvson of Technology, Industry, and Economcs, 18