Potential cost savings from discharge allowance trading: A case study and implications for water quality trading

Abstract

[1] Applying a trading ratio system similar to that proposed by Hung and Shaw (2005), we estimate the potential cost savings of a phosphorus emissions trading program that meets overall total maximum daily load allocations among 22 wastewater treatment plants (WWTPs) in the Passaic River watershed (United States) to be a modest 2-3% relative to a no-trade baseline. These results may be typical of those in relatively small watersheds such as the Passaic, where there are limited numbers of potential traders and relatively homogeneous abatement technologies across WWTPs. More substantial gains from trade may accrue to a concentrated group of WWTPs, suggesting that watershed managers should focus on a targeted set of traders within a watershed. Under certain conditions, additional gains may be achieved by aggregating WWTPs into zones within which there can be one-to-one allowance trading. Background and Objectives[2] Water quality trading has been met with mixed success in the United States. Despite the theoretical promise of water quality markets, substantial financial and technological support by the United States Environmental Protection Agency (EPA), and more than 70 established and pilot programs, ''only 100 facilities have participated in trading'' [EPA, 2008] (E-S 1). Moreover, 80 of these 100 trades have occurred in a single market, the Long Island Sound Nitrogen Credit Exchange program, which operates more like an exceedence tax abatement subsidy than a market with endogenously determined prices. For the more ''typical'' watershed trading programs without such a generous credit exchange to absorb imbalances between supply and demand, reallocation of abatement levels across firms through the buying and selling of pollution allowances or credits has been much more limited (see King and Kuch [2003], Breetz et al. [2004], and EPA [2008] for discussions). Thus the extent of cost savings in a ''typical'' total maximum daily load (TMDL)-governed watershed associated with market trading remains an open, empirical question.[3] In this paper, the nontidal Passaic River watershed in the state of New Jersey is used as a case study to investigate the size of potential cost savings associated with allowing phosphorus emissions trading among wastewater treatment plants (WWTPs) to achieve a significant reduction in ambient phosphorus levels. On 24 April 2008, a final TMDL rule was promulgated, calling for a more than 80% reduction in the total phosphorus concentration emissions from 22 WWTPs in the watershed. It is estimated that the average (flow weighted) total phosphorus emissions are 2.13 mg/l (402,000 lbs (1 lb = 0.4536 kg)). The TMDL document calls for a long-term average year-round effluent concentration of 0.40 mg/l of total phosphorus, equivalent to 75,650 lbs of phosphorus at existing flow.[4] To measure cost savings, we specify a trading-ratio system similar to one proposed by Hung and Shaw [2005] that minimizes the abatement cost of meeting environmental standards throughout the watershed. Under trading, e...

Water Quality Trading with Lumpy Investments, Credit Stacking, and Ancillary Benefits

“…Finally, we estimate the costs of emission reductions from WWTPs following the methodology described in the Chesapeake Bay Program () and used by Sado et al . (). Sado et al .…”

Experimental tests of water quality trading markets

“…install a filtration device). As discussed by a number of sources, these investments often involve large fixed costs and result in substantial increases in abatement capabilities (Sado et al, 2010;Caplan, 2008;Boisvert et al, 2007;EPA 1996). Boisvert et al (2007) and Sado et al (2010) suggest that these fixed technology costs may lead to underinvestment in abatement technology and thus decrease WQT market performance.…”

Optimizing the scale of markets for water quality trading

“…Water quality trading programs are a particular application of environmental market principles that has received considerable theoretical, policy, and rhetorical attention in the water resources and environmental economics literature [e.g., Dales , ; Montgomery , ; Eheart , ; Eheart et al ., ; Lence et al ., ; Riggs , ; Hung and Shaw , ; Morgan and Wolverton , ; Wainger , ]. Water quality markets are often advocated as a means to reduce the costs of achieving goals of the Clean Water Act, particularly nutrient control requirements [ Sado et al ., ]. Nutrient pollution is regulated by several statutes, the most relevant of which is the National Pollutant Discharge Elimination System (NPDES, 40 CFR 122) through which the Environmental Protection Agency (EPA) issues a permit that authorizes a regulated point source (e.g., wastewater treatment plant, WWTP) to discharge some maximum allowable amount of a pollutant.…”