Watersheds on Wall Street Water Pollutant Trading

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Watersheds on Wall Street?Water Pollutant Trading

• Becky Shannon, Missouri Department of Natural
  Resources
• Craig Smith, University of Missouri Extension

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Water Pollutant TradingWater Quality
TradingEffluent TradingMarket-based
Approachto Limit or Reduce Pollutant Discharges
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What is Trading?

• Establishment of an economic market for REDUCTION
  of pollution discharges
• Has been successfully used in limiting air
  emissions

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• 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

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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

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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

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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

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Case Studies

• Kalamazoo River Project, Michigan
• Tar-Pamlico Basin, North Carolina
• Northeast Kansas Watershed Study

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Kalamazoo River Project

• Located in SW Michigan
• High phosphorous levels mid-1990s 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

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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 hadnt 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

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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

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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

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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

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Tar-Pamlico Basin

• Success up to this point caps havent 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

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NE Kansas

• Characteristics
• Middle KS Subbasin (HUC 8 10270102)
• 2160 mi2 area
• Corn, soybeans, sorghum, and wheat
• 32 annual precipitation

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Study Region

• Middle Kansas Subbasin (HUC 8 10270102)

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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

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Data (cont)

• 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

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Results 11 Trading Ratio
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Results 21 Trading Ratio
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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

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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 doesnt have nutrient criteria

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Will Trading Work in Missouri?

• Opportunities
• As TMDLs 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

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