Watersheds on Wall Street? Water Pollutant Trading

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

Simulation Total Gains ($) Credits Traded 1 860,436 40,515 2 800,109 40,515 3 860,437 40,515 4 790,502 40,515 Results: 1:1 Trading Ratio

Simulation Total Gains ($) Credits Traded 1 468,474 18,123 2 413,950 20,241 3 461,449 19,921 4 410,831 20,207 Results: 2:1 Trading Ratio

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

Watersheds on Wall Street? Water Pollutant Trading