Composite market design for a Transferable Discharge Permit (TDP) system

There has been a great deal of interest in addressing water quality issues through the use of Transferable Discharge Permit (TDP) systems. Unfortunately, the attempts to start up permit markets that are able to exploit abatement cost differences between sources have not met with the success expected. Two of the reasons for the lack of success have been the problem of transaction costs and in the case of non-point sources (NPS), undefined property rights. The composite market design is a proposal for a TDP system that specifically includes agricultural non-point source (NPS) discharges and addresses both property rights and transaction cost problems. The composite market consists of three interrelated markets each serving a particular function. The two primary markets are coordinated through price information that makes it possible for a catchment-based authority to issue (sell) permits based on the marginal cost of abatement. When the composite market is mature, the total number of permits issued corresponds to a cap on discharges allowed in the catchment. The structure of the composite market allows this system to be phased in over time with existing institutions and limited demands on financing.     

POINT‐NONPOINT SOURCE WATER QUALITY TRADING: A CASE STUDY IN THE MINNESOTA RIVER BASIN1

ABSTRACT: Contrary to the general trend of only a few actual trades occurring within point‐nonpoint source water quality trading programs in the United States, two trading projects in the Minnesota River Basin, created under the provisions of National Pollutant Discharge Elimination System (NPDES) permits, have generated five major trades and numerous smaller ones. In this paper, these two projects are described to illustrate their origins, implementation, and results. It was found that several factors contributed to the relatively high number of trades in these projects, including the offsetting nature of the projects (hence a fixed number of credits that the point sources were required to obtain), readily available information on potential nonpoint source trading partners, and an effectively internal trading scheme used by one of the two projects. It was also found that long term structural pollution control measures, such as streambank stabilization, offered substantial cost savings over point source controls. Estimates of transaction costs showed that the total costs of the trading projects were increased by at least 35 percent after transaction costs were taken into account. Evidence also showed that in addition to pollution reduction, these two trading projects brought other benefits to the watershed, such as helping balance environmental protection and regional economic growth.     

A Mixed Bag: Assessmentof Market Performance and Firm Trading Behaviour in the NOx Reclaim Programme

Tradable permit markets have become an increasingly popular tool to address environmental policy problems. This paper describes and evaluates the performance of the Regional Clean Air Incentives Market (RECLAIM) that started operating in Southern California at the beginning of 1994. In analysing overall market performance as well as industry and firm specific information,we find strong evidence for uncertainty influencing market participation during the first two years. Furthermore we find evidence for flexibility-induced abatement cost savings as well as a potential business cycle effect on trading behaviour.Our findings emphasizethe importanceof institutional features of trading programmes.     

COSTS AND EFFECTS OF A WATER PROGRAM FOR A SMALL STRIPPING COMPANY-SOUTHEASTERN OHIO1

The purpose of the study was to use economic analysis in determining the ability of a small strip mining company to incure the financial burden of carrying out various alternative mine drainage abatement programs. The quantity and quality of water with which the company has to deal were determined and treatment and diversion programs were costed out. The company's market area and the market structure were analyzed. It was found that pricing policies were determined by a dominant firm, so the target company had no control over its price per ton of coal. The costs and revenue of the firm were analyzed for the period 1960-1970 and, even without a water quality program, losses were incurred in six out of eleven years. Analysis of the average cost curve indicates that the per unit cost could have been reduced by increasing output thereby increasing efficiency. The conclusions of the study were that the small company could not unilaterally implement mine drainage programs because the added costs would seriously worsen its already precarious financial position. Even uniformly enforced legislation might reduce the small firms competitive position because of economies of scale associated with the large treatment facilities used by big mining companies.     

An Ex Post Evaluation of Ohio’s Great Miami Water Quality Trading Program1

Newburn, David A. and Richard T. Woodward, 2011. An Ex Post Evaluation of Ohio’s Great Miami Water Quality Trading Program. Journal of the American Water Resources Association (JAWRA) 48(1): 156‐169. DOI: 10.1111/j.1752‐1688.2011.00601.x Abstract: Market‐based approaches to address water quality problems have resulted in only limited success, especially in trading programs involving both point and nonpoint sources. We analyze one of the largest point‐nonpoint trading programs – the Great Miami Trading Program in Ohio, administered by the Miami Conservancy District (MCD). Our evaluation focuses on the economic and institutional aspects of the program, including cost effectiveness, efficiency of bidding, transaction costs, trading ratios, and innovation. We use a unique dataset consisting of all bids from agricultural nonpoint sources and interviews of soil and water conservation district (SWCD) agents in the watershed. We find that the MCD’s reliance on county‐level SWCD offices to recruit and advise farmers has been essential to achieve relatively high rates of farmer participation. Additionally, the MCD is able to partly free ride on the administrative costs that SWCD offices receive to assist federal conservation programs, which is helpful to lower costs for a fledgling trading program. However, the involvement of SWCD offices reduced the potential cost savings from the reverse auction structure because some agents were able to learn about the threshold price over the six rounds of bidding and help farmers bid strategically. Overall, the program structure serves as an effective model for future trading programs in other regions that seek to involve agricultural nonpoint sources.     

Policy Utopias for Nutrient Credit Trading Programs with Nonpoint Sources

A promising program to address water contamination from nutrients is water quality trading (WQT), whereby entities with high abatement costs purchase credits from entities with lower abatement costs. The concept has found some success with point source water pollution, but very few trades have occurred in over 50 programs in the United States (U.S.) that have focused on nonpoint sources (NPSs). To understand why success has been slow, we identified three environments needed for programs to succeed: physical, economic, and institutional. We estimate that only 5% of watersheds in the U.S. currently listed as nutrient impaired provide a viable physical environment for trading nitrogen; 13% are suitable for phosphorus. Economic and institutional challenges would shrink that domain even further. Therefore, we find places with the ideal physical, economic, and institutional environments necessary for feasible WQT programs are virtual policy utopias — rare places with ideal environments. Fortunately, a growing literature provides the tools necessary to identify where these policy utopias are and to expand that domain through a better understanding about how to manage WQT programs more effectively.     

碳排放交易体系的政策灵活性:国际经验及启示

在《联合国气候变化框架公约》和《京都议定书》的背景下,越来越多的国家开始关注全球气候变暖的问题。考虑到碳排放交易体系比碳税更具有政治可行性,不少国家或地区开始实施碳排放交易体系,以最低的减排成本来达到温室气体减排目标。然而,采用碳排放交易体系,其排放总量是固定的,而减排成本是不确定的,可能会出现由于政策或外部冲击而产生的配额价格异常波动的现象。因此,为确保碳排放交易体系的成本有效性,政策灵活性十分重要。在理想情况下,碳排放市场具有完全的时间灵活性(包括长期的履约期、自由的配额储存与预借)和空间灵活性(即建立全球碳市场),这将对增强市场流动性、降低减排成本、缓解价格波动起到重要的作用。然而,由于政策设计需要考虑更多因素,实际上理想状态很难达到。本文将对国外碳排放交易体系的政策灵活性设计进行较为系统的分析和比较,尤其关注履约期的长短、配额的跨期使用、配额的抵消、区域碳市场连接等方面的具体政策设计,这对我国在7个省市进行碳排放交易试点以及今后建立全国性的碳排放交易体系有较强的借鉴意义。     

Ecosystem services in infrastructure planning – a case study of the projected deepening of the Lower Weser river in Germany

We consider how ecosystem services can be incorporated into water infrastructure planning by studying the projected deepening of the Lower Weser river channel in Germany. We recalculate the project's benefit–cost ratio by integrating the monetary value of changes in different ecosystem services, as follows: (1) the restoration costs of a mitigation measure for a loss in fresh water supply for agricultural production in the estuary region, (2) the costs of a loss in habitat services, transferring the willingness to pay from a contingent valuation study to the area assessed in the environmental impact assessment, and (3) the benefits of emissions savings induced by more efficient shipping, taking a marginal abatement cost approach. We find that including monetary values for ecosystem service changes leads to a substantial drop in the benefit–cost ratio. On this basis, we argue for a reform of the standard cost–benefit analysis to facilitate more complete welfare assessments.     

Uncertainty in exhaustible natural resource economics: The irreversible sunk costs of Hotelling

According to Pindyck (2007) there are three important aspects of uncertainly in environmental economics: (1) the benefits and costs of environmental policy tend to be highly non-linear, (2) environmental policy tends to involve important irreversibilities, where investment in pollution abatement can impose an irreversible, sunk cost on society, and where certain pollutants can stay in the environment forever and build up to cause even more future harm in which case investment in abatement can cause an irreversible, sunk benefit to society, and (3) environmental policy involves long time horizons and yet the discount rate society should use is uncertain for determining the net present value of costs and benefits of pollution abatement. These same uncertainties also affect non-renewable, exhaustible, natural resource economics and in particular the use of the Hotelling rule: (1) the costs, benefits and transversality conditions of using the Hotelling rule can be highly non-linear, (2) the Hotelling rule involves important sunk cost irreversibilities, which will be explained here, and (3) the Hotelling rule can involve long time horizons with uncertain discount rates. All three of these problem make it extremely difficult for a market to use in any way the Hotelling rule, yet by the sheer number of articles in non-renewable natural resource economics, one would believe that it is the basis of all resource markets. In this article, we concentrate on the sunk cost irreversibilities of using the Hotelling rule. The idea of the Hotelling rule is to optimally store a non-renewable resource, but the optimization is highly dependent on the actual reserves that are available to extract. However, reserves of underground exhaustible resources are often unobservable at the beginning stages of extraction which makes using the Hotelling Rule difficult.     

Does the Coase theorem hold in real markets? An application to the negotiations between waterworks and farmers in Denmark

The Coase theorem depends on a number of assumptions, among others, perfect information about each other's payoff function, maximising behaviour and zero transaction costs. An important question is whether the Coase theorem holds for real market transactions when these assumptions are violated. This is the question examined in this paper. We consider the results of Danish waterworks' attempts to establish voluntary cultivation agreements with Danish farmers. A survey of these negotiations shows that the Coase theorem is not robust in the presence of imperfect information, non-maximising behaviour and transaction costs. Thus, negotiations between Danish waterworks and farmers may not be a suitable mechanism to achieve efficiency in the protection of groundwater quality due to violations of the assumptions of the Coase theorem. The use of standard schemes or government intervention (e.g. expropriation) may, under some conditions, be a more effective and cost efficient approach for the protection of vulnerable groundwater resources in Denmark.     

INCENTIVE-BASED NONPOINT SOURCE POLLUTION ABATEMENT IN A REAUTHORIZED CLEAN WATER ACT1

ABSTRACT: This paper summarizes key provisions of the Clinton Administration's proposals for change in the Clean Water Act. Two of the important themes for change are tougher controls for non-point source pollution and the use of market-based instruments. A detailed analysis of market-based abatement suggests limited potential for reducing costs. The keys to nonpoint source pollution control are clearer definition of property rights combined with changes in government programs that encourage polluting activities.     

Nitrogen in the Baltic Sea--policy implications of stock effects

We develop an optimal control model for cost-effective management of pollution, including two state variables, pollution stock and ecosystem quality. We apply it to Baltic Sea pollution by nitrogen leachates from agriculture. We present a sophisticated, non-linear model of leaching abatement costs, and a simple model of nitrogen stocks. We find that significant abatement is achievable at reasonable cost, despite the countervailing effects of existing agricultural policies such as price supports. Successful abatement should lead to lower nitrogen stocks in the sea in 5 years or less. However, the rate of ecosystem recovery is less certain. The results are highly dependent on the rate of self-cleaning of the Baltic Sea, and less so on the discount rate. Choice of target has a radical effect on the abatement path chosen. Cost-effectiveness demands such a choice, and should therefore be used with care when stock effects are present.     

Transaction costs and the clean development mechanism

The emissions trading provisions of the Kyoto Protocol and its clean development mechanism (CDM) are designed to permit greenhouse gas (GHG) emission reductions at the lowest cost globally. However, to ensure climate integrity, these reductions must pass through vigilant approval, monitoring and evaluation procedures that create additional transaction costs unrelated to the physical process of eliminating GHGs. Moreover, the CDM's additionality criterion creates constraints that magnify the influence of these transaction costs on project viability. If these costs are extreme, they could undermine the success of the CDM, and possibly of the Kyoto Protocol itself. This article describes the trading provisions of the treaty, creates a working definition of transaction costs, and discusses their effects. It then analyzes the process of creating a CDM project to identify the sources of transaction costs, illustrated by an example of a fuel substitution project in Ghana. The conditions for project profitability are analyzed and compared with recent GHG emission credit prices in Europe. The specific Ghanaian results are not generalizable to all CDM projects, but the model does suggest a template that can be used to analyze the effects of project and transaction costs in other contexts.     

Analysis of Scavengers’ Activities and Recycling in Some Cities of Nigeria

The state of solid waste recycling by scavengers in Onitsha, a heavily commercial city in Anambra State, and some other urban areas such as Nsukka, Enugu, and Port Harcourt was analyzed. Data were obtained through interviews of scavengers who deal with recyclables. Although the activities of scavengers are sub-optimal, they can have a great impact on Nigerian economy with respect to resource conservation, creation of job opportunities, and reduction of the magnitude of waste disposal problems. A cost analysis is presented to compare the different forms of recycling utilized by municipal solid waste management. It is shown that a well-planned recycling program with recycling and composting would result in 18.6% savings in waste management costs and 57.7% in landfill avoidance costs. However, if the compost materials are not recycled, the corresponding savings in cost become 8.6% and 28.6%, respectively. The option with the lowest cost involves encouraging individual households to separate at the source their recyclables, which are bought by scavengers. This results in 78.0% savings in waste management cost and 79.5% landfill avoidance cost. A low-cost approach aimed at the integration of scavenging activities into conventional solid waste management is presented.     

POTENTIAL BENEFITS AND COSTS OF INGROUND STORAGE OF IMPORTED WATER1

ABSTRACT: In the near future, groundwater storage of imported water may become increasingly important as sites for surface storage are less available. This article explores the potential economic costs and benefits of groundwater storage. The costs include capital outlays, maintenance costs, land costs, legal costs, energy costs, and opportunity costs. The benefits include land cost savings, prevention of subsidence, aquifer protection, and higher economic use of surface lands that might be covered by a reservoir.     

EFFICIENCY PROBLEMS FROM USER FEES IN MUNICIPAL WASTEWATER TREATMENT1

ABSTRACT: The Environmental Protection Agency administers a construction grant program to encourage abatement of wastewater pollution by sharing with municipalities the costs of wastewater treatment facilities. The enabling legislation (P.L. 92–500) specifies that EPA's cost share will be 75% of construction costs. It further requires municipalities to collect user fees from industrial users of the facilities to repay that part of the federal grant allocable to the treatment of industrial wastewater. The municipality must return half of the user fees collected to the U.S. Treasury; the municipality is allowed to retain the remaining half. Retention by municipalities of these user fees lowers their effective cost shares and results in the following consequences: (1) a bias for municipalities to select certain kinds of abatement techniques regardless of whether or not they are the least-cost techniques from the national perspective; (2) a bias for municipalities to select larger-than-optimal scales of abatement facilities; (3) a hidden federal subsidy to industry; and (4) grants that favor industrial communities. This article examines the legislative and regulatory requirements for user charges, derives the algebraic expressions for calculating the real federal, municipal, and industrial cost shares with user fees; computes municipal cost shares for selected values of the determinant factors; evaluates efficiency and other consequences of current user fee arrangements; and concludes that the efficiency distortions brought about by the impacts of user fees on cost sharing could be eliminated by requiring that all user fees collected from industry against the federal cost share be returned to the U.S. Treasury.     

Emission versus Input Taxes for Diffuse Nitrate Pollution Control in the Presence of Transaction Costs

The most important obstacle to solving diffuse pollution problems is that emissions are either unobservable or cannot be observed at a reasonable cost. Biophysical models may provide sufficient information to set a cost-effective emission tax. However, evidence from recent studies has shown that transaction costs for emission-based policies are higher per hectare than for input-based policies. An economic model of agriculture for the Kennet catchment in south-east England shows that, when transaction costs are accounted for, an input tax is more efficient than an emission tax over a range of emission standards. This result has policy implications in that it indicates, first, that economists' policy recommendations should account for transaction costs, and, secondly, that the standard advice that emission-based policies are superior may be wrong where transaction costs differ substantially between emission- and input-based policies.     

Incentive pricing and cost recovery at the basin scale

Incentive pricing programs have potential to promote economically efficient water use patterns and provide a revenue source to compensate for environmental damages. However, incentive pricing may impose disproportionate costs and aggravate poverty where high prices are levied for basic human needs. This paper presents an analysis of a two-tiered water pricing system that sets a low price for subsistence needs, while charging a price equal to marginal cost, including environmental cost, for discretionary uses. This pricing arrangement can promote efficient and sustainable water use patterns, goals set by the European Water Framework Directive, while meeting subsistence needs of poor households. Using data from the Rio Grande Basin of North America, a dynamic nonlinear program, maximizes the basin's total net economic and environmental benefits subject to several hydrological and institutional constraints. Supply costs, environmental costs, and resource costs are integrated in a model of a river basin's hydrology, economics, and institutions. Three programs are compared: (1) Law of the River, in which water allocations and prices are determined by rules governing water transfers; (2) marginal cost pricing, in which households pay the full marginal cost of supplying treated water; (3) two-tiered pricing, in which households' subsistence water needs are priced cheaply, while discretionary uses are priced at efficient levels. Compared to the Law of the River and marginal cost pricing, two-tiered pricing performs well for efficiency and adequately for sustainability and equity. Findings provide a general framework for formulating water pricing programs that promote economically and environmentally efficient water use programs while also addressing other policy goals.     

Potential impacts of imposing methyl bromide phaseout on US strawberry growers: a case study of a nomination for a critical use exemption under the Montreal Protocol

The Montreal Protocol on Substances that Deplete the Ozone Layer requires developed countries to phaseout methyl bromide production and non-quarantine uses by 2005 and developing countries to do the same by 2015. Exemptions to phaseout have been significant in slowing the process of abatement; many countries have applied for exemptions for some uses, partly on grounds that phaseout is economically infeasible. Data on the US strawberry market are used to investigate grower costs arising from substitution away from methyl bromide, the impact of trends in and characteristics of the demand for fresh strawberries, and characteristics of trade with countries not yet required to eliminate use of the compound. It appears that actual net costs to growers will be much smaller than the simple increase in production costs cited in the US nomination for exemption.     

MONITORING AND CONTROL OF CENTER PIVOT SYSTEMS WITH MICROCOMPUTERS1

A computerized water-energy-management system (WEMS) can be used by center pivot operators to reduce pumping fuel costs and monitoring expenses. Irrigation costs are lowered primarily because the system used climatic data and plant growth models to derive water schedules that considerably lowers the use of water compared with conventional irrigation practices. A capital budget analysis of a hypothetical, but representative farm growing corn, shows that cost savings are from three sources: 61 percent from pumping less water, 28 percent from labor savings, and 11 percent from savings on truck fuel, maintenance, and oiL The analysis illustrates that only a 4 percent water savings from irrigation scheduling over a 10-year period is required for the investment to be profitable for many central High Plains’ irrigators. The water savings required are relatively small compared with the potentials shown by irrigation scheduling research. WEMS is cost effective and can extend the life of the ground water source.