Improving Water Quality: Controlling Point and Nonpoint Sources Chapter 15

1.Point Source Controls Technology-Based Effluent Limits End-of-pipe limits that differ by various groups, such as direct dischargers and indirect dischargers – Within any group, the limits are applied ______________ For direct industrial dischargers, the standards are industry-specific and vary by facility age (new versus existing) and type of contaminant released 2

Direct dischargers release pollution directly to surface waters. Indirect dischargers release effluents to publicly owned treatment works which treat wastewaters through sewer systems. 3

Limits are based on technological capability, but polluters can choose the method to achieve them – Therefore, the limits are ______________________ ____________ – Policy intent is to lower limits over time until the ________ discharge goal is met Limits are conveyed through a permit system called the National Pollutant Discharge Elimination System (NPDES) National Pollutant Discharge Elimination System (NPDES) – NPDES prohibits any discharges into navigable waters without a permit – Each permit states what the effluent limits are and the monitoring and reporting requirements 4

Individual homes that are connected to a municipal system, use a septic system, or do not have a surface discharge do not need an NPDES permit; however, industrial, municipal, and other facilities must obtain permits if their discharges go directly to surface waters. 5

2. Analysis of the Effluent Limits: Major Problems 6 Imprecise Statutory Definitions Limits are based on what is technologically achievable instead of what is needed to achieve water quality As a result, _______________________ (TMDLs) had to be established for all polluting sources if water quality goals were not being met, even if the technology-based limits were being satisfied – TMDLs are the maximum amount of pollution a water body can receive without violating the standards Arizona currently has 102 waterbodies on the 303(d) list (impaired water identification).

Cost-Ineffectiveness Cost-effectiveness requires that firms abate to the point where their associated MACs are equal Since the limits are applied uniformly, this criterion would not be achieved unless firms were identical Empirical evidence suggests that the command-and- control (CAC) approach used is more costly than using economic incentives – Various studies estimate the ratio CAC policy cost to that of a least-cost, market-based approach O’Neil (1980):2.29 to1 Faeth (2000):5.9 to 1 Johnson (1967): 3.13 to 1 7

3. Nonpoint Source Controls Nonpoint Source Management Program: Water Quality Act of stage, _________________________ plan 1. Report on waters not achieving standards 2. Develop ___________________________(BMP) to reduce pollution BMP: strategies other than effluent limits 3. Implement the programs Federal grants are available to support plans 8

Examples of BMP in agriculture include practices for the management of pests; vegetative and tillage practices, such as contour farming, cropping sequence… Contour farming is the farming practice of plowing across a slope following its elevation contour lines. The rows formed slow water run-off during rainstorms to prevent soil erosion and allow the water time to settle into the soil. 9

4. Analysis of Nonpoint Source Controls Advantages of state control – better knowledge of local water bodies, precipitation, runoff, etc. – nonpoint pollution is linked to land use practices, which is controlled locally Disadvantages of state control – lack of good data – inadequate monitoring systems – controls are not consistent across states; can cause problems if contamination flows across state borders 10 Such as agriculture, mining, forestry, and urban development.

US Spending: Point vs. Nonpoint ($2008 millions) Source: U.S. EPA, Office of Policy, Planning, and Evaluation (December 1990), p. 3-3, Table 3-3. At the federal level: Insufficient resource allocation to nonpoint controls relative to point source controls 11

5. Market-Based Solutions (1) Pollution Charges a. Effluent Fees on Point Sources These can be ______________ or ______________ Some states in the U.S. are using these fees as well as other nations—France, Germany, China…… Usage can lead to cost-effectiveness – If government sets a per-unit marginal effluent fee (MEF), each polluter would abate as long as their marginal abatement cost (MAC) is less than MEF and continue until MAC = MEF – So all polluters abate to the point where their MACs are equal, which indicates a cost-effective result 12

Modeling an Effluent Fee $ $ A A MAC X MAC Y unit fee MEF A X A Y Polluter XPolluter Y Notice that both firms are abating at levels where their respective MACs are equal to the MEF, which means they are equal to each other—a cost-effective result. 13

b. Product Charges on Nonpoint Source Example: Tax on fertilizers Tax  effective P fertilizer   quantity demanded  – Optimal tax equals MEC at Q E Evidence in the U.S. suggests D for fertilizer is relatively ____________ and tax rate is too low – Result: insufficient demand response 46 states use this; rates tend to be < 2.5%, so the decline in quantity demanded is negligible Some European nations, such as Austria and Sweden, have used fertilizer taxes with measurable effects 14

(2) Tradeable Effluent Permit Markets Set an abatement objective for watershed Issue tradeable effluent permits – Low-cost abaters sell as long as P > their MAC – High-cost abaters buy as long as P < their MAC – Trading continues until MACs equal, which yields a cost-effective abatement allocation Tradeable permit markets involving both point and nonpoint sources exist in some states – e.g., CA, CO, FL, NY, and WI 15

6. Watershed Approach A watershed refers to all land areas draining into a particular water body Focuses on the watershed instead of a specific water body allows for – better assessment of water quality – better identification of polluting sources Underlying motivations are: – to integrate policy initiatives, using pollution prevention where possible – coordinate tasks and resource use among all stakeholders associated with the watershed 16

Primary U.S. Policy Instruments Watershed-based NPDES permits: issued to multiple point sources within a watershed Water quality trading – U.S. policy explicitly states that all trading activity should occur within a watershed – Supported by economic arguments, including cost savings, scale economies, and greater efficiency 17

Modeling a Negative Environmental Externality (negative production externality) Define the market as refined petroleum – Assume the market is competitive – Supply is the marginal private cost (MPC) – Demand is the marginal private benefit (MPB) – Production generates pollution, modeled as a marginal external cost (MEC) Problem: Producers (refineries) have no incentive to consider the externality Result: Competitive solution is inefficient 18

MSC, MPC, MPB Graph 19 P ($ per barrel) Q (thousands) D = MPB = MSB 42 S =MPC MSC = MPC + MEC P C = P E = 26 0 QEQE QCQC

Modeling a Pigouvian Tax (on a negative production externality) 20 $ Q of gasoline MPB = MSB MPC MSC = MPC + MEC 0 QEQE QCQC MPC t b a Amount of tax

Consumption externalitiesProduction externalities PositiveNegativePositiveNegative The benefits to the rest of society of people being vaccinated before traveling abroad Noise pollution from using car stereos The benefits to the environment that arise from the planting of woodland by a forestry company Wastes being dumped into a river by a company 21

Modeling a positive production externality 22 $ Q of gasoline MPB = MSB MPC MSC = MPC + MEC 0 QEQE QCQC MPC s b a

Abatement Equipment Subsidy (on a Positive Consumption Externality) A payment aimed at lowering the cost of abatement technology Goal is to internalize the positive externality associated with the consumption of abatement activities If the subsidy equals the marginal external benefit (MEB) at Q E, it achieves an efficient equilibrium and is called a Pigouvian subsidy 23

Pigouvian Subsidy Market for Scrubbers (on a Positive Consumption Externality) 24 ($ millions) MSC MPB MSB=MPB+MEB 0 Q C = 200Q E = 210 P C = 170 P E = 175 Subsidy = $14 million MPB S Q of scrubbers P E – s = 161 K L

Socially optimal Q = ___ shots To internalize the externality, use _______ = $10/shot. 25 The market for flu shots D S Social value = private value + external benefit P Q $ external benefit 25 Analysis of a Positive Consumption Externality External benefit = $10/shot

Modeling a Tax on Consumption 26 $ Q MPB MSC MSB = MPB + MEB 0 QEQE QCQC MPB t b a Amount of tax Analysis of a Negative Consumption Externality