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 Approach to 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: ) –2160 mi 2 area –Corn, soybeans, sorghum, and wheat –32” annual precipitation

Study Region Middle Kansas Subbasin (HUC 8: )

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

Results: 1:1 Trading Ratio 40,515790, ,515860, ,515800, ,515860,4361 Credits TradedTotal Gains ($)Simulation

Results: 2:1 Trading Ratio 20,207410, ,921461, ,241413, ,123468,4741 Credits TradedTotal Gains ($)Simulation

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