Improving Water Quality Controlling Point and Nonpoint Sources Chapter 16 © 2007 Thomson Learning/South-WesternThomas and Callan, Environmental Economics

Point Source Controls Technology-Based Effluent Limits Permits

3 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 uniformly For direct industrial dischargers, the standards are industry-specific and vary by facility age (new versus existing) and type of contaminant released New sources must meet standards based on the best available demonstrated control technology (BADCT) Existing sources must meet two sets of standards: those based on best conventional control technology (BCT) for conventional pollutants and those based on best available technology economically achievable (BAT) for nonconventional and toxic pollutants

4 Technology-Based Effluent Limits (continued) Limits are based on technological capability, but polluters can choose the method to achieve them Therefore, the limits are performance-based standards Policy intent is to lower limits over time until the zero discharge goal 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 limitations are and the monitoring and reporting requirements

Analysis of the Effluent Limitations

6 Major Problems Imprecise statutory definitions Meeting the zero discharge goal Lack of an efficiency criterion Cost-ineffective decision making

7 Imprecise Statutory Definitions Limits are based on what is technologically achievable instead of what is needed to achieve water quality As a result, total maximum daily loads (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

8 Meeting the Zero Discharge Goal Overly ambitious Inefficient because it is benefit based Unsatisfactory track record EPA was to tighten the standards toward a zero limit, but this has occurred rarely

9 Lack of an Efficiency Criterion No mandate in the law to set standards to maximize net benefits where marginal benefits and costs are equal BAT standards refer only to associated costs BCT standards make only a vague reference to the relationship between costs and benefits

10 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

Publicly Owned Treatment Works (POTW) Programs

12 POTW Funding Programs Federal Grant Program (pre-1987) Federal monies to municipalities to help fund POTW construction  Federal share set at maximum of 75% of the cost until 1984, when it was reduced to 55% Clean Water State Revolving Fund (CWSRF) (1987 to present) Clean Water State Revolving Fund (CWSRF) States loan to municipalities for POTW construction  All 50 states and Puerto Rico have these programs

Analysis of the POTW Program

14 Identifying Accomplishments Invalid to argue that federal funding has been effective simply because municipal waste treatment has progressed Research suggests that the majority of federal grants only displaced local funding It is estimated that ⅔ of every federal dollar was only a substitute for local funds Because only a portion of federal funds was incremental to what would have been spent at the local level, only a fraction of improvements can be linked to federal program

15 Inefficiencies Cost-sharing dampened the municipality’s incentive to minimize costs Led to excess capacity This problem motivated the change from grants to loans, the reduced federal cost share, and other restrictions

16 Equity Implications Some municipalities had not been funded when the grant program was eliminated, so these communities faced a higher cost burden Inequity was more severe for smaller, rural communities that were unable to exploit available scale economies The CWSRF program may have provided some offset because state-managed loans can be tailored to accommodate lower income or wealth levels through lower interest rates or grace periods

Nonpoint Source Controls Controls on polluted runoff

18 Nonpoint Source Management Program Water Quality Act of stage, state-implemented plan 1. Report on waters not achieving standards without action taken against nonpoint sources 2. Develop programs to reduce pollution, specifying strategies* other than effluent limits  *called best management practices (BMP) 3. Implement the programs Federal grants are available to support plans

19 Analysis of Nonpoint Source Controls Advantages of state control better knowledge of local waterbodies, 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

20 Analysis of Nonpoint Source Controls (continued) Inadequacies at the federal level Insufficient resource allocation to nonpoint controls relative to point source controls  Not supported by relative risk analysis Lack of coordination with other federal programs  e.g., crop restriction programs that promote greater dependence on agrichemicals might worsen runoff

US Spending: Point vs. Nonpoint ($2003 millions) Source: U.S. EPA, Office of Policy, Planning, and Evaluation (December 1990), p. 3-3, Table 3-3.

Market-Based Solutions Pollution Charges Tradeable Effluent Permits

Pollution Charges Effluent Fees on Point Sources

24 Effluent Fees These can be volume-based or pollutant-based Real-world usage Some states in the U.S. are using these fees as well as other nations, including France, Germany, Malaysia, and 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

Modeling an Effluent Fee $ $ A A MAC X MAC Y unit fee MEF A X A Y Polluter X Polluter 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.

26 Are the Effluent Fees Efficient? Combined abatement level reached by both polluters would not be efficient unless the MSB of abatement were equal to the associated MSC Even if MSB and MSC could be determined (which would be difficult in practice), result would be efficient only in the aggregate, and not at each site unless the MSB and MSC at each site were identical – highly unlikely For example, consider two pollution sites – a low population and a high population site, with differing MSB. What is the outcome if both face a single, national effluent fee?

Inefficiency of a National Effluent Fee Compare low population to high population region $ Nationally set at $50 MEF MSC LOW = MSC HIGH MSB LOW MSB HIGH A A LOW A HIGH AOAO Each region would abate A O units, which would be above the efficient level in low population region, with the opposite result for the high population region.

Pollution Charges Product Charges on Nonpoint Source

29 Product Charge Example: Tax on fertilizers Tax  effective P fertilizer   Q D  Optimal tax equals MEC at Q E Issue is degree of response of Qd Anecdotal evidence in the U.S. suggests D for fertilizer is relatively inelastic and tax rate is too low Result: insufficient Qd response  46 states use this; rates tend to be < 2.5%, so the decline in Q D is negligible Some European nations, such as Austria and Sweden, have used fertilizer taxes with measurable effects

Tradeable Effluent Permit Markets Point and Nonpoint Sources

31 Tradeable Effluent Permits 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

Watershed Approach

33 Watershed Approach A watershed refers to all land areas draining into a particular water body Focusing 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

34 Watershed Grants in the U.S. Targeted Watershed Grants Program provides monies for projects that use watershed-based strategies to achieve environmental goals Looks to support comprehensive, collaborative projects, anticipating some will use market- based policy instruments

35 Primary U.S. Policy Instruments Watershed-based NPDES permits issued to multiple point sources within a watershed Might be achieved by reissuing individual permits and setting effluent limits to support watershed objectives, or by issuing general permits to a group of sources within a watershed, or by issuing an individual permit to a group of point sources 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