Water Quality Trading Strategies
The following points describe characteristics of two different strategies for water quality trading.
Cap & Trade
- May trade in credits or allowances but credit trading is the norm.
- Partial cap system - not fully capped - not all dischargers are involved - states may use their latitude to bring others into the trading system.
- In partially capped systems, the number of allowances issued is some fraction of the total maximum load target.
- Growth in discharge sources outside the cap or failure to gain measured and real reductions from uncapped sources compromises water quality goal.
- Credits vary by season and may be uncertain and may cause credit demand to be less than credit supply.
- May not be market-like or market based.
- Subsidies may be used to initiate trading.
- Regulator generally dictates the BMP’s to be used.
- Emphasis may tend to be placed on trading rather than the water quality standard in such system.
- May need more focus on the water quality standard.
Cap-and-Allowance Market (CAM)
- Trade in allowances.
- Exchange flexibility—opportunity to sell and buy.
- Waste control flexibility – discharger decides on control technology to minimize cost subject to regulatory rules.
- Cap on allowances equals the regulated discharge - there are no extended allowances.
- Financial incentives created by opportunity to exchange and opportunity to control at possibly low cost to meet regulation.
- Market-based control mechanism
- Regulator needs to concentrate on water quality standard, making sure that all dischargers have allowances that equal the amount that is being discharged.
- Regulator focuses on information and meeting the water quality standard.
- Dischargers that reduce discharges below allowance holdings earn revenue from the sale or lease of allowances – but, that can occur in developing credits below a required discharge limit as well.
- There is incentive to reduce loads and to find more efficient pollutant reduction methods to increase the value of the allowance as an asset.