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.