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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.