How To Trade Water Quality

Transcription

1 Movng Beyond Open Markets for Water Qualty Tradng: The Gans from Structured Blateral Trades Tanl Zhao Yukako Sado Rchard N. Bosvert Gregory L. Poe Cornell Unversty EAERE Preconference on Water Economcs Amsterdam, June 2009 Fundng for ths research was provded by the US-EPA Targeted Watershed Grant Program (WS972841) and USDA Hatch Project funds provded through Cornell Unversty ( , ) Nether the US EPA nor the USDA has revewed or endorsed ths publcaton, and the vews expressed heren may not reflect the vews of these agences.

2 Movng Beyond Open Markets for Water Qualty Tradng: The Gans from Structured Blateral Trades Sado, Y. R.N. Bosvert, and G.L. Poe. Potental Cost Savngs from Dscharge Allowance Tradng: A Case Study and Implcatons for Water Qualty Tradng. ( Zhao, T., Y. Sado, R.N. Bosvert and G.L. Poe. Open Markets v. Structured Blateral Trades : Results of Economc Modelng of Pont-to-Pont Source Water Qualty Tradng n the Non-Tdal Passac Rver Basn ( ) Outlne: Motvaton, orentaton and termnology, Standard economc presentaton of polluton allowance tradng, Adjustng standard economc presentaton to realty of watershed, Results.

3 Motvaton: Water Qualty Tradng? Water qualty tradng has had mxed success n the Unted States. Substantal fnancal and technologcal support by the US EPA, and more than 48 establshed and plot programs Only 100 facltes have partcpated n tradng (US EPA 2008, E-S 1). Moreover, 80 of these 100 trades have occurred n a sngle market, the Long Island Sound Ntrogen Credt Exchange program. Lmted correspondence between open-market tradng system envsoned n standard economcs presentatons and the nsttutonal and hydrologc crcumstances n typcal watersheds.

4 Orentaton: The Non-Tdal Passac Rver Basn 22 wastewater treatment plants (WWTPs) requred to reduce total phosphorus concentratons from present average of 2.33 mg/l to a target of 0.4 mg/l.

5 Tradng Program Termnology Open Markets: The standard theoretcal presentaton n whch frms buy and sell polluton allowances based on margnal abatement costs through a prce mechansm. Best suted for: Large numbers of potental traders, wth Heterogeneous abatement technologes across frms, and Heterogeneous present capacty to meet standards. Structured Blateral Trades: Proftable tradng opportuntes dentfed, and mplemented wth multyear contracts between frms. Best suted for: Small number of potental traders, wth Homogeneous abatement technologes across frms, and Most, f not all, frms do not have present capacty to meet standard.

6 Standard Economc Presentaton (e.g., Tetenberg 2006) Mnmze n C 1 ( e 0 e ) Subject to: n 1 d j e E j ( j 1,2... n) e o = prmary effluent level of source, e = fnal effluent level of source, C (e 0 e ) = abatement cost for source. E j = aggregate emssons levels allowed at receptor j, e j = amount of emssons at receptor j after dscharger at source emts e. d e / e j j e [0, e 0 ]

7 Standard Economc Presentaton (e.g., Tetenberg 2006) MC ( e j ) 1 d j C ( e e ) 1 d kj Ck ( e e k k ) MC k ( e j k )

8 Water Qualty Tradng (Hung and Shaw, JEEM, 2005) Mnmze n C 1 ( e 0 e ) Subject to: e d 0 k 1 1 k k n k 1 k e [0, e 0 ] k, k 0 T 0 = zonal load cap takng nto account background/natural levels of pollutant and nflow from upstream sources adjusted for transfer coeffcent, T k = Tradable dscharge allowances (TDAs) purchased by zone from zone k, T k = TDAs sold by zone to zone k, d k = Transfer coeffcent (tradng rato) 0 < d k < 1

9 Two Crtcal Issues: Theory v. Real World 1. C (e o e ) a. Consstent wth the prevous margnal cost approach, ncreasng and strctly convex (Hung and Shaw), convex and twce dfferentable (Montgomery), contnuous cost functon (Tetenberg). b. Generally, polluton controls are feasble to mplement n relatvely large nstallments that [can] reduce multple unts of pollutants. Pont sources n partcular tend to purchase addtonal loadng reducton capablty n large ncrements. For example a wastewater treatment plant upgrade or plant expanson may be desgned to treat mllons of gallons a day (US EPA, 1996, p. 3-2). 2. The structure of d k a. Downstream trades only. b. Management Area approach to be appled to Upper Passac Rver Basn (Obrupta, Naz and Kardos, JEM 2008).

10 O&M Cost of Treatment 1 Addtonal Unt ($) 1. Total Frm Costs: O&M Data taken from 104 observatons n Nutrent Reducton Technology Cost Estmatons for Pont Sources n the Chesapeake Bay Watershed (2002) and Estmaton of Costs of Phosphorus Removal n Wastewater Treatment Facltes: Adaptatons of Exstng Facltes (2005). For a gven flow level, O&M cost rse wth treatment level O&M treatment costs fall wth flow level. (e.g., 0.4 mg/l) Flow (MGD)

11 Captal Costs ($ Mllon) 1. Total Frm Costs: Captal Costs Data taken from same sources as O&M data. Dscrete functon wth CC steps at 1 mg/l, 0.5 mg/l, 0.25 mg/l, 0.1 mg/l ~1.3 MGD (chemcal treatment) ~13 MGD (chemcal treatment) Concentraton (mg/l) CC rse wth flow level (however large frms wll have lower average captal costs).

12 2. Management Areas Pompton Upper Passac Lower Passac 22 wastewater treatment plants (WWTPs) requred to reduce total phosphorus concentratons from present average of 2.33 mg/l to a target of 0.4 mg/l.

13 2: Structure of Management Areas/Endponts 2a. Downstream trades only, each frm s own management area. Downstream trades only (seller located upstream), Water qualty standard met at all ponts n watershed, no hot spots, Frms wth lowest abatement costs must be located upstream. 2b. Three management areas two endponts. Non-Tdal Passac Rver Basn TMDL, Seller Buyer Upper Passac MA Pompton MA Lower Passac MA Upper Passac MA Yes No Yes Pompton MA Yes Yes Yes Lower Passac MA No No Yes Note: upstream trades between management areas not allowed.

14 2a: Tradng Ratos (Downstream Trades Only) Tradng Ratos: Seller always removes one more lb. 1, buyer receves 1 lb. allowance , buyer receves lbs. allowance. 0 (or empty cell), no drect physcal lnkage or buyer located upstream. TRADING RATIOS Sellers n rows, buyers n columns D1 D2 D3 P1 P2 P3 P4 P5 P6 P7 P8 W1 W2 W3 R1 W4 WQ T1 T2 P9 P10 P11 D D D P P P P P P P7 1 1 P8 1 W W W3 1 1 R1 1 W4 1 WQ T T2 1 P9 1 P P11 1

15 2b: Tradng Ratos (Three Management Areas) Tradng Ratos: Seller always removes one more lb. 1, buyer receves 1 lb. allowance , buyer receves lbs. allowance , buyer receves lbs. allowance. 0 (or empty cell), trades not allowed. TRADING RATIOS Sellers n rows, buyers n columns D1 D2 D3 P1 P2 P3 P4 P5 P6 P7 P8 W1 W2 W3 R1 W4 WQ T1 T2 P9 P10 P11 D D D P P P P P P P P W W W R W WQ T T P P P Note: 90% Worst case tradng rato used n TMDL

16 Baselne, No Trade Scenaro All frms must operate at 0.4 mg/l phosphorus correspondng to TMDL and ther hstorc average flow levels. Flow and concentraton levels converted to pounds. Annualzed total costs: O&M $1,924,000 CC $1,234,000 Total $3,159,000 Total captal nvestment - $12,811,000

17 Percent Total Cost Savngs Open Market Structured Blateral Trades Downstream trades only, each frm s own management area. Three management areas, two endponts 1.19 % 2.64 % Overall gans from trade low n open market. Gans ncrease (margnally) wth greater flexblty n tradng (.e. between rows n table above)

18 Percent Total Cost Savngs Open Market Structured Blateral Trades Downstream trades only, each frm s own management area. Three management areas, two endponts 1.19 % 5.82 % 2.64 % % Overall gans from trade low n open market. Gans ncrease margnally wth greater flexblty n tradng (.e. between rows n table above) Substantal gans of trade relatve to open market scenaro captured by not havng many frms upgrade beyond 0.5 mg/l. (.e. between columns n table above) Savngs n bottom rght cell attrbuted to upgrades of crtcally located, large waste treatment plants, who sell allowances to smaller frms so as to preempt upgradng.

19 Why Structured Blateral Trades Work Bear Creek, CO, each year a large dscharger (Evergreen Metro) reduces phosphorus release n a trade of pounds per year so that a smaller dscharger (Forest Hlls) does not have to undergo a costly upgrade to ts facltes. It s estmated that Forest Hlls saves over $1.2 mllon, the cost of an expensve system replacement that would be necessary to meet ther allocaton wthout a trade In exchange for Evergreen Metro reducng ther dscharge, Forest Hlls pays an undsclosed amount of money that has been estmated to be around $5,000 per year - Breetz et al., p. 28

20 Example of Sequental Restrctons WWTP Restrcton % Total Cost Savng Open-Market Trade 2.64 W1 > 0.50 mg/l 3.95 P7 > 0.50 mg/l 4.60 P1 > 0.50 mg/l 5.44 P6 > 0.50 mg/l 6.24 W3 > 0.50 mg/l 7.41 D1 > 0.50 mg/l 7.95 W2 > 0.50 mg/l 9.68 P3 > 0.50 mg/l P5 > 0.50 mg/l P2 > 0.50 mg/l R1 > 0.50 mg/l P4 > 0.50 mg/l D2 > 0.50 mg/l D3 > 0.50 mg/l P11 > 0.50 mg/l P10 > 0.50 mg/l 16.09

21 In Ths Example: 19 Structured Blateral Trades Seller Buyer W4 W1, W2, W3 R1 P1, P2, P3, P4, P6 P8 D1, P5, P7 T2 D1, D2, D3 P9 WQ T1 P10, P11 R1 R1 Green type ndcates sellers that wll have to upgrade.

22 Summary and Conclusons Open market tradng program based strctly on ndependent frms makng purchase/sales decsons by comparng market prce wth margnal abatement cost s: Unlkely to develop n ths watershed gven the lmted number of WWTPs and other characterstcs. Lkely to provde only relatvely modest cost savngs n ths watershed f an open-market tradng program develops. A structured blateral tradng program n whch operatng and captal costs are explctly consdered and a lmted number of mult-year contracts establshed between frms has the potental to generate larger watershed-wde gans from trade and cost savngs n ths watershed.

23 Extra Sldes Below for Reference Not Part of Presentaton

24 Movng Beyond Open Markets for Water Qualty Tradng: The Gans from Structured Blateral Trades n Small Watersheds Sado, Y. R.N. Bosvert, and G.L. Poe, Potental Cost Savngs from Dscharge Allowance Tradng: A Case Study and Implcatons for Water Qualty Tradng. ( Zhao, T., Y. Sado, R.N. Bosvert and G.L. Poe. Open Markets v. Structured Blateral Trades : Results of Economc Modelng of Pont-to-Pont Source Water Qualty Tradng n the Non-Tdal Passac Rver Basn ( )

25 Dscontnuous Fxed Costs

26 Full Cost Economc Optmum