exploring trading in water quality credits as a cost ... · exploring trading in water quality...

Exploringtradinginwaterqualitycreditsasacost-effectiveapproachformanagingwaterqualityinthe

GreatBarrierReef

Jim Smart, Syezlin Hasan, Adrian Volders, Andrew Buckwell, Peter Dew, Graeme Curwen, Chris Fleming, Poh-Ling Tan, Michele Burford

NESP Science Day - Townsville20th November 2017

NESPTWQProject3.1.6

photoiStock

Project3.1.6objectives:

• determine thescope forwaterqualitycredittradingwithintheGBRcatchments

• develop appropriateconfigurations forcredittradingframeworksforDINandsediment inrepresentativecatchmentsalongtheReefcoast

• estimate howrevenuesfromcredittradingcouldpotentiallystimulateruraleconomiesandcreatejobsbyincentivising innovativebusinessopportunitiesforsupplyingnitrogenandsedimentcredits

STP

UrbanDev

Aquaculture

Farm1

Farm2

GullyRemediation

Demandforoffsets Supplyofoffsets

Bilateralcredittrading(perhaps‘sole-sourceoffsets’)

DINcreditsexpansion wetland

IPA

$$$

STP

UrbanDev

Aquaculture

Farm1

Farm2



DINcreditsexpansion wetland

practicechange

GullyRemediation

IPA

$$$

$$

STP

UrbanDev

Aquaculture

Farm1

Farm2


Bilateralcredittrading(and‘sole-sourceoffsets’)

DINcredits

$$

$$$

expansion

intensify

new

IPA

GullyRemediation

$$$

$$

STP

UrbanDev

Aquaculture

Farm1

Farm2


Bilateralcredittrading(and‘sole-sourceoffsets’)

$$$

DINcredits

$$

expansion wetland

practicechange

IPA

GullyRemediation$$$$

sedimentcredits

$$

$$$

STP

UrbanDev

Aquaculture

Farm1

Farm2



DINcredits

$$

$$$

expansion

intensify

new

IPA

GullyRemediation

$$$

$$

$$$$sedimentcreditsRegulator

STP

UrbanDev

Aquaculture

Farm1

Farm2



DINcredits

$$

$$$

expansion

intensify

new

IPA

GullyRemediation

$$$

$$

$$$$sedimentcreditsRegulator

Transactioncostshigh


EnvironAggregator

STP

Centralisedcredittrading(‘brokeredoffsets’,‘clearinghouse’)Demandforcredits@fixedoffsetpricing

Aquaculture

UrbanDev

expansionortighten

termsofEA

$

new

intensify

$$

$$

EnvironAggregator

STP $$

Demandforcredits@fixedoffsetpricing

Aquaculture

UrbanDev

$

$$

$$$$$

new

intensify

Centralisedcredittrading(‘brokeredoffsets’,‘clearinghouse’)

expansionortighten

termsofEA

EnvironAggregator

STP Farm1

Farm2

NGO

IPA

DINcredits$$


Aquaculture

UrbanDev

intensify

$

Supplyofcreditse.g.viareverseauction

DINcredits$$

$$$$$

new

bioreactor

coastalwetland

$$

$$

Practicechange(CtoB)

wetland

Centralisedcredittrading(‘brokeredoffsets’,‘clearinghouse’)

expansionortighten

termsofEA

EnvironAggregator

STP Farm1

Farm2

NGO

IPA


Aquaculture

UrbanDev

intensify

$

$

$$

$$$$$$$

new

bioreactor

DINcredits$$

DINcredits$$

MaximiseDINreductionwithinbudgetconstraint

$$

$$wetland

Centralisedcredittrading(‘brokeredoffsets’,‘clearinghouse’)Supplyofcredits

e.g.viareverseauction

coastalwetland


expansionortighten

termsofEA

EnvironAggregator

STP Farm1

Farm2

NGO

IPA


Aquaculture

UrbanDev

intensify

$

$

$$

$$$$$$$

new

bioreactor

DINcredits$$


$$

$$wetland



coastalwetland


expansionortighten

termsofEA

EnvironAggregator

STP Farm1

Farm2

NGO

IPA


Aquaculture

UrbanDev

intensify

$

$

$$

$$$$$$$

new

bioreactor

DINcredits$$


$$

$$wetland

sufficientDIN

reductions?



coastalwetland


expansionortighten

termsofEA

EnvironAggregator

STP Farm1

Farm2

NGO

IPA


Aquaculture

UrbanDev

intensify

$

$

$$

$$$$$$$

new

bioreactor

DINcredits$$


$$

$$wetland



coastalwetland


expansionortighten

termsofEA

EnvironAggregator

STP Farm1

Farm2

NGO

IPA


Aquaculture

UrbanDev

intensify

$

$

$$

$$$$$$$

new

bioreactor

DINcredits$$


$$

$$wetland

sufficientDIN

reductions?



coastalwetland


expansionortighten

termsofEA

offsettradingratio?

EnvironAggregator

STP Farm1

Farm2

NGO

IPA


Aquaculture

UrbanDev

intensify

$

$

$$

$$$$$$$$$

new

bioreactor

DINcredits$$

DINcredits$$

$$

Increase budgettoachieverequiredDINoffset

$$

$$wetland



coastalwetland


expansionortighten

termsofEA

EnvironAggregator

STP Farm1

Farm2

NGO

IPA


Aquaculture

UrbanDev

intensify

$

$

$$

$$$$$$$$$

new

wetland

bioreactor

DINcredits$$

DINcredits$$

$$


$$

$$

Transactioncostslow




coastalwetland


expansionortighten

termsofEA

EnvironAggregator

STP Farm1

Farm2

NGO

IPA


Aquaculture

UrbanDev

intensify

$

$

$$

$$$$$$$$$

new

wetland

bioreactor

DINcredits$$

DINcredits$$

$$


$$

$$

Transactioncostslow




coastalwetland


expansionortighten

termsofEA

offsettradingratio?

Conflictingtensions• Lowtransactioncostsencourageparticipation(bothdemand&supply)• ‘Flatrate’pricingforoffsetpurchaseandcreditsupplyreducestransactioncosts

• Notalloffsetsareequallybenign[varyoffsetpricesortradingratiobylocation]• Notallcreditsareequallyeffective[varyofferpricesbylocation]• Economicefficiency?– ‘chargefordamagerisk’&‘payforwhatyouget’

• Usetradingratiotocovervariationsinconsequencesandeffectiveness• Tradingratiotoohigh– notenoughdemandforoffsets• Tradingratiotoolow– notenough$$$$forcreditsupply

• Whatcanwelearnfromotherschemes?

EnvironAggregator

STP Farm1

Farm2

NGO

IPA

Demandforcredits

Aquaculture

UrbanDev

intensify

$

$

$$

$$$$$$$

new

bioreactor

DINcredits$$


$$

$$wetland

Supplyofcredits

coastalwetland


Demandforcredits

expansionortighten

termsofEA

EnvironAggregator

STP Farm1

Farm2

NGO

IPA

Demandforcredits

Aquaculture

UrbanDev

intensify

$

$

$$

$$$$$$$

new

bioreactor

DINcredits$$


$$

$$wetland

Supplyofoffsets

coastalwetland


Supplyofcredits

expansionortighten

termsofEA

• Broadranginginternationalliteratureonwaterqualitytradingexamined• Literaturereviewexamined30majorstudies onwaterqualitytradingand

morethan50individualwaterqualitytradingschemes.• MajorityofstudiesfocusedontheUnitedStateswhereTMDLimposedunder

theCleanWaterActhavefacilitatedstate/territory,watershedandlocaltradingschemes

• USEPAhasactivelyencouragedtradingascosteffectivewaytomeetregulatedpointsourceloadlimitsandaddressdiffusepollution

• Virtuallyalltradingschemesinvolvedpoint/non-pointtradingschemesandthetradingofnitrogenandphosphorus

• Typicalmarketinvolvesaheavilyregulatedpointsourcebuyingcreditsfromnon-regulatednon-pointsources

LiteratureReviewofNationalandInternationalWaterQualityTradingSchemes

• DemandDriversandSupplyBarriers– Tighteningregulatorystandardsforpointsourcedischargesonthebasis

ofrecognised environmentalproblems– Inadequateandpoorlyenforcedregulationisidentifiedasthegreatest

barriertoimplementingasuccessfulwaterqualitytradingscheme– Demandforcreditsfrompointsourcesislimitedbygenerouslicense

conditionsandpoorenforcement– Supplyofcreditsislimitedbylandownersconcernsthatdemonstrating

lowcostreductionsmayincreasecaseforregulation– Meaningfulsupplyanddemandinwaterqualitymarketswillonlyoccur

withstrongregulationandenforcementofpollutionallowancesforbothpointandnon-pointsources(King2005).


– SuccessFactors(USEPA)• singlepollutantincommonform,• appropriatewatershedconditions(proximityofdischargers,presenceoftributaries,orcomplexityofhydrology)thatallowreliablerelationshipsbetweenloadreductionsandwaterqualityinreceivingwaters,

• incrementalcostsoftradinglowrelativetotheincrementalcostsofothercontroloptions,

• appropriatemarketstructurefortransactingtrades


– OtherKeySuccessFactors• transparency• clearlydelineatedrolesandresponsibilities• thirdpartybrokers• stakeholderparticipationinruledevelopment• thirdpartyverification• moveawayfromstatesubsidiesofBMPpracticestostimulatecreditsupply


– KeyChallenges• concernsaboutincreasedliability,• potentiallyhightransactioncosts,• concernthatcomplicatedtradingproceduresmightresultindelaysinreceivingpayments

• resistancetobringinggovernmentemployeesontoprivateland,

• fearthattradingruleswillchange.


EnvironAggregator

STP Farm1

Farm2

NGO

IPA

Demandforcredits

Aquaculture

UrbanDev

intensify

$

$$

$$$$$$$$$$$

expansionortermsofEA

new

bioreactor

DINcredits$$

Maximisecreditsupplywithinbudgetconstraint

DIN$$

DIN$$wetland

Supplyofcredits

coastalwetland


Demandforcredits

NGO

DIN$

Airline

BioDcredits$$

‘Co-benefits’

Estimatingpotentialdemandforcredits• GISmappingofexistingpointsourcesandtheirlicenceconditions• predictionsfornewdevelopments:residential/industrialexpansion,farming/aquacultureexpansion

Stimulatingdemandforcredits• considergovernancearrangements• design‘demandside’structuretoencourageparticipation(butstillensure

environmentalobjectivesareachieved)• tighteningexistinglicence conditions• facilitateprivatemarketinvestmentsinReefcredits• opportunitiesfor‘co-benefits’todeepenthepoolofcreditbuyersand

strengthencreditdemand(e.g.carbon+nitrogen,otherGHG+sediment,carbon+nitrogen+biodiversityetc.)

EnvironAggregator

STP Farm1

Farm2

NGO

IPA

Demandforcredits

Aquaculture

UrbanDev

intensify

$

$$

$$$$$$$$$$$


new

bioreactor

DINcredits$$

Maximisecreditsupplywithinbudgetconstraint

DIN$$

DIN$$wetland

Supplyofcredits

coastalwetland


NGO

DIN$

Airline

BioDcredits$$

‘creditstacking’

Estimatingpotentialsupplyofcredits

• SpatialpredictionofDINlossesandgrossmarginsfromcane(&bananas)inTullycatchment

• Model@250mx250mresolutionfromearlierNESPN-tradingproject• OverlayDINlosspredictionsfromReefProjectPrioritiser tool

EstimatingpotentialsupplyofcreditsSpatialpredictionofDINlossesandgrossmarginsfromcane(&bananas)inTullycatchment

• simulate@250mx250mresolutionfromearlierNESPN-tradingproject• overlayDINlosspredictionsfromReefProjectPrioritiser tool

• predictspatially-specificcreditsupply(DINcredits@source),basedoncoveringforgonegrossmarginand‘transport’downcatchmenttoReefLagoon

• estimatesupplycurvefortotalcreditexpenditurevsDINreductioninreceivingwater

• coveringforgonegrossmargin• includetransactioncosts• include%non-participation

Supplycost($)

DINloadreduction(tonnes)

EstimatingpotentialsupplyofcreditsSpatialpredictionofDINlossesandgrossmarginsfromcane(&bananas)inTullycatchment


• predictspatially-specificcreditsupply(DINcredits@source),basedonforgonegrossmarginand‘transport’downcatchmenttoReefLagoon

• estimatesupplycurvefortotalcreditexpenditurevsDINreductioninreceivingwater

• coveringforgonegrossmargin• includetransactioncosts• include%non-participation

• creditstackingopportunities?• sediment,carbon,biodiversity

Supplycost($)


QuantifyingpotentialsupplyofcreditsSpatialpredictionofDINlossesandgrossmarginsfromcane(&bananas)inTullycatchment


• predictspatially-specificcreditsupply(DINcredits@source),basedonforgonegrossmargin,then‘transport’downcatchmenttoReefLagoon

• estimatesupplycurveforcreditexpenditurevsDINreductioninreceivingwater

• basedonforgonegrossmargin• includetransactioncosts• include%non-participation

Farmers’compensationrequirements

Supplycost($)


WaterqualityimprovementsandlandmanagementinNidderdale UK

Importanceoflandmanagementactivities

HelptoImprovewaterquality

Inorganic Fertilizer Farmyard Manure

Grip Blocking

AppliestoInbyeGrass-land

Applies to

Moor-land

Managementactivities

Inorganic fertiliser

Farmyardmanure

GripBlocking

Compensationpaymentsandagreementlength

Agreementlength

Compensationpayment

Choicecard#1

ProgramX

ProgramY

ProgramZ

Choicecard#1

üProgramX

ProgramY

ProgramZ

Choicecard#2

ProgramX

ProgramY

ProgramZ

£25peracre

£2peracre

£15peracreAllow25%ofgripstobeblocked

Choicecard#2

ü

ProgramX

ProgramY

ProgramZ

£25peracre

£2peracre

£15peracreAllow25%ofgripstobeblocked

Fertiliserreduction(%)

Compensationrequired($)

0 25 50

Fertiliserreduction(%)

Compensationrequired($)

0 25 50

Farmersoverallaverage

Dairy

Beef

Compensationrequirements

• Choiceexperimentswithfarmers canbeusedtoestimate:• farmers’compensationrequirements for differentlevelsofchangetomanagementpracticesand differenttypesoflandusechange

• howconfiguration ofcreditpurchasing/monitoring/evaluationarrangementsaffectcompensationrequirements

• howcompensationrequirementsareinfluencedbycharacteristicsoffarmbusiness andsocio-demographicsoffarmers

Supplycost($)


Basedoncompensationrequirementsfromchoiceexperiments

For more information please contact:Jim Smart: j.smart @ griffith.edu.au

Thankyouforlistening

• Theoreticalbasisofwaterqualitytrading

– Tradingmustoccurwithinafixedregulatoryemissionscap(TMDL,Nonetworsening,Targets)

– Markettransactionreallocateemissionsunderthecapbytrading– Theexistenceofsignificantcostdifferentialsinpollutionabatementcosts

betweenemittersfacilitatestrading– Tradingallowsmeetingofcomplianceconditionsatlowestcost– Diffusepollutioncanbeaddressedthroughpracticeandlandusechange

andtradingallowsthegenerationofanincomestreamtosupportsuchactivities


– Otherkeychallengesidentified– InsufficientGovernmentresourcestoimplementtradingframework

– Lackofclearwaterqualitystandardsforsomepollutants– Liabilityconcerns– Legalchallengestotrading– Administrativeburdens– Ratios– CapAllocation

» Rewardingpoorhistoricalperformance» Virginiabestmanagementpracticequalification


• 3CaseStudies(example)»MinnesotaSugarBeetCooperative

• 1demandsource– wwtp tomeetnewnodischargelegislation

• Phosphorousallocationbeingtraded• Offsetproviders– cooperative- farmersmeetingBMP• Tradingratio2.6:1• 600nonpointtraders• Thirdpartyauditors• TrustfundestablishedtoimplementBMP

»Others- LakeTaupo – GreaterMiamiWaterQualityTradingProgram


• TheKeyQuestionsraisedbytheLiterature» Arethekeydriversinplace(nitrogenandsediment)

• Pollutioncaporallowanceacrossallsources• Legislation– enforcement• Sufficientdemandandsupply• Clearlydefinedunitoftransaction• Sufficientcostdifferential• Marketdesignandtype• Economicfeasibilityandefficiency


• Sediment(InitialAnalysis)» Limitedpointsources» Limitedlegislativeresponsibilities» Significantprivateandgovernmentinvestment» Suitablevoluntarymarketorsolesourceoffset» Testinglevelsofdemand» Testinglevelofsupply


• Nitrogen(InitialAnalysis)» Numberofregulatedpointsources» Emerginglegislativeresponsibilities» Significantprivateandgovernmentinvestment» Emergingmarketstructures» Potentiallysuitableforsmartmarketdesign» Testinglevelsofdemand(scenarios)

• Current• Nonetworsening• 80%reduction

» Testinglevelofsupply• Compensationrequirementsperunitofcreditgeneration


Discussion&updatemeetingwithDEHPOfficeofGBR:16th November2017

1. Shortdescriptionofproject2. Presentationofworksofar

a) Reviewofhowoffsets,funds&creditsoperateb) Findingsfromliteraturereviewc) Demanddriversd) Supplymodellinge) Choiceexperimentsf) Sediments

3. Generaldiscussion

– TypesofTradingSchemes

MarketStructure Advantages Disadvantages

Exchanges Lowtransactioncost Requiresuniformityincommoditytobetraded

Bilateral negotiations Provideslatitudeforbuyerwhencommoditiesarenotuniform

Hightransactioncosts

Clearinghouses Reducedtransactioncosts,can enablegreatermonitoringbygovernmentagencies

Addedresponsibilityforthirdpartyrunning theclearinghouse

Solesourceoffsets Suitableincaseswherenoformalmarketsexist,loweroversightcoststhaninmoreformalmarkets

Hightransactioncosts

Voluntarymarkets Provide fundingforoffsetprojects,allowsearlyadopterstoreducefootprintandbuildpublicconfidenceforfuturemorecomplexmarkets

Allowsfreeriding,unlikely toachieveenvironmentalgoalsontheirown

Smartmarkets Lowtransactioncosts,canoptimise allocationofpollutionrightsgivencomplexvariationintransfercoefficients

Needameanstoinduceallsourcestoparticipate


CreditMarket

STP Farm1

Farm2

NGO

IPA

Demandforcredits Supplyofcredits

catchmentloadcap

Smartmarketcredittrading

Aquaculture

UrbanDev

intensify


$$

$$$$$$$$$

dDINcredits

aDINcredits

xDINcredits

yDINcredits

zDINcredits

$

$$$

$$

$$$

Offersforcreditsupply

Maximisegainsfromtradesubjecttocatchmentloadcap&bidoffermatch

Bidsforcreditpurchase

$$$

$$$$

CreditMarket

STP Farm1

Farm2

NGO

IPA


catchmentloadcap

Credittrading

Aquaculture

UrbanDev

intensify


CreditMarket

STP Farm1

Farm2

NGO

IPA


catchmentloadcap


Aquaculture

UrbanDev

intensify


CreditMarket

STP Farm1

Farm2

NGO

IPA


catchmentloadcap


Aquaculture

UrbanDev

intensify


$$

$$$$$

xDINcredits

yDINcredits

zDINcredits

$$$

$$$$

CreditMarket

STP Farm1

Farm2

NGO

IPA


catchmentloadcap


Aquaculture

UrbanDev

intensify


$$

$$$$$

xDINcredits

yDINcredits

zDINcredits


$$$

$$$$

PracticeCinitialalloc.

PracticeCinitialalloc.

CreditMarket

STP Farm1

Farm2

NGO

IPA


catchmentloadcap


Aquaculture

UrbanDev

intensify


$$

$$$$$

dDINcredits

aDINcredits

xDINcredits

yDINcredits

zDINcredits

$

$$$

$$

$$$



$$$

$$$$

CtoB

coastalwetland

CtoB

wetland

CreditMarket

STP Farm1

Farm2

NGO

IPA


catchmentloadcap


Aquaculture

UrbanDev

intensify


$$

$$$$$

dDINcredits

aDINcredits

xDINcredits

yDINcredits

zDINcredits

$

$$$

$$

$$$




$$$

$$$$

CreditMarket

STP Farm1

Farm2

NGO

IPA


catchmentloadcap


Aquaculture

UrbanDev

intensify


$$

$$$

$$$$

$$$$$

dDINcredits

aDINcredits

xDINcredits

yDINcredits

zDINcredits $$

$$$


Maximisegainsfromtradesubjecttocatchmentloadcap


CreditMarket

STP Farm1

Farm2

NGO

IPA


catchmentloadcap


Aquaculture

UrbanDev

intensify


$$

$$$

$$$$

$$$$$

dDINcredits

aDINcredits

<xDINcredits

<yDINcredits

$$

$$$




CreditMarket

STP Farm1

Farm2

NGO

IPA


catchmentloadcap


Aquaculture

UrbanDev

intensify


$$

$$$

$$$$

$$$$$$$$$

dDINcredits

aDINcredits

<xDINcredits

<yDINcredits

$$

$$$




CreditMarket

STP Farm1

Farm2

NGO

IPA


catchmentloadcap


Aquaculture

UrbanDev

intensify


$$

$$$$$$$$$

dDINcredits

aDINcredits

xDINcredits

yDINcredits

zDINcredits

$

$$$

$$

$$$




$$$

$$$$

Quantifyingpotentialdemandforcredits

• GISmappingofexistingpointsourcesandtheirlicenceconditions• Predictionsfornewdevelopments:residential/industrialexpansion,farming/aquacultureexpansion– phonediscussionswithcouncilplanningdepartments

Pointsources– fromDEHPEnvironmentalAuthoritiesregister

http://environment.ehp.qld.gov.au/env-authorities/

Pointsourcesexpansion– fromStatePlanningPolicy

http://www.dilgp.qld.gov.au/planning/state-planning-instruments/state-planning-policy.html

Pointsourcesexpansion– informationfrom…

http://www.advancecairns.com/files/media/original/027/675/a3f/advc12654-tnqrep-64ppa4e.pdf

Pointsources– fromWetlandInfo

https://wetlandinfo.ehp.qld.gov.au/wetlands/assessment/monitoring/point-source-release/sewage-treatment-facilities/

Pointsources– fromWetlandInfo

exploring trading in water quality credits as a cost ... · exploring trading in water quality...

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