IDEAS home Printed from https://ideas.repec.org/a/kap/enreec/v82y2022i2d10.1007_s10640-022-00681-2.html
   My bibliography  Save this article

Pollutant Trading with Transport Time Lags

Author

Listed:
  • Aaron M. Cook

    (Penn State University)

  • James S. Shortle

    (Penn State University)

Abstract

Nutrient pollution represents one of the costliest and most challenging threats to water quality in the United States and is a major problem elsewhere in the world. Water quality trading is drawing significant interest from policy makers as a mechanism to manage nutrient loads cost-effectively. Overlooked in nutrient markets developed to date and in standard guidance for market design are the fundamental dynamics of nutrient pollution delivery processes. This paper develops rules to efficiently manage pollution trading between sources that differ in terms of how fast their pollution arrives at degraded waters. We develop a system of optimal time-varying discharge permits and lag trade ratios, as well as a simpler, second-best system of time-invariant permits and trade ratios that achieve optimal pollution loads in the long run steady state. Our second-best system accounts for lags in a way that is both pragmatic and grounded in economic theory. Results from a numerical simulation indicate that the total costs of the second-best system are within 0.2% of the first-best optimum, suggesting that the efficiency loss associated with the second-best design may therefore be of little practical concern.

Suggested Citation

  • Aaron M. Cook & James S. Shortle, 2022. "Pollutant Trading with Transport Time Lags," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 82(2), pages 355-382, June.
    • Handle: RePEc:kap:enreec:v:82:y:2022:i:2:d:10.1007_s10640-022-00681-2
    DOI: 10.1007/s10640-022-00681-2
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10640-022-00681-2
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10640-022-00681-2?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Simon Anastasiadis & Suzi Kerr & Marie-Laure Nauleau & Tim Cox & Kit Rutherford, 2014. "Does complex hydrology require complex water quality policy?," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 58(1), pages 130-145, January.
    2. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
    3. Shortle, James & Abler, David & Kaufman, Zach & Zipp, Katherine Y., 2016. "Simple vs. Complex: Implications of Lags in Pollution Delivery for Efficient Load Allocation and Design of Water-quality Trading Programs," Agricultural and Resource Economics Review, Cambridge University Press, vol. 45(2), pages 367-393, August.
    4. Hung, Ming-Feng & Shaw, Daigee, 2005. "A trading-ratio system for trading water pollution discharge permits," Journal of Environmental Economics and Management, Elsevier, vol. 49(1), pages 83-102, January.
    5. James S. Shortle & James W. Dunn, 1986. "The Relative Efficiency of Agricultural Source Water Pollution Control Policies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 68(3), pages 668-677.
    6. Krupnick, Alan J. & Oates, Wallace E. & Van De Verg, Eric, 1983. "On marketable air-pollution permits: The case for a system of pollution offsets," Journal of Environmental Economics and Management, Elsevier, vol. 10(3), pages 233-247, September.
    7. Jon Conrad & Lars Olson, 1992. "The economics of a stock pollutant: Aldicarb on Long Island," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 2(3), pages 245-258, May.
    8. Karen Fisher-Vanden & Sheila Olmstead, 2013. "Moving Pollution Trading from Air to Water: Potential, Problems, and Prognosis," Journal of Economic Perspectives, American Economic Association, vol. 27(1), pages 147-172, Winter.
    9. C. G. Plourde, 1972. "A Model of Waste Accumulation and Disposal," Canadian Journal of Economics, Canadian Economics Association, vol. 5(1), pages 119-125, February.
    10. James S. Shortle & Richard D. Horan, 2001. "The Economics of Nonpoint Pollution Control," Journal of Economic Surveys, Wiley Blackwell, vol. 15(3), pages 255-289, July.
    11. Richard D. Horan & James S. Shortle, 2005. "When Two Wrongs Make a Right: Second-Best Point-Nonpoint Trading Ratios," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(2), pages 340-352.
    12. Falk Ita & Mendelsohn Robert, 1993. "The Economics of Controlling Stock Pollutants: An Efficient Strategy for Greenhouse Gases," Journal of Environmental Economics and Management, Elsevier, vol. 25(1), pages 76-88, July.
    13. R. Scott Farrow & Martin T. Schultz & Pinar Celikkol & George L. Van Houtven, 2005. "Pollution Trading in Water Quality Limited Areas: Use of Benefits Assessment and Cost-Effective Trading Ratios," Land Economics, University of Wisconsin Press, vol. 81(2).
    14. Marc Ribaudo & Jeffrey Savage & John Talberth, 2014. "Encouraging Reductions in Nonpoint Source Pollution through Point-nonpoint Trading: The Roles of Baseline Choice and Practice Subsidies," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 36(3), pages 560-576.
    15. Richard D. Horan & James S. Shortle, 2017. "Endogenous Risk and Point-Nonpoint Uncertainty Trading Ratios," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 99(2), pages 427-446.
    16. Keeler, Emmett & Spence, Michael & Zeckhauser, Richard, 1972. "The optimal control of pollution," Journal of Economic Theory, Elsevier, vol. 4(1), pages 19-34, February.
    17. Griffin, Ronald C., 1987. "Environmental policy for spatial and persistent pollutants," Journal of Environmental Economics and Management, Elsevier, vol. 14(1), pages 41-53, March.
    18. James Shortle & Richard D. Horan, 2013. "Policy Instruments for Water Quality Protection," Annual Review of Resource Economics, Annual Reviews, vol. 5(1), pages 111-138, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. James Shortle & Richard D. Horan, 2017. "Nutrient Pollution: A Wicked Challenge for Economic Instruments," Water Economics and Policy (WEP), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1-39, April.
    2. James Shortle & Richard D. Horan, 2013. "Policy Instruments for Water Quality Protection," Annual Review of Resource Economics, Annual Reviews, vol. 5(1), pages 111-138, June.
    3. James Shortle, 2017. "Policy Nook: “Economic Incentives for Water Quality Protection”," Water Economics and Policy (WEP), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1-11, April.
    4. Valcu, Adriana Mihaela, 2013. "Agricultural nonpoint source pollution and water quality trading: empirical analysis under imperfect cost information and measurement error," ISU General Staff Papers 201301010800004451, Iowa State University, Department of Economics.
    5. Karen Fisher-Vanden & Sheila Olmstead, 2013. "Moving Pollution Trading from Air to Water: Potential, Problems, and Prognosis," Journal of Economic Perspectives, American Economic Association, vol. 27(1), pages 147-172, Winter.
    6. Michael Toman & Karen Palmer, 1997. "How should an accumulative toxic substance be banned?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 9(1), pages 83-102, January.
    7. Sheila M. Olmstead, 2010. "The Economics of Water Quality," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 4(1), pages 44-62, Winter.
    8. Cook, Aaron & Shortle, James, 2018. "Intertemporal Trading Ratios for Nutrient Pollution Control," 2018 Annual Meeting, August 5-7, Washington, D.C. 274845, Agricultural and Applied Economics Association.
    9. Yates, Andrew J. & Doyle, Martin W. & Rigby, J.R. & Schnier, Kurt E., 2013. "Market power, private information, and the optimal scale of pollution permit markets with application to North Carolina's Neuse River," Resource and Energy Economics, Elsevier, vol. 35(3), pages 256-276.
    10. Catherine L. Kling, 2011. "Economic Incentives to Improve Water Quality in Agricultural Landscapes: Some New Variations on Old Ideas," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 93(2), pages 297-309.
    11. Wang, Zhiyu, 2018. "Permit trading with flow pollution and stock pollution," Journal of Environmental Economics and Management, Elsevier, vol. 91(C), pages 118-132.
    12. Haiyan Liu & Roy Brouwer, 2023. "What is the future of water quality trading?," Contemporary Economic Policy, Western Economic Association International, vol. 41(1), pages 194-217, January.
    13. Toman, Michael A. & Withagen, Cees, 2000. "Accumulative pollution, "clean technology," and policy design," Resource and Energy Economics, Elsevier, vol. 22(4), pages 367-384, October.
    14. Horan, Richard & Shortle, James, 2014. "Point-Nonpoint Heresy?! An Endogenous Risk Explanation for Point-Nonpoint Trading Ratios Less than One," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170274, Agricultural and Applied Economics Association.
    15. Marianne Keudel, 2006. "Water Quality Trading: Theoretical and Practical Approaches," IWP Discussion Paper Series 01/2006, Institute for Economic Policy, Cologne, Germany.
    16. Olli Tahvonen, 1995. "Dynamics of pollution control when damage is sensitive to the rate of pollution accumulation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 5(1), pages 9-27, January.
    17. Ghosh, Gaurav & Kwasnica, Anthony & Shortle, James, 2010. "A Laboratory Experiment to Compare Two Market Institutions for Emissions Trading," FCN Working Papers 18/2010, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    18. Conrad, Klaus, 2001. "The Optimal Path of Energy and CO2 Taxes for Intertemporal Resource Allocation," Discussion Papers 602, Institut fuer Volkswirtschaftslehre und Statistik, Abteilung fuer Volkswirtschaftslehre.
    19. Nathaniel O. Keohane & Benjamin Van Roy & Richard J. Zeckhauser, 2000. "Controlling Stocks and Flows to Promote Quality: The Environment, With Applications to Physical and Human Capital," NBER Working Papers 7727, National Bureau of Economic Research, Inc.
    20. Reeling, Carson & Garnache, Cloé & Horan, Richard, 2018. "Efficiency gains from integrated multipollutant trading," Resource and Energy Economics, Elsevier, vol. 52(C), pages 124-136.

    More about this item

    Keywords

    Water quality trading; Lag times; Market design; Trade ratios; Nutrient pollution;
    All these keywords.

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:enreec:v:82:y:2022:i:2:d:10.1007_s10640-022-00681-2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.