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The Economics of Water Quality Trading

Author

Listed:
  • Shortle, James S.
  • Horan, Richard D.

Abstract

Textbook pollution permit trading markets are appealing due to simple market designs and their ability to solve allocation problems without firm-specific information. Neither of these features is true for water quality markets, which may explain why emerging programs in this area have with few exceptions not fulfilled the promise of trading. We review water quality trading programs, and examine market design by focusing on three tasks that must be addressed to cost-effectively achieve environmental targets: (i) defining the point and nonpoint commodities to be traded, (ii) defining rules governing exchanges of the commodities, and (iii) setting caps on the commodity supplies so as to achieve an environmental target. Our examination of the third task, the cap and its role in determining trading rules (e.g., trading ratios), is novel. We examine this task from both an ecological and an economic perspective, and obtain new insights about the challenges of designing water quality trading programs.

Suggested Citation

  • Shortle, James S. & Horan, Richard D., 2008. "The Economics of Water Quality Trading," International Review of Environmental and Resource Economics, now publishers, vol. 2(2), pages 101-133, October.
    • Handle: RePEc:now:jirere:101.00000014
    DOI: 10.1561/101.00000014
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    Citations

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    Cited by:

    1. Frans P. Vries & Nick Hanley, 2016. "Incentive-Based Policy Design for Pollution Control and Biodiversity Conservation: A Review," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 63(4), pages 687-702, April.
    2. Filippelli, Raphael & Termansen, Mette & Hasan, Syezlin & Hasler, Berit & Hansen, Line & Smart, James C.R., 2022. "Water quality trading markets – Integrating land and marine based measures under a smart market approach," Ecological Economics, Elsevier, vol. 200(C).
    3. 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.
    4. Yeo, Boon-Ling & Anastasiadis, Simon & Kerr, Suzi & Browne, Oliver, 2012. "Synergies between Nutrient Trading Scheme and the New Zealand Greenhouse Gas (GHG) Emissions Trading Scheme (ETS) in the Lake Rotorua Catchment," 2012 Conference, August 31, 2012, Nelson, New Zealand 144270, New Zealand Agricultural and Resource Economics Society.
    5. 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.
    6. García, Jorge H. & Torvanger, Asbjørn, 2019. "Carbon leakage from geological storage sites: Implications for carbon trading," Energy Policy, Elsevier, vol. 127(C), pages 320-329.
    7. Caela O'Connell & Marzieh Motallebi & Deanna L. Osmond & Dana L. K. Hoag, 2017. "Trading on risk: The moral logics and economic reasoning of North Carolina farmers in water quality trading markets," Economic Anthropology, Wiley Blackwell, vol. 4(2), pages 225-238, June.
    8. Suzi Kerr, 2013. "Managing Risks and Tradeoffs Using Water Markets," Working Papers 13_13, Motu Economic and Public Policy Research.
    9. Gren, Ing-Marie & Carlsson, Mattias & Elofsson, Katarina & Munnich, Miriam, 2012. "Stochastic carbon sinks for combating carbon dioxide emissions in the EU," Energy Economics, Elsevier, vol. 34(5), pages 1523-1531.
    10. Krutilla, Kerry & Alexeev, Alexander, 2014. "The Political Transaction Costs and Uncertainties of Establishing Environmental Rights," Ecological Economics, Elsevier, vol. 107(C), pages 299-309.
    11. Galik, Christopher S. & Olander, Lydia P., 2018. "Facilitating markets and mitigation: A systematic review of early-action incentives in the U.S," Land Use Policy, Elsevier, vol. 72(C), pages 1-11.
    12. McDonald, Hugh J. & Kennedy, Marianna & Ngawhika, Simon & Kerr, Suzi, 2010. "Trading efficiency in water quality markets," 2010 Conference, August 26-27, 2010, Nelson, New Zealand 96949, New Zealand Agricultural and Resource Economics Society.
    13. Stephenson, Kurt & Shabman, Leonard, 2015. "Nutrient Assimilation Services for Water Quality Credit Trading Programs," RFF Working Paper Series dp-15-33, Resources for the Future.
    14. 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.

    More about this item

    Keywords

    Permit trading; Environmental markets; Environmental policy design; Nonpoint source pollution; Stochastic emissions;
    All these keywords.

    JEL classification:

    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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