Water Emissions Trading on the agenda in Holland
As a side event to the conference 'European Water Governance: challenges for spatial planning, Law and economics' in Utrecht, Holland, january 2010, a meeting took place on Water Emissions Trading (WET, Water Quality Trading). The central issue was: Under what conditions would Water Emissions Trading be beneficial to water management in Europe? Speakers were:
- Michiel Wind, Deltares en Eco-consult Environmental Economics,
- Sean Blacklocke, independent environmental consultant,
- Rob van der Veeren, Rijkswaterstaat, Waterdienst.
WET is based on the same cap-and-trade principle as emissions trading in air pollution, but the practical application is quite different. The central mechanism is that the capacity of ambient air or water to assimilate the emissions to safe levels (i.e., assimilative capacity) is set as the safe emissions level ‘cap’. Permits to use this assimilative capacity are allocated among interested emitters. These permits can be traded amongst emitters. In theory this leads to faster achievement of emission targets, and in a overall less expensive way.
An important difference between trading in greenhouse gases and water pollutants is that in the case of water pollution, location of the emissions is much more important. First, trading cannot extend beyond catchments (watersheds) because reductions in pollutants in a distant catchment will not offset foregone reductions in a target catchment. Also, hot spots can develop more easily in WET if too many permits are used in the same area at the same time. However, in the USA, WET has been experimented with for over 20 years, and a lot of literature and expertise is available to address these challenges.
In his presentation Michiel Wind showed that in general one shouldn't compare WET to the European Emissions Trading Scheme (ETS). In an American book on water quality trading, four different basic types of WET are described, and only one comes close to the ETS. The other three are mostly small-scaled programs that resemble individual offsetting rather than a large and liquid market. Yet, in a number of cases, it has been demonstrated that WET leads to cheaper and faster achievement of environmental targets.
In Europe there is still very little experience with WET. A limited number of studies has been done, but WET has not been implemented anywhere in Europe to date. That may change however, as the Swedish EPA is working on a hybrid trading system, combined with emission levies for nutrient emissions from agriculture. Furthermore, there is a detailed proposal for implementing WET for nutrients for the Baltic Sea.
Juridical aspects, existing regulation
From research initiated by Rob van der Veeren, it seems that there is little room for WET in The Netherlands and perhaps EU-wide due to existing European regulation, especially the Integrated Pollution Prevention and Control Directive and the Nitrates Directive. These laws prohibit emitting more than what Best Available Technology (BAT) dictates (e.g., a maximum of 250 kg of nitrogen/hectare in the Nitrates Directive). According to Michiel Wind however, there is room for cost-saving trades also in the case of emitting less than what present regulation allows. He illustrates this with the following figure:
In this figure it is assumed that present regulation is insufficient to achieve water quality targets, emissions level 1. This scenario is quite common in the USA. Due to a restrictive allocation of emission permits, emittors will have to lower averaged emissions even further than the level resulting from BAT (emissions level 2). According to Sean Blacklocke, this is possible because each sector or subsector-specific BAT does not necessarily entail the 'absolutely best' available technologies for every individual emitter within the sector or subsector. This is due to the fact that no two emittors are ever exactly identical in terms of relevant pollution control technologies and costs (e.g., the cost of power as a factor of production often varies between emittors within the same BAT category). Also, newer technologies may be lacking in these lists, as BAT is only revised periodically. This means that in actual practice, despite the misnomer of BAT, there remain plenty of potential opportunities to achieve additional pollutant reductions in more cost-effective ways.
Imagine emission permits being issued up to emissions level 1. Emitters A and E can reduce at a relatively low cost and sell permits to emitters B, C and D. Existing regulation prevents C and D from buying more permits than level 2. On average, the cap (emissions level 1) is achieved precisely.
A solution to juridical hurdles could be gaining pilot-project status for experimentation with WET (partial exemption from existing regulation), like what was done by the US EPA for the Tar-Pamlico Trading Scheme in the USA. In due time, relevant European directives could be changed, as has been done to make the European ETS possible.
It is not easy to know how much effect reduction measures actually yield in practice. In the USA one generally uses rules of thumb and standard effects of clearly defined Best Management Practices. Also, Sean Blacklocke points out that more detailed monitoring is required in the future, also when other policy measures than WET are chosen. Rob van der Veeren pointed out that due to slow transportation through soils, some measures in agriculture will not yield effects in surface water until 40 years. Sean Blacklocke notes that such measures with very long-term effects would not be ideal for immeditate WET experimentation.
In the USA water emission permits usually are issued and traded once every five years. Also in this respect WET is quite different from the EU-ETS. In spite of this, transaction costs may become prohibitively high, although often transaction costs are carried by the authorities and therefore do not significantly hamper transactions. Transaction costs can be controlled in several ways, such as the automated online trading via Nutrient.net of the World Resources Institute.
Distributional and social aspects
In Dutch parliament a motion has been adopted, stating that the Water Framework Directive should not cost the agricultural sector anything extra. Critics think that this could be a problem for WET because farmers might have to buy expensive emission permits. But it is possible to allocate permits for free and relatively generously to farmers, which they can then to sell when they take reduction measures. In this way, the Polluter Pays Principle is respected on the level of individual farmers, although not on the level of the agricultural sector as a whole. If a farmer chooses not to make emission reductions beyond those already required by existing regualtions, he foregoes the extra income. So in practice given the parliamentary motion, farmers would only participate in WET schemes in Holland as permit sellers.
In Holland and Europe, WET is most promising in relation to implemeting the Water Framework Directive more efficiently and more effectively. The promise of a cheaper and faster way of addressing water quality problems from nutrients perhaps holds the greatest potential for WET. However, in a master of science thesis for the Technical University Delft, The Netherlands, WET was also recommended as an appropriate application for controlling cooling water discharges to the German part of the river Rhine.
For more information and comments, please contact Michiel Wind.