Summary water rights trading

Summary Water Rights Trading

Water rights trading is a policy instrument that can be used for both water quality and water quantity management. Water rights trading is derived from the principle of emissions trading, which is a modern market-based instrument for air pollution. The principle of emissions trading is establishing a maximum (a cap) to pollutant emissions and allocating emission permits over the emitters. The emitters can trade their emission permits amongst them. When they are short of emission rights, they can choose between buying extra emission permits or implementing measures to reduce emissions. Because usually the cheapest choice will be made by emitters, emission reduction measures will be taken at the lowest possible costs throughout the area covered by the emissions trading system. In this way, both emitters and society as a whole can save money. At the same time the environmental goal will be achieved accurately. Moreover, innovative techniques for emission reductions are stimulated, because of the financial reward in the form of emission rights that can be sold. For water quality the instrument is interesting primarily for eutrophication (discharge of nutrients) and also temperature (discharge of cooling water). The instrument is less suitable for toxic and bioaccumulating substances. As for water quantity, possible applications are trading of water storage duties (a land owner is obliged to provide a specific water storage capacity, but he may also pay another land owner to do this instead), and trading of water use rights in the case of water shortages. In this report, water rights trading has been compared to the most relevant alternative instruments: command and controle (such as traditional permits and prescription of specific techniques), subsidies, levies, taxes and covenants (voluntary agreements). The advantages and disadvantages of trading depend on e.g. management goals, design and specific circumstances. In general, however, most important advantages of trading are cost effectiveness (costs savings), continuous stimulation of innovation, guaranteed achievement the emission target (providing adequate monitoring and enforcement) and liberty and flexibility for emitters.  In the USA much experience on the application of water emission trading already exists, especially for eutrophication. There is federal policy, including support for the development of trading projects, and the last 10 to 20 years many (pilot and experimental) projects have been initiated. Expected cost saving vary from 40 to 80%, compared to command and controle policy. Yet, it is too early to conclude that water quality trading is a definite success in the USA, in many cases because the total maximum daily loads (the emissions cap) have not been established yet. However, the US EPA believes in this instrument and is actively promoting it. The large amount of available reports and other literature from the USA can and should be used for the study and implementation of water quality trading in Europe. As for water quantity trading, most experience can be found on permits for water use rights, because globally lack of water is more common than surplus of water. Application of trading for water storage duties appears to be a worldwide novelty.  The design of a well functioning trading system requires special attention for the following issues: · In most cases, distribution of permits is the most controversial part. Although auctioning in theory is the best option, the permits are usually distributed for free, mainly in order to get stakeholders support for implementing a new system. · Compared to air pollution, the location of the discharge is important for water pollution. Therefore, special care should be taken to prevent problematic concentrations of discharges (hot spots). Several ways to prevent hot spots in a water quality trading system are described. · To assure that transfer of permits from seller to buyer does not result in a net increase in environmental damage, correction factors or trading ratios are often used. Correction factors are intended to compensate for differences in environmental damage caused by discharges on different locations, for example due to ecological or other location specific circumstances. · Transactions should be hindered as little as possible by so-called transactions costs, such as government duties to be paid, bureaucracy, regulation and (perceived) risks.  · To create sufficient support, all stakeholders should be involved in an early stage during the development of a trading system. · Unlike e.g. the global trading system for greenhouse gasses, specific local circumstances can and should be taken into consideration while developing the usually small-scale water quality trading systems. Conclusion of this exploratory study is that, taking into account the huge challenges water policy faces and the growing associated costs, this promissing policy instrument deserves more thorough study and attention in Europe. Further research should focus on:
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<li>transfer of American knowledge and experience,</li>
<li>different types of water rights trading (cap and trade, credit trading and hybrids),</li>
<li>ways to include non-points sources such as agriculture,</li>
<li>the legal and policy context of introduction of water rights trading in the Netherlands and Europe,</li>
<li>quantifying differences in the cost-effectiveness and potential cost savings,</li>
<li>public support and cultural issues.</li>
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