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The Economics of Water Quality Trading


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


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.

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Bibliographic Info

Article provided by now publishers in its journal International Review of Environmental and Resource Economics.

Volume (Year): 2 (2008)
Issue (Month): 2 (October)
Pages: 101-133

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Handle: RePEc:now:jirere:101.00000014

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Related research

Keywords: Permit trading; Environmental markets; Environmental policy design; Nonpoint source pollution; Stochastic emissions;

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Cited by:
  1. 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, New Zealand Agricultural and Resource Economics Society 144270, New Zealand Agricultural and Resource Economics Society.
  2. McDonald, Hugh & Kennedy, Marianna & Ngawhika, Simon & Kerr, Suzi, 2010. "Trading efficiency in water quality markets," 2010 Conference, August 26-27, 2010, Nelson, New Zealand, New Zealand Agricultural and Resource Economics Society 96949, New Zealand Agricultural and Resource Economics Society.
  3. Suzi Kerr, 2013. "Managing Risks and Tradeoffs Using Water Markets," Working Papers, Motu Economic and Public Policy Research 13_13, Motu Economic and Public Policy Research.
  4. James Shortle & Richard D. Horan, 2013. "Policy Instruments for Water Quality Protection," Annual Review of Resource Economics, Annual Reviews, Annual Reviews, vol. 5(1), pages 111-138, June.
  5. Gren, Ing-Marie & Carlsson, Mattias & Elofsson, Katarina & Munnich, Miriam, 2012. "Stochastic carbon sinks for combating carbon dioxide emissions in the EU," Energy Economics, Elsevier, Elsevier, vol. 34(5), pages 1523-1531.


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