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Trading efficiency in water quality markets

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Author Info

  • McDonald, Hugh
  • Kennedy, Marianna
  • Ngawhika, Simon
  • Kerr, Suzi

Abstract

A crucial factor in the success of any water quality trading market is its ability to cost-effectively reallocate nutrient allowances from initial holders to those users who find them most valuable; the market's trading efficiency. We explore causes of and solutions to trading inefficiency by assessing the impact on participant transaction costs and the tradeoffs that occur as a result of policy design decisions. Differing impacts of baseline-credit and cap-and-trade markets, the impact of trading rules and monitoring regimes are discussed in this endeavour. Possible solutions of increased information flows and regulatory certainty are also discussed. We then apply this framework to three existing water quality trading schemes; two from the US, and one from New Zealand. We use this experience to extract general recommendations for policy makers looking to maximise trading efficiency when designing future water quality trading markets.

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File URL: http://purl.umn.edu/96949
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Bibliographic Info

Paper provided by New Zealand Agricultural and Resource Economics Society in its series 2010 Conference, August 26-27, 2010, Nelson, New Zealand with number 96949.

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Date of creation: Aug 2010
Date of revision:
Handle: RePEc:ags:nzar10:96949

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Web page: http://www.nzares.org.nz/
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Related research

Keywords: Nutrient trading; trading efficiency; water quality markets; transaction costs; Community/Rural/Urban Development; Environmental Economics and Policy; Health Economics and Policy; International Relations/Trade;

References

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  1. King, Dennis M., 2005. "Crunch Time for Water Quality Trading," Choices, Agricultural and Applied Economics Association, vol. 20(1).
  2. 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.
  3. Richard T. Woodward, 2003. "Lessons about Effluent Trading from a Single Trade," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 25(1), pages 235-245.
  4. Lata Gangadharan, 2000. "Transaction Costs in Pollution Markets: An Empirical Study," Land Economics, University of Wisconsin Press, vol. 76(4), pages 601-614.
  5. Juan-Pablo Montero, 1999. "Voluntary Compliance with Market-Based Environmental Policy: Evidence from the U.S. Acid Rain Program," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 998-1033, October.
  6. Stephenson, Kurt & Bosch, Darrell J., 2003. "Nonpoint Source And Carbon Sequestration Credit Trading: What Can The Two Learn From Each Other?," 2003 Annual meeting, July 27-30, Montreal, Canada 22229, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  7. Kelly Lock & Suzi Kerr, 2008. "Nutrient Trading in Lake Rotorua: Overview of a Prototype System," Working Papers 08_02, Motu Economic and Public Policy Research.
  8. Stavins Robert N., 1995. "Transaction Costs and Tradeable Permits," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 133-148, September.
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Cited by:
  1. Parsons, Oliver, 2012. "Community Governance: An Alternative Approach to Regulation and Market Mechanisms for Management of Nitrogen Loss," 2012 Conference, August 31, 2012, Nelson, New Zealand 136053, New Zealand Agricultural and Resource Economics Society.

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