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Intertemporal Trading Ratios for Nutrient Pollution Control

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  • Cook, Aaron
  • Shortle, James

Abstract

There is significant interest in the use of market mechanisms for controlling nutrient pollution, one of the most challenging threats to water quality in the United States and elsewhere. This type of pollution often is characterized by considerable lag times between discharge from the pollution source and delivery to the impaired waters. We investigate the implications of these lags for efficient pollution reduction markets and compare two alternative market designs: 1) forward markets where participants trade pollution deliveries directly and 2) a trading ratio system where they trade contemporaneous discharges. While a system of first-best trade ratios is complex in early periods, this system can produce the optimal steady state loads using a simple trading rule. We also find that while first-best trade ratios are greater than one when there are lag disparities between trading partners, second-best trade ratios under the same lag disparities may be less than one when the overall cap on discharges is set sufficiently small.

Suggested Citation

  • Cook, Aaron & Shortle, James, 2018. "Intertemporal Trading Ratios for Nutrient Pollution Control," 2018 Annual Meeting, August 5-7, Washington, D.C. 274845, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea18:274845
    DOI: 10.22004/ag.econ.274845
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    File URL: https://ageconsearch.umn.edu/record/274845/files/Cook%20Shortle%20Invited%20Paper.pdf
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    References listed on IDEAS

    as
    1. Shortle, James, 2013. "Economics and Environmental Markets: Lessons from Water-Quality Trading," Agricultural and Resource Economics Review, Cambridge University Press, vol. 42(1), pages 57-74, April.
    2. James Shortle, 2017. "Policy Nook: “Economic Incentives for Water Quality Protection”," Water Economics and Policy (WEP), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1-11, April.
    3. Richard D. Horan & James S. Shortle, 2005. "When Two Wrongs Make a Right: Second-Best Point-Nonpoint Trading Ratios," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(2), pages 340-352.
    4. Khanna, Madhu & Shortle, James, 2017. "(Theme Overview) Preserving Water Quality: Challenges and Opportunities for Technological and Policy Innovations," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 32(4), December.
    5. Shortle, James & Abler, David & Kaufman, Zach & Zipp, Katherine Y., 2016. "Simple vs. Complex: Implications of Lags in Pollution Delivery for Efficient Load Allocation and Design of Water-quality Trading Programs," Agricultural and Resource Economics Review, Cambridge University Press, vol. 45(2), pages 367-393, August.
    6. 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.
    7. Richard D. Horan & James S. Shortle, 2017. "Endogenous Risk and Point-Nonpoint Uncertainty Trading Ratios," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 99(2), pages 427-446.
    8. Karen Fisher-Vanden & Sheila Olmstead, 2013. "Moving Pollution Trading from Air to Water: Potential, Problems, and Prognosis," Journal of Economic Perspectives, American Economic Association, vol. 27(1), pages 147-172, Winter.
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    Keywords

    Demand and Price Analysis; Environmental Economics and Policy;

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