Effluent trading to improve water quality: what do we know today?

When discussing tradable permit systems relating to water, three fundamentally different fields of application can be identified (Kraemer and Banholzer, 1999). Firstly tradable permits for water, or tradable water abstraction rights, can be used for quantitative water resource management. Secondly tradable discharge rights, or tradable water pollution rights, can be use to protect and manage (surface) water quality. Thirdly there are tradable permits to use or consume water- borne resources, such as fish or the potential energy of water at height. In this overview we concentrate on the second case; i.e. the use of tradable water pollution rights. Watershed based trading or effluent trading, allows a pollution source to buy controls or permits that will reduce the amount of a problem pollutant elsewhere in the watershed or drainage basin. By buying such controls, the factory does not need to install abatement technologies to lower the discharge of that pollutant for its own plant. Parties involved in the trade want to either: (a) trade directly with each other; or (b) create a market of 'credits' that represent a specific amount of pollutant reduction, as is currently done with trading air emission reductions. The intent of trading is to achieve an expected reduction of a particular pollutant at a lower cost. The challenge with trading is to allow for innovative, market-based reforms without compromising the existing safeguards in environmental protection (National Wildlife Federation, 1999). It is important to distinguish between two types of pollution sources: point and nonpoint sources. Point sources discharge from a defined route, such as a pipe. Nonpoint source, on the contrary, have diffuse discharges that enter a river or lake as runoff from a wide geographic area. Examples of this last category include runoff from agricultural fields, roads and parking lots.