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Water Quality Trading when Nonpoint Pollution Loads are Stochastic

Author

Listed:
  • Ghosh, Gaurav

    () (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))

  • Shortle, James

    () (Environmental and Natural Resources Institute, Department of Agricultural Economics and Rural Sociology, Pennsylvania State University)

Abstract

We compare two tradable permit markets in their ability to meet a stated environmental target at least cost when some polluters have stochastic and non-measurable emissions. The environmental target is of the safety-first type, which requires probabilistic emissions control. One market is built around the trading ratio, which defines the substitution rate between stochastic and deterministic pollution, and is modeled on existing markets for water quality trading. The other market is built around a new definition of the pollution credit as a multi-attribute good, where the attributes supply information to the market on the environmental risks associated with stochastic pollution loads. The market with multi-attribute credits is found to out-perform the trading ratio market in its ability to satisfy the safety-first environmental target at least cost. This result comes about because polluters are able to directly price risk in this market. In the trading ratio market risk is not a factor in polluters' trading decisions and is only controlled, through the trading ratio, under highly restrictive conditions.

Suggested Citation

  • Ghosh, Gaurav & Shortle, James, 2009. "Water Quality Trading when Nonpoint Pollution Loads are Stochastic," FCN Working Papers 10/2009, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  • Handle: RePEc:ris:fcnwpa:2009_010
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    Cited by:

    1. Dergiades, Theologos & Madlener, Reinhard & Christofidou, Georgia, 2012. "The Nexus between Natural Gas Spot and Futures Prices at NYMEX: Do Weather Shocks and Non-Linear Causality in Low Frequencies Matter?," FCN Working Papers 17/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Sep 2013.
    2. Bernstein, Ronald & Madlener, Reinhard, 2011. "Responsiveness of Residential Electricity Demand in OECD Countries: A Panel Cointegation and Causality Analysis," FCN Working Papers 8/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    3. Ghosh, Gaurav & Kwasnica, Anthony & Shortle, James, 2010. "A Laboratory Experiment to Compare Two Market Institutions for Emissions Trading," FCN Working Papers 18/2010, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    4. Michelsen, Carl Christian & Madlener, Reinhard, 2011. "Homeowners' Preferences for Adopting Residential Heating Systems: A Discrete Choice Analysis for Germany," FCN Working Papers 9/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    5. Rohlfs, Wilko & Madlener, Reinhard, 2013. "Challenges in the Evaluation of Ultra-Long-Lived Projects: Risk Premia for Projects with Eternal Returns or Costs," FCN Working Papers 13/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    6. Harmsen - van Hout, Marjolein & Ghosh, Gaurav & Madlener, Reinhard, 2013. "The Impact of Green Framing on Consumers’ Valuations of Energy-Saving Measures," FCN Working Papers 7/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    7. Rohlfs, Wilko & Madlener, Reinhard, 2011. "Multi-Commodity Real Options Analysis of Power Plant Investments: Discounting Endogenous Risk Structures," FCN Working Papers 22/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    8. Harmsen - van Hout, Marjolein & Ghosh, Gaurav & Madlener, Reinhard, 2013. "An Evaluation of Attribute Anchoring Bias in a Choice Experimental Setting," FCN Working Papers 6/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    9. Kraas, Birk & Schroedter-Homscheidt, Marion & PulvermĂĽller, Benedikt & Madlener, Reinhard, 2011. "Economic Assessment of a Concentrating Solar Power Forecasting System for Participation in the Spanish Electricity Market," FCN Working Papers 12/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).

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    Keywords

    Water Quality Trading; Stochastic Pollution; Market;

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