Theoretical and Empirical Analyses on the Possibility of Water Quality Trading

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This research project investigated the viability of water quality trading (WQT) as a practical water quality conservation policy. We examined, theoretically and empirically, the welfare properties of the two WQT systems, the trading ratio system (TRS), proposed by Hung and Shaw (JEEM, 2005), and the damage-denominated trading ratio system (DTRS), proposed by Farrow et al.(Land, 2005). Our main findings were(i) TRS tends to preclude welfare-improving trades whereas DTRS tends to encourage welfare-decreasing trades under realistic conditions of river systems(ii) their relative efficiency depends on the geographic distribution of polluting sources in the river basin, and(iii) nonetheless, the efficiency loss due to failing to get the total supply of permits is larger than that due to failing to get the spatial prices of permits. Furthermore, we identified the total maximum daily load (TMDL) regulation and its associated WQT policy for phosphorus pollution in the Minnesota River basin as a study area for our empirical research. We estimated the (marginal) abatement costs of phosphorus removal at 44 water treatment plants under the TMDL regulation. The project is currently at the stage of implementing our empirical simulation work using the estimated abatement costs.