Background
Cap and trade is an environmental policy currently used to reduce industrial pollutants such as carbon monoxide and sulfur dioxide. Usually a central governmental body sets a cap on the amount of emissions that can be released for the entire nation and issues permits or allowances to different companies according to the cap. Those permits can be free, auctioned, or both. The cap is lowered over time to reduce the permissible amount of pollutants in air.
The three major existing cap and trade emission programs are the European Union Emission Trading System (EU ETS) in Europe, the Acid Rain Program (ARP) in the U.S., and the regional NOx Budget Trading Program in the U.S. There are currently twenty-one active and pilot programs in water quality trading in the world, thirteen of which are trading programs rather than offset programs. Two of the six most active markets in those trading programs are outside of the U.S. and Europe. They are the Hunter River Salinity Trading (HRSTS) in Australia and the South Nation River Watershed Trading in Canada [20].
An evaluation of the effects of these programs lends insight into whether cap and trade programs can be used effectively for wastewater pollution on a global scale. Mission 2017 recommends a cap and trade system be placed on wastewater pollution. We must balance between the two extremes of giving everyone the right to pollute through water and only letting the most efficient firms to pollute through water. Mission 2017 aims to maximize efficiency while putting a price on pollution in order to limit its extent.
The big picture is that by encouraging and requiring all countries who make significant contributions to global pollution to participate in this program we will increase good will and communication while tackling a huge global environmental problem that affects everyone regardless of their political beliefs. It is our hope that by incentivizing lower emissions in water and air, everyone benefits.
The Solution: Cap and Trade for Water
For each country a governmental commission would determine the cap on pollution and the total amount of permits based on the cap. The commissions should issue a certain number of free permits (allowances) to industries based on the amount of pollution in wastewater calculated from data of 10 percent of the most efficient firms in the industry. The commissions will consider ‘pollution’ to be the conventional pollutants they define in their own country. The commissions can use the conventional pollutants listed under the Clean Air Act in the U.S. (Appendix A to part 403, reprinted after 40 CFR 423.17) [12] as a guide to determine their own conventional pollutants. The remaining permits would be sold by the agency to the firms, who would be required to obtain the amount of permits they are projected to need.
Benefits of cap and trade versus other types of regulations
1. Cap and trade benefits the economy because it creates a new market.
If a firm ends up having surplus permits, it may sell them to other firms. If a firm is short on permits, it can either buy permits from other firms or borrow from forward allocations, meaning that they can borrow part of their allowed permits for the next period. Cap and trade on wastewater pollution provides a good amount of flexibility by creating a market for water pollution and encouraging a reduction of it.
Table 1: Data collected from Acid Rain Program, which aims to reduce SO2 in the air in the U.S. [13]
*Total value of allowance market is a snapshot based on the average nominal price as of July 1, 2007 ($325) and 2007 total allowance volume.
As seen from the chart above, the ARP created a new market. In 2007, it has encouraged 4,700 transactions and created a $5.1 billion SO2 market. 54 percent of the allowances transferred happened between firms that didn’t have prior trading interactions.
Figure 1: A cross-border flow graph from the EU ETS which regulates carbon dioxide emissions [10].
When EU created ETS, most countries in the EU started trading with one another. Figure above shows that most countries in the EU both exported and imported a high amount of permits. The horizontal axis indicates the number of other Member States in which EUAs [permits] issued by the indicated Member State were surrendered. The vertical axis indicates the number of other Member States from which EUAs surrendered by installations in the indicated Member State were imported [10].
2. Cap and trade reduces pollution.
Cap and trade makes firms take the negative externality of pollution into account so they have the incentive to pollute less. This changes the way people view the common resources, like the shared atmosphere. Instead of believing in the right to pollute common resources for economic gain, the companies realize that they need to take the negative externalities they produce into account as part of the true cost of products.
The Acid Rain Program (ARP) in the U.S. has proven to be successful. At the current cap, the ARP had reduced the amount of SO2 emission to half of the amount of SO2 pollution in 1980. According to a 2003 Office of Management and Budget study (PDF) , the annual benefit the program brought exceeded the cost by more than a factor of 40 [14].
The National Acid Precipitation Assessment Program Reported in 2011 that “NOx emissions [had been reduced] to 2 million tons in 2009, 67% lower than 1995 emissions and substantially exceeding the Title IV goal” and the “human health benefits of improved air quality are estimated to be in the range of $170 billion to $430 billion in 2010 alone” while the estimated cost for Title IV, which includes the Regional NOx Budget Trading and ARP, was about $3 billon [24].
Figure 3: Data the EPA in New South Wales in Australia published in 2013 for its Hunter River Salinity Trading (HRSTS), which aims to reduce amount of chemicals in Hunter River, from 2011-2012 [24]
The graph from HRSTS showed the success of the program in reducing salinity in water. As seen from graph, the upper sector of the river fully reached the salinity cap. Although the middle and lower sector exceeded for 1-4 charge periods but it was caused by unexpected salt distribution from local rainfall flushing away chemicals from tributaries of the Hunter River.
Environment Canada reported its South Nation River Watershed Trading program in Canada to be effective. The South Nation River Watershed Trading program has reduced 9966 kg/year the amount of phosphorus released to South Nation watershed. The reduction has also reduced the amount of bacteria and other pathogens and other contaminants to waterways. Not only was the reduction in phosphorus successful, the fishing industry also benefited as there is less sediment in creeks, improved quality of water, and an increase in fish quantity and diversity [21].
As seen from the above statements, cap and trade programs have successfully reduced amount of waterborne pollution in U.S., Canada, and Australia.
3. Cap and trade creates revenue for the central body that enforces it.
The revenues the government receives from cap and trade can be used toward sustainable development projects or invest in more efficient, environmentally friendly technology for use of water. The government can also use the profits to educate how every citizen can contribute to the overall effort of water efficiency.
Figure 4: A table of EU ETS’s revenue measured in millions by country during phase one and two [26]
The figure above showed the total revenue EU ETS generated was 5234.3 millions of euros during phase I and phase II. Member States had the option to sell up to 5 percent of their CO2 emission cap (2005-2007) during phase I and Member States could sell up to 10 percent of their CO2 emission cap during phase II (2008-2012).
Implementation
Governments of all participating countries should create an independent commission comprised of two-thirds appointed government officials and one-third appointed economists who specialize in water related issues to deal with pollution in wastewater. Furthermore, the governments should set aside a specific amount of money from their budget; enough for the commission to regulate all industries that produce wastewater for a year. The commission should create a compliance period (a year), and decides a cap for maximum permissible waterborne pollution within that period of time. The initial cap needs to be set at a level below the current amount of pollution released through water and gradually reduced each compliance period. The commission decides the rate of reduction. The commission will divide the total pollution cap into a number of distributable permits. The government takes 80 percent of profits and would use it to invest in more water-efficient technology, wastewater treatment, and to repay debts. At least 50 percent of the revenue should be allocated toward investments in water-efficient technology and education.
The number of free permits given to each firm is based on the data of pollution in wastewater from 10 percent of the most efficient firms in the industry and adjusted based on the size of each firm. The agency would sell the remaining permits above the allocation.
Monitoring
The government requires the firms to monitor the amount of pollution released through wastewater. Firms would need to install necessary equipment required by the independent commission to measure the amount of waterborne pollution released. The firms are responsible to record their total hourly release of water-based pollution, saving the data and submitting it to the commission on a tri-monthly basis. The government can request to view the data of each firm at any time.
Verification
Each compliance period, the commission randomly selects 10 percent of the firms to go through verification. The burden of proof is on the firm to show that its monitoring equipment is sound and that it has provided accurate data to the government. If a firm is found to have reported false data to the commission, it will lose 40 percent of its free permits given in the next compliance period.
Transboundary Water Problems
The commission requires that firms who pollute in major bodies of water that are transboundary in nature, must not acquire a total amount of permits beyond 120 percent of the number of free permits they are given by the commission. This is a safety check that takes into consideration that the firms who pollute transboundary waters might acquire most of the permits. If most of the pollution gets released into transboundary waters, this will increase the chances for international conflicts.
Possible Shortcomings and Modifications
Development of a cap and trade system for water pollution is not appealing to countries or states that are not in favor of or have strong central governments that are involved in regulation. Water-pollution cap and trade should start in most developed countries like those in Europe, and in states on the coast of U.S. where environmental cap and trade systems are already in place. These places would be good test grounds for cap and trade on waterborne pollutants. While the developing countries are implementing cap and trade on waterborne pollution, developing countries should set up regional pilot programs to test out how to better implement cap and trade in their country on a large scale. Once cap and trade is working successfully in developed countries, the next places that should implement cap and trade are developing countries negatively impacted by the pollution released into the environment, specifically China and India. These are the developing countries who would be more likely adapt to a new environmental policy like this. It has been increasingly important for these developing countries to adapt some type of regulation on pollution because the increasing amount of pollution in both air and water are making it harder for these countries to provide clean water and a healthy environment for their citizens.
In fact, China has already started implementing some regional pilot programs on carbon emission. Although one of the pilot programs, the Shenzhen carbon exchange will regulate around 30 million tons of carbon dioxide emissions which is like “a drop in the ocean” compared to the total amount of carbon dioxide of China (8 billion tons per year), but it is the first step to a full implementation of carbon cap and trading in China [25]. Therefore, it’s important for all countries who do not have experiences with cap and trade environmental policies to start some type of pilot program now so they have sufficient time and data to help them to better decide an appropriate rate of reduction and the amount of money to set for the commissions.
Countries or U.S. states who do not favor cap and trade will hopefully consider implementing cap and trade after seeing the successes from other countries or states.
Cap and trade might negatively impact domestic firms in international trade because of the extra money domestic firms will need to pay. If the country implementing cap and trade is one of a few in the world, the domestic firms from the country can face higher competition due to foreign firms selling similar products at lower price. However, the competition could be beneficial to building stronger domestic firms. Research suggests the pressure from other firms from other countries have a positive impact on the domestic firms who are closer to the frontier to come up with more innovation, use more efficient technologies and come up with better products that pollute less [17]. Government could protect domestic firms by subsidizing those firms or instituting a tariff on foreign goods, but if the government overprotects domestic firms, it can weaken the capability of domestic firms and domestic firms can lose incentive to improve its efficiency and be more innovative to come up with better products at lower costs [19]. A scheme by which products are rated by how much the company pollutes could appeal to those who are willing to pay more for “green” products.
Cap and trade on wastewater pollution could unintentionally incentivize firms to pollute more through emission. If there is only regulation on wastewater pollution, then firms who pollute through water may have the incentive to pollute through ways other than water that are not regulated. Mission 2017 suggests governments who are considering implementing cap and trade on wastewater pollution to have some type of regulation on pollution released through airborne emission to effectively reduce the overall amount of pollution in the environment.
Conclusion
Mission 2017 suggests that every country try to implement a cap and trade system on wastewater pollution. The central government of each country should create an independent commission and set budgets for the commission to be able to regulate the firms in a compliance period. The commission would set the cap and determine the total amount of permits. Part of the total amount of permits will be given to firms for free, and the rests sold to firms. 80 percent of the commission’s profit would be returned to the government and the government will spend at least 50 percent of that revenue on investments in better technology and education. The rest may be used to repay debts.
The implementation should start in developed countries like those in the EU and United States. After two compliance periods, they should be implemented in developing countries, especially China and India. And it’s at last to be implemented in other countries who are less favorable of governmental regulations after one compliance period has passed for China and India.
Keeping the global water supplies clean is essential and it requires a collective effort from all countries in the world. It doesn’t matter if a country is communist, democratic, or dictatorship, or if the country is small or big, each country’s contribution to the overall effort to ensure water security is valuable.
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