Project 3.1.6 - NESP Tropical Water Quality Hub

NESP TWQ Project 3.1.6 Exploring trading in water quality credits as a costeffective approach for managing water quality in the Great Barrier Reef Jim Smart, Syezlin Hasan, Adrian Volders, Andrew Buckwell, Peter Dew, Graeme Curwen, Chris Fleming, Poh-Ling Tan, Michele Burford NESP Science Day - Townsville 20th November 2017

photo iStock

Project 3.1.6 objectives: • determine the scope for water quality credit trading within the GBR catchments • develop appropriate configurations for credit trading frameworks for DIN and sediment in representative catchments along the Reef coast • estimate how revenues from credit trading could potentially stimulate rural economies and create jobs by incentivising innovative business opportunities for supplying nitrogen and sediment credits

Bilateral credit trading (perhaps ‘sole-source offsets’) Demand for offsets

Supply of offsets DIN credits

expansion

STP

$$$

Farm 1 wetland

Farm 2 Aquaculture

IPA

Urban Dev

Gully Remediation



expansion

STP

$$$

Farm 1 wetland

Farm 2

$$

practice change Aquaculture

IPA

Urban Dev

Gully Remediation

Bilateral credit trading (and ‘sole-source offsets’) Demand for offsets


expansion

STP

Farm 1

$$$ $$

Farm 2

$$ Aquaculture

intensify

new Urban Dev

$$$ Gully Remediation

IPA

Bilateral credit trading (and ‘sole-source offsets’) Demand for offsets


expansion

STP

$$$

Farm 1 wetland

Farm 2

$$ $$

practice change

$$$

IPA

Aquaculture

sediment credits

Urban Dev

$$$$

Gully Remediation



expansion

STP

Farm 1

$$$ $$

Farm 2

$$ Aquaculture

intensify

$$$ sediment credits

new Urban Dev

Regulator $$$$

Gully Remediation

IPA



expansion

STP

Farm 1

$$$ $$

Aquaculture

Farm 2

$$ Transaction costs high

Transaction costs high

intensify

$$$ sediment credits

new Urban Dev

Regulator $$$$

Gully Remediation

IPA

Centralised credit trading (‘brokered offsets’, ‘clearing house’) Demand for credits @ fixed offset pricing expansion or tighten terms of EA

Aquaculture

STP

$$

Environ Aggregator

$

intensify $$ new Urban Dev


Aquaculture

STP

$$

Environ Aggregator

$

intensify

$$$$$ $$

new Urban Dev


Aquaculture

STP

Supply of credits e.g. via reverse auction Practice Farm 1 change (C to B)

$$

DIN credits $$

Farm 2

bioreactor

Environ Aggregator

$

intensify

$$$$$

NGO

wetland $$ new Urban Dev

DIN credits $$

IPA

coastal wetland


Aquaculture

STP


$$

DIN credits $$

intensify

$$$$$ $$

new Urban Dev

$$ NGO

$$ DIN credits $$

Farm 2

bioreactor

Environ Aggregator

$

$

wetland IPA

coastal wetland Maximise DIN reduction within budget constraint


STP


$$

$ Aquaculture

bioreactor

Environ Aggregator

$

intensify

$$$$$ $$

new Urban Dev

$$ NGO

$$ DIN credits $$

Farm 2

wetland IPA



STP


$$

$

Aquaculture

Environ Aggregator

$

intensify

$$$$$ $$

new Urban Dev

DIN credits $$

sufficient bioreactor DIN $$ reductions NGO $$ wetland ? Farm 2

IPA



STP


$$

$ Aquaculture

bioreactor

Environ Aggregator

$

intensify

$$$$$ $$

new Urban Dev

$$ NGO

$$ DIN credits $$

Farm 2

wetland IPA



STP


$$

$

Aquaculture

intensify

Environ Aggregator

$ offset trading ratio ?

$$$$$ $$

new Urban Dev

DIN credits $$

sufficient bioreactor DIN $$ reductions NGO $$ wetland ? Farm 2

IPA



Aquaculture

STP

Supply of credits e.g. via reverse auction Practice Farm 1 $$ change (C to B)

$$

DIN credits $$

intensify

$$$$$ $$ $$

new Urban Dev

DIN credits $$

Farm 2

bioreactor

Environ Aggregator

$

$ $$

NGO

$$

wetland IPA

coastal wetland

Increase budget to achieve required DIN offset


Aquaculture

STP

Supply of credits e.g. via reverse auction Practice Farm 1 $$ change (C to B)

$$

DIN credits $$

Transaction costs low

intensify

$$$$$ $$ $$

new Urban Dev

DIN credits $$

Farm 2

bioreactor

Environ Aggregator

$

$

$$

$$ Transaction costs high

NGO

wetland IPA

coastal wetland


Centralised credit trading (‘brokered offsets’, ‘clearing house’) Demand for credits @ fixed offset pricing

Supply of credits e.g. via reverse auction Practice expansion or STP Farm 1 Conflicting tensions $$ $$ change (C to B) • tighten Low transaction costs encourage participation (both demand & supply) DIN •terms of EA ‘Flat rate’ pricing for offset purchase and credit supply reduces transaction costs Transaction credits $$ Farm 2 $ costs low • Not all offsets are equally benign [vary offset prices or trading ratio by location] bioreactor $ Environ • Aquaculture Not all credits are equally effective [vary offer prices by location] • Economic efficiency ? – ‘charge for damage risk’ & ‘pay for what you get’ Aggregator $$ Transaction offset intensify costs high trading $$$$$ $$ NGO • Use trading ratio to cover variations in consequences and effectiveness $$ ratio ? not enough demand for offsets • Trading ratio too high – wetland • Trading ratio too low – not enough $$$$ for credit supply $$ DIN credits $$ new Urban Dev • What can we learn from other schemes ?

IPA

coastal wetland


Demand for credits Supply of credits

Demand for credits expansion or tighten terms of EA

STP

Farm 1

$$

$ Aquaculture

intensify

$$$$$ $$

new Urban Dev

$$ NGO

$$ DIN credits $$

Farm 2

bioreactor

Environ Aggregator

$

Practice change (C to B)

wetland IPA


Supply of credits Supply of offsets

Demand for credits expansion or tighten terms of EA

STP

Farm 1

$$

$ Aquaculture

intensify

$$$$$ $$

new Urban Dev

$$ NGO

$$ DIN credits $$

Farm 2

bioreactor

Environ Aggregator

$


wetland IPA


Literature Review of National and International Water Quality Trading Schemes • Broad ranging international literature on water quality trading examined • Literature review examined 30 major studies on water quality trading and more than 50 individual water quality trading schemes. • Majority of studies focused on the United States where TMDL imposed under the Clean Water Act have facilitated state/territory, watershed and local trading schemes • USEPA has actively encouraged trading as cost effective way to meet regulated point source load limits and address diffuse pollution • Virtually all trading schemes involved point / non-point trading schemes and the trading of nitrogen and phosphorus • Typical market involves a heavily regulated point source buying credits from non-regulated non-point sources

Literature Review of National and International Water Quality Trading Schemes • Demand Drivers and Supply Barriers – Tightening regulatory standards for point source discharges on the basis of recognised environmental problems – Inadequate and poorly enforced regulation is identified as the greatest barrier to implementing a successful water quality trading scheme – Demand for credits from point sources is limited by generous license conditions and poor enforcement – Supply of credits is limited by landowners concerns that demonstrating low cost reductions may increase case for regulation – Meaningful supply and demand in water quality markets will only occur with strong regulation and enforcement of pollution allowances for both point and non-point sources (King 2005).

Literature Review of National and International Water Quality Trading Schemes

– Success Factors (US EPA) • single pollutant in common form, • appropriate watershed conditions (proximity of dischargers, presence of tributaries, or complexity of hydrology) that allow reliable relationships between load reductions and water quality in receiving waters, • incremental costs of trading low relative to the incremental costs of other control options, • appropriate market structure for transacting trades


– Other Key Success Factors • • • • • •

transparency clearly delineated roles and responsibilities third party brokers stakeholder participation in rule development third party verification move away from state subsidies of BMP practices to stimulate credit supply


– Key Challenges • concerns about increased liability, • potentially high transaction costs, • concern that complicated trading procedures might result in delays in receiving payments • resistance to bringing government employees onto private land, • fear that trading rules will change.

‘Co-benefits’ Demand for credits Supply of credits

Demand for credits expansion or terms of EA

STP

Farm 1

DIN $$

Airline

$

Aquaculture

intensify NGO

$$

$$$$$$$$$ DIN $$

new Urban Dev

Farm 2

bioreactor

Environ Aggregator

DIN $


NGO

$$

DIN credits $$ BioD credits $$

wetland IPA

coastal wetland

Maximise credit supply within budget constraint

Estimating potential demand for credits • GIS mapping of existing point sources and their licence conditions • predictions for new developments: residential / industrial expansion, farming / aquaculture expansion Stimulating demand for credits • consider governance arrangements • design ‘demand side’ structure to encourage participation (but still ensure environmental objectives are achieved) • tightening existing licence conditions • facilitate private market investments in Reef credits • opportunities for ‘co-benefits’ to deepen the pool of credit buyers and strengthen credit demand (e.g. carbon + nitrogen, other GHG + sediment , carbon + nitrogen + biodiversity etc.)

‘credit stacking’ Supply of credits

Demand for credits expansion or terms of EA

STP

Farm 1

DIN $$

Airline

$

Aquaculture

intensify NGO

$$

$$$$$$$$$ DIN $$

new Urban Dev

Farm 2

bioreactor

Environ Aggregator

DIN $


NGO

$$

DIN credits $$ BioD credits $$

wetland IPA

coastal wetland

Maximise credit supply within budget constraint

Estimating potential supply of credits • Spatial prediction of DIN losses and gross margins from cane (& bananas) in Tully catchment • Model @ 250m x 250m resolution from earlier NESP N-trading project • Overlay DIN loss predictions from Reef Project Prioritiser tool

Estimating potential supply of credits Spatial prediction of DIN losses and gross margins from cane (& bananas) in Tully catchment • simulate @ 250m x 250m resolution from earlier NESP N-trading project • overlay DIN loss predictions from Reef Project Prioritiser tool • predict spatially-specific credit supply (DIN credits @ source), based on covering forgone gross margin and ‘transport’ down catchment to Reef Lagoon • estimate supply curve for total credit expenditure vs DIN reduction in receiving water Supply cost ($) • covering forgone gross margin • include transaction costs • include % non-participation

DIN load reduction (tonnes)

Estimating potential supply of credits Spatial prediction of DIN losses and gross margins from cane (& bananas) in Tully catchment • simulate @ 250m x 250m resolution from earlier NESP N-trading project • overlay DIN loss predictions from Reef Project Prioritiser tool • predict spatially-specific credit supply (DIN credits @ source), based on forgone gross margin and ‘transport’ down catchment to Reef Lagoon • estimate supply curve for total credit expenditure vs DIN reduction in receiving water Supply cost ($) • covering forgone gross margin • include transaction costs • include % non-participation • credit stacking opportunities ? • sediment, carbon, biodiversity DIN load reduction (tonnes)

Quantifying potential supply of credits Spatial prediction of DIN losses and gross margins from cane (& bananas) in Tully catchment • simulate @ 250m x 250m resolution from earlier NESP N-trading project • overlay DIN loss predictions from Reef Project Prioritiser tool • predict spatially-specific credit supply (DIN credits @ source), based on forgone gross margin, then ‘transport’ down catchment to Reef Lagoon

Farmers’ compensation requirements

• estimate supply curve for credit expenditure vs DIN reduction in receiving water Supply cost ($) • based on forgone gross margin • include transaction costs • include % non-participation


Water quality improvements and land management in Nidderdale UK

Importance of land management activities Inorganic Fertilizer

Farmyard Manure

Applies to Inbye Grassland

Grip Blocking Applies to Moorland

Help to Improve water quality

Management activities

Inorganic fertiliser

Farmyard manure

Grip Blocking

Compensation payments and agreement length

Agreement length

Compensation payment

Choice card #1

Program X

Program Y

Program Z

Choice card #1

Program X

Program Y

Program Z

ü

Choice card #2

Program X

£25 per acre

Program Y

£2 per acre

Program Z

Allow25% of grips to be blocked

£15 per acre

Choice card #2

Program X

£25 per acre

Program Y

£2 per acre

Program Z

Allow25% of grips to be blocked

£15 per acre

ü

Compensation required ($)

Farmers overall average

0

25

50

Fertiliser reduction (%)

Compensation required ($) Dairy

Beef

0

25

50

Fertiliser reduction (%)

Compensation requirements • Choice experiments with farmers can be used to estimate: • farmers’ compensation requirements for different levels of change to management practices and different types of land use change • how configuration of credit purchasing / monitoring / evaluation arrangements affect compensation requirements • how compensation requirements are influenced by characteristics of farm business and socio-demographics of farmers Supply cost ($)

Based on compensation requirements from choice experiments


Thank you for listening For more information please contact: Jim Smart: j.smart @ griffith.edu.au

Literature Review of National and International Water Quality Trading Schemes • Theoretical basis of water quality trading – Trading must occur within a fixed regulatory emissions cap (TMDL, No net worsening, Targets) – Market transaction reallocate emissions under the cap by trading – The existence of significant cost differentials in pollution abatement costs between emitters facilitates trading – Trading allows meeting of compliance conditions at lowest cost – Diffuse pollution can be addressed through practice and land use change and trading allows the generation of an income stream to support such activities


– Other key challenges identified – Insufficient Government resources to implement trading framework – Lack of clear water quality standards for some pollutants – Liability concerns – Legal challenges to trading – Administrative burdens – Ratios – Cap Allocation » Rewarding poor historical performance » Virginia best management practice qualification

Literature Review of National and International Water Quality Trading Schemes • 3 Case Studies (example) » Minnesota Sugar Beet Cooperative • 1 demand source – wwtp to meet new no discharge legislation • Phosphorous allocation being traded • Offset providers – cooperative - farmers meeting BMP • Trading ratio 2.6:1 • 600 non point traders • Third party auditors • Trust fund established to implement BMP

» Others - Lake Taupo – Greater Miami Water Quality Trading Program


• The Key Questions raised by the Literature » Are the key drivers in place (nitrogen and sediment) • Pollution cap or allowance across all sources • Legislation – enforcement • Sufficient demand and supply • Clearly defined unit of transaction • Sufficient cost differential • Market design and type • Economic feasibility and efficiency


• Sediment (Initial Analysis) » Limited point sources » Limited legislative responsibilities » Significant private and government investment » Suitable voluntary market or sole source offset » Testing levels of demand » Testing level of supply

Literature Review of National and International Water Quality Trading Schemes • Nitrogen (Initial Analysis) » Number of regulated point sources » Emerging legislative responsibilities » Significant private and government investment » Emerging market structures » Potentially suitable for smart market design » Testing levels of demand (scenarios) • Current • No net worsening • 80% reduction » Testing level of supply • Compensation requirements per unit of credit generation

Discussion & update meeting with DEHP Office of GBR: 16th November 2017 1. 2.

3.

Short description of project Presentation of work so far a) Review of how offsets, funds & credits operate b) Findings from literature review c) Demand drivers d) Supply modelling e) Choice experiments f) Sediments General discussion

Literature Review of National and International Water Quality Trading Schemes – Types of Trading Schemes Market Structure

Advantages

Disadvantages

Exchanges

Low transaction cost

Requires uniformity in commodity to be traded

Bilateral negotiations

Provides latitude for buyer when commodities are not uniform

High transaction costs

Clearing houses

Reduced transaction costs, can enable greater monitoring by government agencies

Added responsibility for third party running the clearinghouse

Sole source offsets

Suitable in cases where no formal markets exist, lower oversight costs than in more formal markets

High transaction costs

Voluntary markets

Provide funding for offset projects, allows early adopters to reduce footprint and build public confidence for future more complex markets

Allows free riding, unlikely to achieve environmental goals on their own

Smart markets

Low transaction costs, can optimise allocation of Need a means to induce all sources pollution rights given complex variation in to participate transfer coefficients

Smart market credit trading Demand for credits expansion or terms of EA

STP

Supply of credits $$$

a DIN credits

x DIN credits Bids for credit purchase Aquaculture

intensify

$$ y DIN credits

Credit Market $$$$$ $$$$

z DIN credits

$$$$ Urban Dev

Farm 1

$$$

d DIN credits

$

Farm 2

$$$ NGO

$$ Offers for credit supply IPA

catchment load cap Maximise gains from trade subject to catchment load cap & bid offer match

Credit trading Demand for credits expansion or terms of EA

Supply of credits Farm 1

STP

Farm 2

Credit Market

Aquaculture

intensify

NGO

Urban Dev

catchment load cap

IPA



STP

Farm 2

Credit Market

Aquaculture

intensify

NGO

Urban Dev

catchment load cap

IPA


STP


$$$

x DIN credits Aquaculture

intensify

Farm 2

$$ y DIN credits

Credit Market $$$$$

NGO

z DIN credits

$$$$ Urban Dev

catchment load cap

IPA


STP


$$$


intensify

$$ y DIN credits

Practice C initial alloc.

Practice C Farm 2 initial alloc.

Credit Market $$$$$

NGO

z DIN credits

$$$$ Urban Dev

catchment load cap

IPA


STP


a DIN credits


intensify

$$ y DIN credits

Farm 2

$$$ NGO

z DIN credits Urban Dev

$

C to B

C to B

Credit Market $$$$$

$$$$

Farm 1

$$$

d DIN credits

$$ wetland Offers for credit supply

catchment load cap

IPA

coastal wetland


STP


a DIN credits


intensify

$$ y DIN credits

Credit Market $$$$$

Urban Dev

$

Farm 2

$$$ NGO

z DIN credits

$$$$

Farm 1

$$$

d DIN credits


catchment load cap Maximise gains from trade subject to catchment load cap & bid offer match


STP


a DIN credits


intensify

$$ y DIN credits

NGO

z DIN credits Urban Dev

Farm 2

Credit Market $$$$$

$$$$

Farm 1

$$$

d DIN credits


catchment load cap Maximise gains from trade subject to catchment load cap


STP


a DIN credits