Theory and Practice of Pollution Credit Trading in Water Quality Management

Abstract

We compare the theory of pollution credit trading and its application in the Tar-Pamlico nutrient-trading program in North Carolina. Five such programs exist in the United States, but trades are not being made. Six concepts for a successful program were identified from twenty-five years of literature on marketable permits, including: transaction costs, number and relative discharge of participants, abatement costs, enforcement costs, trading ratio, and loading limits. Comparing these concepts to implementation highlighted several factors that encourage or discourage trades. The program reduced transaction costs by trading at a fixed rate. However, this eliminated the marginal cost benefits crucial for efficient trading. In addition, safety-netted trade ratios raised trading costs. Allowable emissions exceed expected emission levels. Better monitoring and evaluation by economists will reveal where research or communication must be improved and ensure that the fruits of our labors are not unharvested.

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