Potential cost savings from discharge allowance trading: A case study and implications for water quality trading

Abstract

Applying a trading ratio system similar to that proposed by Hung and Shaw (2005), we estimate the potential cost savings of a phosphorus emissions trading program that meets overall total maximum daily load allocations among 22 wastewater treatment plants (WWTPs) in the Passaic River watershed (United States) to be a modest 2–3% relative to a no‐trade baseline. These results may be typical of those in relatively small watersheds such as the Passaic, where there are limited numbers of potential traders and relatively homogeneous abatement technologies across WWTPs. More substantial gains from trade may accrue to a concentrated group of WWTPs, suggesting that watershed managers should focus on a targeted set of traders within a watershed. Under certain conditions, additional gains may be achieved by aggregating WWTPs into zones within which there can be one‐to‐one allowance trading.