Jim Smart, Syezlin Hasan, Adrian Volders, Andrew Buckwell, Peter Dew, Graeme Curwen, Chris Fleming, Poh-Ling Tan, Michele Burford

Transcription

1 NESP TWQ Project 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

2 photo istock

3 Project 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

4 Bilateral credit trading (perhaps sole-source offsets ) expansion Demand for offsets STP DIN credits Supply of offsets Farm 1 wetland $ Farm 2 Aquaculture IPA Urban Dev Gully Remediation

5 Bilateral credit trading (perhaps sole-source offsets ) expansion Demand for offsets STP DIN credits Supply of offsets Farm 1 wetland $ Aquaculture Farm 2 practice change IPA Urban Dev Gully Remediation

6 Bilateral credit trading (and sole-source offsets ) expansion Demand for offsets STP DIN credits $ Supply of offsets Farm 1 Aquaculture intensify $ Farm 2 IPA new Urban Dev Gully Remediation

7 Bilateral credit trading (and sole-source offsets ) expansion Demand for offsets STP DIN credits Supply of offsets Farm 1 wetland $ Aquaculture Farm 2 practice change $ IPA Urban Dev sediment credits Gully Remediation

8 Bilateral credit trading (perhaps sole-source offsets ) expansion Demand for offsets STP DIN credits $ Supply of offsets Farm 1 Farm 2 Aquaculture intensify $ IPA new Urban Dev sediment credits Regulator Gully Remediation

9 Bilateral credit trading (perhaps sole-source offsets ) expansion Demand for offsets STP DIN credits $ Supply of offsets Farm 1 Farm 2 Aquaculture intensify Transaction costs high Transaction costs high $ IPA new Urban Dev sediment credits Regulator Gully Remediation

10 Centralised credit trading ( brokered offsets, clearing house ) expansion or tighten terms of EA Demand for fixed offset pricing STP Aquaculture intensify $ Environ Aggregator new Urban Dev

11 Centralised credit trading ( brokered offsets, clearing house ) expansion or tighten terms of EA Demand for fixed offset pricing STP Aquaculture intensify $ Environ Aggregator $ new Urban Dev

12 Centralised credit trading ( brokered offsets, clearing house ) expansion or tighten terms of EA Aquaculture Demand for fixed offset pricing intensify new STP Farm 1 $ Urban Dev Environ Aggregator $ DIN credits DIN credits Supply of credits e.g. via reverse auction IPA coastal wetland Practice change (C to B) Farm 2 bioreactor NGO wetland

13 Centralised credit trading ( brokered offsets, clearing house ) expansion or tighten terms of EA Aquaculture Demand for fixed offset pricing intensify new STP Farm 1 $ Urban Dev Environ Aggregator $ DIN credits DIN credits Supply of credits e.g. via reverse auction $ IPA coastal wetland Practice change (C to B) Farm 2 bioreactor NGO wetland Maximise DIN reduction within budget constraint

14 Centralised credit trading ( brokered offsets, clearing house ) expansion or tighten terms of EA Aquaculture Demand for fixed offset pricing intensify new STP Farm 1 $ Urban Dev Environ Aggregator $ DIN credits Supply of credits e.g. via reverse auction $ IPA coastal wetland Practice change (C to B) Farm 2 bioreactor NGO wetland Maximise DIN reduction within budget constraint

15 Centralised credit trading ( brokered offsets, clearing house ) expansion or tighten terms of EA Aquaculture Demand for fixed offset pricing intensify new STP Farm 1 $ Urban Dev Environ Aggregator $ DIN credits Supply of credits e.g. via reverse auction $ sufficient DIN reductions IPA Farm 2 bioreactor NGO wetland Maximise DIN reduction within budget constraint? coastal wetland Practice change (C to B)

16 Centralised credit trading ( brokered offsets, clearing house ) expansion or tighten terms of EA Aquaculture Demand for fixed offset pricing intensify new STP Farm 1 $ Urban Dev Environ Aggregator $ DIN credits Supply of credits e.g. via reverse auction $ IPA coastal wetland Practice change (C to B) Farm 2 bioreactor NGO wetland Maximise DIN reduction within budget constraint

17 Centralised credit trading ( brokered offsets, clearing house ) expansion or tighten terms of EA Demand for fixed offset pricing Aquaculture intensify new STP Farm 1 $ offset trading ratio? Urban Dev Environ Aggregator $ DIN credits Supply of credits e.g. via reverse auction $ sufficient DIN reductions IPA Farm 2 bioreactor NGO wetland Maximise DIN reduction within budget constraint? coastal wetland Practice change (C to B)

18 Centralised credit trading ( brokered offsets, clearing house ) expansion or tighten terms of EA Aquaculture Demand for fixed offset pricing intensify new STP Farm 1 $ Urban Dev Environ Aggregator $ DIN credits DIN credits Supply of credits e.g. via reverse auction $ IPA coastal wetland Practice change (C to B) Farm 2 bioreactor NGO wetland Increase budget to achieve required DIN offset

19 Centralised credit trading ( brokered offsets, clearing house ) expansion or tighten terms of EA Aquaculture Demand for fixed offset pricing intensify new STP Farm 1 Transaction costs low $ Urban Dev Environ Aggregator $ DIN credits DIN credits Supply of credits e.g. via reverse auction $ Transaction costs high IPA coastal wetland Practice change (C to B) Farm 2 bioreactor NGO wetland Increase budget to achieve required DIN offset

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

21 Demand for credits Demand for credits Supply of credits expansion or tighten terms of EA Aquaculture intensify new STP Farm 1 $ Urban Dev Environ Aggregator $ DIN credits $ IPA coastal wetland Practice change (C to B) Farm 2 bioreactor NGO wetland Maximise DIN reduction within budget constraint

22 Supply of credits Demand for credits Supply of offsets expansion or tighten terms of EA Aquaculture intensify new STP Farm 1 $ Urban Dev Environ Aggregator $ DIN credits $ IPA coastal wetland Practice change (C to B) Farm 2 bioreactor NGO wetland Maximise DIN reduction within budget constraint

23 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

24 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).

25 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

26 Literature Review of National and International Water Quality Trading Schemes 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

27 Literature Review of National and International Water Quality Trading Schemes 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.

28 Demand Co-benefits for credits Demand for credits Supply of credits expansion or terms of EA STP DIN Farm 1 Practice change (C to B) Airline $ Farm 2 Aquaculture intensify NGO new DIN $ Urban Dev DIN Environ Aggregator $ DIN credits BioD credits IPA coastal wetland bioreactor NGO wetland Maximise credit supply within budget constraint

29 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.)

30 credit stacking Demand for credits Supply of credits expansion or terms of EA STP DIN Farm 1 Practice change (C to B) Airline $ Farm 2 Aquaculture intensify NGO new DIN $ Urban Dev DIN Environ Aggregator $ DIN credits BioD credits IPA coastal wetland bioreactor NGO wetland Maximise credit supply within budget constraint

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

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34 Estimating potential supply of credits Spatial prediction of DIN losses and gross margins from cane (& bananas) in Tully catchment 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 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 covering forgone gross margin include transaction costs include % non-participation Supply cost ($) DIN load reduction (tonnes)

35 Estimating potential supply of credits Spatial prediction of DIN losses and gross margins from cane (& bananas) in Tully catchment 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 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)

36 Quantifying potential supply of credits Spatial prediction of DIN losses and gross margins from cane (& bananas) in Tully catchment 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 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 DIN load reduction (tonnes)

37 Water quality improvements and land management in Nidderdale UK

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39 Importance of land management activities Inorganic Fertilizer Farmyard Manure Applies to Inbye Grassland Applies to Moorland Grip Blocking Help to Improve water quality

40 Management activities Inorganic fertiliser Farmyard manure Grip Blocking

41 Compensation payments and agreement length Agreement length Compensation payment

42 Choice card #1 Program X Program Y Program Z

43 Choice card #1 Program X ü Program Y Program Z

44 Choice card #2 Program X 25 per acre Program Y 2 per acre Program Z Allow25% of grips to be blocked 15 per acre

45 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

46 Compensation required ($) Farmers overall average Fertiliser reduction (%) Compensation required ($) Dairy Beef Fertiliser reduction (%)

47 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 DIN load reduction (tonnes)

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

49 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

50 Literature Review of National and International Water Quality Trading Schemes 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

51 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

52 Literature Review of National and International Water Quality Trading Schemes 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

53 Literature Review of National and International Water Quality Trading Schemes 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

54 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

55 Discussion & update meeting with DEHP Office of GBR: 16 th November Short description of project 2. 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 3. General discussion

56 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 Sole source offsets Voluntary markets Smart markets Reduced transaction costs, can enable greater monitoring by government agencies Suitable in cases where no formal markets exist, lower oversight costs than in more formal markets Provide funding for offset projects, allows early adopters to reduce footprint and build public confidence for future more complex markets Low transaction costs, can optimise allocation of pollution rights given complex variation in transfer coefficients Added responsibility for third party running the clearinghouse High transaction costs Allows free riding, unlikely to achieve environmental goals on their own Need a means to induce all sources to participate

57 Smart market credit trading Demand for credits Supply of credits expansion or terms of EA STP $ $ Farm 1 Aquaculture x DIN Bids for credits purchase y DIN credits intensify z DIN credits Urban Dev Credit Market $ d DIN credits a DIN credits $ IPA $ Farm 2 NGO Offers for credit supply catchment load cap Maximise gains from trade subject to catchment load cap & bid offer match

58 Credit trading Demand for credits Supply of credits expansion or terms of EA STP Farm 1 Aquaculture intensify Credit Market Farm 2 NGO Urban Dev IPA catchment load cap

59 Smart market credit trading Demand for credits Supply of credits expansion or terms of EA STP Farm 1 Aquaculture intensify Credit Market Farm 2 NGO Urban Dev IPA catchment load cap

60 Smart market credit trading Demand for credits Supply of credits expansion or terms of EA STP $ Farm 1 Aquaculture intensify x DIN credits y DIN credits z DIN credits Urban Dev Credit Market $ IPA Farm 2 NGO catchment load cap

61 Smart market credit trading Demand for credits Supply of credits expansion or terms of EA STP $ Farm 1 Practice C initial alloc. Aquaculture x DIN Bids for credits purchase y DIN credits intensify z DIN credits Credit Market $ Practice C initial alloc. Farm 2 NGO Urban Dev IPA catchment load cap

62 Smart market credit trading Demand for credits Supply of credits expansion or terms of EA STP $ $ Farm 1 C to B Aquaculture x DIN Bids for credits purchase y DIN credits intensify z DIN credits Urban Dev Credit Market $ d DIN credits a DIN credits $ IPA $ Farm 2 C to B NGO wetland Offers for credit supply catchment load cap coastal wetland

63 Smart market credit trading Demand for credits Supply of credits expansion or terms of EA STP $ $ Farm 1 Aquaculture x DIN Bids for credits purchase y DIN credits intensify z DIN credits Urban Dev Credit Market $ d DIN credits a DIN credits $ IPA $ Farm 2 NGO Offers for credit supply catchment load cap Maximise gains from trade subject to catchment load cap & bid offer match

64 Smart market credit trading Demand for credits Supply of credits expansion or terms of EA STP $ $ Farm 1 Aquaculture x DIN Bids for credits purchase a DIN credits Farm 2 Credit Market y DIN credits intensify $ NGO z DIN credits Offers for credit supply d DIN Urban Dev credits IPA catchment load cap Maximise gains from trade subject to catchment load cap

65 Smart market credit trading Demand for credits Supply of credits expansion or terms of EA STP $ $ Farm 1 Aquaculture <x DIN Bids for credits purchase <y DIN credits intensify Urban Dev Credit Market $ d DIN credits a DIN credits IPA Farm 2 NGO Offers for credit supply catchment load cap Maximise gains from trade subject to catchment load cap

66 Smart market credit trading Demand for credits Supply of credits expansion or terms of EA STP $ $ Farm 1 Aquaculture <x DIN Bids for credits purchase <y DIN credits intensify Urban Dev Credit Market $ d DIN credits a DIN credits IPA Farm 2 NGO Offers for credit supply catchment load cap Maximise gains from trade subject to catchment load cap

67 Smart market credit trading Demand for credits Supply of credits expansion or terms of EA STP $ $ Farm 1 Aquaculture <x DIN Bids for credits purchase <y DIN credits intensify Urban Dev Credit Market $ d DIN credits a DIN credits IPA Farm 2 NGO Offers for credit supply catchment load cap Maximise gains from trade subject to catchment load cap

68 Smart market credit trading Demand for credits Supply of credits expansion or terms of EA STP $ $ Farm 1 Aquaculture x DIN Bids for credits purchase y DIN credits intensify z DIN credits Urban Dev Credit Market $ d DIN credits a DIN credits $ IPA $ Farm 2 NGO Offers for credit supply catchment load cap Maximise gains from trade subject to catchment load cap & bid offer match

69 Quantifying potential demand for credits GIS mapping of existing point sources and their licence conditions Predictions for new developments: residential/industrial expansion, farming / aquaculture expansion phone discussions with council planning departments

70 Point sources from DEHP Environmental Authorities register

71 Point sources expansion from State Planning Policy

72 Point sources expansion from State Planning Policy

73 Point sources expansion information from

74 Point sources from WetlandInfo

75 Point sources from WetlandInfo