Research On The Design Of Watershed-Based Water Pollution Trading Policy And Its Water Environmental Quality Impacts

In theory, a watershed-based emission permit system (EPS) could improve regional water quality in all locations based on total pollution load allocation. Such a "Command and control" approach forces every source to reduce pollution without the consideration of heterogeneities among sources, and causes comparatively higher reduction social cost. A tradable discharge permit (TDP) system has considerable potential for providing an additional avenue to produce environmental benefit, which closely approximates what would be achieved through a "Command and control" approach, with relatively lower costs. However, a TDP system for non-uniformly mixed pollutants such as COD is much more complicated than a uniformly mixed pollutant such as CO2, since the extent and spatial pattern of the damages to the environment depend not only upon the level of emissions, but also upon the locations and the transfer characteristics of the emissions. When a pollutant source pays a source downstream for pollutant reductions through trading, water quality in some locations may become better after trading, and that in certain other locations may become worse after trading. A simply designed TDP system without restrictions for water pollution trading in a watershed may bring uncertainties of water quality improvement, and there is the potential that trades will create spatial "hot spots" immediately downstream of pollutant sources that purchase permits.In2008, the Ministry of Environmental Protection (MEP) and the Ministry of Finance (MOF) started a pilot program of water pollution trading in seven provinces. Tai Lake Basin of Jiangsu province was selected as the first region to initiate the program. The water pollution trading programs must be designed to comprehensively improve the water quality in a specific watershed while pursuing cost efficiency. However, since the water pollution trading is still in its beginning stages in China, the water quality issues after trading have not been addressed in the policy deployments of any pilot programs. The institutional arrangement such as the setting of trading ratios are also not adopted by these programs, related researches are also not found in literatures. By the end of2010, none of trading cases happened in Tai Lake basin, far from the amount of trading observed in active markets. Thus, it is also difficult to assess the water quality impacts of the current policy arrangements of water pollution trading through trading cases. Therefore, empirical studies in specific regions for specific pollutants in China are needed to provide more direct information such as the potential cost savings of a trading system and examine the influence of varying trading rules such as the setting of trading ratios on local environment for decision-makers.This research proposed a zonal based trading-ratio (ZTR) system for COD permits trading to achieve cost efficiency while preventing the occurrence of "hot spots". Such a system allows firms to trade permits freely in accordance with the trading ratios among zones they located. Based on the analysis of agents'decision-making behaviors in a ZTR system, the agent-based model which has been widely applied in simulations of artificial markets and emissions trading markets was employed to construct an artificial trading market to control COD in Wujingang watershed of Tai Lake Basin, China.52major pollutant sources from industrial sector in Wujingang watershed were considered as agents. The results of agent-based model such as the transfers of permits among zones and the changes of discharge distributions in the watershed were integrated into a Water Quality Analysis Simulation Program (WASP) model, to predict the water quality impacts of the trading market to the river system.According to recent practices of water pollution trading in China, this research chose continuous bilateral negotiations as the market structure for the analysis. Trades in such a market are made sequentially, and usually bilaterally, at changing non-equilibrium prices. For each pair of agents with different marginal abatement costs, they negotiate bilaterally to decide the price and desired/offered quantity of permits, and reduce their joint abatement costs. Each agent not only negotiates with one another potential trading partner, but also negotiates with several other agents simultaneously. The behaviors of agents in the trading market which based on their own information such as marginal costs (MC) function, initial permits, and the market principles are analyzed. We also consider each agent has its own pollution reduction capability and associated cost structure, which are a countable and finite number of options on pollution abatement rate and a finite discrete cost function where the abatement rate is the independent variable. All agents are assumed to make decisions for minimizing their own total abatement costs, no agent exercises market power, the perfect monitoring and enforcement are available. Finally, the trading model of the market is consisted by each agent's following decision-marking strategies.The agent-based model of water pollution trading was implemented in NetLogo, a platform suited for simulating spatial logic driven by the multiagent systems (MAS) and Cellular Automata (CA) approach. The agent-based model starts by reading the state variables of agents and global variable of the artificial world in the platform, and operates based on the agents decision-making processes. The GIS data of the watershed was processed and imported into the GIS extension of Netlogo, agents are numbered and arranged in the artificial market in accordance with their zonal locations. Basic data such as COD productions, COD abatement of agents in2007and initial permits were imported into the platform, and the parameters such as discrete abatement rates and associated costs of agents were estimated based on field investigations and previous data. The water quality impacts of TDP system were simulated by the application of Netlogo and WASP.The water quality impacts of ZTR were also simulated by the Netlogo platform and WASP model. Simulation results of EPS, TDP and ZTR were compared and analyzed. The results shown:EPS system achieves higher abatement efficiency than the initial allocation requires. A trading market without trading ratios also meet the requirement of total load control of the watershed. However, it leads to the transactions of399.82tons of permits from other4zones (mainly from zone1) to zone5. COD has not reduced in zone5, but increased267tons. The ZTR system increases the payment costs of purchasing permits to some agents, and conducts the firms at downstream to adopt the strategy of removing more COD by themselves instead of seeking for transactions with upstream agents. In the case of worst water quality impacts, the ZTR system achieves an abatement efficiency of63.74%, which is significantly higher than the initial permits required and the TDP system, and most amount of COD is abated at downstream comparing to other scenarios. Aiming to meet the requirement of environmental regulations, the policy deployment of TDP is most cost efficient, while the ZTR system is slightly worse than the TDP system, and the EPS is the least cost efficient among the three. The water quality standard will be achieved in all segments of Wujingang river under the scenario of EPS with highest cost. A TDP system without restrictions has lowest cost, though, will lead to the violation of water quality standards at segment5in dry season. The ZTR system creates a tradeoff between cost efficiency and environmental quality.The design of a emissions trading system depends not only on cost-efficiency, but also crucially on the nature of the pollutant being regulated and traded. Since the water quality impacts of the pollution that discharged by polluters are closely related to the positions the polluters located, the water pollution trading system for non-uniformly mixed pollutants such as COD may cause violations of predetermined water quality standards over the length of the river. Based on the research results, this research suggests that the trading ratios are a way for ensuring the equivalency of the potential water quality impact between an allowance generated in one location and used in another location in the watershed. The market restricted by ZTR is more efficient on balancing pollution control costs and water quality achievements than the TDP system. In terms of water quality impacts, trading ratios need to be integrated into the policy deployments of the pilot programs in Tai Lake Basin and China.