Ensuring good water quality is an essential step towards water security. Consequently, pollution control is a big part of water resource management. A market-based instrument to deal with water pollution are tradable pollution permits. This Tool introduces basic concepts related to tradable water permits, discusses the enabling conditions and barriers for its adoption, and presents recommendations for implementation based on practical experience.
Under a tradable permits system, “the government establishes an overall level of allowable pollution and then allots this in the form of permits among firms. Firms that keep their emissions below the allotted level may sell or lease their surplus permits to other firms or use them to offset excess emissions in other parts of their own facilities” (Stavins and Whitehead, 1992, 192). The point of this is that polluting firms and public agencies differ in their ability to abate their pollution – some can do it easily and cheaply, for others it would be more difficult and costly. Consequently, tradable pollution permits can be a cost-effective way to achieve a reduction in overall pollution.
The freedom to trade pollution “entitlements” gives an incentive for polluters to consider abatement (since they can sell their surplus quotas) while others face the cost of having to purchase permits. For society, the existence of tradeable permits enables pollution abatement to be achieved in the least costly manner. Over time, pollution standards can be tightened, increasing the value of the permits and the pressure on market participants. Credits are traded within defined trading areas.
Water Tradable Pollution Permits (WTPP) can be organised under two different systems (Stavins, 2003):
- Credit programs: Credits to pollute are assigned when a firm reduces emissions below the level required by the government; these credits can enable the same or another firm to meet its control target.
- Cap-and-Trade systems: an allowable overall level of pollution is established and allocated by the government (through free distribution or through sale) among firms in the form of permits, which can be freely exchanged among sources.