Tradable Water Rights 1 Corinne Waelti, seecon international gmbh.

Tradable Water Rights


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Corinne Waelti, seecon international gmbh


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Contents

1. Introduction to Economic Tools

2. What are Tradable Water Rights?

3. Implementing Tradable Water Rights

4. Conclusion

5. References

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The Economist’s View: Externalities

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Source: SAVENIJE & VAN DER ZAAG (2002)

Externalities arise because a substantial part of the costs of economic activities is not being paid by the actors responsible but by the general public in form of environmental damage, security, or long-term climatic risks.



...people change their behaviour because the want to achieve maximal benefit at minimal cost. Economic Tools involve the use of prices and other market-based instruments to provide monetary incentives to change behaviour.


Tools:• Water pricing (tariffs)• Subsidies • Charges (irrigation, wastewater)• Tradable water rights• Etc.

Source: http://www.wsp.org/userfiles/image/november2002.jpg [Accessed: 23.03.2010]

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With Economic Tools…



How the System Works

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Overall quantitative goal (of pollution or abstraction)

Authority

Permit Permit Permit Permit Permit

Company 1

Company 2

Company 3

Company 4

Company 5

Permit trade between companies

In a perfectly competitive market, permits will flow towards the highest value user: Permit users gaining lower benefit from using their permits will sell them to users with higher benefit. This trading results in mutual benefit.



Different Types of Water Rights

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Right to…:

•Water abstraction

•Consumption of water-based resources (such as fish)

•Water pollution

Further differentiation:

Time scale

•Permanent

•Temporary

•One-off

Limitation

•Cap and trade (maximum ceiling)

•Baseline and credit (minimal performance commitment)

Target

•Absolute

•Relative

JOHNSTONE & TIETENBERG (2004)



System Requirements

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• Secure property rights

• Water rights must be enforceable

• Efficient administrative system to ensure market operation

What can happen if these prerequisites are not met?

• Formation of a Monopoly

• High transaction costs

• Insufficient monitoring and enforcement



Further Requirements to Consider

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• Legal and regulatory framework

• Overall cap on emissions and sources

• Emission quotas for tradable pollution rights

• Timing and spatial issues

• Measuring emissions

• Tracking and enforcement



Efficient Measure, difficult Implementation

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4. Conclusion

Successfully implementing tradable water rights can be difficult and is generally more challenging than other measures, such as water charges.

Advantages Disadvantages

• Internalisation of negative externalities

• More innovation• More environmental certainty• Low administrative costs• Flexibility concerning

distribution• Cost-effective• Can also address smaller

consumers (such as households)

• Has to be compliance controlled and non-compliance punished

• Time consuming• Risk of guaranteeing too many

exceptions• Danger of the formation of a

monopoly• Allocation insecurities



ANDERSON, R. (2002): Incentive-Based Policies for Environmental Management in Developing Countries. Issue Brief 02-07. Washington D.C.: Resources for the Future (RFF). URL: http://www.rff.org/Publications/Pages/PublicationDetails.aspx?PublicationID=9616 [Accessed: 08.08.2012].

JOHNSTONE, N., TIETENBERG, T. (2004): ExPost Evaluation of Tradable Permits: Methodological Issues and Literature Review. OECD Publishing. URL: www.oecd-ilibrary.org/environment/tradeable-permits/ex-post-evaluation-of-tradeable-permits_9789264015036-2-en [Accessed: 08.08.2012].

KRAEMER, R., KAMPA, E., INTERWIES, E. (2004): The Role of Tradable Permits in Water Pollution Control. Brussels: Ecologic, Institute for International and European Environmental Policy. URL: www.ecologic.de/download/projekte/1850-1899/1872-03/1872-03_tradable_permits.PDF [Accessed: 08.08.2012].

SAVENIJE, J., ZAAG, P. van der (2002): Water as an Economic Good and Demand Management. Paradigms with Pitfalls. International Water Resources Association. In: Water International 27, 98-104. URL: www.colorado.edu/geography/class_homepages/geog_4501_s12/readings/watereconomicgood.pdf [Accessed: 08.08.2012].

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5. References

Tradable Water Rights 12

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