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Intertemporal Trading Ratios for Nutrient Pollution Control

Aaron Cook and James Shortle

No 274845, 2018 Annual Meeting, August 5-7, Washington, D.C. from Agricultural and Applied Economics Association

Abstract: There is significant interest in the use of market mechanisms for controlling nutrient pollution, one of the most challenging threats to water quality in the United States and elsewhere. This type of pollution often is characterized by considerable lag times between discharge from the pollution source and delivery to the impaired waters. We investigate the implications of these lags for efficient pollution reduction markets and compare two alternative market designs: 1) forward markets where participants trade pollution deliveries directly and 2) a trading ratio system where they trade contemporaneous discharges. While a system of first-best trade ratios is complex in early periods, this system can produce the optimal steady state loads using a simple trading rule. We also find that while first-best trade ratios are greater than one when there are lag disparities between trading partners, second-best trade ratios under the same lag disparities may be less than one when the overall cap on discharges is set sufficiently small.

Keywords: Demand and Price Analysis; Environmental Economics and Policy (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-env
Date: 2018-06
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea18:274845

DOI: 10.22004/ag.econ.274845

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