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Water Quality Trading Assessment Handbook
3. Financial Attractiveness
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Water Quality Trading Assessment Handbook - Chapter 3: Financial Attractiveness (PDF) (23pp, 444K)
After pollutant suitability, financial attractiveness is the second major consideration in assessing whether WQT can be used successfully in your watershed. The financial attractiveness of trading is created by differences in the pollutant control costs faced by dischargers and other sources in the watershed. These differences may make it possible to improve water quality at lower overall cost by allowing dischargers facing high control costs to pay other sources with lower control cost options to “over-control” their pollutant loadings. Potential economic gains associated with trading are influenced by factors specific to the watershed, such as trade ratios applied to ensure equivalence of water quality impacts, and external factors such as financing costs for pollutant control technology. This section will help you conduct a basic, preliminary analysis of some key financial relationships in the watershed that are likely to determine whether a trading market can thrive.
In analyzing financial attractiveness it is not necessary to estimate costs for all possible trades. Instead the analysis seeks to identify “Alpha Trades,” those trades with sufficient economic return to be viable even after water quality ratios are applied. To look for Alpha Trades, start by analyzing costs for sources that are obligated to make significant pollutant reductions, thus providing an impetus for trading activity. These sources may end up being large buyers or sellers of pollutant reduction credits in a water quality trading market. A buyer of credits compensates another party for over-controlling pollutant loads and then uses the purchased reductions, typically to meet a regulatory obligation. A seller of credits has over-controlled pollutant loadings and can receive compensation from a party wishing to use the surplus reductions.
This section illustrates how to incorporate trade ratios into cost estimates, enabling you to determine whether environmentally protective trades are also cost-effective and thus warrant further exploration in the watershed.