Dynamic tradable discharge permits for managing river water quality : an evaluation of Australia's Hunter River salinity trading scheme

Abstract

This study provides the first comprehensive quantitative assessment of Australia's pilot Hunter River Salinity Trading Scheme (PHRSTS). It casts new light on the relative merits of tradable permit system in terms of environmental and cost effectiveness under the PHRSTS, highlighting the potential benefits from an integrated regulatory instrument for management of natural resource and environmental quality. The PHRSTS was introduced by the New South Wales Environmental Protection Authority (NSW EPA) in 1995 to regulate the discharge of saline water from the coal mines and electric power generators into the Hunter River, which was affecting other uses of the River. It was made permanent in 2002, becoming the formalised HRSTS (FHRSTS). Allowing for the total permitted salt discharge to vary dynamically from day to day subject to river flow conditions, and for salt permits be traded among the mines and power generators, the Scheme is widely known as Australia's first active water quality trading program, and still appears to be the only dynamic tradable permits scheme operating in the world. The NSW EPA has claimed that the PHRSTS achieved significant environmental and economic benefits, but until now there has been no rigorous examination of its operational performance. To help fill this gap, this study investigates the origins, evolution and institutional arrangements of the PHRSTS, examines the performance of the salt credits trading market of the PHRSTS and the two credit auctions of the FHRSTS, and evaluates the environmental and economic effectiveness of the PHRSTS. In particular, this study finds that: (1) The credits trading market of the PHRSTS was active in terms of both volume of trading and number of participants, in spite of the high proportion of intra-company trading. The successful bidders in the credit auctions of the FHRSTS were a mix of sellers and buyers on the credit trading market of the PHRSTS. The low, narrowly-spread auction prices suggest that the firms did not value the credits highly and that the differentials in marginal cost of salt control across the participants are not large enough to yield significant savings from the credit trading. (2) The overall salinity objectives of the Hunter River were attained under the PHRSTS. However, the PHRSTS did not significantly improve the river salinity compared to the previous Trickle Discharge management system. The PHRSTS only generated trivial savings in social damage cost. (3) The PHRSTS generated measurable cost savings in the total control cost of saline water to its participants over its entire period. But this was minor in relation to the participants' sales revenues, and the tradability of the discharge permits accounted for only a very small proportion of the control cost savings. Dynamicism, instead oftradability, of the discharge permits was by far the main source of the cost savings. This study therefore concludes that neither the environmental effectiveness nor the economic effectiveness of the PHRSTS is as impressive as that claimed by the NSW EPA. Nevertheless, the valuable experience drawn from the experimental design and operation of the PHRSTS should prove useful for broader water quality management strategies in Australia and elsewhere.