Improving Water Quality:Controlling Point and Nonpoint Sources

Chapter 15

1.Point Source Controls

Technology-Based Effluent Limits

• End-of-pipe limits that differ by various groups, such as direct dischargers and indirect dischargers– Within any group, the limits are applied

______________

• For direct industrial dischargers, the standards are industry-specific and vary by facility age (new versus existing) and type of contaminant released

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Direct dischargers release pollution directly to surface waters.

Indirect dischargers release effluents to publicly owned treatment works which treat wastewaters through sewer systems.

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• Limits are based on technological capability, but polluters can choose the method to achieve them– Therefore, the limits are ______________________

____________– Policy intent is to lower limits over time until the

________ discharge goal is met

• Limits are conveyed through a permit system called the National Pollutant Discharge Elimination System (NPDES)– NPDES prohibits any discharges into navigable

waters without a permit – Each permit states what the effluent limits are and

the monitoring and reporting requirements 4

Individual homes that are connected to a municipal system, use a septic system, or do not have a surface discharge do not need an NPDES permit; however, industrial, municipal, and other facilities must obtain permits if their discharges go directly to surface waters.

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2. Analysis of the Effluent Limits:Major Problems

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Imprecise Statutory Definitions • Limits are based on what is technologically achievable

instead of what is needed to achieve water quality

• As a result, _______________________ (TMDLs) had to be established for all polluting sources if water quality goals were not being met, even if the technology-based limits were being satisfied– TMDLs are the maximum amount of pollution a water

body can receive without violating the standards Arizona currently has 102 waterbodies on the 303(d) list (impaired water identification).

Cost-Ineffectiveness• Cost-effectiveness requires that firms abate to the point

where their associated MACs are equal

• Since the limits are applied uniformly, this criterion would not be achieved unless firms were identical

• Empirical evidence suggests that the command-and-control (CAC) approach used is more costly than using economic incentives– Various studies estimate the ratio CAC policy cost to

that of a least-cost, market-based approach• O’Neil (1980): 2.29 to1• Faeth (2000): 5.9 to 1• Johnson (1967): 3.13 to 1

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3. Nonpoint Source ControlsNonpoint Source Management Program:Water Quality Act of 1987

• 3-stage, _________________________ plan1. Report on waters not achieving standards2. Develop ___________________________(BMP)

to reduce pollution• BMP: strategies other than effluent limits

3. Implement the programs

• Federal grants are available to support plans8

Examples of BMP in agriculture include practices for the management of pests; vegetative and tillage practices, such as contour farming, cropping sequence…

Contour farming is the farming practice of plowing across a slope following its elevation contour lines. The rows formed slow water run-off during rainstorms to prevent soil erosion and allow the water time to settle into

the soil.

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4. Analysis of Nonpoint Source Controls• Advantages of state control

– better knowledge of local water bodies, precipitation, runoff, etc.

– nonpoint pollution is linked to land use practices, which is controlled locally

• Disadvantages of state control– lack of good data– inadequate monitoring systems– controls are not consistent across states; can cause

problems if contamination flows across state borders10

Such as agriculture, mining, forestry, and urban development.

US Spending: Point vs. Nonpoint ($2008 millions)Source: U.S. EPA, Office of Policy, Planning, and Evaluation (December 1990), p. 3-3, Table 3-3.

At the federal level: Insufficient resource allocation to nonpoint controls relative to point source controls

Program 1987 1995 2000

Point $66,087 97.7%

$92,918 98.1%

$111,196 98.3%

Nonpoint $1,531 2.3%

$1,754 1.9%

$1,884 1.7%

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5. Market-Based Solutions(1) Pollution Chargesa. Effluent Fees on Point Sources

• These can be ______________ or ______________• Some states in the U.S. are using these fees as well as

other nations—France, Germany, China……• Usage can lead to cost-effectiveness

– If government sets a per-unit marginal effluent fee (MEF), each polluter would abate as long as their marginal abatement cost (MAC) is less than MEF and continue until MAC = MEF

– So all polluters abate to the point where their MACs are equal, which indicates a cost-effective result 12

Modeling an Effluent Fee

$ $

A A

MACX MACY

unit fee MEF

AX AY

Polluter X Polluter Y

Notice that both firms are abating at levels where their respective MACs are equal to the MEF, which means they are equal to each other—a cost-effective result. 13

b. Product Charges on Nonpoint Source Example: Tax on fertilizers

• Tax effective Pfertilizer quantity demanded – Optimal tax equals MEC at QE

• Evidence in the U.S. suggests D for fertilizer is relatively ____________ and tax rate is too low– Result: insufficient demand response

• 46 states use this; rates tend to be < 2.5%, so the decline in quantity demanded is negligible

• Some European nations, such as Austria and Sweden, have used fertilizer taxes with measurable effects

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(2) Tradeable Effluent Permit Markets

• Set an abatement objective for watershed

• Issue tradeable effluent permits– Low-cost abaters sell as long as P > their MAC– High-cost abaters buy as long as P < their MAC – Trading continues until MACs equal, which yields a

cost-effective abatement allocation

• Tradeable permit markets involving both point and nonpoint sources exist in some states– e.g., CA, CO, FL, NY, and WI

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6. Watershed Approach• A watershed refers to all land areas draining

into a particular water body• Focuses on the watershed instead of a specific

water body allows for – better assessment of water quality– better identification of polluting sources

• Underlying motivations are:– to integrate policy initiatives, using pollution

prevention where possible – coordinate tasks and resource use among all

stakeholders associated with the watershed 16

Primary U.S. Policy Instruments

• Watershed-based NPDES permits: issued to multiple point sources within a watershed

• Water quality trading– U.S. policy explicitly states that all trading

activity should occur within a watershed – Supported by economic arguments, including

cost savings, scale economies, and greater efficiency

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Modeling a Negative Environmental Externality (negative production externality) • Define the market as refined petroleum

– Assume the market is competitive – Supply is the marginal private cost (MPC)– Demand is the marginal private benefit (MPB)– Production generates pollution, modeled as a

marginal external cost (MEC)

• Problem: Producers (refineries) have no incentive to consider the externality

• Result: Competitive solution is inefficient18

MSC, MPC, MPB Graph

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P ($ per barrel)

Q (thousands)

D = MPB = MSB

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S =MPC

MSC = MPC + MEC

10

160

PC = 22

128

PE = 26

0QE QC

Modeling a Pigouvian Tax (on a negative production externality)

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$

Q of gasoline

MPB = MSB

MPC

MSC = MPC + MEC

0 QE QC

MPCt

b

a

Amount of tax

Consumption externalities Production externalities

Positive Negative Positive Negative

The benefits to the rest of society of people being vaccinated before traveling abroad

Noise pollution from using car stereos

The benefits to the environment that arise from the planting of woodland by a forestry company

Wastes being dumped into a river by a company

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Modeling a positive production externality

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$

Q of gasoline

MPB = MSB

MPC

MSC = MPC + MEC

0 QEQC

MPCs

b

a

Abatement Equipment Subsidy (on a Positive Consumption Externality)• A payment aimed at lowering the cost of

abatement technology• Goal is to internalize the positive externality

associated with the consumption of abatement activities

• If the subsidy equals the marginal external benefit (MEB) at QE, it achieves an efficient equilibrium and is called a Pigouvian subsidy

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Pigouvian SubsidyMarket for Scrubbers (on a Positive

Consumption Externality)

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($ millions)

MSC

MPB

MSB=MPB+MEB

0 QC = 200 QE = 210

PC = 170

PE = 175Subsidy = $14 million

MPBS

Q of scrubbers

PE – s = 161

K

L

Socially optimal Q = ___ shotsTo internalize the externality, use _______ = $10/shot.

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The market for flu shots

D

S

Social value = private value + external benefit

0

10

20

30

40

50

0 10 20 30

P

Q

$external benefit

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Analysis of a Positive Consumption Externality

External benefit = $10/shot

Modeling a Tax on Consumption

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$

Q

MPB

MSC

MSB = MPB + MEB0 QE QC

MPBt

b

a

Amount of tax

Analysis of a Negative Consumption Externality