Exploring trading in water quality credits as a cost-effective approach for managing water quality in the Great Barrier Reef

Jim Smart

Led by: Dr Jim Smart, GU

 

Project Summary

This project will scope opportunities for water quality credit trading, and develop trading frameworks for managing nitrogen and sediment along the Reef coast. The objective is to determine whether trading in water quality credits can cost-effectively offset emissions increases from future economic expansion, whilst ensuring that end-of-catchment pollution loads stay within designated nitrogen and sediment limits. The project will also estimate how revenues from credit trading could potentially stimulate rural economies and create jobs by incentivising innovative business opportunities.
 

Problem Statements

Problem

The Great Barrier Reef Water Science Taskforce report that catchment-generated nitrogen and sediment loads have to be reduced significantly if the 2025 end-of-catchment load targets for anthropogenic dissolved inorganic nitrogen (DIN) and fine sediment set by the Reef 2050 Long-Term Sustainability Plan are to be achieved. Further, the recent Costings Report (Alluvium 2016) indicates that the costs of meeting the 2025 targets with current levels of economic activity will be very substantial.

Under the terms of the Sustainable Planning Act 2009, economic and population expansion in GBR catchments will have to be accommodated within ‘no net worsening provisions’ on water quality. This will be challenging, given the projected expansions in the Reef coast’s population and associated initiatives for development of agricultural and non-agricultural activity in the region.

Non-agricultural developments such as expanded coastal settlements and new industries will require new, or enlarged, sewage treatment plants and will generate additional stormwater runoff – thus creating new point-source nutrient and sediment loads. Potential agricultural expansion in North Queensland, as envisaged in recent white papers from the Australian government, will also generate additional localised diffuse-source DIN and sediment loads. The recent Costings Report (Alluvium 2016) makes it clear that the costs of managing new point-source emissions by mitigation at the point sources themselves are likely to be orders of magnitude higher than the costs of implementing equivalent load reductions from diffuse sources elsewhere in the catchments.

The Taskforce Report recognises that market-based approaches, operating within catchment pollution load limits, offer potential for delivering cost-effective improvements in Reef water quality. Market-based approaches such as water quality credit trading will become even more attractive as a mechanism for facilitating future economic expansion once the lowest cost mitigation opportunities have been fully utilised to deliver the 2025 end-of-catchment load targets. (A forthcoming review of the Reef Water Quality Protection Plan will develop relevant regionally-based targets for the 35 Reef coast catchments. These targets will be incorporated appropriately and flexibly when they become available).

How Research Addresses Problem

This project will, therefore, develop trading frameworks within which water quality credits from diffuse emissions reductions in the catchments can be purchased to mitigate emissions increases from future agricultural and non-agricultural expansion, whilst still ensuring that end-of-catchment pollution loads stay within designated DIN and sediment limits. Under an appropriately-configured credit trading framework, projected economic development could be achieved cost-effectively with ‘no net worsening’ of DIN and fine sediment loads at end-of-catchment.

Major objectives for this project will be to determine the scope for credit trading to help facilitate economic expansion within the 2025 catchment load targets, and to develop appropriate configurations for credit trading frameworks for DIN and sediment in representative catchments along the Reef coast.

These objectives will be accomplished through literature reviews, collation of findings from existing / on-going research, spatially-specific economic modelling, consultation, interviews and choice experiments with key stakeholders, potential (primarily) point-source credit buyers and likely diffuse-source credit suppliers.

The project will appraise the effectiveness and cost-efficiency of existing national and international frameworks for credit trading to draw lessons for policy adaptation in the GBR, while also flagging barriers which could potentially restrict participation and thus impair the effectiveness and economic efficiency of a credit trading approach.

Consultations and interviews with potential credit buyers will identify their likely current and future demand for nitrogen and sediment credits, provide information on perceived barriers to participation, and explore how these barriers might be overcome through appropriate design of credit trading mechanisms.

Similarly, to gain insights into current and future supply of nitrogen and sediment credits, consultations and choice experiments will be undertaken with potential suppliers of diffusesource credits. This will provide information on credit suppliers’ perceptions of possible barriers to participation, and their attitudes towards risk.

A range of different measures for reducing nitrogen and sediment emissions from diffuse sources in Reef catchments have already been identified (Reef Water Quality Science Program, 2009-2015). Further novel opportunities for actively removing nitrogen and sediments from catchments are also being investigated within the NESP TWQ program and elsewhere. When considering credit trading as a mechanism for facilitating economic expansion within post-2025 catchment load limits, innovative opportunities for credit sourcing will be available. Revenues from credit sales could help stimulate development of these innovative mitigation opportunities. A further contribution of this project will, therefore, be to collate findings from existing research to estimate how revenues from credit trading could potentially stimulate rural economies and create jobs by incentivising innovative business opportunities in mitigation.

The project will provide guidance to Federal, State and Local Governments for framing future water quality credit trading schemes. Additionally, the project will identify how credit trading could help to facilitate economic development within 2025 end-of-catchment load targets, and estimate how revenues from credit trading could stimulate innovative business opportunities.

Alignment with NESP Research Priorities

Water quality improvement theme under area 1d – Innovative approaches for using economic levers for achieving nutrient/sediment loss reductions and/or to encourage land use or practice change.
 

Project Keywords

Sediments; Nutrients; Economic development; Trading; Water quality credit.
 

Project Funding

This project is jointly funded through GU, DEHP Office of the GBR and the Australian Government’s National Environmental Science Programme.
 

Project Publications
Factsheet

 

 

 

 

 

Project Map

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