Session 4 (PowerPoint) by chenmeixiu


									Trading Ratios
                                   1. Opportunities & Constraints
Session 4 in Water
                                   2. What to Trade, Where
Quality Credit Trading:
PowerPoint Workbook for            3. Who Trades, Why
a Detailed Assessment of           4. Trading Ratios
Opportunities and Options
                                   5. Credit Generation & Use
Introduction & User Guide (Word)   6. Market Elements, Part One
A. Are We Ready for Trading        7. Market Elements, Part Two
B. Decision Process                8. Market Models & Framework
C. Stakeholder Identification      9. Tracking
D. Stakeholder Readiness           10. Oversight
                                                                Extra Help
E. Information Management          11. Evaluation
Making a Market
 This session begins the transition from examining
  market feasibility to designing and implementing a credit
 It is one of several designed to provide guidance about
  the menu of market elements potentially available and
  examples of what others have done
 The mandate for trading is to achieve equal or better
  environmental results than without trading—trading
  ratios are one way to accomplish this

Making a Market involves these
primary activities:
   Understanding possible “market positions”
   Establishing when water quality “credits”
    are created
   Setting rules for credit use
   Calculating and applying any necessary
    trading ratios
   Ending up with willing sellers and buyers
   Providing a way to execute trades

This session addresses this topic:

   Calculating and applying any necessary
    trading ratios

Trading Ratios
 A key principle of trading is achieving equal or better
  environmental results with trading as compared to without
 To achieve “equivalency” between a pound reduced at
  one location, or from one type of control versus another
  location or a different control, trading “ratios” or other
  credit adjustment “factors” may be needed
 To the extent the objective of a trading program is to do
  better than equivalent, ratios also may be needed

Trading Ratios

The Math
   Ratios are expressed as “# : 1”, where
    • “#” is the number of pounds of reduction or removal
        at the seller’s site needed to equal one pound of
        credit toward the buyer’s compliance requirement
    •   Mathematically, the number of credits generated
        equals the seller’s load reduction divided by “#”
    •   Ratios are multiplicative to calculate the net ratio

Trading Ratios

A Mathematical Example
 If three ratios are established, and each is 2:1
 Multiply the ratios to calculate the net ratio
 In this case, 2 x 2 x 2 = 8:1
 At an effective trading ratio of 8:1
   • the Buyer would receive 1/8 of a pound of credit toward
        compliance for every 1 pound reduced by the Seller
    •   the Buyer would need 8 pounds of reduction from the Seller
        to create one pound of credit
   The result of this calculation is sometimes expressed in
    credits or credit pounds.

Trading Ratios

Impact of Ratios on Trading Feasibility
   Ratios can significantly affect the marketability of a
    given project or action as a credit generator
   For example, if a ratio is increased two-fold, the number
    of credits generated is cut in half
   Likewise, if a ratio is halved, the number of credits is
   This mathematical relationship is intensified because
    the factors are multiplicative
   For this reason, the ratios selected should be
    appropriately, but not overly, conservative

Trading Ratios

Applied on Buyer or Seller Side?
   The term “credit” may be inclusive or exclusive
    of any applicable trading ratio
   Some programs apply the credit on the sellers
    side, then call the result a credit
   Other programs define a credit as “one” unit of
    the reduction or benefit, then use the ratio to
    determine how many credits a buyer needs for
    every unit above the baseline

Trading Ratios

Example Credit Definitions
   Credit Exclusive of Ratio           Credit Inclusive of Ratio
     • Rahr Malting: II.A.2.b.            • Clean Water Services,
       The Permittee is                     Schedule D.7.e:
       authorized to discharge              One credit shall be defined
       CBOD5 in accordance                  as one (1) unit of pollutant
       with the following effluent          reduction or other defined
       limitations in addition to           environmental performance
       those in Part II.A.2.a.              improvement, multiplied by
       One unit of trading credit           any applicable trading
       is the equivalent of                 ratio detailed in the permit
       1 pound per day of                   or plans covered by this
       CBOD5 discharged.                    permit. The credit is
                                            applied at the location
                                            where compliance with the
                                            baseline is measured, for
                                            the applicable time period.
Trading Ratios

Commonly Applied Ratios (or Factors)
   Delivery Ratios
     • also called location ratios
     • accounts for differences in equivalency between a pound reduced (or
        benefit produced) at one location in a waterbody versus another
   Uncertainty Ratios
     • accounts for variation in the estimated load reduction or benefit
     • often applied in point-nonpoint source trading situations
     • may be intended as “margins of safety”
   Situation-Specific Ratios
     • relates to pollutant, e.g., bioavailability
     • relates to watershed hydrodynamics
   Retirement Ratios
     • also sometimes called water quality ratios
     • imposes a “tax” on credits to achieve additional reductions beyond
Trading Ratios

Point-Point Trading
   The trading ratio            Examples of point-point
    between point sources         trading programs with
    normally starts at 1:1 but    ratios that can create
    can be altered by other       effective ratios of
                                  something other than 1:1
    applicable ratios
                                    Lower Boise River
     • uncertainty                   Trading Pilot
     • delivery                     Connecticut
     • attenuation                  Neuse River Compliance
     • other                         Association
                                    Virginia Nutrient
                                     Credit Exchange
Trading Ratios

Point-Nonpoint Trading
   EPA Trading Policy:
     • Greater uncertainty in nonpoint source estimates is due to several factors
       including but not limited to variability in precipitation, variable
       performance of land management practices, time lag between
       implementation of some practices and full performance, and the effect of
       soils, cover and slope on pollutant load delivery to receiving waters.
     • EPA supports a number of approaches to compensate for nonpoint source
       uncertainty. These include:
           monitoring to verify load reductions,
           the use of greater than 1:1 trading ratios between nonpoint and point sources,
           using demonstrated performance values or conservative assumptions in
            estimating the effectiveness of nonpoint source management practices,
           using site- or trade-specific discount factors, and
           retiring a percentage of nonpoint source reductions for each transaction or a
            predetermined number of credits.
     • Where appropriate, states and tribes may elect to establish a reserve pool
        of credits that would be available to compensate for unanticipated
        shortfalls in the quantity of credits that are actually generated.
   Improving the understanding of nonpoint source pollution reduction will result
    in lower trading ratios and trade transaction costs
Trading Ratios

Delivery Factors
 Delivery or location ratios account     Examples of Delivery Factors
  for differences between the               • Chesapeake Bay Program
  environmental value of a mass                 Nutrient Trading Fundamental
  loading reduction or other action at          Principles and Guidelines
  one location versus another               •   Connecticut’s Long Island
                                                Sound Nitrogen Credit Trading
 These ratios are often called factors         Program
 Oftentimes, programs that have            •   Lower Boise River Phosphorus
  such factors have based them on               Trading Program
  water quality models that assess          •   Sacramento Regional County
  transport and attenuation of                  Sanitation District’s Mercury
  pollutants within a water body or             Offset Feasibility Study
  segment                                   •   Virginia Nutrient Credit
                                                Exchange Program
 Delivery factors may not always be
  explicit, for example if they were
                                            •   WERF’s Nitrogen Credit
                                                Trading in Maryland: A Market
  used in calculating the assigned              Analysis for a Statewide
  wasteload and load allocations                Framework
Delivery Factors

Chesapeake Bay States
   EPA’s Chesapeake Bay Program has a
    water quality model that calculates
    “delivery factors” for every waterbody
    segment in the Bay watershed
                                                   SELECTED DELIVERY FACTORS
   They account for attenuation during
    transport and estimate the quantity of        FROM THE YEAR 2000 SCENARIO
    nutrients from sources throughout the       SEGMENT ID #       TN FACTOR        TP FACTOR
    Bay that reach the fall line                    300
   In short, 1 pound of nutrient reduction         100                 0.7568           0.4079
    above the fall line is worth less to the        760                 0.8577           0.9635
    Bay than 1 pound of reduction below the         490                 1.0000           1.0000
    fall line
                                                As illustrated, delivery factors for nitrogen and
     • Reductions above the fall line are           phosphorus can be different. By count,
         discounted by a factor less than one     approximately half the segments have a
     •   Reductions below the fall line are                    delivery factor of 1.
         assigned a discount factor of one
   These are periodically updated and

Delivery Factors

Chesapeake Bay States
                                             Delivery Factors Ratios for
   Under the CBP’s system                   Potomac River POTWs (2000)
                                                              Delivery Supply   Delivery
     • a seller multiplies his credits by         BNR Plant
                                                              Factors Reduced    Ratio

         the delivery factor to determine    Cumberland
                                             George’s Creek
                                                               0.59      41%      1.7

         how many he has to sell             Ballenger
     •   dividing the delivery factor into   Frederick City
                                                               0.69      31%     1.45
         1 produces a “delivery ratio”—      Thurmont
         the number of pounds of a local     Conococheague
                                                               0.75      25%     1.34
         reduction that equates to a one     Nicodemus
                                             Fort Ritchie
         pound reduction at the fall line    Brunswick
                                                               0.82      18%     1.22

    In this example, as in others,
                                             MD Correctional
                                            Damascus

    the default point-point trading
                                             Poolesville       0.84      16%     1.19
                                             Blue Plains
    ratio is 1:1 when trading                Piscataway
                                             Indian Head
    partners have the same                   La Plata
                                                                 1        0%       1

    delivery factor                          Mattawoman

Delivery Factors

Long Island Sound
   Trading zones
    equalize local
    reduction to                                              0.19
    benefit in Long           0.35
                                               0.18                     0.15          0.14

    Island Sound
   Similar to                 0.46

    Chesapeake Bay                                                   0.22        0.18
    Delivery Factors                  0.67             0.60
                               0.85                                                          1-3S
                       1.00                                                                  2-4
                                               Courtesy Gary Johnson, CT DEP

Trading Ratios

Uncertainty Factors
   Typically imposed to          Examples of Uncertainty Factors
    compensate for uncertainty in    • Chesapeake Bay Program
    load reduction by seller           Nutrient Trading Fundamental
   Can be calculated using rules      Principles and Guidelines
    of thumb or policy based         • Cherry Creek, Colorado
    assumptions                        Phosphorus
                                     • Kalamazoo Michigan
   With sufficient data, can be
    calculated considering the       • Lower Boise River Phosphorus
                                       Trading Program
    range and/or variance in load
    reduction estimate               • Sacramento Regional County
                                       Sanitation District’s Mercury
   Often considered for trades        Offset Feasibility Study
    involving nonpoint source-       • WERF’s Nitrogen Credit
    generated credits                  Trading in Maryland: A Market
   May sometimes be intended to       Analysis for a Statewide
    represent “margins of safety”
Uncertainty Factors

Chesapeake Bay Program
   Intended to account for variation in the expected reliability and efficiency of the
    source or type of reduction being applied toward credit for another
   Calibrated to create a margin of safety or otherwise attempt to ensure that the
    credited practice provides a minimum level of reductions, even if actual
    reduction efficiencies and units removed are on the low end of an expected
    range—see for example Table D.6 below
   The guidance states that “while it appears uncertainty ratios in the range of 1.5
    to 3 [for point-nonpoint source trades] would generally be applicable in the Bay
    watershed, it may be necessary to conduct more thorough analyses prior to
    adopting actual uncertainty ratios”

Uncertainty Factors

Kalamazoo Michigan
 Site-specific uncertainty      For a streambank restoration
  factors were developed      project, “data were unavailable to
                                precisely document how much
  for each of the proposed         material was added to a
  nonpoint source trading     streambank at any given point to
                              correlate how much was actually
  sites                         lost to erosion. A 9% discount
 The maximum estimated       factor was applied to the original
                              estimate of 80 lb/yr” to arrive at a
  annual phosphorus            final discounted load of 73 lb/yr.
  reduction was reduced
  by a factor based on          Phosphorus Credit Trading in the Kalamazoo
  judgment                    River Basin: Forging Nontraditional Partnerships,
                                         Kieser et al, WERF 2000.

Uncertainty Factors
Sacramento Regional County Sanitation District
   Description and Rationale
     • Accounts for uncertainty or variance in the load reduction estimates for a
       mercury load reduction (MLR) project
     • Provides reasonable confidence target attained
   Recommendation                                                Cache Creek Settling

     • Project-specific                                           Basin Improvements

                                                                        + 10%
     • Use statistical method                        1.1:1              -
        appropriate for MLR                                       Abbott-Turkey Run Mercury Mine Cleanup
   Discussion                           Ratios        2:1          - 50%         + 100%
     • Variety of factors contribute                           Sulphur Creek Streambank
       to uncertainty: flow, climate,                        Stabilization & Water Treatment

       wet weather events,
       hydrology, etc.
                                                       2:1          - 50%    + 50%

     • MLR estimates will rely on                   -100%    -50%           0%        50%      100%
       best available data                        UNDERESTIMATE
                                                                     Example MLR
                                                                    Estimate Ranges

Trading Ratios

Retirement Factors
 Applied to implement policy-driven       Examples of Retirement Factors
  or programmatic decisions to                • Kalamazoo Michigan
  require that buyers or sellers                Phosphorus
  donate part of all credit purchases              50% retirement
  or sales to the state or some other         • Michigan’s Trading Rules
  entity that will not apply the credits           10% combined
  to offset loadings above its cap                  uncertainty-retirement
 Retirement means the credit is              • Pennsylvania State Policy
  never used                                       5% retirement
 Some parties who might buy
  credits in order to retire them
   • States
   • Conservancy organizations
   • Watershed associations
   • Environmental groups
   • Private citizens
Session Wrap Up
   Making a Market involves these
    primary activities:
     • Understanding possible “market positions”
     • Establishing when water quality “credits”
        are created
    •   Setting rules for credit use
    •   Calculating and applying any necessary
        trading ratios
    •   Ending up with willing sellers and buyers
    •   Providing a way to execute trades

Session Wrap Up
   We addressed these questions in this session
    • Are there any ratios required by policy for our
    •   How do ratios affect feasibility of trading in our
    •   Do ratios need to be developed for our watershed?
    •   If yes, do we have the data and resources to
        determine appropriate ratios?

Our Next Session
Credit Generation & Use
                                       1. Opportunities & Constraints
   Session 5 addresses
                                       2. What to Trade, Where
    these topics:
                                       3. Who Trades, Why
     • Understanding possible
        “market positions”             4. Trading Ratios
    •   Establishing when water        5. Credit Generation & Use
        quality “credits”              6. Market Elements, Part One
        are created                    7. Market Elements, Part Two
    •   Setting rules for credit use   8. Market Models & Framework
    •   Ending up with willing
                                       9. Tracking
        sellers and buyers
                                       10. Oversight
                                       11. Evaluation

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