Trading efficiency in water quality markets

A crucial factor in the success of any water quality trading market is its ability to cost-effectivelyreallocate nutrient allowances from initial holders to those users who find them most valuable;the market's trading efficiency. We explore causes of and solutions to trading inefficiency byassessing the impact on participant transaction costs and the tradeoffs that occur as a result ofpolicy design decisions. Differing impacts of baseline-credit and cap-and-trade markets, theimpact of trading rules and monitoring regimes are discussed in this endeavour. Possiblesolutions of increased information flows and regulatory certainty are also discussed. We thenapply this framework to three existing water quality trading schemes; two from the US, and onefrom New Zealand. We use this experience to extract general recommendations for policymakers looking to maximise trading efficiency when designing future water quality tradingmarkets.