Inter-zonal tradable discharge permit system to control water pollution in Tianjin, China

In recent years, Chinese environmental authorities have expressed interest in the use of Tradable Discharge Permits (TDP) as a regulatory instrument to control pollutant emissions. Environmental professionals still have not had enough experience, however, in designing and managing TDP systems, especially for non-uniformly dispersed pollutants. As an empirical study, this paper proposes an interzonal TDP system and analyzes its effectiveness in cost savings and environmental protection for reducing water pollutant COD (chemical oxygen demand) in Tianjin, China. Zonal permit system (ZPS) and emission permit system (EPS) are discussed for comparison. The inter-zonal TDP system is demonstrated to improve cost efficiency by allowing permit trades between zones, as long as water quality constraints are satisfied. The transactions are assumed to proceed in a multilateral sequential way and are simulated with a circularly running linear programming (LP) model. The simulation of permit transactions among 20 firms shows that to reach the same COD removal target, ZPS, interzonal TDP system, and EPS lowered the total reduction cost by 12.8%, 14.6%, and 15.8%, respectively. EPS, however, brought about "hot spots" problem. Finally, the transaction costs and the sensitivity of the three TDP systems to changes in both COD reduction rate and the initial permit allocation are discussed, and policy implications are addressed.