UNDP/GEF DANUBE REGIONAL PROJECT

DANUBE STUDY ON POLLUTION TRADING AND
CORRESPONDING ECONOMIC INSTRUMENTS
FOR NUTRIENT REDUCTION

DRAFT WORKSHOP REPORT
February 2005

In association with
Institute for Water Quality and Waste Management, Vienna University of Technology
and J�rgen H. Lottmann, Frankfurt

This Report contains restricted information and is for official use only
UNDP/GEF DANUBE REGIONAL PROJECT

UNDP/GEF Danube Regional Project Danube Study on Pollution Trading and
Corresponding Economic Instruments for Nutrient Reduction

DANUBE STUDY ON POLLUTION TRADING AND
CORRESPONDING ECONOMIC INSTRUMENTS
FOR NUTRIENT REDUCTION

DRAFT WORKSHOP REPORT
February 2005

In association with
Institute for Water Quality and Waste Management, Vienna University of Technology
and J�rgen H. Lottmann, Frankfurt

UNOPS-file:
RER/01/G32
NIRAS-file:
03.141.00

Prepared by
Date:
11 February 2005

Jens L�nholdt NIRAS A/S: jlt@niras.dk

UNDP/GEF Danube Regional Project
NIRAS A/S
Vienna International Centre D0418 Austria
Sortemosevej 2 DK-3450 Aller�d Denmark
Tel. + 43 1 26060/5767
Tel. + 45 4810 4200
Fax + 43 1 26060/5837
Fax + 45 4810 4300
www. icpdr.org/undp-drp/
www.niras.dk

This Report contains restricted information and is for official use only
Draft Workshop Report February 2005

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UNDP/GEF Danube Regional Project Danube Study on Pollution Trading and
Corresponding Economic Instruments for Nutrient Reduction

FOREWORD

This Report is the result of a Study entitled Danube Study on Pollution Trading and Corresponding
Economic Instruments for Nutrient Reduction, which has been commissioned by the Danube Regional
Project to a consortia of consultants lead by the Danish engineering and consultant company NIRAS.

The main aim of the Study is to review international experience in relation to pollution trading and to
assess the feasibility of applying such concepts to the nutrient discharges to the Danube River System,
which are largely responsible for the eutrophication problems of the North-western Black Sea.

The main aim of this Report is to constitute the textual background for a basin wide Completion
Workshop concerning the issues of the Study scheduled for Friday the 25th of February in Baden
bei Wien. The Report target national decision makers and senior policy advisors responsible for the
water quality of the Danube and the Black Sea. Consequently this report will put emphasis on policies
and strategies, and the conceptual framework for implementing these policies and strategies.

The full result of the Study is reported in two background reports, which include the
comprehensive review and feasibility assessment of applying pollution trading and corresponding
economic instruments to the nutrients problem of the Danube and the North-western Black Sea:

� Review Report dated October 2004; and
� Feasibility Report � Conceptual Assessment dated February 2005.

These reports are available on request from the Danube Regional Project Office (UNDP/GEF Danube
Regional Project. Vienna International Centre. D0418 Austria.Tel. + 43 1 26060/5767. Fax + 43 1
26060/5837. www. icpdr.org/undp-drp/ ), and they will also be available at the Completion Workshop.

This Draft Workshop Report will be amended and supplemented, especially in terms of the conceptual
implementation framework, based on the discussions and the results of the Completion Workshop. The
Final Workshop Report is consequently intended to form the policy and strategy, as well as
conceptual implementation background and point-of-departure, for improved nutrient management in
the Danube River System for the benefit mainly of the water quality of the North-western Black Sea.

As mentioned above the comprehensive review and feasibility assessment is available in the two said
background reports. Further to this, the target group of this Report, and the Completion Workshop, is
national decision makers and senior policy advisors. Consequently this Report will only give a cursory
overview, and highlight strategic and policy options. Based on this it will identify important policy
questions to be discussed at the Completion Workshop.

In this context Chapter 1 gives an introduction and background to the Study including the scope of the
Study and the questions that has been addressed by the Study. Chapter 2 gives a cursory overview of
study results with emphasis on highlighting strategic and policy options. Chapter 3 identifies the main
policy elements and strategy questions, to be discussed at the Completion Workshop.
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UNDP/GEF Danube Regional Project Danube Study on Pollution Trading and
Corresponding Economic Instruments for Nutrient Reduction
TABLE OF CONTENTS

1.
INTRODUCTION AND BACKGROUND
5

2.
CURSORY OVERVIEW OF STUDY RESULTS
7

3.
POLICY ELEMENTS AND STRATEGY QUESTIONS
11

ABBREVIATIONS AND ACRONYMS

DaNUbs
Nutrient Management in the Danube and its Impact on the Black Sea (5th
EU Framework Programme Scientific Project)

DRB
Danube River Basin. The full catchment area of the Danube

DRP
Danube Regional Project. The implementing unit for i.a. this assignment

GEF
Global Environmental Facility

GHG
Green-House Gases

ICPDR
International Commission for the Protection of the Danube River

N
Nitrogen in all its forms and compounds (Total Nitrogen)

NIRAS
The Danish company NIRAS Consulting Engineers and Planners A/S. The
lead consultant for this assignment

NWBS
The North-western Black Sea, which is the target area for this Study

P
Phosphorous in all its forms and compounds (Total Phosphorous)

Study
This Study: Danube Study on Pollution Trading and Corresponding
Economic Instruments for Nutrient Reduction

UNOPS
United Nations Office of Project Services. The contracting agency for this
assignment
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UNDP/GEF Danube Regional Project Danube Study on Pollution Trading and
Corresponding Economic Instruments for Nutrient Reduction

1.
INTRODUCTION AND BACKGROUND

This Study is part of the overall and comprehensive UNDP/GEF Danube Regional Project (DRP),
which started in December 2001, and which is scheduled for completion in December 2006.

The main aim of the DRP is to assist the Danube Countries (except Austria and Germany, which are
co-operating countries within the DRP) in increasing their capacities for developing effective
mechanisms and means for co-operation for the protection of the Danube and its final recipient the
Black Sea. The DRP complements the activities of the ICPDR (International Commission for the
Protection of the River Danube) to strengthen regional co-operation for solving transboundary water
pollution problems.

The 13 (11 plus 2) Danube Countries are schematically outlined in Chart No. 1 below.

"Dark blue" countries are Danube riparian countries
"Light blue" countries are countries which discharge in-directly to the Danube
Czech
Ukraine
Republic
Slovakia
Romania
Moldova
North-
Germany
Austria
Hungary
Serbia and
Western
Montenegro
Black Sea
Croatia
Bulgaria
Slovenia
Bosnia and
Herzegovina
Chart No. : Schematical Presentation of the Danube with the
Danube Countries

Due to the regional and transboundary character of the water pollution problems in the Danube and
the Black Sea, there is a need to consider the application of regional means and measures to solve
the pollution problems of the Danube and its final recipient.

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UNDP/GEF Danube Regional Project Danube Study on Pollution Trading and
Corresponding Economic Instruments for Nutrient Reduction
A major regional water pollution problem is the eutrophication ("over-enrichment" with nutrients,
which leads to degradation of water quality and aquatic life) of the North-western Black Sea due to
the discharge of nutrients by the Danube. In this connection it could be considered to introduce the
concept of "nutrient trading", well known from air pollution abatement, as a means of solving the
eutrophication problem economically and co-operatively.

Based on this it has been decided within the DRP to investigate this further by a Study entitled
Danube Study on Pollution Trading and Corresponding Economic Instruments for Nutrient
Reduction. The scope and content of the Study, which has been contracted to NIRAS with
associates based on a tendering process, is described in the Inception Report dated 8 March 2004,
which was approved by DRP 2 April 2004.

The Study set out to answer the following questions as grouped in the following three main groups:

� Nutrient Framework (Component A of the Study):
a. What is the present N (total nitrogen) and P (total phosphorous) load to the Danube,
and how is it distributed on countries and the main dischargers: domestic, industrial and
agriculture?
b. What is the present N and P transformation capacity distributed on the main tributaries
and reservoirs, and the delta?
c. How much N and P reductions are needed in order to achieve the necessary water
quality of the North-western Black Sea?
d. How will the impact be on the discharges of N and P of improved wastewater
management (which will decrease discharges) and increased and changed level of
agricultural activities (which, if not counter acted, will increase discharges)?

� Legal and Regulatory Framework (Component B of the Study)
a. To which extent will the present legal and regulatory framework of the 13 Danube
Countries facilitate or constrain the introduction of nutrient trading?
b. Based on this, which specific legal and regulatory gaps for the 13 Danube Countries
can be identified, and how is the feasibility of timely filling these gaps for each
country?
c. Is it based on the legal and regulatory analysis advisable or not to introduce nutrient
trading, and if yes what will be the necessary main legal and regulatory steps?

� Economic Instruments (Component C of the Study)
a. What is the US, Australian and European experience and lessons-learned with pollution
trading of air pollutants, green-house gases, and water pollutants?
b. How can the above concepts and lessons-learned in principle be applied to the specifics
of the Danube?
c. Based on this is there an advantage in applying pollution trading as a means for
nutrients reduction for the Danube River System, and if yes how could it be applied on
the conceptual level?
d. Is it based on the economic instruments review and analysis advisable or not to
introduce nutrient trading, and if yes what will be the necessary main implementation
steps?

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UNDP/GEF Danube Regional Project Danube Study on Pollution Trading and
Corresponding Economic Instruments for Nutrient Reduction
2.
CURSORY OVERVIEW OF STUDY RESULTS

The detailed and comprehensive answers to the study questions in Chapter 1 can be found in the two
background reports referred to in the Foreword of which the Feasibility Report gives a comprehensive
conceptual assessment.

In the following the overall findings and conclusions of the Study are summarised in the context of
application of policies and strategies:

1. The Danube River System is the main controller of the eutrophication of the North-western
Black Sea (NWBS) as the main load of N and P comes via the Danube.

2. The NWBS has significantly improved over the last decade due to the reduction in the
nutrient discharge caused by the lower agricultural and industrial activities in a number of the
Danube Countries with developing economies. The decrease in economic activities in these
countries is caused by the economic crisis following the break down of the former Soviet
Union in 1989.

3. The present ecological status of the NWBS is close to being assessed "good". Some
problems remain with the fish stock, which is however assessed to be due to over fishing, and
not nutrient discharge.

4. Consequently the present nutrient loading is proposed "frozen" as the sustainable
nutrient loading for the NWBS. The management strategies should thus aim at counter acting
possible increase in the load due to increase in agricultural or industrial activities or increase in
population.

5. Phosphorous seems to be the limiting nutrient for the NWBS, and consequently counter
acting strategies should first target the discharge of this nutrient.

6. However, as the Central Part of the Black Sea seems to be nitrogen limited, and as the ratio
between phosphorous and nitrogen in the NWBS could be decisive if only phosphorous is
targeted, counter acting strategies should also target nitrogen for the Danube System.

7. Consequently a two-pronged strategy is proposed. First target phosphorous, but keep a close
watch on the development in the nitrogen discharge, and especially the relationship between
phosphorous and nitrogen in the NWBS. Secondly, if the ratio changes in the wrong direction,
counter acting strategies should be applied for nitrogen as well.

8. The Danube is the main contributor to the NWBS with phosphorous as 75 % of the load
generates from the Danube. In average only 35 % of the phosphorous emissions is directly
manageable as it stems from point sources. In average 10 % of the phosphorous emissions are
non-manageable as it is so called "background emissions" from nature. In average only 35 %
of the phosphorous discharged to the Danube system reaches the NWBS as it is transformed
and/or stored in the Danube System on its way to the NWBS due to physical, chemical,
biological, and microbiological processes.

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UNDP/GEF Danube Regional Project Danube Study on Pollution Trading and
Corresponding Economic Instruments for Nutrient Reduction
9. The complexity of the Danube River System in terms of i.a. demography, economy, culture,
geology, hydrology, hydraulics, climate, land use, etc. have to be carefully evaluated when
applying regional, national and local counter acting strategies for nutrients.

10. Pollution trading of green-house gasses (GHG) is well developed, and with a fair amount of
implementation experience, based on the Kyoto Protocol and its implementation mechanisms.
As for water the concepts are not that developed, and the experience and case stories are
limited. In relation to applying the experience from pollution trading of GHG to nutrients
reduction in the Danube River System, there is a significant contextual difference, which
should be taken into account. It is about the joint benefit. In pollution trading of GHG the
basic concept is that everybody will benefit from a better global climate no matter where the
reduction is introduced. This joint-benefit-concept is not directly applicable to possible nutrient
trading within the Danube in relation to improving the water quality of the NWBS as the
countries bordering and with direct access to the Black Sea will benefit substantially more than
the upstream countries. However, when taken this into account it should also be taken into
account that the 13 Danube Countries through being signatory to the two Conventions are
committed to a shared and joint responsibility also for the quality of the Black Sea. Further,
they are also committed to the polluter-pays-principle, which is not based on a benefit
assessment. In relation to the lesser experience with pollution trading within water another
significant contextual difference applies, as the major part of the case studies are within states
and nations with the same economic standing. In this context the Danube is very complex as
it is trans-national as well as trans-regional. Further, it covers a huge range from countries
with very high institutional, legal, regulatory and administrative capacity and economic means,
to countries with very limited capacity and limited economic resources.

11. At the international level water quality management in the Danube River System is regulated
by two conventions: The Convention on the Protection and Use of Trans-boundary Water
Courses and International Lakes, and the Danube River Protection Convention. For at
majority of the Danube Countries the EU Water Framework Directive is a supranational and
demanding basic law of water management. These Conventions, and the Directive, neither
prohibit nor promote pollution trading. However, the EU Water Framework Directive includes
a number of the necessary technical instruments and mechanisms for nutrient trading including
the important monitoring programming. EU based legal and regulatory framework has to be
addressed carefully as compliance has to be ensured with EU principles concerning e.g. state
aid, unfair competition and discrimination. Especially the requirements of the use of BAT (Best
Available Technology) and BAP (Best Agricultural Practice) in pollution abatement requires
carefully consideration about what should be understood as "real emission reductions".

12. The EU Water Framework Directive is an important and basic instrument for water
management in the Danube River System as a majority of the Danube Countries are either EU
Member States or EU Accession Countries (Bulgaria and Romania). For the remaining 5
Danube countries it is to be expected that they will follow EU legislation. Consequently it
should be investigated more in-depth to which extent pollution trading could be facilitated by
the Directive and its sister directives.

13. It seems that a mix of pollution trading with traditional "command-and-control"
instruments and economic incentives, will be best suited for and applicable to the complex
situation in the Danube River System. This is mainly based on the complexity of the Danube
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UNDP/GEF Danube Regional Project Danube Study on Pollution Trading and
Corresponding Economic Instruments for Nutrient Reduction
River in a number of aspects as outlined above, and taken into account that introduction and
application of new and untraditional means and measures are resource demanding.
Consequently the economic and water quality benefits could be outweighed by the increased
administrative costs.

14. Based on the above, four contextual different scenarios could be discussed:

I. Business As Usual: The management and control of P-emissions to the Danube is based
on the international and regional Conventions and Directives, and the national legal and
regulatory framework in the 13 Danube Countries.

II. Regulatory with basic point-source P-trading: Same as Scenario I but supplemented
with P-trading for the point sources, which is carefully formulated and managed, and only
introduced where a clear economic benefit can be ensured.

III. Regulatory with full-fledged point-source P-trading: Same as Scenario II but
supplemented with as much as possible point source P-trading where the economic
benefit is not fully clarified or ensured.

IV. Regulatory with full-fledged P-trading: Same as Scenario III but supplemented with
non-point source P-trading.

15. In line with the two-pronged P-strategy introduced in Point 7 above, a two-phase overall
strategy is proposed. The first phase comprises P-increase counter acting strategies for the
Danube River System. This will be premised on a comprehensive P-discharge and
transformation monitoring programme with agreed compilation, processing and interpretation
of monitoring results. Further, a comprehensive water quality monitoring programme for the
North-western Black Sea with as well agreed compilation and so forth. The second phase is
presumed to be N-increase counter acting or reduction strategies from the sea shore countries
of the Black Sea in relation to the water quality of the Black Sea in the open areas. If the water
quality monitoring in the NWBS reveals that the quality is changing to an unacceptable level
due to the change in the N/P ratio caused by the second phase N strategies, then it has to be
considered to introduce additional measures to limit N-emissions to the Danube River System.

16. For the Danube River System a two-level strategy is also proposed. The first level is the P-
increase counter acting strategies on the overall regional level with the aim of keeping the
discharge of P to the NWBS at the "freeze" level. The second level is P-increase counter acting
and possible P-decrease strategies at the country and area specific level in order to solve semi-
regional or local eutrophication problems for specific reservoirs and bigger slow flowing areas
of the Danube River.

17. In the context of the Danube River System three basic types of P-trading seems to be
interesting and relevant:
� Inter-state State Level P-trading, where Danube Countries on the state level buy or sell state
allocated P-increase rights and P-decrease obligations;
� Entity-to-entity Inter-state P-trading, where an entity in one country buy or sell a national
allocated P-increase right or a P-decrease obligation to an entity in another Country (it
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UNDP/GEF Danube Regional Project Danube Study on Pollution Trading and
Corresponding Economic Instruments for Nutrient Reduction
could be wastewater treatment plants or factories producing P rich wastewater as detergent
producing facilities).
� Entity-to-entity National P-trading, where entities within a country buy and sell P-
discharges within the National cap.

18. In continuation of the above it is important to take into account, when setting up a possible P-
trading facility, the P-reduction requirements, which comes directly and not imposed by
Conventions, from improved wastewater management due to national legislation and/or EU
Directives. Further, it is important in this context to take into account that some P-reduction
requirements on wastewater management are "non-tradable" as they address semi-regional
and/or local eutrophication problems, and consequently can not be transferred into a regional
context in relation to the NWBS.

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UNDP/GEF Danube Regional Project Danube Study on Pollution Trading and
Corresponding Economic Instruments for Nutrient Reduction
3. POLICY ELEMENTS AND STRATEGY
QUESTIONS

The policy elements of a comprehensive nutrient management system for the Danube River System,
with the aim of protecting the North-western Black Sea, could, premised on Chapter 2, consist of the
following main elements to be jointly agreed between the 13 Danube Countries.:

I. The present quality of the NWBS is basically satisfactory and a "freeze" of the present quality
should be proclaimed as the desirable situation. It should more in-depth be assessed if the present
water quality is in full accordance with the quality objectives of the two Conventions and the EU
Water Framework Directive with sister Directives.

II. In continuation of the above the present P-load from the Danube to the NWBS is the acceptable
level, and consequently policies and strategies should focus on counteracting increase in the load.
In this connection the specific number as tonnes total P per year should be agreed on as the "cap"
for the P load from the Danube River System to the NWBS. Following this, a distribution and
allocation of the cap to each of the 13 Danube Countries should be agreed upon by possible taken
into consideration the transformation capacity of the Danube River System (due to this capacity 1
kg of P discharged by Germany will be significant "lesser" than 1 kg when it reaches the mouth
of the Danube River System).

III. The principle that some countries, especially the countries which due to a present low economic
activity have a low P-discharge, but have a need and potential for economic development, should
be allowed to increase their P-discharge. This should be premised on that the increase in one or
more countries should be counteracted by an equivalent decrease in a "package" of one or more
countries.

IV. The criteria for distribution, and the calculation, of "increase-rights" as well as "decrease-
obligations". The actual distribution and allocation of the increase-rights and the decrease-
obligations on the 13 Danube Countries in amount and in time. The setting up, responsibility, and
functioning of a comprehensive inventory and monitoring system of emissions and loads, able
to measure reduction and increases by States and entities.

V. The setting up, responsibility and functioning of an independent inter-state P-trading facility
and organisation. And the setting up, responsibility and functioning of an entity-to-entity P-
trading system covering trading between entities within the same countries and between entities
in different countries. It could be part of the first one.

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UNDP/GEF Danube Regional Project Danube Study on Pollution Trading and
Corresponding Economic Instruments for Nutrient Reduction
Based on the previous the following policy and strategy questions are proposed to the Completion
Workshop Friday 25th of February 2005 in Baden bei Wien:

Policy and Strategy Question No. 1: Should nutrient trading be promoted for the Danube River
System as a mix with traditional command-and-control measures? Should it first target P, and should it
be based on the "low-risk" scenario" or the "high-risk" scenario?

Policy and Strategy Question No. 2: Is the present water quality of the North-western Black Sea
acceptable, and should the nutrient management consequently be based on "freezing" the present
overall load from the Danube River System?

Policy and Strategy Question No. 3: Is the concept of P-increase counter acting strategies acceptable?
If yes should an overall principle be applied that some countries could increase their P-emissions
premised on that an equivalent P-reduction is provided by other countries?

Policy and Strategy Question No. 4: Should the transformation capacity of the Danube River System
be taken into account when allocating P-loads or should it be based on gross emissions? If yes, how
should this be done? As a linear function or based on regional, semi-regional or local specifics of the
transformation capacity? If a linear function is chosen should it go from 1 in the mouth of the Danube
to 0, x upstream in the Danube?

Policy and Strategy Question No. 5: By which criteria should respectively P-increase rights and P-
decrease obligations be given to specific countries (the so called burden-sharing)? Should it be based
on GDP and the concept of "rich countries taken a bigger share than poor countries"? Or which other
political criteria (examples are given in the Feasibility Report Chapter 4) should be applied?

Policy and Strategy Question No. 6: If P-trading is introduced should it encompass all three principal
trading possibilities (Inter-state State; Entity-to-entity Interstate; Entity-to-entity National) or only one
or two of the options?

Policy and Strategy Question No. 7: How should the direct P-reduction through improved
wastewater management be taken into account? Incorporated into the strategy and overall managed
and monitored, or as an extra benefit, which will further lower the P-discharge?

Policy and Strategy Question No. 8: How should a possible P-trading facility be set up, and what
should be its responsibility and functioning?

Policy and Strategy Question No. 9: How should the inventory and monitoring facility be set up, and
what should be its responsibility and functioning? Should it be part of the above, or a separate
independent entity?

Policy and Strategy Question No. 10: Which are the most important next steps?
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