By integrating the successful case of the European Union emissions trading system, this study proposes a water emissions trading system, a novel method of reducing water pollution. Assuming that upstream governments allocate initial quotas to upstream businesses as the compensation standard, this approach defines the foundational principles of market trading mechanisms and establishes a robust watershed ecological compensation model to address challenges in water pollution prevention. To be specific, the government establishes a reasonable initial quota for upstream enterprises, which can be used to limit the emissions of upstream pollution. When enterprises exceed their allocated emissions quota, they face financial penalties. Conversely, these emissions rights can be transformed into profitable assets by participating in the trading market as a form of ecological compensation. Numerical simulations demonstrate that various pollutant emissions from upstream businesses will have various effects on the profits of other businesses. Businesses in the upstream region received reimbursement from the assigned emission rights through the market mechanism, demonstrating that ecological compensation for the watershed can be achieved through the market mechanism. This novel market trading system aims at controlling emissions management from the perspectives of individual enterprises and ultimately optimizing the aquatic environment.

  • The article establishes a water emissions trading mechanism. We establish this mechanism to control the amount of emission from each enterprise. Then we achieve the purpose of optimizing the water environment.

Researchers (Shortle & Dunn 2010; Huang et al. 2010; Bao et al. 2012; Gorelick et al. 1983; Rozell & Reaven 2012) have shown a lot of interest in the issue of controlling water contamination. Until the middle of the 1990s, China had five or fewer domestic wastewater treatment facilities. Most big cities, such as Wuhan and Chongqing, do not treat any household wastewater before it is released into the environment. There is still no Chinese city that has completely treated all of its sewage, highlighting the environmental pollution problem plaguing China’s river basins.

The rapid industrialization of cities has increased resource consumption, energy consumption, and pollution emissions (Liu et al. 2012). Growing public and international condemnation has compelled governments to take steps to reduce watershed contamination to tolerable levels. Water emissions trading is regarded as a less costly alternative tool compared to traditional administrative control methods (Hung & Shaw 2005; Jamshidi et al. 2015). As with many other emissions trading programs, post-event analysis of Chinese emissions trading programs by researchers found small cost savings and lower than expected trading volumes at the start of the program (Atkinson & Tietenberg 1991; Chang & Wang 2010).

In the existing literature, scholars have conducted numerous studies on carbon and sulfur emission rights (Cong & Wei 2010; Lin & Jia 2018; Zetterberg & Wrake 2012; Kumar & Managi 2010; Ren et al. 2020; Burtraw & Mansur 1999; Corburn 2001; Kroes et al. 2010). Cong & Wei (2010) studied the potential impact of introduction of carbon emissions trading on China’s power sector and discusses the impact resulting from different approaches to the allocation of allowances. Lin & Jia (2018) constructed six countermeasure scenarios with various methods for carbon allocation reduction to investigate the impact of these schemes on energy, economy, and the environment. The findings indicate that the emission-based emission trading plan (ETS) quota decrease plan would encourage society to prioritize emission reduction. Zetterberg & Wrake (2012) employed economic analysis to analyze grandfathering, auctioning, and benchmarking systems for distributing emissions permits and then discussed practical experience from European and American schemes.

Ren et al. (2020) used ‘China’s sulfur dioxide (SO) emissions trading program’ as a quasi-natural experiment to identify the causal effect of this market-based environmental regulation on firm’s labor demand. The research findings demonstrated that the market-based environmental regulations in even developing countries could achieve the double dividend of coexistence of environmental protection and employment growth. Kumar & Managi (2010) found that from 1995 to 2007, due to the introduction of the cap-and-trade system, power plants were able to increase their power output and reduce and emissions.

Environmentalists have questioned whether market-based schemes are satisfying their needs for effective and equitable pollution reduction promises as emissions trading systems have grown in popularity as a tool for environmental pollution management on a global scale. Water quality trading (WQT) programs including point-nonpoint trading have been promoted for decades in many countries (e.g., the United States, Japan, Canada) to address water pollution problems (Duke et al. 2020). However, China’s emission trading system has been gradually improved, the country has the initial foundation to implement emission trading, and the research on water emission trading is extremely immature (Havens & Schelske 2001).

Based on the successful case of EU ETS, this study provides a reference for the existing research by establishing water pollutant emission trading markets and watershed ecological compensation models. Previous studies have already shown the potential of market mechanisms in promoting environmental protection (Zhang et al. 2012) and the importance of economic incentives in pollution control (Juan et al. 2002). We further demonstrate how the introduction of market mechanisms and trade can achieve economically effective water pollution control at the watershed level. This model innovatively integrates economic incentives with ecological restoration by incorporating ecological compensation into the trading market, thus addressing the dual challenge of economics and environment.

This article is organized as follows. In Section 2, we briefly introduce the basic elements of water emission right trading market and introduce the market operation mechanism and watershed ecological compensation. The model is analyzed in different cases and explained the theoretical results in Section 3 and summarized in Section 4.

This article mainly draws on the European Union (EU) carbon emission trading system to research the water emission trading mechanism (Brink et al. 2016; Anger & Kohler 2010). Incorporating the concept of ecological compensation, the water pollution control model was designed based on the quota. This section mainly elaborates on the fundamental components of the market and the trading mechanism.

Basic elements

Emission threshold

The social welfare of the downstream region is directly impacted by the pollution emission threshold of the upstream region in addition to its own social welfare level. Our thoughts in this study are therefore focused on the formulation of the emission threshold. Instead of upstream and downstream regional administrations, basin management establishes consistent emission levels (Talmadge et al. 1998).

Transaction subject, object, and scope

We study a market where the trading parties are basin-wide water discharge businesses that are located upstream and downstream, and the trading objects are water discharge rights. Not all of the emitters in the basin, nevertheless, are tradeable. Based on variables such as whether the firm has a right to emit, the magnitude of earlier emissions, and the actual size of production, basin management should establish precise market access thresholds and standards (Arabi et al. 2007). The EU’s participation in the carbon emissions trading scheme is limited to a small number of high carbon output industries. As a result, several businesses with substantial emissions of water pollution are thought to be covered by water emissions trading, including the paper industry, printing and dyeing, nitrogen fertilizers, and others.

Allocation of quotas

A key feature that sets the water emissions trading market apart from the carbon emissions trading market is that it complements the basin ecological compensation mechanism in addition to promoting the reduction of water pollution (Marchal et al. 2011). In particular, the basin management only provides the upstream government with a limited number of emission rights, or quotas as discussed, free of charge, under the upstream region’s water pollution discharge threshold (Zhang & Hao 2017). This is done as ecological compensation to the upstream region. Following that, the quotas are further distributed to local emitters by upstream governments.

Market operation mechanism

The suggested basin water emissions trading market operation mechanism is shown in Figure 1 and is based on the analysis of the fundamental components of the water emissions trading market that was done earlier. Upstream emitters purchase emission rights from basin management agencies, and through an offset system, the emission quotas they acquire can be used to lower the emission fees owed for emissions. The remaining quota can also be swapped with other upstream and downstream polluters when the allotted amount is greater than the permitted emissions.

Therefore, by allocating some additional emission rights to upstream emitters, the emissions trading market primarily delivers ecological compensation for upstream regions. In addition, there are two key factors that determine the extent of ecological compensation: First, the quota that the basin management distributed to the regional governments upstream. More effluent costs can be mitigated or more money can be made via market transactions the more quotas there are. Second, how much upstream emitters are permitted to compensate for their polluting emissions by buying their emission rights. Downstream emitters (Yu et al. 2016) that there is a higher demand for emission licenses when the amount of offsetting is high. The upstream emission businesses can then sell them for more money and get paid more as a result.
Figure 1

Policy on market trading platform for emission rights.

Figure 1

Policy on market trading platform for emission rights.

Close modal

Hypothesis

  • (1) Within the basin, there is one rational discharge enterprise in each of the upstream and downstream areas (Jiang et al. 2019).

  • (2) Due to the relatively poor economy of the upstream region, the government of the upstream region can allocate a certain amount of quota to enterprises in the upstream region, while no quota is allocated to enterprises in the downstream region (Marchal et al. 2011). After upstream enterprises offset their actual emissions with quotas, they can sell their water emissions rights to other enterprises through a trading market.

  • (3) Water emissions rights cannot be used past their expiration date (Konishi et al. 2015).

  • (4) Businesses in the downstream are open to trading water emissions rights. In other words, regardless of how many quotas are available for upstream businesses, downstream businesses are eager to purchase them. In addition, downstream businesses can keep reselling the purchased allowances to other businesses while using them to reduce their own emissions payments.

Basic model

Combined with the operating mechanism of the water emission rights trading market in the basin shown in Figure 2, there are two regions (A, B) in the basin, and watershed management controls the emissions threshold to . For enterprise (), enterprise a obtains quota (). We considered that one unit of pollutant emissions are subject to an emission fee of t. When the emission exceeds the emission threshold , the excess will be paid in the amount of 2t emission fees. It can be seen that when the actual pollutant emissions are at different levels, the environmental benefits R of enterprise will be significantly different. Therefore, (n represents different situations) was analyzed according to the . The basic parameters are set as shown in Table 1.
Table 1

Notations and definitions

A Upstream region 
B Downstream region 
Qs Initial quota 
Qi Pollutant emissions threshold of region  
 Income of enterprise j, n means different pollution emissions cases of enterprises 
 Emissions from region i 
a Upstream enterprise 
b Downstream enterprise 
t Pollutant emissions for fee per unit of pollutant emissions 
 Trading price of water emission rights under different circumstances 
A Upstream region 
B Downstream region 
Qs Initial quota 
Qi Pollutant emissions threshold of region  
 Income of enterprise j, n means different pollution emissions cases of enterprises 
 Emissions from region i 
a Upstream enterprise 
b Downstream enterprise 
t Pollutant emissions for fee per unit of pollutant emissions 
 Trading price of water emission rights under different circumstances 
Figure 2

Operating mechanism of water emission rights trading market in the basin.

Figure 2

Operating mechanism of water emission rights trading market in the basin.

Close modal

Case 1: 0 < qa < Qs

In this case, enterprise may trade the set-off remaining quota in the water emission rights trading market. Correspondingly, enterprise a and enterprise b trade water emissions rights in the water emissions rights trading market. Here, we assume that enterprise b is a rational individual, so the price he can accept for water emissions rights will be less than the emission fees t. And enterprise a can obtain a free quota , we do not consider the allocation of quotas by the local government to downstream enterprises, and the reason is that upstream regions are relatively economically poor and the downstream regions are economically developed. Of course, both enterprises are rational individuals. We defined that the actual trading price of water emission rights is p (0 ), the main situation is shown in Figure 3.
Figure 3

Trading of water emission rights between enterprise a and enterprise b.

Figure 3

Trading of water emission rights between enterprise a and enterprise b.

Close modal
We obtained the benefits of enterprise a as follows:
formula
(1)
From Equation (1), 0 shows that in the case of low emissions, enterprise a does not need to pay sewage charges and can also get additional environmental benefits through water emission rights trading. That is to say, the amount of ecological compensation consists of two parts: (i) The exemption of pollutant emissions fee. (ii) Additional benefits obtained through transactions. Under this circumstance, enterprise b can also obtain certain benefits through water pollution rights trading. Compared with when there is no water pollution rights trading, it can reduce the emission fees of .
formula

Case 2: Qs < qa < QA

Under this situation, the quota of water emission rights obtained by enterprise a cannot completely offset its actual emission volume, so it is necessary to pay a certain sewage charge. Since the actual emissions does not exceed the upper limit, the income of enterprise a in case 2 is:
formula
(2)
Where , it means that when enterprise a emissions a lot of pollution, it needs to pay a sewage fees for excessive emissions, and there is no remaining water emissions right to trade with enterprise b. Therefore, the amount of ecological compensation received by enterprise a is only part: underpaid sewage charges .

Case 3: qa > QA

In this case, since the pollution emissions of enterprise a exceeds the threshold of region A, not only does it need to pay the pollution emissions fees within the specified emissions volume but also the government needs to punish it accordingly, and the penalty is () . The details are shown in Figure 4. Thus, the income of enterprise in this case:
formula
(3)
Figure 4

Enterprise a pollution charge situation.

Figure 4

Enterprise a pollution charge situation.

Close modal

Model extensions

As shown in section (Section 2.4), there is only one enterprise that exists in region A. Now, we consider that there are two enterprises (, ) in region A, and the actual emissions of enterprise and are and , respectively. In addition, the upper limit of pollutant emissions for region A is decomposed into and . Corresponding to the pollutant emission thresholds of enterprise and enterprise , respectively. The quota of water emission rights obtained by the two enterprises are and , respectively. Among them, and . Next, we analyze the revenue of each enterprise based on the actual emissions of enterprise and enterprise .

0 < qa2 < Qsa2

Case 4:

In this case, enterprises and can trade the offset remaining quotas () and (). In the water emission rights trading market and resell the excess emission rights to enterprise b. Moreover, the actual market transaction price of water pollution rights is , which satisfies 0 t. Therefore, we obtain the revenue of each enterprise as follows:
formula
(4)
formula
(5)
Similar to the analysis in Section 2.4.1, no enterprises in upstream region A need to pay pollution fees, and they can also obtain additional income through water pollution rights trading, thereby obtaining corresponding ecological compensation. At the same time, enterprise b can pay less for sewage :
formula
(6)

Case 5:

In this case, the quota of water emission rights obtained by enterprise can only offset part of the pollution emissions fees. Not only can enterprise completely offset the pollution emissions fees but also it can resell part of the excess quota to enterprise b or enterprise . Now suppose that enterprise sells to enterprise proportion of the remaining quota is (). Among them, because the quota purchased by enterprise will not be higher than the difference between the actual emissions and its own quota. Then enterprise b can purchase proportions remaining quota. Moreover, suppose that the market equilibrium is that the price of water emission rights is t). Thus, the benefits of these enterprises are as follows:
formula
(7)
formula
(8)
In this case, enterprise b can obtain proportion water emission rights quota from enterprise , so the emission reduction cost it can got
formula
(9)

Case 6:

In this case, the pollutant emissions volume of enterprise exceeds the threshold . Although the initial quota allocated by the upstream government can offset certain pollution charges, the government should impose certain penalties on the part with multiple emissions. For enterprise , not only does it not need to pay pollution fees but also it can sell the remaining quota to other enterprises. It should be noted that there are two situations for discussion here: (i) . (ii) . In addition, we assume that the trading price in the market at this time is (). Thus, the benefits of these enterprises we given that

(i) .

In this case, because enterprise emissions more pollutants than it purchases, even if it can be exempted from some penalties, it still needs to pay a certain fine. Therefore, we give that
formula
(10)
formula
(11)
Similarly, the sewage fees underpaid by enterprise b is
formula
(12)
(ii) .
In this case, enterprise has purchased too much emission rights. To achieve the ecological compensation standard for upstream enterprises, we assume that enterprise will sell the excess quota to downstream enterprises at price .
formula
(13)
formula
(14)
The sewage fees underpaid by enterprise b, we assume that enterprise a resells the excess emission rights to b at price (0 ). Thus, we given that
formula
(15)

Qsa2 < qa2 < QAa2

Case 7:

In this case, the quota of enterprise is greater than its emissions, so he has the remaining quotas to be sold to other enterprises. For enterprise , its emissions are larger than the initial quota and less than the local upper limit. Therefore, he needs to be punished accordingly and pay a certain sewage charge. At this point, we set the market price as . And we assumed that enterprise sells the remaining quota to enterprise at proportion , and then enterprise b will have a quota of proportion. Same analysis as Equation (7), . Thus, we given that
formula
(16)
formula
(17)
formula
(18)

Case 8:

In this case, neither enterprise nor enterprise has any remaining quota. Therefore, upstream enterprises are required to pay a certain amount of pollution emissions fees, and enterprise b cannot purchase quotas. So, the income of each enterprise is
formula
(19)
formula
(20)
formula
(21)

Case 9:

In this case, enterprise has exceeded the emission limit and it will be penalized, while the others have no quota to sell. As a result, their earnings are as follows:
formula
(22)
formula
(23)
formula
(24)

qa2 > QA2

Case 10:

In this case, enterprise exceeds its emission threshold and needs to be severely punished. However, compared with enterprise , it has the remaining quota to be sold to enterprise and enterprise , so both of them can reduce the sewage charge relatively. In fact, this situation is similar to case 6 (see Section 2.4.5), so we also discuss it in two cases: (i) . (ii) . Among them, the market transaction price is set to . If enterprise buys more quotas, it can be sold to enterprise at the price of . Thus, the benefits of these enterprises we given that

(i) .
formula
(25)
formula
(26)
formula
(27)
(ii) .
formula
(28)
formula
(29)
formula
(30)

Case 11:

Neither enterprise nor enterprise has quota surplus, so we have
formula
(31)
formula
(32)
formula
(33)

Case 12:

In this case, the earnings we get from each enterprise are as follows
formula
(34)
formula
(35)
formula
(36)
The two-enterprise water emissions rights trading model and the three-enterprise water emissions rights trading model were covered in the earlier research. The next section uses numerical simulations to more clearly clarify the issue by analyzing the relationship between upstream businesses’ pollution emissions and their revenues in various scenarios.

Result analysis

To further illustrate the impact of the parameters in the model on the earnings of the upstream firms, we will use numerical simulations to analyze the impact of the emissions volume and the trading price on earnings of the firms. Table 2 presents the initial values of each parameter (the assumptions of the parameters are based on the analysis in the previous sections).

Table 2

Parameter data

pt
30 60 10 
pt
30 60 10 

Notes: is the initial quota allocated by the upstream government to upstream enterprises, represents the upper limit of pollutant emissions in region set by the watershed management department, is the emission of upstream enterprise , represents the price traded to other enterprises () by upstream enterprises, and indicates the pollutant emissions price set by the river basin management department.

According to the previous model and hypothetical parameters, we can obtain Figure 5. From Figure 5, we analyze the relationship between the emissions of upstream enterprise a and its income. With the increase of emissions, it can be seen from that the income of enterprise a is declining faster and faster. It demonstrates that the severity of the penalty for firms increases with the level of emissions. As a result, upstream businesses should precisely take into account how their emissions and earnings relate during manufacturing and building. Only in this way, we can maximize our own interests and better develop our enterprises.
Figure 5

Relationship between emission and profit of enterprise a.

Figure 5

Relationship between emission and profit of enterprise a.

Close modal

Analysis of extended model results

In this section, we mainly explain the situation of three enterprises. It is relatively complex compared to the two companies. Here, the parameters we assumed are shown in Table 3:

Table 3

Parameter data

16 14 32 28 10 
16 14 32 28 10 

Notes: represents the initial quota allocated to enterprise by the upstream government, represents the initial quota allocated to enterprise by the upstream government, indicates that the watershed management department sets the emissions threshold for enterprise , indicates that the watershed management department sets the emissions threshold for enterprise , represents the amount of pollution emissionsd by the upstream enterprise , represents the amount of pollution emissionsd by the upstream enterprise , and () represents the trading price of emissions in different cases, , .

(i) .

Combined with the previous analysis, we can also make a function diagram of upstream enterprise emissions and their benefits. However, it should be noted that when the emission of enterprise is greater than the threshold given by the watershed management department, or when the emission of enterprise is greater than the threshold given by the watershed management department, we need to discuss it on a case-by-case basis. Therefore, the function diagrams of the following cases are obtained.

Figures 6 and 7 explain the relationship between the emissions of enterprise and enterprise and the income when , and . In Figure 6, the images of , , and are obtained by Equations (4), (7), and (10), respectively. Similarly, the images of , , and are obtained from Equations (5), (8), and (11), respectively. From the analysis of the picture, it shows that , and on the contrary, . It means that as corporate emissions increase, enterprise earnings will decline faster and faster. However, the revenue of enterprise will grow faster and faster. This is because the more emissions, when they exceed their initial quota, are penalized accordingly. However, to avoid paying excessive sewage charges, it will buy a certain amount of pollution from enterprise . As a result, the revenue of enterprise will increase as the volume of emissions of enterprise increases.

Figure 7 shows that when the emissions of enterprise are at 0 , the earnings of enterprise and enterprise decline at almost the same rate, and the reason is when enterprise produces emissions, it will offset a certain amount of sewage charges with its own initial quota, resulting in the same result as enterprise . When the emissions of enterprise are at , and as shown in the figure, we found that with the increase of emissions, the income of enterprise decreases faster than that of enterprise . The reason is that enterprise emits too much pollution and will be punished accordingly, while enterprise does not have to pay a fine because it has an excess quota. When the emissions of enterprise are at , we found that the rate of decline in enterprise revenue is even more drastic.
Figure 6

Relationship between emissions and profits of enterprise and .

Figure 6

Relationship between emissions and profits of enterprise and .

Close modal
Figure 7

Comparison of the profit situation of enterprise and enterprise .

Figure 7

Comparison of the profit situation of enterprise and enterprise .

Close modal

Next, we will analyze the case: .

(ii) .

In this case, we give an image of , as shown in Figure 8. Through the comparison between the two parties, we found that the images of , and have changed.
Figure 8

Comparison of enterprise purchase quota situation.

Figure 8

Comparison of enterprise purchase quota situation.

Close modal

As shown in Figure 8, it is obvious that the image results of Equations (10) and (13) are different, and the result of Equation (10) is larger than of Equation (13). The reason is that the quota that enterprise buys from enterprise exceeds its emission capacity, so enterprise will resell the remaining quota to other enterprises, and this article assumes that it will be resold to downstream enterprise . As a result, enterprise will get a certain quota to offset the sewage charges. Therefore, the results of the two cases are different.

Figures 9 and 10 explain the relationship between the emissions of enterprise and enterprise and the income when . In Figure 9, the images of , , and are, respectively, obtained from Equations (16), (19), and (22). Similarly, the images of , , and are obtained from Equations (17), (20), and (23), respectively. We found that , by reversing the order, . As shown in Figure 10, we obtained that only in the case of and , the enterprise and , their earnings decline at the same rate. When the emissions of enterprise are 0 and , the revenue of enterprise is falling faster than that of enterprise . Next, we will analyze the case: .
Figure 9

The relationship between income and emissions of enterprise and .

Figure 9

The relationship between income and emissions of enterprise and .

Close modal
Figure 10

Comparison of profit and emissions of enterprise and .

Figure 10

Comparison of profit and emissions of enterprise and .

Close modal
We analyze the situation of enterprise for the reason that the functional image of enterprise is relatively simple, as shown in Figure 11. From Figure 12, we see that, except that Equations (25) and (28) get different results, the other cases are exactly the same. This shows that when enterprise has a surplus quota, enterprise can buy a certain quota to offset the sewage charge, but when enterprise has no extra quota to sell. This case will result in enterprise to paying the excess sewage charges.
Figure 11

Relationship between enterprise ’s emissions and profits.

Figure 11

Relationship between enterprise ’s emissions and profits.

Close modal
Figure 12

Comparison of different percentages of quotas purchased by enterprise .

Figure 12

Comparison of different percentages of quotas purchased by enterprise .

Close modal

Discussion

In the numerical simulation phase, this article firstly analyzes the relationship between the income and emissions of a single upstream enterprise. Then, it focuses on an extended model that includes upstream enterprises and , as well as a downstream enterprise . The relationship between profits and emissions is studied under different emission scenarios. Similar to Li & Wang (2018), it suggested that cross-border urban areas should adhere to the principle of ‘polluter pays’, and cities that excessively use emission rights should pay more ecological compensation. Different from this research, Zhu et al. (2022) studied the central government and upstream and downstream governments, and the central government fines or rewards upstream and downstream governments based on pollution emissions. The model proposed in this article aligns more with the purposes of enterprises, which is profit-oriented, profit is a key driver for enterprises to engage in technological innovation. If enterprises know that their investment in pollution control can bring returns, they will take the initiative to implement pollution control measures. However, it may require initial financial subsidies from the government to achieve significant income in the early stages.

This study establishes a watershed ecological compensation model of the water emissions trading market, analyzes, and explains the operation mechanism of the water emissions trading market from the theoretical level, and primarily draws the following conclusions. These conclusions are based on the successful case of EU international carbon emissions trading and the fundamental characteristics of water pollution emissions.

  1. The water emissions trading system is a useful new solution to the pollution management issue and a supplement to the already-existing ecological compensation in the basin. This article proposes a synergistic model in which market mechanisms successfully complement each other through combined coordination of government regulation and market processes. Government macro-regulation takes the lead (quota allocation, setting of emissions thresholds, etc.). It has been discovered that the use of water emissions trading for watershed pollution control, along with the knowledge gained through carbon emissions trading, can give government policy makers a fresh viewpoint when addressing water pollution issues.

  2. The market mechanism can facilitate ecological compensation in the basin, incentivizing upstream regions to mitigate water pollution. As the emissions from upstream enterprises escalate, the income of these enterprises is rapidly diminishing. From a market operation perspective, the ecological compensation received by upstream enterprises primarily stems from allocated water discharge rights.

  3. The allocation of initial quotas to upstream enterprises by the upstream governments is found to be a crucial trade-off process when basin management sets emission thresholds, which has a significant impact on the basin’s ecological environment, to effectively control the water pollution emissions of each enterprise. In addition, when the government assigns initial quotas to upstream firms, they benefit by lowering emissions and also make a significant contribution to decreasing water pollution. According to the calculation results, the government can set a more reasonable initial emission quota to reduce pollutant emissions. In addition, businesses can invest in sewage treatment facilities to reduce pollution emissions and increase revenue in the trade market.

In future research, scholars are recommended to include diverse regions, multiple industries, and varying strategic decisions made by companies or governments. In addition, researchers can explore more practical and effective strategies to optimize emissions and allocate initial quotas, taking into account regional characteristics, industrial activities, and government policies. Furthermore, empirical analysis of a particular region will contribute to the development of effective and sustainable water pollution management strategies.

All relevant data are included in the paper or its Supplementary Information.

The authors declare there is no conflict.

Lu Zuliang and Xing Lu have participated in the sequence alignment and drafted the manuscript. Xu Ruixiang, Hou Chunjuan, and Yang Yin have made substantial contributions to conception and design.

This work was supported by Natural Science Foundation of Chongqing (CSTB2022NSCQ MSX0286, CSTB2022NSCQ-MSX0393, cstc2021jcyj-msxmX0949), Scientific and Technological Research Program of Chongqing Municipal Education Commission (KJZD-K202001201, KJQN202101212), Humanities and Social Sciences program of Chongqing Municipal Education Commission (23SKGH282) and Research Center for Sustainable Development of Three Gorges Reservoir Area (2022sxxyjd01).

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