THE STRUCTURE AND PRACTICE OF WATER QUALITY TRADING MARKETS1

ABSTRACT: The use of transferable discharge permits in water pollution, what we will call water quality trading (WQT), is rapidly growing in the U.S. This paper reviews the current status of WQT nationally and discusses the structures of the markets that have been formed. Four main structures are observed in such markets: exchanges, bilateral negotiations, clearinghouses, and sole source offsets. The goals of a WQT program are environmental quality and cost effectiveness. In designing a WQT market, policy makers are constrained by legal restrictions and the physical characteristics of the pollution problem. The choices that must be made include how trading will be authorized, monitored and enforced. How these questions are answered will help determine both the extent to which these goals are achieved, and the market structures that can arise. After discussing the characteristics of different market structures, we evaluate how this framework applies in the case of California's Grassland Drainage Area Tradable Loads Program.     

Policy Utopias for Nutrient Credit Trading Programs with Nonpoint Sources

A promising program to address water contamination from nutrients is water quality trading (WQT), whereby entities with high abatement costs purchase credits from entities with lower abatement costs. The concept has found some success with point source water pollution, but very few trades have occurred in over 50 programs in the United States (U.S.) that have focused on nonpoint sources (NPSs). To understand why success has been slow, we identified three environments needed for programs to succeed: physical, economic, and institutional. We estimate that only 5% of watersheds in the U.S. currently listed as nutrient impaired provide a viable physical environment for trading nitrogen; 13% are suitable for phosphorus. Economic and institutional challenges would shrink that domain even further. Therefore, we find places with the ideal physical, economic, and institutional environments necessary for feasible WQT programs are virtual policy utopias — rare places with ideal environments. Fortunately, a growing literature provides the tools necessary to identify where these policy utopias are and to expand that domain through a better understanding about how to manage WQT programs more effectively.     

Water Quality Trading with Lumpy Investments,Credit Stacking,and Ancillary Benefits

This paper studies the economics of a water quality trading market in a predominantly agricultural watershed, and explores the effects of credit stacking in such a market when buyers and sellers of pollution credits can only reduce pollution with large, discrete investments that yield discontinuous supply and demand. The research simulates hypothetical water quality trading markets in the corn‐belt area of Illinois, where wastewater treatment plants (WWTPs) can pay farmers to reduce nutrients by installing wetlands and farmers may or may not be allowed to earn payments for multiple services from one wetland. We find that wetlands are a more cost‐effective way to mitigate nitrogen pollution than abatement by WWTPs. Stacking credits may improve social welfare while providing more ecosystem services if there is enough demand for the primary credit in the market (nitrogen) to cover most of the cost of installing the wetland but the supply of nitrogen credits is not exhausted. However, in the presence of lumpy pollution reduction activities, the effects of allowing stacked credit sales are idiosyncratic and not necessarily positive; stacked payments may or may not satisfy additionality. The results imply that credit trading for nitrogen is likely to make society better off, but the effects of allowing farmers to receive multiple payments from a single wetland depend on details of the situation.     

Economic and Ecological Rules for Water Quality Trading1

Horan, Richard D. and James S. Shortle, 2011. Economic and Ecological Rules for Water Quality Trading. Journal of the American Water Resources Association (JAWRA) 47(1):59‐69. DOI: 10.1111/j.1752‐1688.2010.00463.x Abstract: Emissions trading in textbook form uses markets to achieve pollution targets cost‐efficiently. This result is accomplished in markets that regulators can implement without knowing pollution abatement costs. The theoretical promise of emissions trading, along with real‐world success stories from air emissions trading, has led to initiatives to use trading for water pollution control. Yet, trading, particularly when it involves nonpoint sources of pollution, requires significant departures from the textbook concept. This paper explores how features of water quality problems affect the design of markets for water pollution control relative to textbook emissions markets. Three fundamental design tasks that regulators must address for pollution trading to achieve an environmental goal at low cost are examined: (1) defining the point and nonpoint commodities to be traded, (2) defining rules governing commodity exchange, and (3) setting caps on the commodity supplies so as to achieve an environmental target. We show that the way in which these tasks are optimally addressed for water quality markets differs significantly from the textbook model and its real‐world analogs. We also show that the fundamental appeal of emissions trading is lost in the case of realistic water quality markets, as market designs that reduce the costs of achieving water quality goals may no longer be implementable without the regulatory authority having information on abatement costs.     

A Recourse‐Based Interval Fuzzy Programming Model for Point‐Nonpoint Source Effluent Trading under Uncertainty

In this study, a recourse‐based interval fuzzy programming (RIFP) model is developed for tackling uncertainties expressed as fuzzy, interval, and/or probabilistic forms in an effluent trading program. It can incorporate preregulated water‐pollution control policies directly into its optimization process, such that an effective linkage between environmental regulations and economic implications (i.e., penalties) caused by improper policies due to uncertainty existence can be provided. The RIFP model is applied to point‐nonpoint source effluent trading of the Xiangxi River in China. The efficiency of trading efforts between water quality improvement and net system benefit under different degrees of satisfying discharge limits is analyzed. The results are able to help support (1) formulation of water‐pollution control strategies under various economic objectives and system‐reliability constraints, (2) selection of the desired effluent trading pattern for point and nonpoint sources, and (3) generation of tradeoffs among system benefit, satisfaction degree, and pollutant mitigation under multiple uncertainties. Compared with the traditional regulatory approaches, the results demonstrate that the water‐pollution control program can be performed more cost‐effectively through trading than nontrading.     

Multiple pollutant discharge permit markets,a challenge for wastewater treatment plants

This study focuses on the challenge of using a multiple pollutant transferable discharge permit market for operating wastewater treatment plants. It uses an analytical case of Sefidrud River in Iran with two checkpoints. It shows that the operating limitations for simultaneous biochemical oxidation demand (BOD) and total nitrogen (TN) removal may convert the economically optimal waste load allocation (WLA) to a framework with lack of incentives. Therefore, water quality trading (WQT) may lose its economical advantages. In this case, a third parameter, such as dissolved oxygen is recommended as an index for assigning market interactions. In spite of economical and practical success, this approach made WLA become a more complicated and uncertain policy. It was totally concluded that using single parameter WQT is only recommended for areas with small agricultural activities or lakes. Otherwise, the integrated discharged permit and reclaimed water market is proposed instead for simultaneous BOD and TN management.     

POLICY OBJECTWES AND ECONOMIC INCENTWES FOR CONTROLLING AGRICULTURAL SOURCES OF NONPOINT POLLUTION1

In this paper, we review the physical characteristics of agricultural non point pollution and discuss the implications for setting appropriate pollution control objectives and designing incentive-based pollution control policies. First, we discuss that policy objectives must be designed carefully to ensure positive economic net benefits can be expected from pollution control. Next, we review several classes of incentives and recommend the use of design-based incentives (i.e., incentives based on variable input use, management practices, and land use) for controlling non point pollution. Cost-effectiveness requires that incentives elicit three types of responses from farmers: (1) use variable inputs at appropriate levels, (2) adopt appropriate management practices, and (3) make appropriate land use decisions at the extensive margin of production. If a set of incentives fails to induce the correct responses, the resulting runoff levels and hence ambient pollution levels and damages will be too large relative to policy goals. A review of existing programs suggests that greater program coordination and improved targeting of incentives are needed for further water quality improvements. Alternatively, properly designed market-based systems may be effective alternatives. These systems would reduce overall pollution control costs by allowing markets to allocate point source and non point source control costs more efficiently.     

Point‐Nonpoint Trading – Can It Work?1

Ribaudo, Marc O. and Jessica Gottlieb, 2011. Point‐Nonpoint Trading – Can It Work? Journal of the American Water Resources Association (JAWRA) 47(1):5‐14. DOI: 10.1111/j.1752‐1688.2010.00454.x Abstract: Water quality trading between point and nonpoint sources is of great interest as an alternative to strict command and control regulations on point sources for achieving water quality goals. The expectation is that trading will reduce the costs of water quality protection, and may speed compliance. The United States Environmental Protection Agency has issued guidance to the States on developing point‐nonpoint trading programs, and United States Department of Agriculture is encouraging farmer participation. However, existing point‐nonpoint trading programs have resulted in very few trades. Supply side and demand side impediments seem to be preventing trades from occurring in most trading programs. These include uncertainty over the number of discharge allowances different management practices can produce, high transactions costs of identifying trading partners, baseline requirements that eliminate low‐cost credits, the reluctance of point sources to trade with unfamiliar agents, and the perception of some farmers that entering contracts with regulated point sources leads to greater scrutiny and potential future regulation. Many of these problems can be addressed through research and program design.     

Constrained Choice and Ethical Dilemmas in Land Management: Environmental Quality and Food Safety in California Agriculture

As environmental and conservation efforts increasingly turn towards agricultural landscapes, it is important to understand how land management decisions are made by agricultural producers. While previous studies have explored producer decision-making, many fail to recognize the importance of external structural influences. This paper uses a case study to explore how consolidated markets and increasing corporate power in the food system can constrain producer choice and create ethical dilemmas over land management. Crop growers in the Central Coast region of California face conflicting demands regarding environmental quality and industry imposed food safety standards. A mail survey and personal interviews were used to explore growers’ perceptions and actions regarding these demands. Results indicate that in many cases growers face serious ethical dilemmas and feel pressured by large processing and retail firms to adopt measures they find environmentally destructive and unethical. Future strategies to address environmental issues on agricultural landscapes should consider the economic constraints producers face and the role of large firms in creating production standards.     

Where Did the Agricultural Nonpoint Source Trades Go? Lessons from Virginia Water Quality Trading Programs

Governmental agencies, nongovernmental organizations, and agricultural organizations promote water quality trading programs as an innovative policy to engage agricultural producers in conservation activities. Cost analyses suggest regulated sources can reduce compliance costs by purchasing agricultural nonpoint source credits. Yet, such “point‐nonpoint” trades are rare. This article assesses the demand for agricultural nonpoint sources in well‐developed nutrient trading programs in Virginia for industrial and municipal wastewater treatment plants, municipal stormwater programs, and land developers. Evidence suggests nutrient trading programs in Virginia will not stimulate investments in pollutant reduction practices on working agricultural lands. The lack of demand for agricultural nonpoint source credits can be attributed to a substantial degree to the design features and incentives present in multiple overlapping regulatory programs. The legal setting that dampens regulated source demand for nonpoint source credits in Virginia is broadly representative of conditions found elsewhere in the United States.     

Achieving Nutrient Water Quality Goals: Bringing Market‐Like Principles to Water Quality Management*1

Abstract: Market‐like trading programs for water quality management begin with enforceable limits on the amount of the pollutant allowed in a watershed. Properly designed market‐like trading programs then create incentives for dischargers to reduce nutrient control costs over time by making pollution prevention innovations. However, the structure of the Clean Water Act can be a barrier to establishing market‐like trading programs. First, we describe the general features and advantages of market‐like trading programs. Then we offer practical suggestions for bringing market‐like design concepts to nutrient trading programs within the existing legal and regulatory setting.     

GOAL-ORIENTED AGRICULTURAL WATER QUALITY LEGISLATION1

ABSTRACT: While significant nonpoint source (NIPS) pollution control progress has been made since passage of Section 319 in the 1987 Water Quality Act, existing federal legislation does not provide for the most timely and cost-effective NIPS pollution reduction. In this paper, we use findings from the Rural Clean Water Program and other nationwide agricultural NIPS pollution control programs, building on legislative history to recommend a coordinated and efficient direction for agricultural water quality legislation. A collaborative framework should be established to accomplish the goals of the Clean Water Act (CWA), Coastal Zone Management Act (CZMA), and the Conservation Title of the Farm Bill. Valuable elements of the 1990 CZMA amendments that created a coastal NIPS program should be subsumed into the CWA. The CWA should reemphasize use of receiving water quality criteria and standards and should allow states flexibility to tailor basin-scale NPS program implementation to local needs. Implementation should involve targeting of NIPS pollution control efforts to critical land treatment areas and use of systems of best management practices to address these targeted water quality problems. The 1995 Farm Bill should reorient production incentives toward water quality to support the collaborative framework, implementing ecologically sound source reduction principles. The Farm Bill and the CWA should contain interrelated provisions for voluntary, incentive-assisted producer participation and fallback regulatory measures. Such coordinated national water quality and Farm Bill legislation that recognizes the need for flexibility in state implementation is supported as the most rational and cost-effective means of attaining water quality goals.     

Assessment OF SURFACE WATER QUALITY at Large Watershed Scale: Land‐Use,Anthropogenic, and Administrative Impacts

Understanding the impacts that influence water quality is critical to the development of best management practices at the large watershed scale. This study describes the spatiotemporal variation in surface water quality and identifies their main impact in the Haihe River basin, China. Multivariate statistical techniques are applied to analyze the similarities among the sampling sites and to identify the main pollution sources in surface water. Results show that: (1) the basin can be clustered into two regions, water quality being better in the mountainous vs. plain regions; (2) water quality improves due to implementation of a strict state policy on environmental pollution control, prodded by the hosting of the Olympic games in the cities of Beijing and Tianjin; and (3) agricultural and residential land uses as well as livestock‐breeding are the main sources affecting water quality in the mountainous regions, whereas rural waste discharge — including domestic waste sewage, human and animal feces, and solid waste — significantly influences water quality in the plain regions. The waste discharge of industrial factories may be a significant source of water pollution in the plain regions. Results indicate that the environmental management from pollution sinks and sources, long‐lasting legal framework, and adequate economic incentives should be improved to optimize the large‐scale watershed management under the background of the rapid development of countries like China.     

Power,Fairness and Constrained Choice in Agricultural Markets: A Synthesizing Framework

The (un)fairness of agricultural markets is frequently invoked, especially by farmers. But fairness is difficult to define and measure. In this paper we link fairness and power with the concept of constrained choice to develop a framework for assessing fairness in agricultural markets. We use network exchange theory to define power from the dependencies that exist in agricultural networks. The structure of agricultural networks and the options that agricultural producers have to participate in agricultural networks affect the degree to which they are dependent on others within the network. Dependency, in turn, affects the choices that agricultural producers have. We consider both the number and nature of these choices. We argue that constraining or limiting choices—both in number and type—violates principles of justice. Importantly, network exchange theory provides a method for assessing constraints in choices and, hence, the fairness of agricultural markets. Such an assessment could potentially lead to new policies that safeguard the liberties of marketplace participants. We present a brief case to illustrate how this framework can inform on the fairness of agricultural markets and conclude with considerations of what this means for policy, particularly in the arena of anti-trust.     

AGRICULTURAL POLLUTION CONTROL: IMPLICATIONS FROM THE RURAL CLEAN WATER PROGRAM1

ABSTRACT: The Rural Clean Water Program has provided a unique opportunity to study the economics of agricultural nonpoint source pollution control. Several implications for improving the economic efficiency of future agricultural nonpoint source pollution control programs can be drawn from the results. First, individual projects should be targeted towards water bodies that have water quality problems causing economic damages. Considerable variation can exist among areas in the magnitude of economic damages, which may not be proportional to physical impacts. Second, the relative costs and effectiveness of the practices selected to reduce the delivery of pollutants can vary dramatically from one location to another. Early identification and emphasis on cost-effective BMPs can substantially reduce project costs and may make a project economically justifiable that would not otherwise be so. Finally, some projects that do not hive potential economic benefits from water quality improvements exceeding government cost may have on-farm benefits from reduced costs and increased long-term yields that are sufficient to make total benefits (water quality and on-farm) exceed costs.     

COST-EFFECTIVE REGULATORY OPTIONS FOR WATER QUALITY LIMITED STREAMS1

With the pressure from industries and municipalities to reduce the waste water treatment costs associated with the permit limits needed to attain the goals of the Clean Water Act, attention has turned ways of introducing flexibility into the regulations without sacrificing the water quality goals. Wisconsin is the first state to have adopted a variety of options from which dischargers may choose when meeting their water quality requirements. These options were developed for the express purpose of minimizing the costs and maximizing the flexibility of the point source water quality regulations while ensuring that permitted discharge would not violate the water quality standards. This paper presents five options that the state has made available to dischargers, as well as one the state did not adopt. The conclusion is that a mix of options can substantially increase the flexibility and reduce the costs of meeting water quality standards on effluent limited streams.     

INTEGRATING DIFFUSEINONPOINT POLLUTION CONTROL AND WATER BODY RESTORATION INTO WATERSHED MANAGEMENT1

ABSTRACT: The objective of water quality/watershed management is attainment of water quality goals specified by the Clean Water Act. The Total Maximal Daily Load (TMDL) planning process is a tool to set up watershed management. However, TMDL methodologies and concepts have several problems, including determination of Loading Capacity for only low flow critical periods that preclude consideration of wet weather sources in water quality management. Research is needed to develop watershed pollutant loading and receiving waters Loading Capacity models that will link wet and dry weather pollution loads to the probability of the exceedence of water quality standards. The long term impact of traditional Best Management Practices as well as ponds and wetlands, must be reassessed to consider long term accumulation of conservative toxic compounds. Socioeconomic research should focus on providing information on economic and social feasibility of implementation of additional controls in water quality limited watersheds.     

Agricultural water pollution control: An interdisciplinary approach

Regulation and control of agricultural water pollution is unique and difficult to accomplish. Water quality standards are often proposed without adequate consideration of the overall economic impact on agricultural production. This article illustrates how economists and physical scientists can cooperate to develop appropriate control strategies for agricultural water pollution. Data provided by physical scientists and economists are used in a linear programming model to describe salt discharge as a function of water management, production levels, and an associated effluent charge. Four water management activities were chosen on the basis of different costs of production (including a parametrically varied effluent charge), water requirements, alfalfa yields, and levels of salt discharge. Results indicate that when the effluent charge is low (<$0.20/metric ton salt discharged), maximum production with maximum salt discharge is most profitable. As the effluent charge is increased ($0.20–$0.40/metric ton salt discharged), it becomes progressively less profitable to produce alfalfa at maximum levels of pollutant discharge. When the effluent charge is >$0.40/metric ton salt discharged, alfalfa production is no longer economically feasible. An important aspect of this approach is that it permits policy makers to identify explicitly the relationship between the environmental standard and the effect on agricultural production.     

An Ex Post Evaluation of Ohio’s Great Miami Water Quality Trading Program1

Newburn, David A. and Richard T. Woodward, 2011. An Ex Post Evaluation of Ohio’s Great Miami Water Quality Trading Program. Journal of the American Water Resources Association (JAWRA) 48(1): 156‐169. DOI: 10.1111/j.1752‐1688.2011.00601.x Abstract: Market‐based approaches to address water quality problems have resulted in only limited success, especially in trading programs involving both point and nonpoint sources. We analyze one of the largest point‐nonpoint trading programs – the Great Miami Trading Program in Ohio, administered by the Miami Conservancy District (MCD). Our evaluation focuses on the economic and institutional aspects of the program, including cost effectiveness, efficiency of bidding, transaction costs, trading ratios, and innovation. We use a unique dataset consisting of all bids from agricultural nonpoint sources and interviews of soil and water conservation district (SWCD) agents in the watershed. We find that the MCD’s reliance on county‐level SWCD offices to recruit and advise farmers has been essential to achieve relatively high rates of farmer participation. Additionally, the MCD is able to partly free ride on the administrative costs that SWCD offices receive to assist federal conservation programs, which is helpful to lower costs for a fledgling trading program. However, the involvement of SWCD offices reduced the potential cost savings from the reverse auction structure because some agents were able to learn about the threshold price over the six rounds of bidding and help farmers bid strategically. Overall, the program structure serves as an effective model for future trading programs in other regions that seek to involve agricultural nonpoint sources.     

ENVIRONMENTAL AND ECONOMIC DAMAGE CAUSED BY SEDIMENT FROM AGRICULTURAL NONPOINT SOURCES1

Environmental and economic damages caused by agricultural nonpoint source inputs of sediment and associated pollutants are examined. Widespread water quality problems are identified in lakes, rivers, and estuaries in agricultural areas, and billions of dollars of on-site and offsite costs result from this eroded soil every year. Some water bodies have been irretrievably damaged, and expensive rehabilitation programs are needed to remedy in-place water pollution problems if Clean Water Act goals are to be achieved. Unless effective abatement and rehabilitation programs are established, billions of dollars of benefits to future generations will not be realized as more waters become irretrievably damaged, and billions more will continue to be spent by government to treat symptoms of these sediment-related problems.