Exploring Nontraditional Participation as an Approach to Make Water Quality Trading Markets More Effective

Water quality trading (WQT) has the potential to be a low‐cost means for achieving water quality goals. WQT allows regulated wastewater treatment plants (WWTPs) facing discharge limits the flexibility to either reduce their own discharge or purchase pollution control from other WWTPs or nonpoint sources (NPSs) such as agricultural producers. Under this limited scope, programs with NPSs have been largely unsuccessful at meeting water quality goals. The decision to participate in trading depends on many factors including the pollution control costs, uncertainty in pollution control, and discharge limits. Current research that focuses on making WQT work tends to identify how to increase participation by traditional traders such as WWTPs and agricultural producers. As an alternative, but complementary approach, we consider whether augmenting WQT markets with nontraditional participants would help increase the number of trades. Determining the economic incentives for these potential participants requires the development of novel benefit functions requiring not only economic considerations but also accounting for ecological and engineering processes. Existing literature on nontraditional participants in environmental markets tends to center on air quality and only increasing citizen participation as buyers. Here, we consider the issues for broadening participation (both buyers and sellers) in WQT and outline a multidisciplinary approach to begin evaluating feasibility.     

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.     

ADDRESSING TOTAL PHOSPHORUS IMPAIRMENTS WITH WATER QUALITY TRADING1

ABSTRACT: Water quality trading is a voluntary economic process that provides an opportunity for dischargers to reduce the costs associated with meeting a discharge limitation. Trading can provide a cost effective solution for point sources (i.e., wastewater treatment plants) to meet strict effluent limitations set in response to total maximum daily loads (TMDLs). A successful trading program often depends on first determining the trading suitability of a pollutant for a particular watershed. A simple technical approach has been developed to identify sub‐watersheds within the Raritan River Basin, New Jersey, where water quality trading could provide a cost effective and scientifically feasible method for addressing total phosphorus impairments. The methodology presented will serve as a model to conduct similar analyses in other watersheds. The Raritan River Basin was divided into 12 subwatershed‐based study areas. Point‐nonpoint source trading opportunities were examined for each study area by examining the point and nonpoint source total phosphorus loading to impaired water bodies. Of the 12 subwatersheds examined, four had a high potential for implementing a successful trading program. Since instream phosphorus concentrations are closely related to soil erosion, an additional analysis was performed to examine soil erodibility. Recommendations are presented for conducting an economic analysis following the feasibility study.     

POINT‐NONPOINT SOURCE WATER QUALITY TRADING: A CASE STUDY IN THE MINNESOTA RIVER BASIN1

ABSTRACT: Contrary to the general trend of only a few actual trades occurring within point‐nonpoint source water quality trading programs in the United States, two trading projects in the Minnesota River Basin, created under the provisions of National Pollutant Discharge Elimination System (NPDES) permits, have generated five major trades and numerous smaller ones. In this paper, these two projects are described to illustrate their origins, implementation, and results. It was found that several factors contributed to the relatively high number of trades in these projects, including the offsetting nature of the projects (hence a fixed number of credits that the point sources were required to obtain), readily available information on potential nonpoint source trading partners, and an effectively internal trading scheme used by one of the two projects. It was also found that long term structural pollution control measures, such as streambank stabilization, offered substantial cost savings over point source controls. Estimates of transaction costs showed that the total costs of the trading projects were increased by at least 35 percent after transaction costs were taken into account. Evidence also showed that in addition to pollution reduction, these two trading projects brought other benefits to the watershed, such as helping balance environmental protection and regional economic growth.     

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.     

Rhetoric and Reality of Water Quality Trading and the Potential for Market‐like Reform1

Stephenson, Kurt and Leonard Shabman, 2011. Rhetoric and Reality of Water Quality Trading and the Potential for Market‐Like Reform. Journal of the American Water Resources Association (JAWRA) 47(1):15‐28. DOI: 10.1111/j.1752‐1688.2010.00492.x Abstract: Many public interest groups, government agencies, and professional economists argue that current approaches to water quality trading are a cost‐effective, politically practical innovation for achieving water quality standards, in part by addressing one of the most difficult water quality improvement challenges – limiting the discharge from nonpoint sources. A critical analysis shows that these claims for current water quality trading programs are often unrealized. This rhetoric, without adherence to principles of market‐like reform, can undermine the support of regulated parties for meaningful water quality policy reform, contribute to missed opportunities to implement cost‐effective programs, and postpone successfully meeting the challenge of limiting nonpoint source discharges. A better understanding and application of market‐like principles can result in an improved design of trading as well as general water quality management programs.     

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.     

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.     

COST‐EFFECTIVE POINT‐NONPOINT TRADING: AN APPLICATION TO THE SUSQUEHANNA RIVER BASIN1

ABSTRACT: Point‐nonpoint trading has been suggested as a relatively efficient approach for reducing nutrient pollution in the Chesapeake Bay and elsewhere. However, relatively little economic research has examined the design of trading programs involving nonpoint sources. The purpose of this paper is to investigate the economics of several fundamental design choices for point‐nonpoint trading programs. The Susquehanna River Basin (SRB) in Pennsylvania as an example, although many of the insights should generally apply to other regions as well.     

Optimal Pollution Trading Without Pollution Reductions: A Note1

García, Jorge H., Matthew T. Heberling, and Hale W. Thurston, 2011. Optimal Pollution Trading Without Pollution Reductions: A Note. Journal of the American Water Resources Association (JAWRA) 47(1):52‐58. DOI: 10.1111/j.1752‐1688.2010.00476.x Abstract: Various kinds of water pollution occur in pulses (e.g., agricultural and urban runoff). Ecosystems, such as wetlands, can serve to regulate these pulses and smooth pollution distributions over time. This smoothing reduces total environmental damages when “instantaneous” damages are marginally increasing. This paper introduces a water quality trading model between a farm (a pulse‐pollution source) and a firm (a more steady pollution source) where the object of exchange is the “temporary” retention of runoff as opposed to total runoff reductions. The optimal trading ratio requires firm emissions to be offset by more than a proportional retention of the initial agricultural runoff pulse. The reason is twofold: (1) emissions are steady or constant over time and, in this sense, have relatively larger environmental impact; and (2) certain kinds of runoff management cause delayed environmental damages.     

INFLUENCES ON RESIDENTIAL YARD CARE AND WATER QUALITY: TUALATIN WATERSHED,OREGON1

ABSTRACT: The Tualatin is the first watershed in Oregon to implement the Total Maximum Daily Load provisions of the Clean Water Act to deal with nonpoint source pollution. Local officials cite residential yard care practices as potential contributors to nonpoint source pollution in the basin. Qualitative and quantitative methods, including observation of yard maintenance styles, suggest behaviors potentially harmful to water quality and conservation. Yard maintenance is influenced by the importance of neighborhood appearance and concern for aesthetics. These concerns stimulate residents to water, fertilize, and apply weed control at more frequent intervals than yard care experts recommend. Better understanding of the effects that relations with neighbors and yard maintenance knowledge have on residential yard care practices can help improve water quality.     

Review of Urban Stormwater Quality Models: Deterministic,Stochastic, and Hybrid Approaches1

Abstract: The growing impact of urban stormwater on surface‐water quality has illuminated the need for more accurate modeling of stormwater pollution. Water quality based regulation and the movement towards integrated urban water management place a similar demand for improved stormwater quality model predictions. The physical, chemical, and biological processes that affect stormwater quality need to be better understood and simulated, while acknowledging the costs and benefits that such complex modeling entails. This paper reviews three approaches to stormwater quality modeling: deterministic, stochastic, and hybrid. Six deterministic, three stochastic, and three hybrid models are reviewed in detail. Hybrid approaches show strong potential for reducing stormwater quality model prediction error and uncertainty. Improved stormwater quality models will have wide ranging benefits for combined sewer overflow management, total maximum daily load development, best management practice design, land use change impact assessment, water quality trading, and integrated modeling.     

ECONOMIC INCENTIVES FOR AGRICULTURAL NONPOINT SOURCE POLLUTION CONTROL1

ABSTRACT. The limited success of command-and-control policies for reducing nonpoint source (NPS) water pollution mandated under the Federal Water Pollution Control Act (FWPCA) has prompted increased interest in economic incentive policies as an alternative control mechanism. A variety of measures have been proposed ranging from fairly minor modifications of existing policies to substantial revisions including watershed-wide polices that rely on economic incentives. While greater use of economic incentive policies, such as environmental bonds and point/nonpoint source trading is being advocated in the reauthorization of the CWA, the expected effects of individual proposals will be modest. The characteristics of NPS pollution, namely uncertainty and asymmetrical information, underscores that there is no single, ideal policy instrument for controlling the many types of agricultural NPS water pollution. Some of the usual incentive-based policies, such as effluent taxes, are not well suited to the task. Individual incentive policies proposed for the reauthorized CWA, such as pollution trading or deposit/refund systems, are not broadly applicable for heterogeneous pollution situations. Economic incentive policies may be appropriate in some cases, and command-and-control policies will be preferable in others and may in fact complement incentive policies.     

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.     

PLANNING DIFFUSE POLLUTION CONTROL: AN ANALYTICAL FRAMEWORK1

ABSTRACT: Determination of an optimal nonpoint pollution control strategy demands information relating to (1) costs of pollutant reduction, (2) transport of pollutants, (3) water quality impact of pollutants, and (4) the economic impact of water quality changes. This paper briefly reviews the literature in each of these areas and suggests an analytical framework useful in the development of an optimal nonpoint pollutant control strategy.     

A Benefit‐Cost Analysis of Total Maximum Daily Load Implementation1

Abstract: Total Maximum Daily Load (TMDL) implementation generates benefits and costs from water quality improvements, which are rarely quantified. This analysis examines a TMDL written to address bacteria and aquatic‐life‐use impairments on Abrams and Opequon Creeks in Virginia. Benefits were estimated using a contingent valuation survey of local residents. Costs were based on the number and type of best management practices (BMPs) necessary to achieve TMDL pollution reduction goals. BMPs were quantified using watershed‐scale water quality simulation models (Generalized Watershed Loading Function and Hydrological Simulation Program‐FORTRAN). Based on our projections, the costs to achieve TMDL induced pollution reduction goals outweigh the estimated benefits. Benefit‐cost ratios ranged between 0.1 and 0.3.     

CREATING MEANINGFUL STAKEHOLDER INVOLVEMENT IN WATERSHED PLANNING IN PIERCE COUNTY,WASHINGTON1

ABSTRACT: Since 1989, the government of Pierce County, Washington, has prepared four watershed action plans. The watersheds cover almost 800,000 acres and include about 600,000 residents and diverse land uses, from the city of Tacoma to Mount Rainier National Park. The primary purpose of these plans was to address water quality impacts from nonpoint sources of pollution and to protect beneficial uses of water. Pierce County has experienced problems such as shellfish bed closures and the Federal Clean Water Act Section 303(d) listing of local water bodies as a result of declining water quality. Pierce County achieved improvements by engaging diverse groups of stakeholders in generating solutions to nonpoint sources of water pollution through our watershed planning process. Using participatory methods borrowed from private industry, Pierce County was able to reach consensus, build trust, maximize participation, facilitate learning, encourage creativity, develop partnerships, shorten time frames for the planning processes, and increase the level of commitment participants had to implementing the plans. As a result, the earliest plans have a high rate of voluntary implementation. This indicates that the process and methodology used to develop watershed plans has a significant, if not critical, impact on their success.     

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.     

INCENTIVE-BASED NONPOINT SOURCE POLLUTION ABATEMENT IN A REAUTHORIZED CLEAN WATER ACT1

ABSTRACT: This paper summarizes key provisions of the Clinton Administration's proposals for change in the Clean Water Act. Two of the important themes for change are tougher controls for non-point source pollution and the use of market-based instruments. A detailed analysis of market-based abatement suggests limited potential for reducing costs. The keys to nonpoint source pollution control are clearer definition of property rights combined with changes in government programs that encourage polluting activities.