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.     

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.     

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.     

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.     

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.     

Water Quality Model Uncertainty Analysis of a Point‐Point Source Phosphorus Trading Program1

Kardos, Josef S. and Christopher C. Obropta, 2011. Water Quality Model Uncertainty Analysis of a Point‐Point Source Phosphorus Trading Program. Journal of the American Water Resources Association (JAWRA) 47(6):1317–1337. DOI: 10.1111/j.1752‐1688.2011.00591.x Abstract: Water quality modeling is a major source of scientific uncertainty in the Total Maximum Daily Load (TMDL) process. The effects of these uncertainties extend to water quality trading programs designed to implement TMDLs. This study examines the effects of water quality model uncertainty on a nutrient trading program. The study builds on previous work to design a phosphorus trading program for the Nontidal Passaic River Basin in New Jersey that would implement the watershed TMDL for total phosphorus (TP). The study identified how water quality model uncertainty affects outcomes of potential trades of TP between wastewater treatment plants. The uncertainty analysis found no evidence to suggest that the outcome of trades between wastewater treatment plants, as compared with command and control regulation, will significantly increase uncertainty in the attainment of dissolved oxygen surface water quality standards, site‐specific chlorophyll a criteria, and reduction targets for diverted TP load at potential hot spots in the watershed. Each simulated trading scenario demonstrated parity with or improvement from the command and control approach at the TMDL critical locations, and low risk of hot spots elsewhere.     

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.     

A Watershed Approach to Improve Water Quality: Case Study of Clean Water Services’ Tualatin River Program1

Cochran, Bobby and Charles Logue, 2011. A Watershed Approach to Improve Water Quality: Case Study of Clean Water Services’ Tualatin River Program. Journal of the American Water Resources Association (JAWRA) 47(1):29‐38. DOI: 10.1111/j.1752‐1688.2010.00491.x Abstract: Over the last five years, Clean Water Services developed and implemented a program to offset thermal load discharged from its wastewater facilities to the Tualatin River by planting trees to shade streams and augmenting summertime instream flows. The program has overcome challenges facing many of the nation’s water quality trading programs to not only gain consensus on the frameworks needed to authorize trading, but also provide a broad range of ecosystem services. This paper compares the Tualatin case study with some of the commonly cited factors of successful trading programs.     

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.     

Multiple Interactive Pollutants in Water Quality Trading

Efficient environmental management calls for the consideration of multiple pollutants, for which two main types of transferable discharge permit (TDP) program have been described: separate permits that manage each pollutant individually in separate markets, with each permit based on the quantity of the pollutant or its environmental effects, and weighted-sum permits that aggregate several pollutants as a single commodity to be traded in a single market. In this paper, we perform a mathematical analysis of TDP programs for multiple pollutants that jointly affect the environment (i.e., interactive pollutants) and demonstrate the practicality of this approach for cost-efficient maintenance of river water quality. For interactive pollutants, the relative weighting factors are functions of the water quality impacts, marginal damage function, and marginal treatment costs at optimality. We derive the optimal set of weighting factors required by this approach for important scenarios for multiple interactive pollutants and propose using an analytical elasticity of substitution function to estimate damage functions for these scenarios. We evaluate the applicability of this approach using a hypothetical example that considers two interactive pollutants. We compare the weighted-sum permit approach for interactive pollutants with individual permit systems and TDP programs for multiple additive pollutants. We conclude by discussing practical considerations and implementation issues that result from the application of weighted-sum permit programs.     

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.     

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.     

Sociopolitical Conditions for Successful Water Quality Trading in the South Nation River Watershed,Ontario, Canada1

O’Grady, Dennis, 2011. Sociopolitical Conditions for Successful Water Quality Trading in the South Nation River Watershed, Ontario, Canada. Journal of the American Water Resources Association (JAWRA) 47(1):39‐51. DOI: 10.1111/j.1752‐1688.2010.00511.x Abstract: The South Nation River watershed has a regulated water quality trading program. Legally, wastewater dischargers must not discharge any increased loading of phosphorus (P) into receiving waters. New wastewater systems are now choosing trading instead of traditional P removal technology, and point source dischargers are buying P credits from rural landowners, primarily farmers. These credits are generated by constructing nonpoint source pollution control measures. Mathematical formulae are used to calculate the credits of P removed by each measure. A successful trading program requires several conditions, including community agreement, legislative backing, credit and cost certainty, simplified delivery and verification, written instruments, and legal liability protection. South Nation Conservation, a community‐based watershed organization, is the broker handling the transactions for these P credits. The program is run by a multi‐stakeholder committee, and all project field visits are done by farmers and not paid professionals. An independent evaluation showed higher opinions for the broker and regulatory agency, and most farmers were willing to, or had already, recommended the program to other farmers.     

太湖流域水污染权交易制度比较分析——基于环湖六市的调研

太湖流域作为全国经济发达的地区之一,水环境污染成为制约太湖流域可持续发展的重要因素。同时作为水污染权交易制度实施最早的流域,该制度在太湖流域理论与实践层面探索经验的总结对排污许可制度的应用和排污权交易的推广有着重要的理论意义和紧迫的现实意义。本文通过对嘉兴、湖州、苏州、无锡、常州及上海地方经验的调研,从制度设计、产权界定、信息披露、制度效率等方面进行比较分析,发现市场主导型的水污染权交易模式可以显著提高政策绩效,而交易市场的规模是交易制度推广实施的关键,最后,提出建立太湖流域统一水污染权交易市场等的政策建议。     

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.     

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.     

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.     

Integrated Modular Modeling of Water and Nutrients From Point and Nonpoint Sources in the Patuxent River Watershed1

Abstract: We present a simple modular landscape simulation model that is based on a watershed modeling framework in which different sets of processes occurring in a watershed can be simulated separately with different models. The model consists of three loosely coupled submodels: a rainfall‐runoff model (TOPMODEL) for runoff generation in a subwatershed, a nutrient model for estimation of nutrients from nonpoint sources in a subwatershed, and a stream network model for integration of point and nonpoint sources in the routing process. The model performance was evaluated using monitoring data in the watershed of the Patuxent River, a tributary to the Chesapeake Bay in Maryland, from July 1997 through August 1999. Despite its simplicity, the landscape model predictions of streamflow, and sediment and nutrient loads were as good as or better than those of the Hydrological Simulation Program‐Fortran model, one of the most widely used comprehensive watershed models. The landscape model was applied to predict discharges of water, sediment, silicate, organic carbon, nitrate, ammonium, organic nitrogen, total nitrogen, organic phosphorus, phosphate, and total phosphorus from the Patuxent watershed to its estuary. The predicted annual water discharge to the estuary was very close to the measured annual total in terms of percent errors for both years of the study period (≤2%). The model predictions for loads of nutrients were also good (20‐30%) or very good (<20%) with exceptions of sediment (40%), phosphate (36%), and organic carbon (53%) for Year 1.     

Importance of Crop Yield in Calibrating Watershed Water Quality Simulation Tools1

Surendran Nair, Sujithkumar, Kevin W. King, Jonathan D. Witter, Brent L. Sohngen, and Norman R. Fausey, 2011. Importance of Crop Yield in Calibrating Watershed Water Quality Simulation Tools. Journal of the American Water Resources Association (JAWRA) 47(6):1285–1297. DOI: 10.1111/j.1752‐1688.2011.00570.x Abstract: Watershed‐scale water‐quality simulation tools provide a convenient and economical means to evaluate the environmental impacts of conservation practices. However, confidence in the simulation tool’s ability to accurately represent and capture the inherent variability of a watershed is dependent upon high quality input data and subsequent calibration. A four‐stage iterative and rigorous calibration procedure is outlined and demonstrated for Soil Water Analysis Tool (SWAT) using data from Upper Big Walnut Creek (UBWC) watershed in central Ohio, USA. The four stages and the sequence of their application were: (1) parameter selection, (2) hydrology calibration, (3) crop yield calibration, and (4) nutrient loading calibration. Following the calibration, validation was completed on a 10 year period. Nash‐Sutcliffe efficiencies for streamflow over the validation period were 0.5 for daily, 0.86 for monthly, and 0.87 for annual. Prediction efficiencies for crop yields during the validation period were 0.69 for corn, 0.54 for soybeans, and 0.61 for wheat. Nitrogen loading prediction efficiency was 0.66. Compared to traditional calibration approaches (no crop yield calibration), the four‐stage approach (with crop yield calibration) produced improved prediction efficiencies, especially for nutrient balances.     

Benthic Algal (Periphyton) Growth Rates in Response to Nitrogen and Phosphorus: Parameter Estimation for Water Quality Models

Nitrogen (N) and phosphorus (P) are significant pollutants that can stimulate nuisance blooms of algae. Water quality models (e.g., Water Quality Simulation Program, CE‐QUAL‐R1, CE‐QUAL‐ICM, QUAL2k) are valuable and widely used management tools for algal accrual due to excess nutrients in the presence of other limiting factors. These models utilize the Monod and Droop equations to associate algal growth rate with dissolved nutrient concentration and intracellular nutrient content. Having accurate parameter values is essential to model performance; however, published values for model parameterization are limited, particularly for benthic (periphyton) algae. We conducted a 10‐day mesocosm experiment and measured diatom‐dominated periphyton biomass accrual through time as chlorophyll a (chl a) and ash‐free dry mass (AFDM) in response to additions of N (range 5–11,995 µg nitrate as nitrogen [NO₃‐N]/L) and P (range 0.89–59.51 µg soluble reactive phosphorus/L). Resulting half‐saturation coefficients and growth rates are similar to other published values, but minimum nutrient quotas are higher than those previously reported. Saturation concentration for N ranged from 150 to 2,450 µg NO₃‐N/L based on chl a and from 8.5 to 60 µg NO₃‐N/L when based on AFDM. Similarly, the saturation concentration for P ranged from 12 to 29 µg‐P/L based on chl a, and from 2.5 to 6.1 µg‐P/L based on AFDM. These saturation concentrations provide an upper limit for streams where diatom growth can be expected to respond to nutrient levels and a benchmark for reducing nutrient concentrations to a point where benthic algal growth will be limited.