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.     

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.     

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.     

Institutional Constraints on Cost‐Effective Water Management: Selenium Contamination in Colorado's Lower Arkansas River Valley

Ground and surface water selenium (Se) contamination is problematic throughout the world, leading to harmful impacts on aquatic life, wildlife, livestock, and humans. A groundwater reactive transport model was applied to a regional‐scale irrigated groundwater system in the Lower Arkansas River Basin in southeastern Colorado to identify management practices that remediate Se contamination. The system has levels of surface water and groundwater Se concentrations exceeding the respective chronic standard and guidelines. We evaluate potential solutions by combining the transport model with an assessment of the cost to employ those practices. We use a framework common in economics and engineering fields alike, the Pareto frontier, to show the impact of four different best management practices on the tradeoffs between Se and cost objectives. We then extend that analysis to include institutional constraints that affect the economic feasibility associated with each practice. Results indicate that although water‐reducing strategies have the greatest impact on Se, they are the hardest for farmers to implement given constraints common to western water rights institutions. Therefore, our analysis shows that estimating economic and environmental tradeoffs, as is typically done with a Pareto frontier, will not provide an accurate picture of choices available to farmers where institutional constraints should also be considered.     

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.     

Estimation of Catchment Nutrient Loads in New Zealand Using Monthly Water Quality Monitoring Data

Causes of variation between loads estimated using alternative calculation methods and their repeatability were investigated using 20 years of daily flow and monthly concentration samples for 77 rivers in New Zealand. Loads of dissolved and total nitrogen and phosphorus were calculated using the Ratio, L5, and L7 methods. Estimates of loads and their precision associated with short‐term records of 5, 10, and 15 years were simulated by subsampling. The representativeness of the short‐term loads was quantified as the standard deviation of the 20 realizations. The L7 method generally produced more realistic loads with the highest precision and representativeness. Differences between load estimates were shown to be associated with poor agreement between the data and the underlying model. The best method was shown to depend on the match between the model and functional and distributional characteristics of the data, rather than on the contaminant. Short‐term load estimates poorly represented the long‐term load estimate, and deviations frequently exceeded estimated imprecision. The results highlight there is no single preferred load calculation method, the inadvisability of “unsupervised” load estimation and the importance of inspecting concentration‐flow, unit load‐flow plots and regression residuals. Regulatory authorities should be aware that the precision of loads estimated from monthly data are likely to be “optimistic” with respect to the actual repeatability of load estimates.     

Water Quality Functions of a 15-Year-Old Riparian Forest Buffer System1

Newbold, J. Denis, Susan Herbert, Bernard W. Sweeney, Paul Kiry, and Stephen J. Alberts, 2010. Water Quality Functions of a 15-Year-Old Riparian Forest Buffer System. Journal of the American Water Resources Association (JAWRA) 46(2):299-310. DOI: 10.1111/j.1752-1688.2010.00421.x Abstract: We monitored long-term water quality responses to the implementation of a three-zone Riparian Forest Buffer System (RFBS) in southeastern Pennsylvania. The RFBS, established in 1992 in a 15-ha agricultural (row crop) watershed, consists of: Zone 1, a streamside strip (∼10 m wide) of permanent woody vegetation for stream habitat protection; Zone 2, an 18- to 20-m-wide strip reforested in hardwoods upslope from Zone 2; and Zone 3, a 6- to 10-m-wide grass filter strip in which a level lip spreader was constructed. The monitoring design used paired watersheds supplemented by mass balance estimates of nutrient and sediment removal within the treated watershed. Tree growth was initially delayed by drought and deer damage, but increased after more aggressive deer protection (1.5 m polypropylene shelters or wire mesh protectors) was instituted. Basal tree area increased ∼20-fold between 1998 and 2006, and canopy cover reached 59% in 2006. For streamwater nitrate, the paired watershed comparison was complicated by variations in both the reference stream concentrations and in upslope groundwater nitrate concentrations, but did show that streamwater nitrate concentrations in the RFBS watershed declined relative to the reference stream from 2002 through the end of the study in early 2007. A subsurface nitrate budget yielded an average nitrate removal by the RFBS of 90 kg/ha/year, or 26% of upslope subsurface inputs, for the years 1997 through 2006. There was no evidence from the paired watershed comparison that the RFBS affected streamwater phosphorus concentration. However, groundwater phosphorus did decline within the buffer. Overland flow sampling of 23 storms between 1997 and 2006 showed that total suspended solids concentration in water exiting the RFBS to the stream was on average 43% lower than in water entering the RFBS from the tilled field. Particulate phosphorus concentration was lower by 22%, but this removal was balanced by a 26% increase in soluble reactive phosphorus so that there was no net effect on total phosphorus.     

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.     

A Hydrologic/Water Quality Model Applicati11

Abstract: This paper presents a procedure for standard application of hydrologic/water quality models. To date, most hydrologic/water quality modeling projects and studies have not utilized formal protocols, but rather have employed ad hoc approaches. The procedure proposed is an adaptation and extension of steps identified from relevant literature including guidance provided by the U.S. Environmental Protection Agency. This protocol provides guidance for establishing written plans prior to conducting modeling efforts. Eleven issues that should be addressed in model application plans were identified and discussed in the context of hydrologic/water quality studies. A graded approach for selection of the level of documentation for each item was suggested. The creation and use of environmental modeling plans is increasingly important as the results of modeling projects are used in decision‐making processes that have significant implications. Standard modeling application protocols similar to the proposed procedure herein provide modelers with a roadmap to be followed, reduces modelers’ bias, enhances the reproducibility of model application studies, and eventually improves acceptance of modeling outcomes.     

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.     

Climate Sensitivity of Phosphorus Loadings to an Urban Stream

We investigate the sensitivity of phosphorus loading (mass/time) in an urban stream to variations in climate using nondimensional sensitivity, known as elasticity, methods commonly used by economists and hydrologists. Previous analyses have used bivariate elasticity methods to represent the general relationship between nutrient loading and a variable of interest, but such bivariate relations cannot reflect the complex multivariate nonlinear relationships inherent among nutrients, precipitation, temperature, and streamflow. Using fixed‐effect multivariate regression methods, we obtain two phosphorus models (nonparametric and parametric) for an urban stream with high explanatory power that can both estimate phosphorus loads and the elasticity of phosphorus loading to changes in precipitation, temperature, and streamflow. A case study demonstrates total phosphorus loading depends significantly on season, rainfall, combined sewer overflow events, and flow rate, yet the elasticity of total phosphorus to all these factors remains relatively constant throughout the year. The elasticity estimates reported here can be used to examine how nutrient loads may change under future climate conditions.     

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.     

BATCH REACTOR UNVEGETATED WETLAND PERFORMANCE IN TREATING DAIRY WASTEWATER1

ABSTRACT: Wetlands that treat holding pond effluent can be designed to utilize the pond storage capacity to allow flexibility in system management. Management of a wetland as a sequencing batch reactor can simplify operation and control detention times, but little performance data on such systems are available. The objective of this study was to evaluate the batch reactor wetland concept by quantifying removal of chemical oxygen demand (COD), total suspended sediments (TSS), total nitrogen (TN), ammonium (NH₄), nitrate (NO₃), total phosphorus (TP), and orthophosphate (PO₄) and by assessing the suitability of first‐order kinetics. Weekly samples were collected following batch loadings of wetland cells with high concentration or low concentration dairy holding pond wastewater during both fall and spring seasons. During three‐week batch periods without plants, overall mass removal averaged 54 percent for COD, 58 percent for TSS, 90 percent for TN, 72 percent for NH₄, ‐54 percent for NO₃, 38 percent for TP, and ‐8 percent for PO₄. Best fit, first‐order kinetic rate constant (k) and background concentration (C*) for COD varied by season, with k = 0.024/d and C*= 0 mg/l in fall and k = 0.056/d and C*= 200 mg/l in spring. Ammonium exhibited a consistent C*= 0 mg/l but had variable rate constants of k = 0.121/d for low concentration treatments and k = 0.079/d for high concentration treatments. Using first‐order kinetics was also appropriate for TN, with k = 0.061/d and C*= 0 mg/l for all loadings and seasons, but was not consistently appropriate for TP or PO₄. These results support the use of first‐order kinetics to describe treatment in batch reactor wastewater treatment wetlands without vegetation, perhaps during the establishment phase or in open water zones of vegetated wetlands. Further work is needed to assess the effects of vegetation.     

OPTIMAL PROFITS UNDER ENVIRONMENTAL CONSTRAINTS: IMPLICATIONS OF NUTRIENT AND SEDIMENT STANDARDS1

To reduce nonpoint source pollution from nutrient, chemical, and sediment runoff, a number of environmental policy standards have been proposed. Such standards could be used to reduce nonpoint source pollution from nutrient, chemical, and sediment runoff to impaired water bodies. State governments can use voluntary approaches to meet nonpoint source pollution reduction goals. However, the practices that lower net returns will not be voluntarily adopted by farmers. Crop rotations and tillage practices may help producers to comply with the environmental standards while minimizing losses in farm profits. This study compares runoff from crop rotation practices and conventional continuous row cropping systems in Mississippi. The results are compared for different tillage systems in order to examine robustness of results. Nutrient runoff and sediment runoff are simulated using the Erosion Productivity Impact Calculator (EPIC). Sensitivity analysis of the sediment and nitrate reductions at 15 percent, 25 percent, and 35 percent are conducted. Under these scenarios, net returns are optimized under environmental constraints, and the marginal cost of sediment reduction ranges from US$1.61 to US$9.63 per ton depending on soil conditions, while the corresponding nitrate and phosphorus reductions costs range from US$1.21 to US$7.08 per kg and from US$0.09 to US$31.91, respectively. The empirical results from this study indicate that a nitrate reduction policy is relatively less costly than a sediment reduction policy. The results also demonstrate the importance of geophysical conditions and policy costs, which vary across regions.     

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.     

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.     

ESTIMATING THE BENEFITS OF PHOSPHORUS POLLUTION REDUCTIONS: AN APPLICATION IN THE MINNESOTA RIVER1

ABSTRACT: In order to make economically efficient decisions about water quality improvements, data on both the costs and benefits of these improvements is needed. However, there has been little research on the benefits of reducing phosphorus pollution which implies that policy decisions are not able to make the comparison of costs and benefits that is essential for economic efficiency. This research attempts to ameliorate this situation by providing an estimate of the benefits of a 40 percent reduction in phosphorus pollution in the Minnesota River. A 1997 mail survey gathered information on Minnesota residents'use of a recreational site on the Minnesota River, the Minnesota Valley National Wildlife Refuge, and their willingness to pay for phosphorus reductions in the Minnesota River. The random effects probit model used in this research to investigate household willingness to pay for phosphorus pollution reductions in the Minnesota River incorporates recent innovations in nonmarket valuation methodology by using both revealed and stated preference data. This model estimated annual household willingness to pay for phosphorus reductions in the Minnesota River at $140. These results may be used in combination with cost estimates to determine the economic efficiency of phosphorus clean up.     

NONPOINT SOURCE DISCHARGES OF NUTRIENTS FROM PIEDMONT WATERSHEDS OF CHESAPEAKE BAY1

ABSTRACT: We measured annual discharges of water, sediments, and nutrients from 10 watersheds with differing proportions of agricultural lands in the Piedmont physiographic province of the Chesapeake Bay drainage. Flow-weighted mean concentrations of total N, nitrate, and dissolved silicate in watershed discharges were correlated with the proportion of cropland in the watershed. In contrast, concentrations of P species did not correlate with cropland. Organic P and C correlated with the concentration of suspended particles, which differed among watersheds. Thus, the ratio of N:P:Si in discharges differed greatly among watersheds, potentially affecting N, P or Si limitation of phytoplankton growth in the receiving waters. Simple regression models of N discharge versus the percentage of cropland suggest that croplands discharge 29–42 kg N ha^-1 yr^-1 and other lands discharge 1.2–5.8 kg N ha^-1 yr^-1. We estimated net anthropogenic input of N to croplands and other lands using county level data on agriculture and N deposition from the atmosphere. For most of the study watersheds, N discharge amounted to less than half of the net anthropogenic N.     

Dry Weather Water Quality Loadings in Arid,Urban Watersheds of the Los Angeles Basin,California, USA1

Abstract: Dry weather runoff in arid, urban watersheds may consist entirely of treated wastewater effluent and/or urban nonpoint source runoff, which can be a source of bacteria, nutrients, and metals to receiving waters. Most studies of urban runoff focus on stormwater, and few have evaluated the relative contribution and sources of dry weather pollutant loading for a range of constituents across multiple watersheds. This study assessed dry weather loading of nutrients, metals, and bacteria in six urban watersheds in the Los Angeles region of southern California to estimate relative sources of each constituent class and the proportion of total annual load that can be attributed to dry weather discharge. In each watershed, flow and water quality were sampled from storm drain and treated wastewater inputs, as well as from in‐stream locations during at least two time periods. Data were used to calculate mean concentrations and loads for various sources. Dry weather loads were compared with modeled wet weather loads under a range of annual rainfall volumes to estimate the relative contribution of dry weather load. Mean storm drain flows were comparable between all watersheds, and in all cases, approximately 20% of the flowing storm drains accounted for 80% of the daily volume. Wastewater reclamation plants (WRP) were the main source of nutrients, storm drains accounted for almost all the bacteria, and metals sources varied by constituent. In‐stream concentrations reflected major sources, for example nutrient concentrations were highest downstream of WRP discharges, while in‐stream metals concentrations were highest downstream of the storm drains with high metals loads. Comparison of wet vs. dry weather loading indicates that dry weather loading can be a significant source of metals, ranging from less than 20% during wet years to greater than 50% during dry years.