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.     

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.     

Baseline requirements can hinder trades in water quality trading programs: Evidence from the Conestoga watershed

The U.S. Environmental Protection Agency (USEPA) and the U.S. Department of Agriculture (USDA) are promoting point/nonpoint trading as a way of reducing the costs of meeting water quality goals. Farms can create offsets by implementing management practices such as conservation tillage, nutrient management and buffer strips. To be eligible to sell offsets or credits, farmers must first comply with baseline requirements. USEPA guidance recommends that the baseline for nonpoint sources be management practices that are consistent with the water quality goal. A farmer would not be able to create offsets until the minimum practice standards are met. An alternative baseline is those practices being implemented at the time the trading program starts, or when the farmer enters the program. The selection of the baseline affects the efficiency and equity of the trading program. It has major implications for which farmers benefit from trading, the cost of nonpoint source offsets, and ultimately the number of offsets that nonpoint sources can sell to regulated point sources. We use a simple model of the average profit-maximizing dairy farmer operating in the Conestoga watershed in Pennsylvania to evaluate the implications of baseline requirements on the cost and quantity of offsets that can be produced for sale in a water quality trading market, and which farmers benefit most from trading.     

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.     

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.     

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.     

INCREASING REGULATORS' CONFIDENCE IN POINT-NONPOINT POLLUTANT TRADING SCHEMES1

ABSTRACT: One of the principal stumbling blocks to regulatory agencies' adopting pollutant trading schemes is the complex of uncertainties surrounding any change in institutions. This is especially true if nonpoint pollution sources are to be involved along with point sources. Regulators are understandably reluctant to switch from tried-and-true point source permit systems, even if trading schemes can be shown (on paper, at least) to result in lower public expenditures. We propose a set of practical criteria for point-nonpoint pollutant trading systems that promise to increase regulators' confidence that the new system will be equally effective in controlling pollution and at the same time more likely to capture efficiencies in pollution reduction practices.     

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.     

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.     

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.     

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.     

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.     

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.     

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.     

REGULATING NONPOINT SOURCE POLLUTION IN SURFACE WATERS: A PROPOSAL1

ABSTRACT: Nonpoint sources (NPS) are an important and continuing source of toxic and conventional pollutants to surface waters. The Clean Water Act amendments of 1987 call for the regulation of these sources through the use of Best Management Practices (BMP). However, BMP implementation has generally occurred on a voluntary basis. This paper proposes a regulatory mechanism to control nonpoint source pollution. The regulatory mechanism involves the development of consortia, made up of all parties potentially responsible for NPS pollution, the development of wasteload allocations that coordinate the pollutant contributions from both point and nonpoint sources in a stream segment, and the issuance of permits to consortia to regulate the impacts of NPS pollution and ensure achievement of state or federal Water Quality Criteria and Standards.     

唐山排污权交易模式浅析

对开展排污权交易的目的、意义、关键因素进行了分析,对唐山排污权交易的工作进程以及交易指标、交易主体、交易程序、指导价格、申购数量、交易范围、优先及限制条件等模式特点进行了阐述,以期为同类型城市开展排污权交易提供参考。     

Transaction costs and the clean development mechanism

The emissions trading provisions of the Kyoto Protocol and its clean development mechanism (CDM) are designed to permit greenhouse gas (GHG) emission reductions at the lowest cost globally. However, to ensure climate integrity, these reductions must pass through vigilant approval, monitoring and evaluation procedures that create additional transaction costs unrelated to the physical process of eliminating GHGs. Moreover, the CDM's additionality criterion creates constraints that magnify the influence of these transaction costs on project viability. If these costs are extreme, they could undermine the success of the CDM, and possibly of the Kyoto Protocol itself. This article describes the trading provisions of the treaty, creates a working definition of transaction costs, and discusses their effects. It then analyzes the process of creating a CDM project to identify the sources of transaction costs, illustrated by an example of a fuel substitution project in Ghana. The conditions for project profitability are analyzed and compared with recent GHG emission credit prices in Europe. The specific Ghanaian results are not generalizable to all CDM projects, but the model does suggest a template that can be used to analyze the effects of project and transaction costs in other contexts.     

DEVELOPMENT OF A NONDEGRAIATION POLICY FOR HIGH QUALITY WATERS1

ABSTRACT: The development of a nondegradation policy for high quality waters is a complex and often controversial process. This paper discusses the development of a nondegradation policy for two components of the National Wild and Scenic Rivers System. Water quality in these reaches of the Delaware River is threatened by rapid growth and development and the cumulative impacts from numerous wastewater discharges and nonpoint sources of pollution. The Delaware River Basin Commission, with assistance from its member states and the National Park Service, conducted a highly public, six-year planning process to develop a nondegradation policy that protected existing water quality without impinging upon local and state economic development objectives. The resulting non-degradation policy includes such features as numeric definitions of existing water quality and measurable change; stringent point source requirements; nonpoint source requirements including watershed planning requirements; and other water quality management policies.     

MODELING URBAN NONPOINT SOURCE POLLUTION WITH A GEOGRAPHIC INFORMATION SYSTEM1

ABSTRACT: A geographic information system (GIS) was a useful aid in the assessment of urban nonpoint source pollution and the development of a pollution control strategy. The GIS was used for data integration and display, and to provide data for a nonpoint source model. An empirical nonpoint source loading model driven by land use was used to estimate pollutant loadings of priority pollutants. Pollutant loadings were estimated at fine spatial resolution and aggregated to storm sewer drainage basins (sewersheds). Eleven sewersheds were generated from digital versions of sewer maps. The pollutant loadings of individual land use polygons, derived as the units of analysis from street blocks, were aggregated to get total pollutant loadings within each sewershed. Based on the model output, a critical sewershed was located. Pollutant loadings at major sewer junctions within the critical sewershed were estimated to develop a mitigation strategy. Two approaches based on the installation of wet ponds were investigated - a regional approach using one large wet pond at the major sewer outfall and a multisite approach using a number of smaller sites for each major sewer junction. Cost analyses showed that the regional approach would be more cost effective, though it would provide less pollution control.     

EFFECT OF WATER QUALITY STANDARDS ON FARM INCOME,RISK, AND NPS POLLUTION1

ABSTRACT: Enforceable standards play a crucial role in the design and implementation of most water quality policies. The impacts of these standards on farm income and nonpoint source (NPS) pollution can provide valuable information to develop economic policies that can improve water quality with minimal loss in income and minimal risk. This study uses an integration of nonlinear programming and a simulation model to assess the impacts of enforceable standards at technology and farm boundary levels. The results indicate that the type of pollutant regulated, enforcement type, and the level of standard had a significant impact on farm income and water quality. Choice of farm boundary standards over technology standards is dependent on the impact of the policy on other NPS pollutants, in addition to the reduction of nitrate and phosphorus pollutants. Enforcing farm boundary standards on nitrates had desirable effects on subsurface and percolate nitrogen and variance in income. Technology standards were uncertain in their effects because of the restriction on the choice of technologies available to farmers. A comparative policy analysis considering incentives, multiple impacts, transaction costs of implementation, and regional consideration is important to an effective policy design.