Adaptive Trading: Experimenting with Unlikely Partners

Abstract

Congress did not design the Clean Water Act to address diffuse or nonpoint pollution with the same prescriptive standards and permits it required for point sources; instead, Congress relegated diffuse runoff to a largely voluntary, state-led approach. Not surprisingly, after more than 40 years of implementing the Clean Water Act, diffuse runoff is now the single biggest source of water quality problems in the United States, and agriculture is the biggest contributor to the problem. In response, the EPA, some states, and regulated point sources are pushing to bridge this regulatory gap by setting up water quality trading programs. In theory, trading would allow regulated industries and municipal sewage plants (point sources) to pay largely unregulated farms (nonpoint sources) to reduce pollution in lakes, rivers and streams. To date, however, water quality trading has produced more smoke than fire. Although the EPA has been promoting it for almost three decades, only 24 programs have had an actual trade, and of those only ten programs have had a trade between point and nonpoint sources. Despite the lack of track record, the EPA is presenting trading as a key tool for addressing contemporary problems in major watersheds, such as the Chesapeake Bay, the Ohio River Basin, and the Great Lakes. The push for trading in these and other watersheds is at times coupled with an urge to use adaptive management, but with very little detail about how to implement the approach. Given the reliance on trading as an antidote to persistent water quality problems and the reality that trading is still in its experimental phase, this is a regulatory approach that could benefit from applying adaptive management. Taking an adaptive approach to trading between point and nonpoint sources could increase the understanding of system dynamics and transparency essential to deciding whether this regulatory tool can solve widespread water pollution problems. This article discusses how to apply adaptive management to water quality trading programs to satisfy the informational needs of policy makers charged with delivering on the promise of clean water. It suggests developing "adaptive trading" as a more defined approach to applying adaptive management to nutrient trading.