Water Quality Trading Programs Research Articles

Assessing and improving the outcomes of nonpoint source water quality trading policies in urban areas: A case study in Virginia

Nonpoint source (NPS) water quality trading (WQT) is a market-based approach to improving water quality. Past work has shown that these programs could increase localized pollutant loadings, in part by exporting water quality controls from urban to rural areas. Virginia's NPS WQT program has enabled thousands of transactions and may provide a model for other programs, but its impacts on urban water quality have not been thoroughly assessed. We quantify the impact of NPS WQT purchases in Virginia on water quality and hydrology in an urban catchment. We go on to assess outcomes of a policy alternative where buyers and sellers are collocated in the urban catchment. Simulation results show that NPS WQT increased total phosphorus (TP) loading by an average of 0.8 lbs TP/year for each 1.0 offsite credits purchased in the analyzed catchment. The TP loading increased in years with greater rainfall, such that TP loads were increased by up to 1.2 lbs TP/year for each offsite credit purchased. These loading increases may or may not be acceptable, depending on the cumulative number of purchases within an urban catchment and existing local water quality issues. In our policy alternative with buyers and sellers collocated in the catchment, we found that the TP increase from development was completely offset at the catchment scale, with a decrease of 4.3 lbs TP/year for each 1.0 credits purchased. This suggests that credits awarded for urban mitigation practices are undervalued compared with water quality requirements for credit purchasers. This undervaluation is a result of the Virginia trading program using one approach to compute the credit value for buyers and a different approach to compute the credit value for sellers. We demonstrate how using a single model to determine both buyer and seller credit values in urban areas could provide greater transparency and mitigate the risk of urban pollution hot spots. This work demonstrates the importance of consistency in the scale of pollutant load calculations between buyers and sellers for NPS WQT, and contributes novel insight into the implications of WQT for urban NPS pollution.

Prioritizing Irrigation‐System Upgrades to Maximize Improvements to Agricultural Drain‐Network Water Quality: A Graph‐Theoretic Approach

AbstractWe develop and demonstrate an approach to optimally prioritize fields for irrigation‐system upgrades to improve agricultural‐drain discharge water quality. The approach accounts for the attenuation of pollutants transported along complex drain networks from fields to drain‐network outlets. The approach produces a Pareto‐optimal cost curve of irrigation‐system upgrade combinations that compromise between maximizing the reduction of drain‐outlet loads and minimizing upgrade implementation costs. The approach utilizes a graph‐theoretic data structure to organize drain‐network data, route drain‐network flow paths, and formulate objectives and constraints for multi‐objective optimization. Due to the linearity of the objective functions and constraints, Pareto‐optimal solutions are obtained along the cost curve by prioritizing fields by decreasing load‐reduction/cost ratio (pollutant load‐reduction per cost). Multi‐objective optimization will identify additional Pareto‐optimal solutions along the cost curve providing additional compromises. The approach allows for a computationally efficient prioritization, providing a level of complexity that is able to incorporate commonly available data. The cost curve is highly sensitive to the pollutant attenuation coefficient, with higher attenuation coefficients resulting in low sensitivity of load reduction to cost. While the focus of this work is on irrigation‐system upgrades, there are other conservation actions and/or land‐use change scenarios that this method could also prioritize. Analyses of this nature could prove valuable in improving the allocation of limited conservation funding and/or developing cost‐effective water quality trading programs. We demonstrate the approach on a collection of drain networks around Grand View, Idaho, USA with the objective to reduce total phosphorus loads to the Snake River.

What is the future of water quality trading?

AbstractA comprehensive review of experiences with water quality trading (WQT) programs worldwide is presented, spanning altogether more than 4 decades. A new WQT database is built, extracting data and information from existing review papers, complemented with gray and published literature about individual trading programs. Key aspects that affect trading volumes and program continuation are identified and categorized. No single success or fail factor emerges from this review, typically a mix of factors play a role. There is potential for WQT to evolve further and serve as a cost‐effective pollution control instrument, but this requires nudging political will to regulate nonpoint source.

Water Quality Trading Framework with Uncertainty for River Systems Due to Climate and Population Characteristics

Climate change and population growth serve as fundamental problems in assessing potential impacts on future surface water quality. In addition to uncertainties in climate depicted in various representative concentration pathway (RCP) scenarios, futuristic population growth mimicking historical conditions is subject to uncertainties related to changing development patterns. The combination of climate change and population characteristics exacerbates concerns regarding the future water quality performance of river systems. Previous studies have established linkages among future climate, population impacts and watershed water quality performance. However, these linkages have not been specifically incorporated into water quality trading programs. Rather than temporally-variant adjustment factors, WQT programs use constant margins of safety for pollutant reduction credits resulting in trade ratios that do not explicitly account for futuristic climate and population uncertainties. Hence, this study proposes a conceptual framework for water quality trading establishing adjustment factors as margins of safety on trade ratios for pollutant reduction credits examining climate and population characteristics separately followed by evaluating them combined. This new framework is demonstrated using a programming script that calculates the margins of safety based on simulation results conducted through a water quality model of the Jordan River in Salt Lake City, UT, USA over a 3-year timeframe. With margins of safety over magnitudes of ±2 over the Jordan River simulations, this research introduces the framework as a foundation for developing adjustment factors for addressing climatic and population characteristics upon river systems.

Nonpoint Source Water Quality Trading outcomes: Landscape-scale patterns and integration with watershed management priorities

Nonpoint source (NPS) water quality trading (WQT) has been lauded as a way to reduce water pollution while mitigating costs, but NPS WQT programs often do not account for cumulative landscape-scale impacts to hydrological and ecological processes. In this work, we parameterize the landscape-scale patterns of an emerging NPS WQT market in Virginia (n = 606 transactions) and describe potential tradeoffs and synergies. We also examine program outcomes in the context of Virginia's spatially-explicit conservation and restoration priorities, and discuss ways in which NPS WQT integrates or fails to integrate with these state-level watershed management goals. These spatial and policy analyses demonstrate novel ways to evaluate NPS WQT programs. Our results reveal how NPS WQT has influenced Virginia land management patterns in practice. Specifically, we show that this program has encouraged the transfer of water quality Best Management Practices (BMPs) from urban to rural areas. Impact sites are often far from mitigation sites, at an average of 164.6 km apart measured along the stream network and most often migrated outside the 8-digit Hydrologic Unit Code watershed boundaries. We also find opportunity for improved integration with the state-level management priorities, including that an estimated 22% of the NPS WQT mitigation site area works against state priorities (for example by converting prime farmland to forest), 9% supports state priorities, and 69% neither negates nor supports state priorities. We suggest policy and management actions that can increase the integration of NPS WQT with statewide watershed management goals, and could ultimately improve environmental returns from this fast-growing program.

Enhancing Efficacy of Water Quality Trading with Automation: A Case Study in Virginia’s Nutrient Trading Program

AbstractThe complexity of water quality trading (WQT) policy can lead to the promulgation of regulations that are challenging to comply with and to enforce. As a result, transaction costs may be high and administrators have limited ability to monitor the program outcomes. These concerns can be alleviated in part through increased automation of trading compliance procedures. We present a case study of a pilot system designed for the Virginia Department of Transportation that automates compliance and streamlines brokering processes that are a part of the Virginia nonpoint source WQT program. Outcomes of this work reveal opportunities and challenges for implementing automated systems in WQT and suggest a framework for developing automated programs. We conclude that use of automated procedures to facilitate compliance with WQT rules can help identify gaps in data reporting and availability, amend inconsistency in rule interpretation, and reduce transaction costs for credit purchasers by enabling efficient analysis of trading opportunities. Persistent limitations to automation exist, including lack of standardized, machine accessible, and open data sources. Potential long‐term benefits of automating WQT processes include minimizing transaction costs, enabling new environmental data collection and policy analysis, and ultimately yielding improved WQT program efficacy and water resources outcomes.

Predicting the Existence and Prevalence of the US Water Quality Trading Markets

Water quality trading (WQT) programs aim to efficiently reduce pollution through market-based incentives. However, WQT performance is uneven; while several programs have found frequent use, many experience operational barriers and low trading activity. What factors are associated with WQT existence, prevalence, and operational stage? In this paper, we present and analyze the most complete database of WQT programs in the United States (147 programs/policies), detailing market designs, trading mechanisms, traded pollutants, and segmented geographies in 355 distinct markets. We use hurdle models (joint binary and count regressions) to evaluate markets in concert with demographic, political, and environmental covariates. We find that only one half of markets become operational, new market establishment has declined since 2013, and market existence and prevalence has nuanced relationships with local political ideology, urban infrastructure, waterway and waterbody extents, regulated environmental impacts, and historic waterway impairment. Our findings suggest opportunities for better projecting program need and targeting program funding.

A method for predicting participation in a performance-based water quality trading program

One innovative way to solve water pollution problems is through water quality trading programs. However, participation levels and the price of offsets/credits tend to be low, which raises questions about the effectiveness of the policy. To offer more tools for policymakers, this paper provides a method for predicting participation in performance-based water quality trading programs, which accounts for field-level heterogeneity. We frame the economic problem in terms of derived demand, i.e., as a farmer Best Management Practice (BMP) input decision rather than a farmer output decision about supplying offsets. Specifically, this approach offers a straightforward way for farmers and policymakers to frame the decision to add a marginal unit of BMP—rather than a marginal unit of abatement—and take advantage of existing performance-based scientific models of nutrient loading. The paper uses actual market and field data in Maryland to illustrate the method and demonstrate the heterogeneity within and among BMPs. We also run sensitivity analyses to test the effects of different levels of farmer subsidies and transaction costs. The application results find, first, the extensive field-level heterogeneity in BMP abatement productivity. Second, the results show that far more farmers will adopt the high-abatement, medium-cost buffer BMPs than low-abatement, low-cost and high-abatement, high-cost BMPs.

Water quality trading schemes as a form of state intervention: Two case studies of state-market hybridization from Canada and New Zealand

The agricultural sector is considered as an important contributor to diffuse nutrient pollution within watersheds. While hierarchical models of environmental governance are costly to implement when targeting diffuse pollution, market-based water quality trading (WQT) is viewed as a win–win solution. Based on economic incentives, WQT promoters suggest that it offers greater flexibility to implicated actors for attaining environmental goals within watersheds, provides private funds to finance agro-environmental practices and diversifies income sources for farmers. These programs, however, have produced few results, and where they are successful, WQT schemes appear strongly dependent on institutional support from public agencies. This paper explores the gap between what is theorized on WQT institutional operation and what occurs in practice. In particular, this work adopts a lens of hybridization to understand how institutional forms that emerge around WQT blend both market-based techniques, while retaining top-down hierarchical structures. Through analysis of two case studies – South Nation Total Phosphorus Management Program (Canada) and Lake Taupo Nitrogen Trading Program (New Zealand) – we argue that WQT programs serve as a novel intervention framework for public authorities to retain their influence on the way watershed management takes place. In both case studies, we find the state also uses the WQT discourse and established institutional structures to channel new funding sources, target a broader range of actors and manage a suite of environmental and socio-economic objectives. These new institutional arrangements reframe traditional modes of environmental management and affect the way private and public resources are used and distributed among implicated actors. Both case studies illustrate how hybrid forms of financing and governance strategies, in which heterogeneous private and public institutions are brought together, are a response to the transaction costs and particular socio-ecological contexts faced in the implementation of WQT.

The impact of relative individual ecosystem demand on stacking ecosystem credit markets

A blended actual and hypothetical vertical ecosystem services stacking scenario is developed for a water quality trading (WQT) program in North Carolina. Demand is estimated for total nitrogen reduction and simulated for total phosphorous reduction. Nitrogen and phosphorus are complementary pollutants jointly produced by a single conservation practice, riparian buffers. The supply of reduction is based on the amount of riparian buffers that would be implemented by farmers at a given offering price for WQT credits. Nitrogen reduction is the primary ecosystem service that already has a market in the form of a WQT program. Phosphorus reduction is a hypothetical, secondary ecosystem service that we introduce to evaluate ecosystem stacking. We specifically evaluate stacking in thin markets, where there are few buyers and/or sellers. Our detailed analysis shows that the relative size of demand for different services plays a profound role in the success of stacking when markets are thin; and many if not most ecosystem markets are thin. A secondary service with relatively low demand will either be too small (insufficient) to generate any new credits, or, in a non-competitive market with few sellers, produce no additionality of the secondary service (double dipping). In these two cases, sponsors of the secondary market should not make payments since they will receive no additional benefits above what would have been achieved under conservation practices implemented for the primary ecosystem service. We find that ecosystem stacking is most likely to generate more revenue to producers and to reduce pollution emissions when demand for the secondary service is comparable in magnitude to the primary service. Accurate assessment of relative demand can help policy makers determine where stacking might work, and help purchasers avoid paying for services without results, especially where markets are thin.

Can Water Quality Trading Fix the Agricultural Nonpoint Source Problem?

Policy analysts and government agencies promote a particular form of what they term water quality trading as a means to address the most vexing obstacle to meeting water quality standards: reducing nutrient pollutants from agricultural nonpoint sources. However, agricultural nonpoint sources’ participation in water quality trading programs will only make limited contributions to lowering overall pollutant loads. We argue that economists need to more clearly articulate the limitations of current and proposed water quality trading programs as a water quality management strategy. A new generation of market-like incentive policies will be necessary to make significant progress in reducing agricultural nonpoint source loads.

Where Did the Agricultural Nonpoint Source Trades Go? Lessons from Virginia Water Quality Trading Programs

AbstractGovernmental 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.

Effluent trading in river systems through stochastic decision-making process: a case study.

The objective of this paper is to provide an efficient framework for effluent trading in river systems. The proposed framework consists of two pessimistic and optimistic decision-making models to increase the executability of river water quality trading programs. The models used for this purpose are (1) stochastic fallback bargaining (SFB) to reach an agreement among wastewater dischargers and (2) stochastic multi-criteria decision-making (SMCDM) to determine the optimal treatment strategy. The Monte-Carlo simulation method is used to incorporate the uncertainty into analysis. This uncertainty arises from stochastic nature and the errors in the calculation of wastewater treatment costs. The results of river water quality simulation model are used as the inputs of models. The proposed models are used in a case study on the Zarjoub River in northern Iran to determine the best solution for the pollution load allocation. The best treatment alternatives selected by each model are imported, as the initial pollution discharge permits, into an optimization model developed for trading of pollution discharge permits among pollutant sources. The results show that the SFB-based water pollution trading approach reduces the costs by US$ 14,834 while providing a relative consensus among pollutant sources. Meanwhile, the SMCDM-based water pollution trading approach reduces the costs by US$ 218,852, but it is less acceptable by pollutant sources. Therefore, it appears that giving due attention to stability, or in other words acceptability of pollution trading programs for all pollutant sources, is an essential element of their success.

Trading on risk: The moral logics and economic reasoning of North Carolina farmers in water quality trading markets

Water quality trading (WQT) is a popular policy for improving the quality of waterways across the United States by reducing water pollution. However, in established markets, few trades are happening, making environmental gains from WQT limited. Despite these trends, policy makers continue to implement this market-based approach to achieve clean water. Successful markets rely on stakeholders' willingness to buy and sell in the market, yet research has not focused on this aspect of WQT. The stakeholders involved in WQT are frequently farmers (as sellers) trading with developers and urban municipalities (as buyers). To better understand stakeholder decisions about WQT, this research sought to document barriers and catalysts for farmers participation in a brand-new WQT program in the Jordan Lake Watershed, North Carolina. Key findings from interviews with ninety farmers show that most have high conservation rates and know about local water problems. Nevertheless, they were unwilling or unlikely to participate in the program. We offer detailed evidence of the complex ways farmers calculate risk for farm practices and environmental health as an indication that their perceptions of risk and moral sensibilities involve a broader set of costs and values than accounted for in the WQT policy design, ultimately making trading unviable.

Policy Utopias for Nutrient Credit Trading Programs with Nonpoint Sources

AbstractA 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.

Water quality trading opportunities in two sub-watersheds in the northern Lake Okeechobee watershed

For decades, the increase of nutrient enrichment has threatened the ecological integrity and economic sustainability of many rivers, lakes, and coastal waters, including Lake Okeechobee, the second largest freshwater lake in the contiguous United States. Water quality trading programs have been an area of active development to both, reduce nutrient pollution and minimize abatement costs. The objective of this study was to apply a comprehensive modeling framework, integrating a hydrologic-water quality model with an economic model, to assess and compare the cost-effectiveness of a water quality trading program over a command-and-control approach in order to reduce phosphorus loadings to Lake Okeechobee. The Upper Kissimmee (UK) and Taylor Creek/Nubbin Slough (TCNS) sub-watersheds, identified as major sources of total phosphorus (TP) loadings to the lake, were selected for this analysis. The effect of different caps on the market potential was assessed while considering four factors: the least-cost abatement solutions, credit prices, potential cost savings, and credit supply and demand. Hypothetical trading scenarios were also developed, using the optimal caps selected for the two sub-watersheds. In both sub-watersheds, a phosphorus credit trading program was less expensive than the conventional command-and-control approach. While attaining cost-effectiveness, keeping optimal credit prices, and fostering market competition, phosphorus reduction targets of 46% and 32% were selected as the most appropriate caps in the UK and TCNS sub-watersheds, respectively. Wastewater treatment facilities and urban areas in the UK, and concentrated animal feeding operations in the TCNS sub-watershed were identified as potential credit buyers, whereas improved pastures were identified as the major credit sellers in both sub-watersheds. The estimated net cost savings resulting from implementing a phosphorus trading program in the UK and TCNS sub-watersheds were 76% ($ 34.9 million per year) and 45% ($ 3.2 million per year), respectively. It is important to note that the realization of the environmental and economic benefits of this market-based alternative is also contingent on other important factors, such as the market structure, the specific program rules, the risk perception, and the education and outreach to develop trusted relationships among regulatory agencies, the public sector, and other stakeholders. Nevertheless, this research provided the foundation for stakeholders to better understand whether water quality trading has the potential to work in the Lake Okeechobee watershed and to facilitate the development of a pilot program.

An economic inquisition of water quality trading programs, with a case study of Jordan Lake, NC

A water quality trading (WQT) program was promulgated in North Carolina to address water quality issues related to nutrients in the highly urbanizing Jordan Lake Watershed. Although WQT programs are appealing in theory, the concept has not proved feasible in several attempts between point and nonpoint polluters in the United States. Many application hurdles that create wedges between success and failure have been evaluated in the literature. Most programs, however, face multiple hurdles; eliminating one may not clear a pathway to success. Therefore, we identify and evaluate the combined impact of four different wedges including baseline, transaction cost, trading ratio, and trading cost in the Jordan Lake Watershed program. Unfortunately, when applied to the Jordan Lake program, the analysis clearly shows that a traditional WQT program will not be feasible or address nutrient management needs in a meaningful way. The hurdles individually would be difficult to overcome, but together they appear to be unsurmountable. This analysis shows that there is enough information to pre-identify potential hurdles that could inform policy makers where, and how, the concept might work. It would have saved time, energy, and financial resources if North Carolina had done so before embarking to implement their program in the Jordan Lake Watershed.

Transactions costs of expanding nutrient trading to agricultural working lands: A Virginia case study

Agricultural nonpoint sources (NPS) figure prominently in the design of many water quality trading programs. In concept water quality trading programs can create incentives for agricultural operators to supply low cost pollutant reductions while still keeping land in agricultural production. In practice water quality trading programs in the United States have produced few trades involving agricultural NPS. Transactions costs are a critical, but poorly understood, feature of water quality trading programs. The objective of this study is to examine the transactions costs associated with expanding the use of NPS credits in a water quality trading program in Virginia (United States) to include credits generated from agricultural working lands best management practices (BMPs). Findings indicate that transactions costs for agricultural NPS trades in Virginia are currently relatively low, due to the activity being credited: simple land conversion. Based on best available evidence, transactions costs of creating credits using management and structural BMPs will be 2 to 16 times more costly on a per project basis than for land conversion credits. Compliance monitoring protocols are a significant driver of costs for working lands credits. Our results suggest an important cost/risk tradeoff between verification costs and compliance certainty for program designers to consider.

Role of Conservation Adoption Premiums on Participation in Water Quality Trading Programs

Over half of lakes, reservoirs, and ponds in the United States are threatened or impaired, mostly by nutrients. One policy to improve water quality is water quality trading (WQT). While the concept is appealing, adoption of conservation practices in these programs has been anemic at best. Using a case study in the newly-formed WQT market in Jordan Lake, North Carolina, we propose that part of the problem is a large adoption premium (AP) for this program. AP is the amount that farmers require over and above direct adoption costs to participate. In this study, farmers were asked at in-person interviews about their willingness to accept (WTA) a payment to adopt a particular conservation practice (riparian buffers) in order to generate and sell credits. We compared farmers’ WTA to their direct cost of participation, which allowed us to estimate an AP. On average, the AP more than doubles the cost of purchasing credits. The AP sums all of the known indirect costs already cited in the literature, and more, into a single value and is relatively simple to estimate. Knowing the AP would improve the ability of policy makers to accurately estimate what is needed to boost adoption rates in WQT programs and other conservation programs as well.

Additionality and reverse crowding out for pollution offsets in water quality trading

Market-based environmental policies frequently include offset provisions that allow polluters who are not subject to a binding cap to participate in trading programs. When offsets are used for compliance, it is important that they are additional in the sense that the payment from the trading program induces environmental benefits that would not occur without the program. In this paper we analyze a water quality trading program in Ohio, U.S., to estimate the extent to which the offsets are additional. Using data from the program and a farmer survey, we estimate the number of additional conservation practices that are adopted by farmers who participated in the trading program relative to the counterfactual outcome without the program. Using matching methods, we find no statistically significant increase in the number of conservation practices due to the trading program. We also examine whether the trading program may have crowded out government funding. We also do not find significant evidence for such crowding out, instead finding some evidence that the trading program may have led to greater participation in federal cost-share programs.