Water Quality Trading Research Articles

The potential of carbon markets to accelerate green infrastructure based water quality trading

Green infrastructure solutions can improve in-stream water quality in lieu of building electricity-consuming gray infrastructure. Permitted under the United States Clean Water Act, these programs allow regulated utilities to trade point-source water quality obligations with non-point source mitigation efforts in the watershed. Carbon financing can provide an incentive for water quality trading. Here we combine data on impaired waters, treatment technologies, and life cycle greenhouse gas emissions in the Contiguous United States, and compare traditional treatment technologies to alternative green infrastructure. We find green infrastructure could save $15.6 billion dollars, 21.2 terawatt-hours of electricity, and 29.8 million tonnes of carbon dioxide equivalent emissions per year while sequestering over 4.2 million tonnes CO2e per year over a 40 year time horizon. Green infrastructure solutions may have the potential to generate $679 million annually in carbon credit revenue (at $20 per credit), which represents a unique opportunity to help accelerate water quality trading.

Harnessing market based mechanisms to improve water quality: Water quality trading policies in the river Alde, UK

Nitrogen fertiliser in agriculture continues to be one of the largest contributors to water pollution driven by the global food demand. Consequently, policies designed to tackle nitrogen pollution tend to be focused on the farm level. Applying mitigation measures requires knowledge, local labour and financial investment to achieve desired goals. Influencing farming activity comes with challenges as policies result in economic losses. We propose Water Quality Trading (WQT) to minimize the cost of controlling water pollution and develop it for policy recommendations in the River Alde catchment in Suffolk. We apply WQT to three scenarios named Reference Pollution Target, Livestock Target Plan and Variation of Farming. Our findings demonstrate that WQT can reduce farmers nitrogen load by 8%, 7% and 18% respectively from the baseline of 6 mg/L. The scenario simulations show a net revenue increase of 6%, 5% and 18% respectively. Our study demonstrates the effectiveness of the WQT approach in reducing water pollution, promoting sustainable agriculture and meeting water management goals.

A geographic information system approach for estimating state‐wide water quality credit need: Application for planned transportation projects in Virginia

AbstractUncertainty in water quality trading (WQT) markets is frequently cited as a deterrent for participation, with few studies focusing on uncertainty in future water quality credit needs. To reduce this uncertainty, we present a geographic information system (GIS)‐based methodology for estimating an upper bound of water quality credit needs for a set of spatially referenced planned construction projects over a large geographic region. We demonstrate the methodology by applying it to estimate future credit needs for the Virginia Department of Transportation's (VDOT) 6‐year improvement program. The results show that 25% of the state's 6‐digit hydrologic unit code (HUC) basins lack sufficient current credit supply to meet the estimated future credit need from VDOT's planned projects alone. Furthermore, while 70% of the 8‐digit HUCs containing planned projects have a sufficient current credit supply to meet VDOT credit needs, this is true for only 20% of the 10‐digit HUCs. Finally, nearly 25% of the planned transportation projects, representing potentially $9 million in credit purchases at current market rates, will be constructed in catchments with impaired water bodies. State regulations will initially limit these projects to trade with credit banks collocated at the 12‐digit HUC level. This application demonstrates how the GIS‐based methodology can be applied to reduce uncertainty about future WQT credit needs and how needs are aligned with current credit supply.

Can market segmentation improve the performance of water quality trading auction? A laboratory experiment

This study addresses the problem of improving the performance of water quality trading auctions when information about delivery coefficients of nonpoint sources is revealed to potential sellers. We consider the case in which a regulator participating in an auction market as a buyer of water quality credits segments the market using information about the delivery coefficients of nonpoint sources participating as sellers and configurations representing the sellers' set of cost distributions. We examine whether market segmentation can reduce sellers' rent-seeking and improve market performance through a laboratory experiment and investigate the robustness of the results to the configuration. The results show that market segmentation can improve the performance of water quality trading auctions when the share of potential sellers with high delivery coefficients is large. However, the effect varies depending on the configuration.

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.

Water Quality and Pollution Trading: A Sustainable Solution for Future Food Production.

Nitrogen, an essential nutrient for plant growth, is commonly added to food crops in the form of manure and synthetic fertilizers. Fertilizer use has significantly increased in the past decades to meet the food demands from a rising population. Although this has boosted food production, it has come at a cost to the environment. Indeed, excess fertilizer ends up in water bodies, a pollution that causes losses in aquatic biodiversity. Better fertilizer management is therefore essential to maintaining water sustainability. Here, we develop and evaluate a nitrogen water quality trading scheme to address this challenge. Nitrogen trading incentivizes farmers to work together to invest in pollution reduction measures in order to keep nitrogen water pollution levels within a standardized limit. We build a mathematical model to represent the nitrogen trading and use it to assess the pollution reduction, the effect on the crop yield, and economical outcomes. The model is applied among local farms in the agricultural county of Suffolk, eastern England. We calculate the nitrogen load to the river from each farm and incorporate the abatement cost into the model. The results show how nitrogen water pollution could be reduced cost-effectively while simultaneously increasing the benefit for the whole catchment. Although the benefit does not increase for all the farms, the increase in benefit for the whole catchment is enough to compensate for this loss. The surplus benefit is equally distributed between all the farms, thus increasing their overall benefit. We discuss how the proposed trading model can create a platform for farmers to participate and reduce their water pollution.

Geographically-resolved evaluation of the economic and environmental services from renewable diesel derived from attached algae flow-ways across the United States

Harmful algal blooms (HABs) are becoming more invasive and ever more prevalent due to rises in nitrogen and phosphorus pollution in watersheds. Herein, we introduce a novel biorefinery that taps into the vast sources of nitrogen and phosphorus in watersheds. Contaminated water is diverted to flow over attached algae systems, feeding native, periphytic algal cultures and scrubbing excessive nutrients from the water with the produced biomass converted to fuels through hydrothermal liquefaction. The evaluation of the biorefinery concept is done with sustainability analysis that incorporates geographically-resolved growth modeling with nutrient resource availability based on all Hydrologic Unit Code-8 (HUC8) in the contiguous US. Life cycle analysis results demonstrate a global warming potential of 25 g CO2-eq MJ−1, a eutrophication potential of 1.3 ∗ 10−5 kg N eq. MJ−1, and a net energy ratio 0.33 of MJ MJ−1 in the Santa Monica Bay, CA subbasin. Techno-economic assessments found that renewable diesel can be produced for $1.20 per cubic decimeter (dm−3) or $4.56 per gallon of gasoline equivalent (GGE−1) under optimal conditions in the Santa Monica Bay, CA subbasin, with results dramatically varying across the US. Water quality trading was also incorporated into the analysis. Using modest nutrient credit values of $4.5 per kg of total nitrogen (kg-TN−1) and $4.5 per kg total phosphorus (kg-TP−1) removed enabled the renewable diesel to achieve parity with conventional diesel, $1.01 dm−3 ($3.84 GGE−1) in the Santa Monica Bay, CA subbasin. A more aggressive credit value of $45 kg-TN−1 and $45 kg-TP−1 made the price of the renewable diesel negative in Santa Monica Bay, CA, roughly $-4.45 dm−3 ($-16.8 GGE−1), and across the Midwest, the Gulf of Mexico, and major cities on the East and West Coast. These results highlight a path forward for mitigating eutrophication while also creating a sustainable fuel.

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 markets – Integrating land and marine based measures under a smart market approach

Implementation of effective policy instruments to reduce emissions from non-point agricultural sources has been challenging. Mussel farming has the potential to mitigate diffuse nitrogen losses from agricultural production, and a Water Quality Trading Market (WQTM) between agricultural and mussel farmers could potentially be an efficient mechanism. We simulate a hypothetical WQTM in a catchment in northern Denmark using a relatively new approach referred to as a smart market for water quality. Building on previous work, we integrate mussel farmers as nitrogen permit sellers in a WQTM involving agricultural farmers and analyze the effect of the market on the cost of meeting water quality improvement targets. In addition, we set-up scenarios with decreasing levels of participation by agricultural farmers (−10%, −20% and − 30%). The results show a clear benefit from allowing trading between agricultural and mussel farmers, reducing the total costs by as much as 11.9%. Lower participation results in reductions in the benefits from trade. However, allowing mussel-based mitigation to supply N permits at modest cost can potentially partially circumvent the well-documented challenge that agricultural farmers are reluctant to act as N permit suppliers in WQTMs. The study illustrates the economic and environmental potential of integrating land- and marine-based farmers in a joint policy scheme to reduce nitrogen emissions to coastal and marine areas.

Which policy instrument do citizens and civil servants prefer? A choice experiment on Swedish marine policy

Abstract In the choice between alternative environmental policy instruments, economists tend to favor policies capable of attaining cost-efficiency, but other considerations may be more important to stakeholders. We perform a choice experiment modeled on Swedish water and marine policy to estimate preferences for different policy instruments among citizens and municipal civil servants. Both the modal citizen and the modal civil servant prefer direct regulation and subsidies to nutrient trading. Moreover, nutrient trading is unlikely to deliver sufficiently large cost savings for civil servants to prefer it to other instruments. These results are consistent with the apparent reluctance to adopt water quality trading in Europe.

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.

Assessing Climate Change Linkages related to Water Quality Trading Effectiveness for Incorporating Ancillary Benefits

Assessing Climate Change Linkages related to Water Quality Trading Effectiveness for Incorporating Ancillary Benefits

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.

Water Quality Trading in the Presence of Conservation Subsidies

Most studies of water quality trading analyze its cost-effectiveness in isolation from existing policies like conservation subsidy programs that pay farmers to use conservation practices. We investigate the interaction between trading and conservation subsidy programs using an integrated assessment model that combines farmer behavioral responses with a biophysical water quality model. Current subsidy program enrollees with comparative advantage in nitrogen abatement will sort into the trading program, worsening adverse selection. Actual increases in abatement from trading depend on incentivizing additional conservation practice acreage without inducing the conversion of vegetative cover to cropland.

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.

A Place at the Well: The Imperative for Farmer Inclusion in Water Conservation Policy Design

AbstractAchieving cleaner water for rural and suburban communities in a sustainable way requires approaches tailored to the unique socioeconomic, ecological, and historic contexts embedded in a particular community and place. Water quality trading (WQT) is a payment for ecosystem services style policy that is currently popular across North America as a mechanism to reduce water pollution from rural communities. Yet this approach is failing to generate markets with enough trades to measurably improve waterways. Some failures are attributed to poor program design and others to stakeholder communities who are averse to the premise or morality of WQT. However, rural communities are not homogenous and many are in fact amenable to payment for ecosystem services policies such as WQT. Although our case study identified Tennessee watersheds as “feasible” locations, we present evidence that the typical program design parameters would fail, despite having a willing population of farmers. We argue that identifying amenable communities or feasible locations simplifies the agency of stakeholders and is ultimately insufficient to make ecosystem services programs work unless the design and implementation phases of the programs include local stakeholders.

When the Levee Breaks: Can Multi‐Pollutant Markets Break the Dam on Point–Nonpoint Market Participation?

High transaction costs and thin participation plague water quality trading and prevent markets from delivering expected efficiency gains. Little prior work explores the relationship between transactions costs and market performance. We develop a model of point–nonpoint trading that includes transactions costs. Point sources (PS) generate a single pollutant, whereas nonpoint sources (NPS) generate multiple, complementary pollutants. Trading occurs via bilateral negotiation: regulated PS must find and contract with unregulated NPS to obtain pollution offsets. Each PS bears search and contracting costs that depend on the number of potential trading partners. The NPS sector does not pay search costs but may incur some contracting costs. These costs may affect participation decisions. Transactions costs may generate strategic complementarities that lead to multiple equilibria, characterized by large or small levels of market participation. The equilibrium at which the market arrives depends on sources' expectations about others' participation. We explore the effect of different market structures on trading outcomes. Allowing NPS to participate in multiple, distinct markets for each pollutant they abate may have little effect on the basin of attraction for trading. In contrast, integrated markets—in which regulated polluters can meet their caps by holding permits generated from abatement of either pollutant—can reduce transactions costs for both sources. This generates a larger basin of attraction around the full‐participation equilibrium and thus may improve the efficiency of pollution trading.