Agriculture and water quality trading: Exploring the possibilities

Abstract

Water quality trading is a market-based alternative to command and control policies for meeting water quality goals. A trading program creates a market for pollution discharge reductions for the purpose of achieving a water quality goal at a lower cost than traditional command-and-control policies. The US Environmental Protection Agency and the USDA are promoting water quality trading in watersheds impaired by both point source and agricultural pollution. This research examines the extent to which water quality impairments have the potential for creating a demand for credits from agriculture. We found that the opportunities for the development of active markets between point sources and agriculture are limited, due primarily to lack of available demand from point sources. Out of 710 eight-digit HUCs containing waters impaired by nutrients, we identified 142 and 224 where active markets for nitrogen and phosphorus credits, respectively, between regulated point sources and agriculture have the best opportunity to develop, assuming supply and demand impediments can be addressed through program design and government support. We use program data to account for current conservation measures on farms that could drive up the price of credits and reduce demand.