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Cracking the code for development of water quality markets

Tuesday, March 3, 2015

Water quality markets are perhaps the holy grail of environmental policy. It could be the silver bullet that would bring conservatives and liberals together to address water quality problems throughout the United States.

The thought is that if we were able to apply the efficiency of market-based environmental policy to the nation’s water quality problem, willing sellers (farmers) would be able to bring low-cost water quality credits (e.g., commitments to reduce nitrogen losses) to a market where regulated entities like sewage treatment plants or power companies would buy the credits.

Largely based on the reported success of the sulfur dioxide and nitrogen oxides markets, policy makers have been eager to crack the code and apply market-based solutions to water quality concerns, especially those related to non-point sources of nutrients. However there has been limited success. A paper published in 2004 identified 70 water quality trading programs in the United States, but only 15 of those markets included agriculture as a source of credits. Another paper, published in 2005, noted: “Most importantly, point/nonpoint trading involving agriculture—the type that will be needed for WQ trading to have a significant impact in many watersheds and the type of trading that will be addressed in this article—has not materialized at all.”

Since these assessments were written nearly a decade ago, additional water quality markets have been established. Examples include nutrient trading in the Chesapeake Bay watershed and the greater Miami watershed trading pilot program. However, the number of agricultural credits brought to market continues to be low.

On Dec. 3, 2013, EPA published a news release announcing a new EPA-USDA partnership to “… support water quality trading and other market-based approaches that provide benefits to the environment and economy.”  USDA Secretary Tom Vilsack was quoted as saying, “New water quality trading markets hold incredible potential to benefit rural America by providing new income opportunities and enhancing conservation of water and wildlife habitat.”

On March 11, 2014, after five years of development led by the Electric Power Research Institute, the first interstate water quality credits were purchased in the voluntary Ohio River Basin pilot water quality trading program. Duke Energy, Hoosier Energy and American Electric Power purchased 9,000 stewardship credits from nearly 50 agricultural producers who entered into three-year contracts agreeing to reduce nutrient losses in exchange for payments of $10 per pound of nutrient. The power companies have invested in the agricultural water quality credits to meet corporate sustainability goals or to hold for future permit compliance. This is just the beginning, and an agricultural credit auction is planned for the fall of 2014.

The Ohio River market is an exciting development in the application of market forces to helping address water quality problems. However, if history is a guide, this endeavor will prove to be a challenge.

In an article on the Ohio River market on March 24, 2014, Annie Snider of Environment and Energy Daily, wrote that “…no major water quality trading programs have advanced beyond the pilot stage yet, and many say that a market for water quality credits will only really take off when states implement numeric standards for water quality—a highly controversial prospect.”

Snider reported on March 10, 2014, that although some environmental groups support water quality trading, others contend such a system would be gamed and not create any significant water quality benefits. Scott Edwards, co-director of the Food & Water Justice project at Food & Water Watch said, “There is no level of verification that would make us comfortable.” On the other hand, the Chesapeake Bay Foundation supports water quality trading, but with strong verification and transparency requirements.

While interested in water quality trading, agricultural groups also have concerns. Don Parrish, senior director of regulatory relations at the American Farm Bureau Federation, said, “So much of what I’ve seen in trading, there’s always this underlying assumption that it’s inexpensive for farmers and nonpoint sources to address an issue and have something to trade,” he said. “I think that’s a myth—it’s not easy, and it’s not inexpensive.”

Creating a water quality market is exceedingly difficult. I recall one of the lawyers working on environmental market language in the 2008 farm bill remarked that what we were trying to do wasn’t like drafting language to create a market for corn, it was like drafting language to create corn.

Resources:
Ribaudo, Marc, Jorge Delgado, LeRoy Hansen, Michael Livingston, Roberto Mosheim and James Williamson. Nitrogen in Agricultural Systems: Implications for Conservation Policy, Economic Research Report No. (ERR-127) 89 pp, September 2011

Ribaudo Marc, LeRoy Hansen, Daniel Hellerstein, and Catherine Greene, The Use of Markets To Increase Private Investment in Environmental Stewardship, 2008


Doug Lawrence Doug Lawrence (doug.lawrence@blackwoodsgroup.com)
President, Blackwoods Group LLC
http://blackwoodsgroup.com
View more posts by Doug Lawrence

1 comment on “Cracking the code for development of water quality markets”

  1. Tim Gieseke
    Posted Wednesday, April 02, 2014 at 2:58:33 PM

    close - it is like drafting language for developing units to measure corn.

The views and opinions expressed in AgChllenge2050 blog posts are solely the opinions of the authors, and not those of Farm Foundation, NFP.