Water Quality Trading Policy

In May, the Environmental Protection Agency requested comment on its proposed Policy on Water Quality Trading. The policy looks to use permit trading and other market mechanisms to achieve environmental results that traditionally have been pursued through government command-and-control regulation. The proposal observes that "market-based approaches such as water quality trading provide greater flexibility and have potential to achieve water quality and environmental benefits greater than can be achieved under current practices and policies." The economic incentive programs are actually developed by states, localities, and public or private watershed associations. Thus, EPA'S proposal signals its willingness to cooperate in the development of such programs for improving water quality.

Consider the Tar-Pamlico Basin Association of North Carolina, North America's foremost example of a nutrient trading community with experience in point-source and non-point source trading. Faced with a high phosphorous and nitrogen load in the river, the association turned to trading to reduce the levels of those nutrients. Through trading, the association has met its nutrient reduction goals in a cheaper and more efficient way than command-and-control regulation. The association estimates that it would have cost its members an average of $7 million in command-and-control directed technology upgrades to achieve a comparable level of nutrient reduction that a $1 million investment in non-point source controls yield. (See "The Trouble with TMDLs," Spring 2001.)

Virginia, on the other hand, chose an entirely different system of economic incentives to address the problem of excess nutrients in the Chesapeake Bay. It instituted voluntary cost-sharing contracts with farmers and with wastewater treatment plants throughout the watershed. The point-source contracts included annual penalties or bonuses based on measured performance. The "tax/subsidy" approach achieved many of the same efficiencies as trading, but it was done through contract, not regulation.

EPA could improve its proposed policy further by expanding its willingness to consider different experimental systems, and not to dictate what an "approvable" program looks like. It should also be more willing to use economic incentives to replace, and not just supplement, the existing federal regulatory regime.