Flawed concept may set back market-based rescue of Chesapeake Bay
Congress, some state agencies, and some environmental advocates are
promoting a program of buying and selling pollution credits as a
way to have regulated polluters pay unregulated farmers hundreds of
millions of dollars every year to install practices that reduce
nutrient runoff from their farms — the main source of pollution to
the Chesapeake Bay.
Advocates for this idea
believe it would cost regulated polluters (such as wastewater
treatment plants and urban developments) less to meet their
pollution reduction obligations if they pay farmers to install
pollution controls, rather than install controls themselves. This
practice is called “water-quality trading,” in which some polluters
meet their requirements by purchasing “credits” created by
pollution reductions that result from the actions of others, in
this case farmers.
Unfortunately, the logic
behind the idea is factually flawed and conceptually misleading.
First the facts.
There will be relatively few
buyers for farm credits. Permits typically limit permit holders’
opportunity to shift their control obligations to others,
regardless of the cost advantages. Wastewater treatment plants are
required to clean their outflows to the limits of technology.
Emerging storm water programs require developers to exhaust all
feasible on-site controls first.
Even if allowed to buy credits
from farmers, regulated sources may find few financial benefits in
this approach. In Virginia, recent research suggests buyers may
need to pay over $100 for every credit they buy from a
Costs of credits are high in
part because trading programs usually require at least two pounds
of credits from a farmer to offset one pound of nitrogen. Also,
farmers usually must employ at least the lowest cost pollution
control practices on their fields before they are eligible to sell
credits, so credits for sale are generally created with higher cost
practices. Further, farmers will seek a premium for giving up
income from crops and for linking their farm operations to a
Not surprisingly, wastewater
treatment plants are investigating gray water reuse, constructed
wetlands and biomass harvest as compliance strategies – strategies
that keep control of compliance in their own hands.
Finally, the claim that this
kind of program can generate hundreds of millions of dollars to
fund agricultural nutrient reductions in the Chesapeake Bay region
is wildly optimistic. The U.S. Environmental Protection Agency and
some states have promoted nutrient trading since 1996. All the cash
transfers ever made from regulated sources to agriculture in all
those existing trading programs do not add up to one year’s worth
of payments being promised for bay region farms. There is no reason
why a Chesapeake Bay program would diverge radically from past
Conceptually, buying and
selling credits – trading — is a way for a group of pollution
sources to meet their regulatory obligation – not a way to transfer
revenue to unregulated polluters. If trading is envisioned, and
then designed as a mechanism to generate revenue for agricultural
sources, it becomes a de facto tax on the regulated
parties. If additional revenue to pay for nutrient reductions on
farms is desired, one can imagine a whole variety of tax systems
that can generate more revenue, be easier to administer, and
provide far greater transparency than that provided by a water
quality trading program.
The fairness of this kind of
tax will also be questioned. Already, sewage treatment plants in
the bay region have been required to reduce nutrient discharges by
a greater proportion than other nutrient sources and their control
requirements approach the limits of technology. Now these regulated
sources and their customers would be asked to also pay for
reduction efforts by sources that state governments have decided
not to regulate directly.
Demanding funds from a
compliant source to pay for reductions at a noncompliant one is
hardly fair. Nonetheless, EPA has recently threatened to require
further reductions from regulated sources if bay region states fail
to reduce pollution from unregulated sources, mainly
We believe it is possible to
design programs that use market-like principles to secure
meaningful and certifiable reduction in all sources of pollution.
Properly designed trading programs can ensure more water quality
benefits at lower cost. A variety of explicitly created taxes can
create nutrient reducing incentives, raise funds and effectively
deploy those new funds for real results.
Thinking that trading is a way
to generate millions for farmers, however, is an unfortunate
diversion from the real opportunities to employ market-like
programs for water quality management.
(Kurt Stephenson is a professor in the Department
of Agricultural & Applied Economics at Virginia Tech and
Leonard Shabman is a resident scholar at Resources For the Future.
This column was distributed by the Chesapeake Bay