Trust, Farmers, and Water Quality Trading

dreamstime_m_14783122The essence of the Clean Water Act (CWA) is its prohibition of the discharge of any pollutant into the waters of the U.S. from any point source except when specifically sanctioned in a permit.  A point source is essentially any “discernible, confined and discrete conveyance,” something like a traditional pipe discharging into a body of water.

By contrast, diffuse, nonpoint sources, such as row crop agriculture, are not regulated by the federal statute.

The regulatory structure for point sources was and is relatively straightforward even if difficult to implement in practice.  It was and is a linear, top-down system of command-and-control regulation of a large but discrete class of dischargers.  While not terribly efficient, it was effective.  The clean-up of the Great Lakes is often cited as the outstanding accomplishment of this water quality regime.

With the decline in point-source pollution, nonpoint sources have come to be a primary concern especially nutrient runoff from agriculture.  Also, the post-World War II acceleration in the use of nutrients as fertilizer has brought with it new challenges which are beyond the scope and jurisdiction of the original CWA.

The hypoxic or “Dead Zone” in the Gulf of Mexico is caused by polluted runoff from the Mississippi including the Ohio and Missouri River basins.  This zone has been measured at various stages as the size of New Jersey or Massachusetts.  Ninety-percent of the nitrogen delivered to the Gulf-the primary cause of over-enrichment and oxygen depletion-comes from unregulated, diffuse agricultural nonpoint sources of pollution, including 58 percent from fertilizer and mineralized soil nitrogen.

Point sources, on the other hand, account for approximately 10 percent of the delivered load.  It is a measure of how small the relative contribution of traditional, regulated point sources is to the hypoxic problem that Chicago’s wastewater system may be the single biggest point-source discharger of nutrients to that body of water via the Chicago, Illinois and Mississippi Rivers. This result stems from the reversal of the flow of that city’s rivers into Lake Michigan, over a hundred years ago, in order to avoid horrible epidemics.  Thus, the nutrients flow into the Mississippi watershed rather than the Great Lakes.

The Chesapeake Bay and its tributaries are also suffering from excess nitrogen, phosphorus, and sediment entering its waters. According to the U.S. Environmental Protection Agency (EPA), “Agriculture is the number one source of pollution to the Bay.”  It covers 25 percent of the watershed with 87,000 farms across 8.5 million acres. (U.S. Environmental Protection Agency 2009).

Municipal and industrial sources of water pollution are regulated. Many if not most agricultural operations are not. Clearly, there is an opportunity for a market exchange between point sources who face costly end-of-the-pipe regulations and farmers who are in a position to profit from making cheaper, cost-effective efforts to reduce nutrient and sediment runoff from their fields.  In other words, agricultural producers can “sell” their environmental services or nutrient-reducing actions on their land, for the provision of water quality credits.  The vehicle for these transactions is often called water quality trading. The object of the trade is an environmental or ecological service rather than a commodity.

Trading has successfully reduced air pollution while maintaining cost-effectiveness as demonstrated by the Clean Air Act’s acid rain trading program as well as the phase-out of lead in gasoline.  Trading capitalizes on the economies of scale and the control cost differentials among and between various sources of pollution.  In allowing one source to meet its regulatory obligations by using pollutant reductions created by another source, be it regulated or unregulated, with lower pollution-control costs, trading creates economic incentives to improve water quality. The standards remain the same, but efficiency is increased, costs decreased, and often benefits are multiplied.

Point-to-nonpoint source trading offers the greatest opportunity for both reducing control costs and generating multiple environmental or ecological benefits due to the potential of encouraging a variety of watershed-, conservation-, and land-based management practices which could reduce water pollution while, concurrently, creating habitat, reducing energy consumption, restoring flow regimes, sequestering carbon, protecting forests and grasslands, and reducing high-cost agricultural inputs, e.g., nutrients and chemicals.

The World Resources Institute (WRI) conducted a study of three watersheds in Minnesota, Michigan, and Wisconsin on the cost of controlling phosphorus. The cost of reductions from point sources was considerably higher than those based on trading with nonpoint sources.  The estimated cost for point-source control ranged from $10.38 per pound in the Wisconsin watershed to $23.89 in the Michigan one. With trading, these costs could be lowered to $5.95 per pound in the former and $4.04 per pound in the latter.  These cost reductions represented a drop of 40 percent in Wisconsin and over 80 percent in Michigan (Faeth 2000).

According to the Willamette Partnership, a strong proponent of trading, there are 24 active point-nonpoint trading programs, some significant point-to-point trading programs such as on Long Island Sound, and many emerging programs, too (Willamette Partnership 2012).

Entrepreneurs, conservation or agricultural commodity associations, land trusts and watershed organizations might want to participate in the trading process as aggregators, bankers, or brokers of credits generated by a large number of widely dispersed nonpoint sources which might require or seek technical advice and comfort with, or distance from, the regulatory process. Many nonpoint sources are relatively small enterprises which do not have parity with large regulated point sources in any bargaining relationship.

A recent study for the Sand County Foundation in Madison Wisconsin recommended developing a small-scale conservation cooperative to participate in a water quality market for nutrients in the Milwaukee River Basin tributary to Lake Michigan and flowing into the service area of the Milwaukee wastewater utility.  Pete Nowak of AgInFomatics, LLC conducted an extensive review of 80 items in the scientific and informal literature to assess whether there is a precedent for use of farmer cooperatives or comparable non-profit structures as a means of facilitating such participation.

The report sought to answer the question, “what would happen if one made it possible for those farms contributing to the problem to also be responsible for resolving the problem, and then be rewarded for this performance?” (AgInformatics, LLC 2013).

The study did not find any case of a farmers’ cooperative engaging in environmental or water quality markets.  Still, it viewed positively the generic attributes of cooperatives in terms of their potential to participate in water quality markets noting, especially, their “potential to harness the problem solving capabilities of participating farmers and the persuasive power of peer pressure.”  Furthermore, “recent research demonstrates that a group can generate better knowledge about dynamic situation [sic] than experts, or the individual member of the group.”

The literature indicates that principles proposed by Elinor Ostrom, the first woman to win the Nobel Prize for economics and a proponent non-governmental communal governance models, would apply to conservation cooperatives involved in water quality markets.  Specifically, they include the following:

1) The presence of well-defined boundaries around a community of users and boundaries around the resource system.

2) There is congruence between appropriation and provision of rules and local conditions, i.e., allocation of funds from the market go to the cooperative in a manner specified by the members.

3) The local effort is organized so that most individuals affected by the operational rules can participate in modifying the operational rules.

4) Monitors or third parties are present and actively audit conditions, appropriator behavior, and account for appropriations.

5) Appropriators who violate operational rules are likely to be assessed graduated sanctions by other appropriators (not external parties).

6) Appropriators and their officials have rapid access to low-cost arenas to resolve conflicts among appropriators or between appropriators and officials.

7) The rights of appropriators to devise their own institutions are not challenged by external governmental authorities.

A critical element underlying these principles is the role of trust in the person or persons who initiates and manages the local conservation effort,” says Aginfomatics [emphasis added]. It concludes that “a conservation cooperative is feasible” given “a significant amount of insight in the literature on how this cooperative should be structured and managed.”

This report demonstrates that success in encouraging a farmer’s participation in water quality trading requires more than simply focusing on the solitary individual and his or her property rights.  These are necessary but not sufficient conditions of success to use an Aristotelian formulation.  Most definitely, progress in point-to-nonpoint trading must be grounded on the individual farmer’s right to property and his or her entitlement to the fruits of the sale and marketing of ecological or water-quality services generated with and on that property.

Successful integration of nonpoint sources into the trading scheme would, in this analysisk entail an individual property owner collaborating with his or her neighbors to participate in an environmental market for the profit of all.  Thus, trading between point and nonpoint sources, usually agricultural producers, woodlot owners, and other owners of land, requires adopting a kind of “network governance” structure, an apt term I owe to Lynn Scarlett of The Nature Conservancy.

For landowners or farmers to effectively engage in and benefit from water quality markets, it is necessary for them to collaborate with one another to share knowledge, build trust, reduce transaction costs, set and enforce rules, and thereby facilitate individual participation in the trading program.  That, at least, is the lessons from the Sand County Foundation’s seminal study.

5 Comments
  1. Tim Gieseke 4 years ago

    Tracy – very good research and insights. In my work I have come to the same conclusions in addition to the need to shift from a practice-based to an outcome-based approach – or from a program-driven to a resource-driven system.

    To my knowledge there are not successful water quality trading programs in existence – that is where the value of trades is larger than the transactions cost generated. Water quality trades with high rates of NGO and government funds often mask the high transaction costs.

  2. Marianne Horinko 4 years ago

    Excellent post. I have always thought that a forward-thinking estuary program could serve as an organizing function for such a trading system. Not to further muddy the water, but the system should recognize the other ecosystem services in the water body, such as sediment remediation and natural resources restoration under the cleanup statutes. Complicated to be sure – but worth recognizing that many partners, public and private, are pouring dollars into the watershed.

    • Author
      Tracy Mehan 4 years ago

      And, as you know, Marianne, estuaries are ecosystems most threatened by nutrient over-enrichment and eutrophication. Thx.

  3. Joseph Britt 4 years ago

    Tim hits on what, in terms of economics, is perhaps the greatest challenge for advocates of water quality markets. Transaction costs are bound to be higher when the transaction in question involves actions of uncertain value and, moreover, calculations neither party to the transaction is used to making. Reducing the number of variables in the equation — for example, by engaging farmers in a watershed collectively rather than individually — should be one way of reducing transaction costs, one of the insights in the work Pete Nowak did for us.

  4. sbo 4 years ago

    Water pollution is the most important environmental problems of the country as compared to other pollution, water pollution often associated with major cities of the country’s major water sources are contaminated with dirt and pollutants, making. can not fully utilize the water resources. Which affect quality of life. And economic and social development.

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