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Working Paper: Offset Markets for Nutrient and Sediment Discharges in the Chesapeake Bay Watershed: Policy Tradeoffs and Potential Steps Forward

Paper Number: 2011-05

Document Date: 08/2011

Author(s): Andrew Manale, Cynthia Morgan, Glenn Sheriff and David Simpson

Subject Area(s): Water Pollution; Land Use; Non-Point Source Pollution

JEL Classification: Agriculture: Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment; Environmental Economics: Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling

Keywords: water quality trading; offsets; transactions costs; adverse selection; leakage; additionality; monitoring; chesapeake bay; nutrients

Abstract: Considerable interest has been expressed recently in prospects for water quality trading markets between nutrient sources in the Chesapeake Bay Watershed. Allowing such flexibility in response to the terms of recently announced total maximum daily load (TMDL) restrictions might considerably decrease costs of compliance with the TMDLs. Before an effective and efficient market for offsets can be established, however, certain preconditions must be met. In particular, there must be means by which nutrients can be measured, allowances can be assigned, and limits on nutrient discharges enforced. In this paper we consider some factors that may affect the realization of these preconditions. A recurrent theme is that there are tradeoffs in policy design. A regime that imposes tight restrictions on those who are eligible to trade may also limit the cost savings that might be realized from trading. On the other hand, a regime that maximizes market participation might fail fully to achieve the environmental goals of an offset or trading policy. We conclude with some recommendations for steps that might be taken to initiate limited markets in nutrient and sediment discharges. These markets might then be expanded as experience is gained and methods developed to assure improved market performance.

This paper is part of the Environmental Economics Working Paper Series.

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