Controlling Non-additional Credits from Nutrient Management in Water Quality Trading Programs Through Eligibility Baseline Stringency

A concern for any program that offers payment for environmental services is that those services be additional. Non-additional services are those that would have been provided without the payment. One source of non-additionality is farmer misrepresentation of their pre-program management. Farm management practices are often difficult to observe, particularly those that do not involve structural changes, such as nutrient management. If practices are difficult to observe, management oversight lax, and enforcement weak, the farmer has an incentive to provide biased information that increases the likelihood that he will receive a more favorable baseline for calculating services created, and a larger payment. This is a moral hazard problem. The presence of non-additional credits in a water quality trading program can result in the degradation of water quality. Point source discharges above permitted levels are replaced by equivalent reductions from unregulated nonpoint sources. If the abatement that point sources purchase from nonpoint sources is non-additional, discharges will be higher than if the abatement was truly additional. Preventing non-additional credits from entering a water quality trading market is one of the goals of program design. In this paper we assess how program eligibility baseline choice affects the incentive to misrepresent baseline nutrient management practices using data from the Chesapeake Bay Watershed.