Trading pollution for water quality : assessing the effects of market-based instruments in three basins

Since its passage in 1972, the majority of pollution reduction under the federal Clean Water Act has resulted from technology-based limits imposed on point source dischargers. However, most U.S. water bodies are unmonitored and of those that are, between 40 and 50 percent remain impaired. Given this limited progress, the U.S. Environmental Protection Agency, multiple state agencies, and non-governmental organizations have proposed water quality trading as a cost-effective means to achieve pollution reductions from point and nonpoint sources. To determine whether these programs actually achieve cost-effective pollution reduction in practice that they promise in theory, I evaluate direct and indirect outcomes associated with three water quality trading cases: the Grassland Area Farmers Tradable Loads Program in California's San Joaquin Valley; the Tar-Pamlico River Basin Nutrient Offset Program in North Carolina; and the Long Island Sound Nitrogen Credit Exchange in Connecticut. Although reallocating reduction efforts through trades to achieve cost-effective solutions is supposedly the major benefit of market-based instruments, only dischargers in the Long Island Sound Nitrogen Credit Exchange actively traded.