Selected Economic Aspects of Water Quality Trading: A Primer and Interpretive Literature Review

E.B. 2007-02The economic objective of environmental regulatory design is to achieve a targeted reduction of pollution at the lowest possible cost.2 Conceptually, this “cost–effectiveness” objective can be achieved through voluntary adoption of new technologies, strict regulatory approaches, and/or market-based incentive programs such as tax/subsidy mechanisms or marketable permit systems. Encouraged by the singular success of the highly visible United States (U.S.) acid rain program in accelerating reductions in sulfur dioxide pollution, while also providing substantial savings relative to alternative command-and-control measures, environmental policymakers are increasingly directing their attention to market-based approaches that allow flexibility in meeting caps set on aggregate pollution levels. That the longstanding academic interest in pollution trading is being translated into actual water policy is evident in the rapid growth in the number of water quality trading initiatives over the past fifteen years: in 1990 three such programs existed in the United States, by 1999 there were 25 programs in various stages of implementation and development, and as of 2004 this number had increased to 70 (Woodward, Kaiser and Wicks; Environomics; Breetz et al.). Water quality trading programs have been established internationally in such diverse locations as Australia, Chile, China and Slovakia (NCEE)