Nutrient Trading – A Water Quality Solution? - Water and Agriculture: Sustainability, Markets and Policies - page 93

Even though regulatory approaches frequently achieve initial success in improving
water quality, it does place heavy financial burdens on facilities to continually upgrade
their equipment, and regulators to keep abreast of new technological advances, and
provides little opportunity or incentive for facilities to be innovative.
In the U.S., between 1974 and 1994, local governments and the federal construction
grants programme spent approximately $213 billion for the construction or upgrades of
municipal wastewater treatment facilities to control point-source pollution. During the
next 20 years, it was anticipated that an additional $330 billion would likely be required
to construct new plants and replace aging facilities to meet the water quality levels and
treatment demands of a growing U.S. population using this policy approach (Association
of Metropolitan Sewage Agencies and the Water Environment Federation, 1999).
Regulatory approaches become expensive once the initial 'low-hanging fruit' (or least
expensive treatment options) have been exploited.
Taxes and subsidies
Another set of policy instruments used to address pollution includes taxes and
subsidies. Taxes place a penalty on polluters, providing the 'stick' in the carrot-and-stick
analogy, while subsidies are the 'carrot', providing incentives (usually financial) for
polluters to reduce their discharges. These instruments are often used to provide
incentives for non-point sources of pollution. In the U.S., taxes are rarely used in the
agricultural sector to change behaviour, while in some OECD countries taxes have been
more widely used, especially where pollution sources can be tied to inputs, such as
fertilisers and pesticides, in the production process. Fertiliser taxes have been introduced
in Finland, Norway, and Sweden with this tax revenue frequently earmarked for various
environmental uses. Sweden, for instance, uses its fertiliser and pesticide tax to finance
environmental research and improvements (O'Riordan, 1997).
Subsidies are common instruments used to provide incentives to implement
agricultural best management practices (BMPs) aimed at providing environmental
benefits. In the U.S., some examples include the Conservation Reserve Program—which
pays farmers to take agricultural land out of production—and subsidies to increase the use
of conservation tillage practices on cropland; both are aimed at reducing soil loss from
agricultural land. Subsidies target a prescribed set of practices, rather than allowing
farmers to choose the most effective way for them to address the specific problem at
hand.
Performance-based policy instruments
Performance-based policy instruments target an environmental outcome rather than
the sources of pollution and are frequently market-based, i.e., kilograms of nutrient
pollution reduced is the commodity of interest, not the implementation of a BMP that
results in a reduction in nutrient losses. Two performance-based mechanisms that can be
applied to improve water quality are nutrient trading and reverse auctions.
Nutrient trading
Nutrient trading is an example of a performance-based instrument that is gaining
popularity as a mechanism to cost-effectively meet water quality goals. Nutrient trading is
premised on the fact that compliance costs differ between individual industrial and