Nutrient Trading – A Water Quality Solution? - Water and Agriculture: Sustainability, Markets and Policies - page 94

wastewater treatment facilities depending upon their size, scale, age, and overall
efficiency. This means that the cost of meeting a water quality standard (or regulation)
may be less for one facility than for another. Trading between point sources provides an
opportunity for those facilities whose costs are lower to make additional reductions
beyond their obligation, and sell these additional reductions to facilities whose costs are
higher.
Similarly, trading can also occur between point sources and non-point sources. Point
sources with high compliance costs can purchase nutrient reduction credits from non-
point sources, whose nutrient reduction costs are much lower. In most instances point
source facilities are controlled by regulatory discharge permits (e.g., USEPA NPDES
programme), while non-point sources are generally not controlled by regulatory limits.
Trading gives both point sources and non-point sources the flexibility of achieving an
environmental target using the most cost-effective option available to them. There are a
number of nutrient trading programmes currently in operation in North America. The
Long Island Sound trading programme administered by the Connecticut Department of
Environmental Protection, for example, addresses the problem of low oxygen levels in
Long Island Sound by trading nitrogen credits between point sources, which are the main
cause of excessive nitrogen levels in the Sound. The South Nation watershed in Ontario,
Canada, also has a trading programme in operation that targets phosphorus discharged
from both point and non-point sources.
Reverse auctions
Reverse auctions are another example of performance-based policy instruments. They
are competitive bidding systems where sellers compete to supply buyers with a specified
good or service, enabling buyers to locate the most competitive sellers. The key
difference between reverse auctions and conventional auctions is that in reverse auctions
sellers bid to sell goods and services at lower prices than their competitors, whereas in a
conventional auction buyers compete with each other to purchase goods and services
from sellers. Thus, in a reverse auction sellers bid prices down while in a conventional
auction buyers bid prices up. Reverse auctions are used in a variety of markets and are
particularly suited to markets with multiple sellers and only a single buyer. The reverse
auction concept has been used in the Conestoga watershed in Pennsylvania, U.S. to
purchase phosphorus reductions from farmers. In this instance, an environmental
organisation with funding from the U.S. Department of Agriculture (USDA) acted as the
buyer for these reductions.
How do performance-based mechanisms compare?
The World Resources Institute has undertaken two analyses to compare a variety of
policy instruments for improving water quality—one addresses the hypoxic zone in the
Gulf of Mexico and the other looking at phosphorus reductions in three watersheds in the
Upper Midwest of the U.S.
Analysis of nitrogen water quality impairments
A 2003 study by WRI (Greenhalgh and Sauer, 2003) assessed a variety of agricultural
policy options to mitigate the hypoxic — oxygen-depleted — zone in the Gulf of Mexico
and found that nutrient trading was the most cost-effective solution. The hypoxic zone