Crunch Time for Water Quality Trading

Economists have been promoting water quality (WQ) trading for decades. Over the past few years, many political leaders and upper-level government officials have been joining them. Money has even started to flow from Wash-ington to local trading organizations to help make WQ trading work. However, enthusiasm about WQ trading is based mostly on conceptual arguments about its potential to generate cost savings and ideological arguments about the superiority of market-based solutions over conventional regulatory programs. Experiences with actual WQ trading programs have been discouraging. Under current regulatory conditions, there is simply not enough supply or demand to support WQ trading. The critical question now is whether the regulatory conditions that are inhibiting trading will change any time soon. According to a recent EPA-funded review, the number of WQ trading initiatives in the United States during 2004 was more than 70 (Breetz et al., 2004), which is up from around 25 just a few years earlier (Environomics, 1999; King & Kuch, 2003) However, this recent review, like previous ones, showed that WQ trading programs are frozen at an awkward pretrading stage of development— plenty of new guidelines, regional trading institutions, and computer simulations of trading, and even some well-developed WQ trading software and websites, but very little actual trading taking place. Most importantly, point/ nonpoint 1 trading involving agriculture—the type that will be needed for WQ trading to have a significant impact in many watersheds and the type of trading that will be addressed in this article—has not materialized at all. Advocates of WQ trading are putting their hopes on the anticipated establishment over the next few years of Total Maximum Daily Loads (TMDLs) for individual water bodies. These are a kind of total pollution budget that could be divided among pollution dischargers as individual discharge allowances that could be made tradable. The Clean Water Act of 1972 required each state to develop and implement TMDLs by 1979, but they are only now being developed in most parts of the country. Eventually, TMDLs may provide the market driver that is needed to make WQ trading work. (See Boyd, 2000.) However, establishing TMDLs will merely be the first of many steps that will all need to be taken quickly if WQ trading is to be given a fair chance to succeed. State and local WQ regulators, under increasing pressure to do something soon about growing WQ problems, are beginning to turn to …