Water Quality Trading

by James S. Shortle; Richard D. Horan

Jan 1, 2005
Water pollution trading, which is being promoted by the United States Environmental Protection Agency (EPA), has been adopted by several states and some multi-state regional water quality authorities. Further, water pollution trading is being actively considered by many others as means for achieving water quality goals, especially within the context of EPA's Total Maximum Daily Load (TMDL) program. The EPA issued a water quality trading policy in January 2003, and has funded demonstration projects in watersheds across the nation. Water quality trading programs are also active in Canada and Australia.

The development of water quality trading is part of a broader trend towards the use of market-based strategies to address environmental and natural resource problems. Markets provide an economically efficient method for rationing all varieties of private goods and services, and the same can often be said for public goods provided that the right institutional mechanisms can be put into place. Trading has become, for example, a major tool for air quality protection and for rationing access to fisheries and water resources, and is of great interest as a mechanism for managing greenhouse gas emissions as well as water quality and other environmental resources. The broad interest in trading has a variety of origins, but economic arguments, which are supported by increasing empirical evidence about the potential cost-savings from trading by comparison to traditional command-and-control approaches, have been particularly compelling.
Water Quality Trading

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