Efficiency pricing: Putting our money where our science is
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Here's an idea for lowering nutrient pollution loads to the Chesapeake Bay. Let's adopt a policy to use what we know to obtain the greatest nutrient pollution reduction possible (for our available budget). Everyone agrees that this is a good idea, I think. Some might wonder, "Why aren't we already doing it?" But, it is not as easy as it sounds.
To get the most nutrient pollution reduction we can, we need to know where the nutrients are coming from. Then, we need to figure out the efficacy of mitigation practices for reducing loads and their unit cost. We have to select nutrient reduction practices according to their costs because we want to get as much nutrient reduction as we can for some available budget. We can only do that if we spend our money on the cheapest reductions first and then pick the more expensive practices as the cheaper ones are exhausted and as our available budget increases. The metric here is dollars spent per pound of nutrient reduced ($/lb).
So, it is already sounding a little complicated. Especially when we consider that there are so many disparate nutrient load sources across such a very large drainage. Moreover, there is a range of potential mitigation practices for each of those load sources. Do we have to figure out how many pounds of nutrients are coming from each acre in the drainage and then assign each of them a set of practices that we know will reduce their pollution loads in the most cost-efficient manner? That would be very complicated. Maybe there is an easier way.
Suppose we said that, for some given nutrient pollution mitigation practice, a pound of reduction is worth some fixed price. Let's use as an example cover crops and let's say a pound of nutrient reduction from cover crops is worth $3.50. Then, for any given acre, we just need to know how many pounds of nutrients are reduced when cover crops are planted there. Multiply that number by $3.50 and that is how much a farmer would be paid to implement the practice on that acre.
By using what is known about nutrient loads of different cropping systems and the reduction efficiencies of specific planting practices, it is possible to create a matrix that describes the number of pounds of nutrient load reduced for any combination of practices and cropping systems. By multiplying any of those factors times our fixed price ($3.50/lb), we would know the value of that acre in terms of nutrient reduction.
Placing a price on the thing that we want (nutrient load reduction), instead of an imprecise proxy for the thing that we want (acres), would motivate greater nutrient load reduction for the same budget. Farmers would choose the practices that maximized nutrient load reduction on their fields because that would maximize their cover crop income from those acres. And, farmers with acres that are not greatly affected by the planting of cover crops-whose reductions are very low-would not bother.
The existing payments system does not provide that sort of information to the farmer. Currently, farmers are paid for cover crops by the acre, with premiums for planting early and for planting on acres in specific cropping systems. But, how do you price the premium? And, cover crop $/lb cost efficiencies vary across more than just cropping systems and time of planting, although those are important. Why not use all the information at our disposal?
Just as aggregators prefer to buy wheat by the ton and not by the acre, we should prefer buying nutrient load reduction by the pound. This approach could also be used (with adjustments) to motivate more cost-efficient nutrient load reductions on riparian buffers, although those have different characteristics than cover crops.
It could also work for mitigating impervious surface effects of developed land, if adequate standards were adopted for loads from that source.
Pricing nutrient load reduction by the pound provides the added benefit of giving one a better idea of the total volume of nutrient load reductions achieved in any spending period. Total load reduction would be total spending divided by the price per pound. It would make tracking load reductions much simpler-and more precise.
So, with regard to the new and improved Chesapeake Bay restoration arrangements, what would it take to make this happen?
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