Bay Journal

Simplify nutrient trading debate: Focus on allowances, not reductions

  • By Robert Wieland on November 01, 2001
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The idea of allowing polluters to achieve nutrient pollution reduction in a “least-cost” manner has started to generate some discussion among people interested in protecting the Chesapeake Bay

I assume, as I write this, that readers realize that the term “polluters” refers to everyone in the watershed.

Publicly owned wastewater treatment plants do not create wastewater. We, the toilet-flushers do; then pay them to clean it. Similarly, farmers use fertilizer to meet our demand for their products. Our houses, roads and cars all contribute.

We are all polluters and accessories to pollution. And, as we will all have to pay to clean it up, I assume that we would like buy the most cleanup possible for our investment. That is what “least-cost” pollution reduction would do.

Unfortunately, some of this discussion makes the clear understanding of “least cost” approaches more difficult than it needs to be.

After nutrient trading rules were developed in Maryland, a study looked at how pollution trading might work and what impact it might have on the costs of achieving nutrient reduction targets.

The authors of this study use engineering and cost information for a number of point and non-point pollution reduction practices in a rudimentary model that predicts how pollution reduction would be distributed under various scenarios.

By tallying up and comparing the costs of different pollution reduction allocations, the authors are able to show the savings that accrue under nutrient trading approaches.

Therein lies the rub. The study, and much of the discussion that goes on about nutrient trading, focuses on “pollution reduction allocations.”

While pollution reduction is, to be thoroughly sure, the goal of our desiring, it is not what is being traded when we talk about “nutrient trading” policies. What is being traded in these schemes is a limited right to pollute.

While a “right to pollute” may be unpalatable at first glance, a quick review of what is happening in a nutrient trading scheme shows why this is an important variable.

First, imagine that for some place — a watershed, tributary or basin — scientists determine the maximum amount of man-made pollution that can go into the water without impairing it. Because the goal is unimpaired water (with regard to specified uses), this maximum amount is established as the most pounds of nitrogen, phosphorous, silt, etc. that will be allowed into the water. Call it a cap.

Under a nutrient trading approach, policy makers would allocate bits of this cap among polluters as tradable pollution allowances. These allowances would entitle the bearer to pollute up to some specific amount. The sum of all these allowances would be less than the cap.

Assuming that the current pollution was greater than the cap, most polluters would find that their quota did not cover their present loadings, so they would have to do something. Their choices would be as follows:

  • Implement enough pollution control to get down to their allowance,
  • Look for some additional pollution rights to buy so that they could pollute at a level higher than their initial allowance, or
  • Reduce pollution below their allowance and either bank or sell the bit of it that they are not using.

The deciding factor for most polluters in choosing among these three alternatives, would be cost. This is how the nutrient trading policy generates “least-cost” pollution reduction.

Less efficient pollution reducers would, effectively, pay the more efficient reducers to bear more of the reduction burden by buying excess pollution allowances from them.

A government agency would not have to attempt to allocate pollution reduction requirements through industry-specific regulations. The role of the government agency, in a nutrient trading scheme, is to set the cap and to ensure that it is not exceeded. A market would determine how it was not exceeded.

Now, go back to the part of this explanation that said that tradable pollution allowances would be allocated and substitute for that the phrase, “pollution reduction requirements would be allocated.” In this case, policy makers would determine the size of the reduction needed to get below the cap and then allocate bits of this reduction requirement among the polluters.

Polluters who reduced more than they needed to could sell their excess pollution reduction amounts to other polluters.

For any given amount of pollution, this approach would provide the same outcome as a market that traded in pollution allowances.

To see this, consider a polluter that puts 100 pounds of nitrogen into the water each year. Telling that polluter it can put only 60 lbs/yr into the water is the same as saying it has to reduce its pollution by 40 pounds.

The problem is, the amount of pollution that needs to be kept out of the water in order to stay beneath the cap is changing all of the time. As new housing developments are created, as wastewater treatment plants face ever greater volumes of flow, as agricultural practices (or prices) change, the amount of pollution that needs to be kept out of the water also changes.

If we think of nutrient trading in terms of pollution reduction requirements, we have to recalibrate the policy every time the total pollution load changes.

On the other hand, the amount of nutrient pollution that the water can receive before it starts to be impaired does not change.

Focusing our policy on how much pollution will be allowed into the water gives us a solid, unchanging goal, except as scientific accuracy improves. Focusing on nutrient pollution reductions gives us a moving target and, room for fudging.

The simple description of nutrient trading given above gets more complicated when you start adding bells and whistles, such as trying to ensure that the market distributes pollution in such a way that you don’t get “hotspots” or trying to ensure that variance and uncertainty in pollution reduction get taken into account.

Could people who thought that the allowable loads were set too high enter this market to buy and retire pollution rights?

Because it is important for interested citizens to understand what is implied by “nutrient trading,” we should focus on the fundamental factor in the process and not its inverse.

The thing that is of primary concern is the pollution that goes into the water. Reducing current and future loadings is our ultimate goal, but we can reach this most directly by deciding what the allowable load will be and letting a market develop around getting down to that level.

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About Robert Wieland
Robert Wieland is a resource economist working to expand the application of economic analysis in environmental decision-making. He wrote "Why People Catch Too Many Fish" (Center for Marine Conservation) and "Fish, Markets, and Fishermen" (Island Press).
Read more articles by Robert Wieland


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