The Market

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Market-Inspired Solutions to Environmental Problems

The theme of the nineties in environmental policy is the market. The heavy-handed nature and mediocre success of the environmental movement’s command and control policies caused many to rethink environmental legislation and regulation to achieve goals more cost effectively. This reevaluation was a necessity in the face of declining sympathy and growing frustration with the Clean Water Act, the Endangered Species Act, and the Clean Air Act. One of the explicit goals of many members in the 1994 Republican Congress was the abolishment of the Environmental Protection Agency!

Economics has attractive ideas to offer the debate over pollution. Since the most efficient way to produce a good is through an open market, then environmental “goods” like water quality, air quality, and wetlands could be provided by a market or a created pseudo-market. The pseudo-market like the "real" market would have a system of rights and incentives and rely on individual self interest to achieve the water quality goal. The idea has caught on with both environmental activists and industry groups. A market framework legitimates all stakeholders and depoliticizes the fiercely opposed ideologies: natural rights-based environmentalism and individual rights-based corporate philosophy. In an ironic sense, using markets in environmental problems most directly serves neither “side”, only the utilitarian interests of representative government who devises them, which is providing the most satisfaction to the most people at the least cost (Des Jardins, 1997).

Marketization of environmental policy is happening. Air pollution credit trading exists in the U.S. and also is included in the international Kyoto treaty. Wetlands mitigation banks now exist in the U.S. and take advantage of economies of scale to provide more, higher quality wetlands. For a discussion of wetlands policy, visit .

Kenyon College Wetlands Resources

Market-Inspired Solutions to Eutrophication

Trading schemes have been devised under the supervision of the EPA to trade water quality services in order to obtain water quality goals at the lowest cost.
First, a limit is set (lbs/year), and dischargers (wastewater treatment plants) bid for the rights to discharge each pound. They can then trade rights. For example, a new water treatment plant which can easily upgrade treatment technology to virtually eliminate Nitrogen discharge will receive compensation from a older plant in the same watershed which would only be able to upgrade at great cost. Or, an older plant could pay for the implementation of agricultural BMPs to reduce nitrogen loads to the watershed instead of purchasing very expensive new capital.

Trading requires a limit for the maximum level of pollutant. Throughout watersheds across the country, TMDLs (Total Maximum Daily Loads) are being established for various pollutants including nitrogen and phosphorous. Importantly, TMDLs are standards for the water body, not for dischargers. Once the total is established, dischargers bid for the rights to discharge each pound of nitrogen. The price of the credit would reflect the price for reducing discharge by one pound. In the Tar-Pamlico watershed in North Carolina, the EPA has estimated that achieving nitrogen goals would cost 860-7861 $/lb with traditional policy and 67-119 $/lb with a watershed trading system. The new philosophy puts the emphasis on the pollution outcome rather than the individual discharger. Trading of discharge rights so far has occurred in local watersheds addressing local water quality issues. It remains to be seen if such a solution could be devised to address the near national scope of the hypoxia problem in the Gulf of Mexico.

Another market solution would be to create a market for nitrogen fertilization rights (UIUC, 1997). If you limit the amount of nitrogen applied to the soil in a watershed and sell rights to use nitrogen, then you will limit application to the most productive areas, where Nitrogen is taken up and does not runoff. However, this solution would have to be implemented on a national basis or high nitrogen demanding crops (corn, wheat, sorghum) would migrate to unregulated areas. A fertilization rights market confines the increasing costs to farmers, with an expected increase in the price of corn and wheat, which may carry to much political baggage to become feasible.

Non-point source pollution is gaining regulatory attention nationwide but still needs more legislative action for nitrogen markets to become more widespread. The largest barrier is the burden of scientifically defensible TMDL and monitoring systems. If we need certainty beyond common sense to enact changes in our agricultural system, then we need funding to back the necessary science. Once established on a firm footing, trading systems have the potential to achieve much stricter water quality standards, while remaining economically viable to point and non-point polluters alike.

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