WASHINGTON – Environmental regulations often require firms that emit pollutants to limit emissions to a set level or to install specific emission-reducing technologies.
While fairly straightforward, this command-and-control approach can be costly both to the firms and to society. Firms with high costs of pollution reduction and those with low costs are required to meet the same requirements, which may waste resources.
Let market do it. Environmental credit trading, an alternative to command-and-control regulations, is a market-based approach to comply with regulations that could achieve pollution abatement goals at lower costs to society.
Environmental credit trading allows regulated firms to meet their obligations by purchasing pollution abatement services (credits) from lower-cost providers. For example, the 1990 Clean Air Act amendments established a trading program between power plants to cut sulfur dioxide emissions by 50 percent from 1980 levels to control acid rain.
Can farmers benefit? Trading programs have been created for environmental issues other than air quality, such as water quality, wetlands protection, and greenhouse gas emissions. Even though agriculture is not subject to most environmental regulations, farmers can participate in these credit trading programs by generating pollution-reduction credits and selling them to regulated firms.
Farmers can benefit if the cost of generating credits is less than the price they command.
What will it take? For a credit trading program to be successful, there needs to be a demand for credits as well as a supply of credits.
Demand is generally created by a regulation or other cap on emissions or other activity that degrades the environment.
In the case of water quality, the Total Maximum Daily Load provisions of the Clean Water Act set a discharge cap for point sources in impaired watersheds, creating a demand for pollution-reduction credits. Firms required to meet a discharge cap will be willing to pay for credits from other sources as long as the credits are less expensive than their own abatement costs.
Forty trading programs have been established across the country for such pollutants as nitrogen, phosphorus, selenium, dissolved solids, and heavy metals.
Wetland trading. Wetland conversion is governed by a federal “no-net-loss” policy that functions like a cap. The policy requires that wetlands converted to other uses be offset by the creation or enhancement of other wetlands. This policy effectively caps the supply of land for development in certain areas (e.g., in the construction of roads, housing developments, shopping malls).
Wetland mitigation banks have been set up in many states to allow private developers to purchase wetland conversion rights (credits) from farmers, who have established or restored wetlands on their farms.
Current values of wetlands banked can depend on their location and/or expected environmental benefits. For example, in Minnesota, the value of wetland credits to public transportation authorities ranged from $4,000 to $35,000 per acre, depending on proximity to the Twin Cities metro area.
The Rahr Malting Co., for example, achieved its Minnesota discharge requirements through trades with only four farmers. Rahr purchased water quality credits for its new wastewater treatment plant by funding upstream reductions in nonpoint-source phosphorus discharges.
Apples to apples. For a successful trading program, the environmental equivalence between the location where a pollutant reduction is made and the location where that reduction is purchased or used must be established.
For example, drained wetlands must be replaced with wetlands with equivalent wetland functions, otherwise, there will be a net loss in environmental quality. This is also the case with water quality trading. Credits produced by farmers implementing conservation practices should be assessed where a point source discharges (e.g., into a stream), not at the edge of the field.
Lots of challenges. Though opportunities to trade credits exist, very few farmers have taken advantage of them. Demand for credits from agricultural sources may be low because of uncertainty over the credits it can produce.
Water quality is a good example. Much of agricultural pollution is considered nonpoint in nature, therefore, it is difficult to predict with certainty the amount of discharge reduction (or production of credits) the implementation of management practices will produce at the point in the watershed where credits are measured.
Uncertainty could be reduced by more intensive monitoring, but that may be expensive. Such transaction costs could negate the benefits of trading.
Farmers may also be reluctant to participate in a program that is partly regulatory, even with compensation. Some have suggested that farmers are afraid that information about their contributions to water quality and costs of pollution abatement on farms could eventually be used to develop regulations for agricultural pollution.
Double dipping. Another supply-side issue is the treatment of credits generated on farms through publicly funded conservation programs such as the Conservation Reserve Program and Environmental Quality Incentives Program.
Since credits from conservation programs are already partly or fully funded, some trading programs do not allow them to be traded. A farmer participating in a conservation program would have to implement additional conservation measures to participate in a trading program.
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