2014 CARD Award for Best Ph.D. Dissertation in Agricultural, Environmental, and Energy Economics and Policy
Agricultural Nonpoint Source Pollution and Water Quality Trading: Empirical Analysis under Imperfect Cost Information and Measurement Error
Iowa State University
More than four decades have passed since the passage of the Clean Water Act, which serves as the main US regulatory act for improving water quality. In spite of the numerous nascent programs that have followed, water quality pollution from agricultural activity remains a significant problem, particularly in watersheds dominated by row crop production.1
The goal of my dissertation is to propose and evaluate policies to implement water quality trading among nonpoint sources, where nonpoint sources define the agricultural fields as a source of water pollution. In my dissertation, I present a theoretical model of pollution in which a watershed is impaired by agricultural runoff. My model captures the main aspects of pollution within an agricultural watershed—imperfect information on the abatement costs of individual farms, difficulties in observing pollution or abatement activities at the farm level, and difficulties in measuring the emissions leaving the field. These aspects have all been critical to the policy design of agricultural pollution.
Next, I propose and estimate a simplified proxy for the water quality production function that defines the complex fate and the transport of pollutants, such as nitrogen and phosphorus, across a watershed. I apply this model in a variety of empirical studies to evaluate alternative programs designed to improve water quality and encourage carbon sequestration under different policy approaches. For the empirical evaluation, I use a data-rich, spatially detailed model of land use and water quality for two agricultural watersheds in Iowa: the Boone River Watershed and the Raccoon River Watershed.
The water quality production function is approximated as linear combinations of known field-level emission reductions. Given this linearization, I identify a system of points to approximate both the edge-of-field reductions and the impact on the total ambient level of pollution associated with the abatement actions implemented at the field scale.
The first approach is a command-and-control where a regulator has the ability to mandate specific abatement actions to each farm in the watershed. The second approach is a performance standard where each farm has to meet predetermined farm-level performance requirements by choosing relevant abatement actions. The third approach is a trading program where farmers, conditional on meeting their farm-level performance requirement, can trade points assigned to each abatement action.
The main message that echoes from the conceptual model is that under a linear approximation of the abatement function, policies with more flexibility, like the performance standard or abatement trading program, may outperform a command-and-control program in terms of abatement costs, but they may also result in the non-attainment of the abatement goal. However, the incentive-based policies can overcome, either partially or totally, the issue of cost asymmetries, since the regulator does not need to know the farm-level abatement costs. My modelling framework allows estimation of the magnitude of these efficiency tradeoffs for the first time. Furthermore, the close calibration to two real-world watersheds offers valuable insights for the design of the actual policy.
The proposed point-based trading system has the potential for implementation when there is either a single pollutant (e.g., nitrogen or phosphorus) or multiple pollutants (e.g., nitrogen and phosphorus). I compare the efficiency of the three practice-based approaches, assuming first that the policy approaches are designed only for one of the two pollutants, and next by considering the case where both pollutants are simultaneously targeted. The empirical results show there are no gains from implementing programs that simultaneously target both nitrogen and phosphorus, since phosphorus abatement levels can be achieved through programs targeting reductions in nitrogen.
Soil carbon sequestration is a global ecosystem service that plays an important role in reducing greenhouse gases. The abatement actions that have the potential to improve water quality can also improve soil-carbon sequestration levels. In my dissertation, I analyze the impact of a carbon-offset market on the efficiency of an already established water quality program. The results show that while there is little impact on the total level of nitrogen or phosphorus abatement, a parallel carbon market has the potential to decrease abatement costs of, and increase the amount of, soil carbon sequestration.
Many caveats regarding the assumptions for the conceptual model, the water quality process, and data availability underlie my empirical estimation. Moreover, the approaches presented here are simplified versions of any actual water quality program. However, I believe that these should not hamper the consideration of proxies, such as point coefficients, as efficient tools in implementing incentive-based programs designed for improving water quality in agricultural watersheds.
1 “A watershed is the area of land where all of the water that is under it or drains off of it goes into the same place.” Watersheds come in all sizes and shapes. In the continental US, there are more than 2,100 watersheds. water.epa.gov/type/watersheds/whatis.cfm.