Water Quality Trading

February 4, 2010 06:00 PM
Think you already have enough to occupy your mind? Now water quality trading comes along to give you something new to ponder.

Similar to carbon trading, water quality trading, at least in theory, gives utility companies a chance to mitigate pollution by paying farmers for using conservation practices. Will farmers make enough from it to justify changing operations? Can long-time no-till farmers get paid for what they've already been doing? Will farmers be seen as enablers bought off by polluters? In the end, can conservation practices truly offset much pollution?

We're going to get to find out. Water quality trading has been tested on a small scale in a couple of places as well as in the Chesapeake Bay watershed. A new project in the Ohio River Basin is the first interstate water quality trading program. It involves a number of big players and could make or break the water quality trading concept.

Pushed by the American Farmland Trust (AFT), the project focuses on nitrogen and phosphorus and aims to improve water quality in the Ohio River and reduce hypoxia in the Gulf of Mexico. It includes parts of Illinois, Indiana, Kentucky, Ohio, Pennsylvania, West Virginia, Virginia and New York.

 Meetings with farmers have started as project representatives outline the plan. Participants include the Ohio River Valley Water Sanitation Commission, Tennessee Valley Authority, Hoosier Energy Rural Electric Cooperative and Duke Energy. The project has $1.3 million in federal startup grants along with $700,000 from the participants.

"What's proposed is a market-based solution to a problem, and that is a good thing. Market-based solutions are almost always lower-cost and more efficient,” says Noel Gollehon, USDA Natural Resources Conservation Service (NRCS) senior economist.

Costly water. The market, however, just might not offer farmers enough money to make much difference to the bottom line. "I've been looking at water quality trading for 10 years and the amount of money generated to ag sources to this point is trivial. I don't think it ever will be a pot of gold to ag because of the way the Clean Water Act is structured,” says Kurt Stephenson, a Virginia Tech ag economist who studied nonpoint offset trading in the Chesapeake Bay region.

The Environmental Protection Agency (EPA) requires point-source polluters, such as the utility companies, to meet standards or pay to offset the pollution they create. "The idea is that point-source polluters can purchase offsets or credits from farmers by giving farmers money to install conservation improvements. It's similar to what started in the 1970s with EPA and air quality, which worked really well,” says Ann Sorensen, AFT research director.

AFT hopes the system operates like a commodity market, where a pound of nitrogen or phosphorus is worth a price that fluctuates with demand.

"Ideally, in a fully functioning market, the company would be willing to pay a certain dollar amount. The seller could offer to sell nitrogen or phosphorus credits. In reality, as a developing market, the companies will say they will pay a certain price per pound for conservation practices,” says Jimmy Daukas, AFT managing director, agriculture and environment initiative.

NRCS's Gollehon says it could diversify income. "Farmers could use resources as an income source, rather than just the products the assets produce. That's something farmers need to grab hold of,” he says.
It's still unclear whether farmers already using minimum tillage, filter strips or cover crops could get paid for that in the water quality trading program. It might be possible to double-dip and get paid for water quality trad-
ing and NRCS programs. The details will have to be hammered out soon.

"This is an exciting new world we're entering. This might be the future of ag,” Sorensen says.

Stephenson doubts it. "In Virginia, the only way for point-source sources to get significant reductions over baselines is to convert ag land into forest. Water quality trading has been overhyped in terms of being a revenue source for agriculture,” he says.

You can e-mail Charles Johnson at cjohnson@farmjournal.com.

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