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Do Baseline Requirements Hinder Trades in Water Quality Programs?

  • Ghosh, Gaurav

    ()

    (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))

  • Ribaudo, Marc

    ()

    (Economic Research Service, U.S. Department of Agriculture)

  • Shortle, James

    ()

    (Environmental and Natural Resources Institute, Department of Agricultural Economics and Rural Sociology, Pennsylvania State University)

The Environmental Protection Agency and the U.S. Department of Agriculture are promoting point/nonpoint trading as a way of reducing the costs of meeting water quality goals while giving nonpoint sources a larger role in meeting those goals. Farms can create offsets or credits in a point/nonpoint trading program by implementing management practices such as conservation tillage, nutrient management, and buffer strips. To be eligible to sell credits, farmers must first comply with baseline requirements. The EPA defines a baseline as the pollutant control requirements that apply to a seller in the absence of trading. EPA guidance recommends that the baseline for nonpoint sources be management practices that are consistent with the water quality goal. A farmer would not be able to create credits until the minimum practice standards are met. An alternative baseline is those practices being implemented at the time the trading program starts. The selection of the baseline has major implications for which farmers benefit from trading, the cost of nonpoint source credits, and ultimately the number of credits that nonpoint sources can sell to regulated point sources. We use a simple model of the average profit-maximizing dairy farmer operating in the Conestoga (PA) watershed to evaluate the implications of baseline requirements on the cost and quantity of credits that can be produced for sale in a water quality trading market, and which farmers benefit most from trading.

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Paper provided by E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) in its series FCN Working Papers with number 11/2009.

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Length: 27 pages
Date of creation: Nov 2009
Date of revision:
Handle: RePEc:ris:fcnwpa:2009_011
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