Water Quality and Agriculture: Economics and Policy for Nonpoint Source Water Pollution (Palgrave Studies in Agricultural Economics and Food Policy)

Water pollution control has been a top environmental policy priority of the world’s most developed countries for decades, and the focus of significant regulation and public and private spending. Yet, significant water quality problems remain, and trends for some pollutants are in the wrong direction. This book addresses the economics of water pollution control and water pollution control policy in agriculture, with an aim towards providing students, environmental policy analysts, and other environmental professionals with economic concepts and tools essential to understanding the problem and crafting solutions that can be effective and efficient. The book will also examine existing policies and proposed reforms in the developed world. Although this book addresses and has a general applicability to major water pollutants from agriculture (e.g., pesticides, pharmaceuticals, sediments, nutrients), it will focus on the sediment and nutrient pollution problem. The economic and scientific foundations for pollution management are best developed for these pollutants, and they are currently the top priorities of policy makers. Accordingly, the authors provide both highly salient and informative cases for developing concepts and methods of general applicability, with high profile examples such as the Chesapeake Bay, Lake Erie, and the Gulf of Mexico Dead Zone in the US; the Baltic Sea in Northern Europe; and Lake Taupo in New Zealand. Foreword 7 Preface 10 Acknowledgments 11 Praise for Water Quality and Agriculture 12 Contents 15 List of Figures 16 List of Tables 18 Chapter 1: Introduction 20 1.1 Introduction 20 1.2 Choices, Trade-offs, Economics 23 1.3 Policy Design and Economics 26 1.4 Outline 31 References 33 Chapter 2: Economics and Policy for Water Pollution Control 35 2.1 Introduction 35 2.2 Efficiency, Markets, Market Failure, Externalities 36 2.2.1 Pareto Efficiency 37 2.2.2 Pareto Efficiency and Markets 39 2.2.3 An Illustration 40 2.2.4 Market Failure 45 2.3 Pareto Efficient Pollution and the Role of Government 49 2.3.1 Pollution Benefits and Abatement Costs 50 2.3.2 Pollution Costs and the Benefits of Abatement 53 2.3.3 Optimal Level of Emissions 57 2.3.4 Market Failure Revisited: Pigou Versus Coase 57 2.4 Efficiency in Water Pollution Control 61 2.4.1 Water Quality Goals and Social Cost Minimization 62 2.4.2 Cost-Effective Management of Uniformly Mixed Pollutants 63 2.4.3 Cost-Effective Management of Nonuniformly Mixed Pollutants 65 2.4.4 Cost-Effective Management with Multiple Receptors 67 2.5 Implementing Solutions 69 2.5.1 Water Quality Policy Instruments 70 2.5.2 Pricing Pollution: Subsidies, Charges, Markets 72 2.5.3 Ex Ante and Ex Post Policy Assessment and Policy Criteria 73 2.6 Water Pollution Policy in Practice 74 2.6.1 A Brief History of Water Quality Protection Policy 75 2.6.2 Water Pollution Policy and Conditions in the US 76 2.6.3 Water Pollution Policy and Conditions in the European Union 82 2.6.4 Transboundary Pollution 84 2.7 Policy Interactions and Conflicts 86 2.8 Summary 87 References 88 Chapter 3: Agricultural Land Use, Production, and Water Quality 93 3.1 Introduction 93 3.2 Water Pollution Problems: Nutrients 93 3.2.1 Nitrates in Drinking Water 94 3.2.2 Eutrophication 96 3.3 Sediments, Salinity, Pesticide, Emerging Contaminants 104 3.3.1 Pesticides 104 3.3.2 Sedimentation 107 3.3.3 Salinity 109 3.3.4 Emerging Contaminants 110 3.4 Agricultural Production, Past, Present, Future 111 3.4.1 Demand for Agricultural Commodities 112 3.4.2 The Technology of Agricultural Production 115 3.5 Agricultural Production and Water Quality 118 3.5.1 Nutrients and Crop Production 119 3.5.2 Nutrients and Animal Production 119 3.5.3 Tillage 121 3.5.4 Irrigation 121 3.6 From Field Edge to Ambient Water Quality: Principles and Methods of Watershed Management 123 3.6.1 Place-Based Water Quality Management 123 3.6.2 Physical Processes from Source to Receptor 125 3.7 Biophysical and Economic Models 131 3.7.1 Watershed-Scale Model Applications 133 3.7.2 Biophysical Model Uncertainty and Complexity 134 3.7.3 Economic Models and Integrated Assessment Models 135 3.8 Summary 138 References 139 Chapter 4: Decision Making at the Farm Level 151 4.1 Introduction 151 4.2 Some Basics 152 4.3 Private Production Decisions: Input Intensities and Land Allocation 154 4.3.1 Nitrogen Fertilization Use 155 4.3.2 Optimal Land Allocation on the Farm 161 4.3.3 Land Use at Watershed Scales 162 4.4 Pareto Efficient Production Intensities and Land Allocation 164 4.4.1 Pareto Optimal Production Intensity 165 4.4.2 Pareto Efficient Land Allocation in a Watershed 170 4.4.3 Summing Up 174 4.5 Generalizing the Ricardian Model 180 4.5.1 Phosphorus Fertilization 181 4.5.2 Manure and Livestock 182 4.5.3 Irrigation 184 4.5.4 Pesticides 186 4.5.5 Spatial Interdependencies at the Farm Level 189 4.5.6 Spatial Interdependencies at the Watershed Level 189 4.5.7 Co-benefits, Rural Amenities and Disamenities 189 4.6 Agricultural Best Management Practices 190 4.6.1 BMP Types and Economic Aspects 191 4.6.2 BMPs for Crop Production 194 4.6.3 BMPs for Livestock Production 198 4.6.4 Multiple Pathways, Multiple Receptors, Complex Trade-offs 200 4.6.5 Social Net Benefits 201 4.7 Conclusions 202 References 208 Chapter 5: Environmental Policy Instruments for Agriculture 217 5.1 Introduction 217 5.2 Uncertainty and Policy Goals 218 5.2.1 Uncertainty and the Characterization of Nonpoint Pollution Control 219 5.2.2 Policy Goals: Cost-Effectiveness and Efficiency for Uncertain Pollution 223 5.2.3 Co-benefits 227 5.3 Water Pollution Policy Instruments for Agriculture: The Options 228 5.3.1 Compliance Bases 228 5.3.2 Compliance Mechanisms 229 5.3.3 Policy Instruments 230 5.4 Some Useful Concepts: Adverse Selection, Moral Hazard, Spatial Targeting, Spatial Differentiation 233 5.4.1 Asymmetric Information 234 5.4.2 Spatial Targeting 236 5.4.3 Spatial Differentiation 238 5.5 Polluter-Pays Instruments in the Pigouvian Tradition 238 5.5.1 Policy Design with Perfect Information 238 5.5.2 A Conceptual Example of Policy Design with Perfect Information 242 5.5.3 A Numerical Example with Multiple Sources and Nonuniform Mixing 245 5.5.4 Defining and Coping with Complexity: Part I 247 5.5.5 Defining and Coping with Complexity: Part II 250 5.5.6 Polluter-Pays Policies in Practice 254 5.6 Pay-the-Polluter and Other Voluntary Compliance Policies 255 5.6.1 Voluntary Compliance Programs: Approaches 255 5.6.2 Voluntary Program Design Challenges 259 5.7 Summary 269 Appendix 272 Selecting BMP Types and Locations to Minimize Costs 272 A Basin-Wide Agricultural Cost Analysis 273 Small Watershed-Scale Cost Analysis 274 Watershed Selection 276 References 278 Chapter 6: Water Quality Trading 286 6.1 Introduction 286 6.2 Basic Trading Models and the Merits of Markets 288 6.2.1 The Basic Cap-and-Trade Model 288 6.2.2 Trading Versus Emission Standards 292 6.2.3 Emissions Permits Versus Emissions Taxes 293 6.2.4 Nonuniform Mixing and Multiple Receptors 294 6.2.5 Cap-and-Trade vs. Baseline-and-Credit 299 6.3 Trading with Agricultural Nonpoint Sources: Conceptual Issues 301 6.3.1 Agricultural Nonpoint Commodities 301 6.3.2 Stochastic Cap Definition 304 6.3.3 Point-Nonpoint Uncertainty Trade Ratios 305 6.4 Water Quality Trading in Practice: United States 307 6.4.1 US Trading Program Overview 308 6.4.2 The Partially Capped Baseline-and-Credit Model 314 6.5 Water Quality Trading in Practice: Non-US 318 6.6 Ex Ante and Ex Post Assessments 320 6.6.1 Ex Ante Assessment 321 6.6.2 Ex Post Assessment: Non-US Programs 322 6.6.3 Ex Post Assessment: Active US Programs 323 6.7 Conclusions 325 References 328 Chapter 7: Water Quality Auctions 335 7.1 Introduction 335 7.2 Conservation Auctions: The Basics 337 7.2.1 Basic Auction Design 338 7.2.2 The Economics of Bidding 339 7.3 Auctions vs. Uniform Price Subsidies 341 7.4 Bid Ranking for Water Quality Auctions 343 7.4.1 Quantifying the Environmental Good 344 7.4.2 Bidding with Water Quality Metrics 346 7.5 Conservation and Water Quality Auctions in Practice 347 7.5.1 US Conservation Reserve Program 347 7.5.2 Australian Conservation Pilots and Programs 348 7.5.3 Conservation Auctions: Other Countries 349 7.5.4 US Water Quality Auctions 349 7.5.5 Finnish Water Quality Pilot Auction 351 7.6 What Role for Water Quality Auctions? 353 7.6.1 Assessing the Conservation Auction Programs 353 7.6.2 Farm Assistance and Transaction Costs 355 7.6.3 Learning and Budget Efficiency 356 7.6.4 The Best Case for Conservation Auctions 357 7.7 Conclusions 358 References 359 Chapter 8: Credit Stacking 362 8.1 Introduction 362 8.2 The Economics of Stacking 363 8.2.1 Baselines for Credit Calculations 364 8.2.2 Credit Supply Decisions with Stacking 366 8.2.3 Credit Supply Without Stacking 367 8.3 Stacking with Endogenous Prices 369 8.3.1 Credit Supply Functions 369 8.3.2 Supply, Demand, and Credit Market Equilibrium with Stacking 371 8.3.3 Supply, Demand, and Prices Without Stacking 373 8.4 Market Design, Performance, and Environmental Integrity 374 8.4.1 Double Dipping vs. Credit Stacking 376 8.4.2 Baseline Choice 377 8.5 Stacking in Practice 381 8.6 Summary 382 References 383 Chapter 9: The Way Forward 385 9.1 The Challenge 385 9.2 Political Ambition 386 9.3 Essential Elements of “Good” Policy 388 9.3.1 Explicit Water Quality Policy Goals 389 9.3.2 Accountability Frameworks 390 9.3.3 Spatial Targeting of Source Areas 390 9.3.4 Policy Coherence 391 9.4 Instrument Choice and Design 392 9.4.1 Single-Purpose vs. Multipurpose Instruments 393 9.4.2 Standards Vs. Incentives 393 9.4.3 Practices Vs. Performance 394 9.4.4 Public Vs. Private Funding 395 9.4.5 Innovations in Incentive Design 395 9.4.6 Markets Vs. Charges 398 9.5 Fitting the Policy to the Problem 399 References 401 Index 403