Water Quality Trading in the Presence of Existing Cost Share Programs

Abstract

Most studies of water quality trading (WQT) analyze the cost effectiveness of reducing nutrient pollution in isolation from other policies. However, the policy landscape to reduce nutrient pollution from agriculture is dominated by existing cost-share (CS) programs, which are likely to persist even after introducing WQT. We investigate empirically how these two programs are likely to interact. Using farmer survey data, we estimate the behavioral responses to a CS program aimed at increasing cover crop adoption using a two-stage simultaneous equation approach to correct for voluntary participation in the CS program. We integrate these econometric results with the Chesapeake Bay Program water quality model to evaluate the profit-maximizing decision for farmers sorting between the existing CS program and proposed WQT program. Our results indicate that farmers with comparative advantage in nitrogen abatement per acre will choose to switch into the WQT program, worsening adverse selection and increasing average payments for nitrogen abatement in the existing CS program. Actual increases in nitrogen abatement from the WQT program depend on incentivizing additional cover crop acreage without inducing slippage for those farmers not currently enrolled in the CS program.