Agricultural best management practices (BMPs) such as streamside buffer zones and cover crops are increasingly being used to reduce nutrient pollution into water bodies. Eutrophication from fertilizer runoff is the key driver behind growth of hypoxic “dead zones” where fish production comes to a standstill. Governments heavily subsidize BMPs, but do not generally allocate funds to maximize their environmental benefits. But with ever-increasing fiscal constraints, policy makers are searching for ways to enhance efficiency of BMP programs. Pay for performance presents an alternative platform based on nutrient reduction achieved. This paper compares a conventional subsidy approach with pay for performance for BMPs designed to reduce nutrient pollution into the Chesapeake Bay. We model four paired scenarios using a constrained optimization model. In the first pairing we held the level of nutrient reduction constant and compared cost effectiveness of the two subsidy allocation methods. In the second pairing we held the level of program investment constant and compared nutrient reduction outcomes. In both pairings, pay for performance was far superior — delivering identical nutrient reduction outcomes at less than half the cost in the first and delivering two to three times the amount of nutrient reduction for the same budget allocation in the second.

The following sections are included:Introduction to Water Quality TradingWater Quality Trading Programmes GloballyKey Areas of Interaction Between the Private Sector and GovernmentKey MessagesBibliography

Water quality trading is being widely explored and, as we show, increasingly imple- mented as a means of providing flexibility and lowering the costs of meeting water quality goals. A comparison between existing and evolving trading programs in Australia, New Zea- land and North America illustrates both differences and similarities among programs and identifies the main hurdles to trading as well as some key factors for program success. These can be used to design more effective programs.

Water quality markets are gaining worldwide popularity as strategies to provide flexibility and cost savings to sources managing pollution. One prominent example is the establishment of water quality trading programs in the Chesapeake Bay watershed in the United States to manage nonpoint and point source pollution. Some of the agricultural land use practices that can be used to generate offsets in water quality markets in this region have other environmental benefits including greenhouse gas (GHG) sequestration. This study describes the structure of Maryland's water quality trading program, its climate co-benefits and its potential link with GHG markets. Results reveal that Maryland's agricultural sector could offset half of its GHG emissions by 2020 through projects primarily designed to improve water quality. The potential opportunity for agricultural sources to participate in multiple markets could provide incentives for the adoption of management practices that have climate co-benefits. The results of this study could guide the continued development of multiple markets in the Bay watershed and other regions of the world where ecosystem markets play a role in pollution management.

Water quality trading is gaining traction in a number of watersheds around the world. It is a market-based approach that works alongside water quality regulation to improve water quality. In 2008, the State of Maryland developed its nutrient trading policy to create offset mechanisms for new and expanding nutrient discharges in the Chesapeake Bay watershed. Marylands nutrient trading policy allows trades between regulated point sources and agricultural nonpoint sources. In order to facilitate implementation of Marylands nutrient trading program, the Maryland Department of Agriculture (MDA) worked with the World Resources Institute (WRI) (which had previously developed NutrientNet) and the Texas Institute for Applied Environmental Research, Tarleton State University (TIAER) (which had developed the national Nutrient Tracking Tool or NTT) to create a unified tool that would:

Limnology and Oceanography BulletinVolume 20, Issue 1 p. 2-2 FeatureFree Access NEW WEBSITE FOR TRACKING EUTROPHICATION AND HYPOXIA SEEKS INPUT AND DATA Mindy Selman, Mindy Selman mindy.selman@wri.org World Resources Institute, 10 G Street NE, Suite 800, Washington, DC, 20002 USASearch for more papers by this author Mindy Selman, Mindy Selman mindy.selman@wri.org World Resources Institute, 10 G Street NE, Suite 800, Washington, DC, 20002 USASearch for more papers by this author First published: 18 December 2014 https://doi.org/10.1002/lob.20112011AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat No abstract is available for this article. Volume20, Issue1March 2011Pages 2-2 RelatedInformation

around the world. It is a market-based approach that works alongside water quality regulation to improve water quality, providing fl exibility in how regulations are met and potentially lowering regulatory compliance and abatement costs. Our research identifi ed 57 water quality trading programs worldwide. Of these, 26 are active, 21 are under consideration or development, and 10 are inactive or are completed pilots with no plans for future trades. The majority of programs were located in the United States, with only six programs existing outside the United States—four in Australia, one in New Zealand, and one in Canada. From our assessment of these water quality trading programs, we identifi ed fi ve key factors that stakeholders believed were important for the successful implementation of their trading programs:

Agricultural practices continue to degrade water quality and ecosystems worldwide. In the United States, programs like the Department of Agriculture’s (USDA) Environmental Quality Incentive Program (EQIP) target the voluntary adoption of agricultural best management practices (BMPs). Demand for these programs has historically exceeded available funding, so allocating funding to achieve the greatest environmental outcome is essential. In recent years, economists have argued that market mechanisms should be incorporated within government programs to improve their cost-effectiveness. This article presents the results of a reverse auction to allocate funding to reduce phosphorus losses from farms, and compares the results with EQIP funded contracts in the same watershed.

Recent coastal surveys of the United States and Europe found that a staggering 78 percent of the assessed continental U.S. coastal area and approximately 65 percent of Europe’s Atlantic coast exhibit symptoms of eutrophication.1,2 In other regions, the lack of reliable data hinders the assessment of coastal eutrophication. Nevertheless, trends in agricultural practices, energy use, and population growth indicate that coastal eutrophication will be an ever-growing problem.

The over-enrichment of rivers and estuaries by excessive levels of nutrients, such as nitrogen and phosphorus, is a persistent and growing water quality problem around the world. Even though there have been significant improvements in water quality, most of these improvements have resulted from regulating point sources – industrial and municipal wastewater treatment facilities; today the predominant source of nutrients is non-point sources, especially agricultural and urban runoff. Innovative solutions are needed to provide incentives for non-point sources, whose nutrient discharges are difficult to regulate, to reduce their nutrient contributions. One such solution is nutrient trading. Trading involves setting a goal for the total amount of nutrients entering streams and rivers within a watershed and allowing sources, both point and non-point, to trade nutrient reduction credits in order to meet the local and regional water quality goals. Nutrient trading is being explored and implemented as a viable mechanism to reduce nutrient pollution in a number of areas in the U.S. and internationally. To facilitate the establishment of these markets, we have developed an on-line marketplace, NutrientNet, for point and non-point sources to estimate their nutrient loads and achievable reductions, and provide a marketplace for trades to occur and a registry that allows trades to be tracked.

WORLD RESOURCES INSTITUTE • 10 G Street, NE • Washington, DC 20002 • Tel: 1-202-729-7600 • Fax: 1-202-729-7610 • www.wri.org World Resources Institute Working Papers contain preliminary research, analysis, fi ndings, and recommendations. They are circulated to stimulate timely discussion and critical feedback and to infl uence ongoing debate on emerging issues. Most working papers are eventually published in another form and their content may be revised.

SUMMARY The largest estuary in the United States, the Chesapeake Bay is a vital economic, cultural, and ecological resource for the region and the nation. Excess runoff and discharges of nutrients—particularly nitrogen and phosphorus—from farms, pavement, wastewater treatment plants (WWTPs), and other sources is responsible for creating excess algal growth that degrades water quality and harms the ecology of the bay.

Washington, DC 20002 www.wri.org Over the last ten years, four Chesapeake Bay states—Maryland, Pennsylvania, Virginia, and West Virginia—introduced nutrient trading programs to provide wastewater treatment plants with flexible options for meeting and maintaining permitted nutrient load limits. At least one other bay state, Delaware, also convened a work group to discuss developing such a program. Through these programs, wastewater treatment plants may purchase credits or offsets generated by other wastewater treatment plants or farms that reduce the nutrients they release to impaired water bodies. States are also exploring options for construction and urban stormwater programs to buy and sell credits and offsets.