Assessment of a Market-Based Water Quality Trading System for Kentucky River Watersheds

The Upper Mississippi, Ohio, and Lower Mississippi River sub-basins discharge significant quantities of nutrients and sediment to the Gulf of Mexico contributing to the hypoxic zone, an oxygen-depleted area that cannot support aquatic life. These excess nutrients and sediments come from a wide range of sources, including runoff from developed land, atmospheric deposition, soil erosion, agricultural fertilizers, animal feeding facilities, and sewage and industrial discharges. Market-based approaches such as water quality trading that use innovative trade programs and pollutant cap can accelerate the restoration of the Gulf, and help achieve major reductions in pollution at lower costs. The trading scheme allows polluters to re-allocate the right to pollute and decide who actually does the pollution abatement. Those with high costs of abatement pollute more and abate less, and those with low costs pollute less and abate more. Setting pollutant reduction targets and allowing sources to buy and sell credits to meet those targets can make pollution reduction faster, easier, and cheaper to meet water quality goals. This proposed project is directed to the Priority I (Market Feasibility Analysis) of the EPA funding opportunity "Targeted Watersheds Grants for Water Quality Trading or Other Market- Based Projects to Reduce the Hypoxic Zone in the Northern Gulf of Mexico." This study uses the watershed approach, which targets the Kentucky River Basin that discharges into the Ohio River. In this multidisciplinary project, a scientific suitability analysis will establish the profile of two major types of nutrients (nitrogen and phosphorous) in the study area, define the geographic nature that contributes to the understanding of loadings, determine pollution trade ratios, and address the issues of high levels of pollutants and the lifetime of pollutant reduction. The pollution analysis will be linked to geospatial watershed health indicators (Jones et at., 1997) will be conducted simultaneously with an economic suitability analysis to describe the overall feasibility of a water trading market. The economic analysis, with contribution from evidence obtained through the pollution analysis, will identify the areas of buyers and sellers of the water trading market, quantify demand and supply of pollutant reduction effort, and evaluate several water trading frameworks which may be implemented in the future. The intention and amount buyers are willing to pay and the price sellers may charge will be jointly assessed based on the market condition while considering necessary risks and uncertainties involved. During the process, attention will be paid to the trading and transferring between point and nonpoint source pollution and pollution reduction effort. Policy implications for the implementation stage are also highlighted.