NCPA - National Center for Policy Analysis

Water Quality Markets

May 6, 1999

River water is treated as a common resource in the United States and water pollution is regulated by state and federal agencies. But a free-market approach based on property rights and incentives can save money and reduce pollution, say economists.

One example is North Carolina's Tar-Pamlico River Basin Association.

  • In 1983, a serious fish kill occurred in the nearby Pamlico Sound as a result of oxygen depletion from heavy discharges of phosphates and nitrates into the rivers.
  • The U.S. Environmental Protection Agency (EPA) and state authorities regulate discharges, but every one of the 26 regulated dischargers was in compliance with the law.
  • Furthermore, more than 80 percent of the pollution of Pamlico Sound is runoff from farms, dairies and timber operations -- nonpoint polluters outside of EPA's control.

Regulators set an overall limit on pollutants and allowed the Tar-Pamlico River Basin Association, which includes most of the area's 24 municipal water treatment plants and one industrial firm, to set up a water quality market. The market matches those seeking to discharge waste with water quality providers -- those who find ways to reduce discharge and runoff.

The association pays farmers to change their practices, thereby producing more water quality to be sold. In addition, some operators of lower cost treatment works are selling treatment services to others who face higher costs.

EPA estimated that using command-and-control technology to reduce a pound of nutrient discharge from point sources would have cost from $860 to $7,861, whereas the cost for farmers doing the same thing ranged from $67 to $119 per pound.

According to the EPA, trading programs for improving water quality that involve a wide variety of pollutants are now in place or are being planned for 10 U.S. locations.

Source: Bruce Yandle (Political Economic Research Center), "Harnessing Markets to Improve Water Quality," Environmental Protection Magazine, March 1999.


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