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Do Baseline Requirements Hinder Trades in Water Quality Programs?

FCN Working Paper No. 11/2009

31 Pages Posted: 4 Jun 2010  

Gaurav S. Ghosh

Pennsylvania State University - College of Agricultural Sciences - Department of Agricultural Economics and Rural Sociology

Marc Ribaudo

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS)

James S. Shortle

Pennsylvania State University - College of Agricultural Sciences - Department of Agricultural Economics and Rural Sociology

Date Written: November 1, 2009

Abstract

The Environmental Protection Agency and the U.S. Department of Agriculture are promoting point/nonpoint trading as a way of reducing the costs of meeting water quality goals while giving nonpoint sources a larger role in meeting those goals. Farms can create offsets or credits in a point/nonpoint trading program by implementing management practices such as conservation tillage, nutrient management, and buffer strips. To be eligible to sell credits, farmers must first comply with baseline requirements. The EPA defines a baseline as the pollutant control requirements that apply to a seller in the absence of trading. EPA guidance recommends that the baseline for nonpoint sources be management practices that are consistent with the water quality goal. A farmer would not be able to create credits until the minimum practice standards are met. An alternative baseline is those practices being implemented at the time the trading program starts. The selection of the baseline has major implications for which farmers benefit from trading, the cost of nonpoint source credits, and ultimately the number of credits that nonpoint sources can sell to regulated point sources. We use a simple model of the average profit-maximizing dairy farmer operating in the Conestoga (PA) watershed to evaluate the implications of baseline requirements on the cost and quantity of credits that can be produced for sale in a water quality trading market, and which farmers benefit most from trading.

Keywords: Nonpoint Pollution, Emissions Trading, Management Practices

Suggested Citation

Ghosh, Gaurav S. and Ribaudo, Marc and Shortle, James S., Do Baseline Requirements Hinder Trades in Water Quality Programs? (November 1, 2009). FCN Working Paper No. 11/2009. Available at SSRN: https://ssrn.com/abstract=1620507 or http://dx.doi.org/10.2139/ssrn.1620507

Gaurav S. Ghosh (Contact Author)

Pennsylvania State University - College of Agricultural Sciences - Department of Agricultural Economics and Rural Sociology ( email )

University Park, PA 16802-3306
United States

Marc Ribaudo

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS) ( email )

355 E Street, SW
Washington, DC 20024-3221
United States
202-694-5488 (Phone)
202-502-6174 (Fax)

James S. Shortle

Pennsylvania State University - College of Agricultural Sciences - Department of Agricultural Economics and Rural Sociology ( email )

University Park, PA 16802-3306
United States

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