My old professors at the University of Maryland’s Department of Agricultural and Resource Economics (AREC)) would have approached the economics of restoring the Chesapeake Bay by considering all of the benefits implied under two different existential states.  One state would be an imagined restored Chesapeake Bay with its attendant benefits, and the other would be the current, degraded Chesapeake Bay and its attendant benefits.  They would have considered both monetary and non-market benefits in both states.  The difference between the benefits generated under either state would provide a measure of the “value” of a restored Chesapeake Bay.

With a measure of the benefits of a restored Chesapeake Bay in hand, my old professors would have then turned their attention to the costs of getting from the current state of the Chesapeake Bay to a restored state.  Along the way, they would reference the Pareto improvement aspect  (somebody is made better off, nobody is made worse off), and its weaker but more practical cousin, the Kaldor-Hicks criterion (those who are made better off could – in principle – adequately compensate those who are made worse off and still enjoy a gain) as a basis for their comparisons.  And they would have boiled it all down to eloquent equations that only students of economics could hope to penetrate.

Having tasted that sort of holistic approach to making prudent decisions about protecting the environment, it is frustrating to listen to current arguments about the Chesapeake Bay TMDL.  Of course it will cost somebody something to restore the Chesapeake Bay.  And, since one person’s cost is another person’s gravy train, restoring the Bay will create winners and losers.  Who are winners and who are losers will be determined by who is liable for the costs and what the money gets spent on.

My old professors in the AREC department eschewed positive economics in favor of the normative kind (that is, their economics addressed questions of efficiency, not equity), so they would have likely addressed the question of who pays in abstract terms of who held the property rights for environmental harm (or, benefit).  They might have suggested ways that the winners could compensate the losers in fact, rather than just in principle.  But they would have recognized that the 230,000 new jobs required under the effort had to be balanced against what had to be foregone to pay for those jobs.

Somewhere in this process, my old professors would have cottoned onto the fact that minimizing the short and long-term costs of restoration required getting the pricing right.  That is, that in pursuing restoration we are better off spending less for more restoration rather than paying more for less restoration.  They would have expected innovation to reduce restoration costs over the longer term, but only if there were attendant rewards to innovation.  They would have seen competition as being integral to that process.

Most of my old AREC professors have moved on, one way or another.  In their stead are professors who remain at the forefront of their field but who are practically irrelevant in the discussion of economics surrounding the Chesapeake Bay restoration.  Whether their absence from this discussion is a supply issue or a demand issue is a topic for argument.  And, while such an argument would be much more informative than the current one about whether we will enjoy additional jobs, fewer jobs or just different jobs as a result of trying to restore the Bay, it is less useful than the contributions that they could make if they simply applied their craft to the question of how to improve our performance in pursuing Chesapeake Bay restoration goals.  I often wonder why that is not happening.

It is not that the Chesapeake Bay Program didn’t already have enough on its plate, what with overseeing the TMDL and all. And, cost/benefit analysis is not something that they have ever done before – at least for public consumption. Moreover, under the Clean Water Act, there is no requirement that benefits exceed costs in the imposition of a TMDL. But, if one looks for a reason for all of this investment in cost/benefit analysis one finds a likely suspect in uncertainty about how serious we are about the TMDL.

Assume a group of economically interested parties who might suffer losses under the more stringent pollution abatement requirements of the TMDL. Such a group might feel that restoring the Chesapeake Bay is an extravagance that our society cannot afford. If they banded together and retained advisors, those advisors would doubtlessly recommend at least two strategic objectives. First, call the science into question. And, second, show that it will cost more than anyone in their right mind would want to pay.

Assume on the other side a group of economically interested parties who have an interest in restoring the Bay, but no attendant financial risks whether this happens or not. That is, they get paid for working on restoring the Bay, but not for actually restoring it. Some in this group are just paid advocates, while others have more direct impact on the development of policies by which the TMDL is to be achieved (i.e., public servants and their staff).

When you place these two assumed groups into current history, you get studies from the first one implying that restoring the Chesapeake Bay is all cost (see: http://www.sagepolicy.com/wp-content/uploads/2009/06/builders4-14.pdf) and studies from the latter group implying that it is all benefit (see http://www.cbf.org/document.doc?id=591). Interestingly, both studies employ the same analytical package (IMPLAN), but each describes results that suit the underlying aims of their respective users. Does this confirm Mark Twain’s contention that there are lies, damn lies and (economic) statistics?

If we strip away the interests of the two assumed interest groups, perhaps we can evaluate the question of costs and benefits to better effect. First, let’s define the cost of restoring the Chesapeake Bay as the sum of the costs of all the things that we must do differently in order to achieve the TMDL. We can define the benefit as the sum of all the value that is generated by a restored Bay. Clearly, to get at costs and benefits we need to compare two different states – before and after.

In the “before” state, costs show up as ecosystem degradation but not as something that is paid by the production and consumption activities that generate that degradation. Since restoration costs are counted as being paid in the “after” state but not in the ‘before’ state, they are all additional. In monetary terms, since our economy will be paying an expense that it did not use to pay, we all will be a little bit poorer. How these costs are distributed matters, but the basic point is, if we don’t count environmental degradation as a cost, then restoration costs are all new and in that sense, the Sage Policy/Maryland State Builders Association study is sort of correct.

On the benefits side, if turning around the decline of the Bay results in more recreational benefits, higher valued harvests of the Bay’s living resources, increased property values, etc, then those gains will count as economic benefits to restoration. Additionally and importantly, each of us who has been disappointed about the degradation of the Bay will be relieved of that disappointment when the degradation is turned around. Consider the question: What would you pay to switch out of a group that has to say, “we turned the Chesapeake Bay into a septic mess”, into a group that can say, “we changed the way we do things so that we could have a healthy Chesapeake Bay”? Economists will be asking a question like that in their evaluation of benefits of Bay restoration and the smart money says that the values implied by our answers will show the benefits of restoration to be greater than the costs.

If none of this seems all that satisfying, welcome to my world. We don’t know the least costs by which the TMDL can be achieved and we can only guess at the values that might be generated by actually restoring the Bay because it hasn’t happened yet. People’s answers to willingness-to-pay questions change at the drop of a hat. I suppose that it will give people something to talk about, but it seems to me that there are more important questions around. Like, what will it take to ensure that our choices for restoring the Bay generate the smallest cost possible (i.e., how do we keep from getting any poorer than we have to)? Or, how can we establish incentives to innovate so that the costs of restoring and maintaining the Chesapeake Bay fall over time? How can we keep from disproportionately hurting any particular group and spread the costs equitably while maintaining incentives to innovate and reduce costs?

Maybe we can get around to my questions next year.

This should be good news to someone who has been suggesting that maybe we should be worried about cost efficiency in the Chesapeake Bay cleanup, right?  Not really.  Because the question as it is understood by the Chesapeake Bay Program only asks what the cost will be of doing all the things that the States have committed to do in their Watershed Implementation Plans.   It does not ask for a comparison between those costs and, say, some least cost approach for achieving the goals of the TMDL.  It just asks how much it will cost the states to do all of the things that their agency staff say need to be done to achieve the TMDL goals.

A more useful question would have been, how does your program ensure that the costs of achieving the TMDL are minimized?  What are the marginal costs and how much would we have to pay to achieve the level of reduction required by the TMDL if we tracked along some optimal path?  Think about it.  If it is possible to specify the costs of implementing the complete range of nutrient pollution reduction practices over the whole range of sources and conditions, and if you have a model that tells you how much pollution reduction is achieved for all of that implementation, then it should be possible to specify a cost-efficient or, least cost, trajectory to the TMDL goals.  You just divide costs by reduction for each practice and condition and then sort those values from lowest to highest.  That gives you a marginal cost trajectory for each practice out to everything, everywhere.

So, while we at least got a question about costs, we did not get what I think of as the right question.  Maybe it would be useful to consider some possible reasons why we didn’t.

1.)    Maybe cost efficiency doesn’t matter.  We are a wealthy country.  So maybe the Chesapeake Bay TMDL is something that we can handle without reference to economic welfare.  Maybe we can afford to ignore cost efficiency.  The obvious counter-point to this is that we didn’t get to be a wealthy nation by being foolish with our money.  Our resources, maybe, but not with our money.

2.)    Maybe the states’ agency staff have already identified the least-cost options for achieving the TMDL goals without using any of the analyses or policy mechanisms that economists would recognize as necessary for identifying least-cost attainment (with a single market price and at some given level of technology).  Or, maybe somewhere in the agencies there are economists who do this work for agency-eyes-only.  Maybe.

3.)    Maybe no one but economists thinks about it all that much.  This is likely, but it does not imply that people do not care whether they get value for expenditure.  Even though people may not have thought through the connection between marginal costs and how much pollution reduction you can get for any given budget, the general public probably would prefer more, rather than less pollution reduction per tax dollar, were we to ask them.

4.)    Politics.

At a symposium in Washington recently, someone suggested that, given the current federal budget outlook, we should not expect cost efficiency to be high on the agendas of the agencies who oversee and support the achievement of environmental protection goals.  This assessment was made by someone who operates much closer to the corridors of power than I do, so I have to take him at his word.  But what a depressing thought.  Having less money to play with will not encourage decision-makers to play less?

There is an incentives story in here, somewhere.  There must be something or some things that distract decision-makers from seeking and achieving cost efficiency in pollution reduction.  Or, maybe I am wrong to suppose that there should be any cost efficiency goal in the first place.  There is no explicit mandate for policy-makers to pursue cost efficiency in pollution reduction, other that the general idea that it is better not to be wasteful.  In either event, isn’t there a role for economists, who have well-developed tools for analyzing these sorts of questions, to advocate for a more agreeable standard of achievement?

Roads are typically mandated by governments.  While governments may retain some transport engineering capacity, roads are generally built by private for-profit engineering firms and road building companies.  The agency that implements road-building policy decides where the road will go and other particulars.  But, after that, they just manage the expenditures and watch the private firm build the road.

An interesting thing about this institutional set up for road building is that all the players need their own road engineers.  The government agencies need road engineers for specifying the bid solicitations and managing the project.  The engineering firms obviously need road engineering capacity.  And the actual road-building companies need engineers to make good on implementing the design.  There always seem to be another set of engineers who follow along afterwards to verify that the road has been built the way it is supposed to have been built.  Everybody in the process has a road engineer or two.

Roads, like healthy natural eco-systems, are public goods.  That means they provide benefits that are difficult to exclude anyone from enjoying.  While environmentalists might not want to think of themselves as being in the same league as road builders, their work does share this public good aspect.  And, the authority and funding for protecting or managing natural ecosystems, like building roads, largely originates in the public sector  (– all the good work of not-for-profit organizations not withstanding).

So, if environmental managers/protectors want to innovate with eco-system services markets, who is the technical equivalent of the road engineer in this process?  Is it the physical or life scientist who defines the parameters of a healthy eco-system?  Is it the modeler who can show a defensible way to put the various science findings together?  Or is it the economist, who can suggest ways to incorporate this modeled science into the economic world, where everything is denominated by monetary values.

I would argue that it takes expertise from all of these disciplines to build functioning eco-system markets.  I would further argue that, by and large, economists are missing from the process.  I recently had occasion to look at the water quality trading schemes that are being developed in response to the Chesapeake Bay TMDL – a classic eco-system services market innovation.  The absence of economists associated with those various schemes, while not complete, was very near complete.  I was puzzled by this.

Was it that the people designing the trading schemes were not aware of how economics could inform their design and perhaps help them to avoid pitfalls?  Was it that the economists were not available to help with this work (or, same result, were speaking a language that nobody else could speak)?  Were there institutional pressures, or was it just the result of random bad decisions?

It is always nice to wrap up with a thought that resolves the issue under discussion.  But I can’t do that here.  Because I haven’t really answered any of the questions in the preceding paragraph.  Governments have been building roads for a long time and they have only just recently started trying to create ecosystem markets.  Maybe this is all just a function of where we are on the eco-system services markets learning curve.

Maybe I should lower my expectations.  But if that is the case, I hope that getting eco-system services markets wrong the first time around will not be as costly as building a bad road.  People die on bad roads.  Still, getting eco-system services markets wrong will delay the environmental outcomes that we all desire.  And, it would be truly sad if failing to get it right the first time deflates all the interest that currently seems vested in the idea.

A common thread through the presentations was the question, how will we pay for the redoubled effort demanded by the TMDL? The economists seemed to be in consensus that current and future budget deficits will limit the resources that the public sector is going to be able to throw at the problem. I kept hoping that this might lead someone to suggest that these fiscal constraints might provide a lever to ensure that we are getting the best possible value for what we are spending, but it didn’t really come up in a substantial way.

In an interesting teaming, Rich Batiuk (Bay Program) gave a description of how the TMDL was developed and how pollution loading caps (read: reduction requirements) were allocated among the source jurisdictions; and then Carl Hershner (Bay Program Partner) described some of the uncertainties attending what Rich had presented. Rather than just leave it at “we can’t say for sure”, Carl made the useful point that we have the means to track our performance, and, in so doing, learn by our successes and failures. Unfortunately, there was only one state legislator in the audience and I am not sure how effectively that point will disseminate. No one suggested a way to infect the state or federal agencies with adaptive management.

Ted McConnell (UMD) addressed a question that provides insight into why our universities still grant tenure. He asked, if cleaning the Bay is going to be as difficult as all this (and more), when might the taxpayers (or their representatives) decide that the Bay is clean enough? Because the clean water act makes this question practically irrelevant, I hadn’t expected to like this presentation. But it provided a lot of useful information and interesting ways of looking at the problem, even if it missed the opportunity to develop the point – but we could get better value for our tax dollars than we are getting now.

The presentation that I had the highest hopes for, “Incentivizing Pollution Control in Agriculture”, danced around the issue of economic efficiency at about 5,000 feet. So it is not clear that the audience got a complete sense of just how wasteful current policies are, with respect to cleaning up the Chesapeake Bay. Marc Ribaudo (USDA), the presenter, pointed out that the federal programs supporting agricultural conservation practices seek to be equally accessible  across wide groups of farmers.  Clearly, targeting practices that generate greater reduction returns would change access across farmers.  It is implied that targeting practices with monetary incentives may face a strong political headwind.

Michelle Perez (Private-not-for-profit) brought the discussion back down to a more road-side view, describing research on the various ways in which states have attempted to impose nutrient planning on farmers. She was in the right place at the right time to assess this effort in three different states and was able to show what worked in the short-term but not in the longer term and vice versa. Hers was one of two empirical talks that the day.

I also had high hopes for James Shortle’s (PSU) discussion of ways that we might improve the efficiency of agro-environmental policies, but here again the discussion took place at somewhat stratospheric heights and no detail was given on what is being foregone in our current policies, compared to what could be achieved with more efficient policies. One can’t take issue with the technical validity of what was said, but, watching the audience, it’s was not clear that the non-economists (I guess they would be the “policy-makers”) were really following it.

Len Shabman (RFF) then gave the other empirical talk of the day and for those who stuck with him it was revealing. The big point was that ten years and $7 million later, maybe they have created a viable water quality trading scheme in south Florida. There was a lot more to it than that, but that alone would have been a good take home for all the policy-makers who think that water quality trading is already here in the Chesapeake Bay drainage, saving the day.

The final presentation was an odd thing that addressed the allocation of pollution load reduction obligations among the states as if it had not already happened. The presenter, Anthony Kwasnica (PSU) made the point early on that economics provides a way of identifying a fair and efficient allocation of reduction obligations, but then he sped on to why politics prevents that sort of solution to the problem. He might have described in detail why the economic standard for allocating pollution load reductions is fair and efficient and laid the groundwork for overcoming some of those political constraints. But he opted instead for the rational expectations stuff¹.

So, for all the policy-makers who did not attend the conference (and that includes all the signatories of the Bay Action Plan), that’s it in a nutshell. Nobody suggested inserting a requirement into Bay restoration efforts that economic efficiency be a goal, so the status quo is safe for a while. The conference joins the ghosts of the psychiatric patients who wander the grounds there at the Hyatt, as something that already happened and is finished now. Except there is supposed to be a more complete write-up of the presentations in CHOICES magazine.

¹Definition: A professor and a graduate student are walking across the quadrangle. Graduate student says, “Wow, look. There’s a $20 bill.” Professor won’t look but says, “Nonsense. There’s no more likelihood of a $20 bill being there than anywhere else on the quadrangle and if it was there somebody would have already picked it up.”

(Note: This was prepared for a poster presentation that never happened. I’m posting it here because it may describe the unit pricing idea more thoroughly than earlier posts. RW)

The current mix of policies for restoring the Chesapeake Bay includes regulations that require nutrient and sediment load reductions from some sources. It also includes plans to use public sector resources to encourage other sources to reduce nutrients and sediments by paying them to implement qualifying abatement practices. Additionally, experimental trading programs are being developed that would allow regulated pollution sources to reduce their compliance costs by buying pollution reductions from sources that can supply them more cheaply.

Trading programs are expected to achieve several results; some of which are more likely than others. Many policy makers believe that trading programs will bring additional resources to the task of buying nutrient reductions from unregulated sources. But, the water quality benefits from any increase in funding to unregulated sources are offset by the increase in load from the regulated source. Thus, there is no net gain in water quality; only a change in liability for payment. More substantially, by allowing the substitution of low cost reductions for high-cost reductions, trading programs should generate cost efficiencies such that meeting some given level of pollution reduction will impose lower total social costs.

Another, and perhaps more subtle result from trading programs is that, by pricing the tradable asset – mass measures of annual nutrient and sediment export reduction – an incentive will be provided to suppliers to choose practices and land uses that generate greater yields in pollution reduction per dollar cost. By focusing the exchange on this desired product, pollution trading arrangements should also induce suppliers to effectively sort themselves from lowest to highest cost. Buying nutrient and sediment reduction from that type of sorted supply will ensure greater yield per pollution reduction dollar than existing pricing schemes. However, one does not need a trading program to enjoy this benefit.

Current programs that support agricultural non-point source nutrient and sediment pollution reduction practices are functionally indifferent to the number of pounds of nutrients or sediments generated by the practices that they support. Payments under those programs are based on per acre average implementation costs. USDA support for riparian buffers, for example, is paid at a fixed rate per riparian acre, regardless of whether the acre is expected to reduce 20 pounds of Nitrogen (to pick one nutrient), or 30 pounds of Nitrogen per year.

It has been thought too difficult to base per acre payments on the number of pounds of nutrients reduced by a specific type of buffer on a specific type of acre. However, the imposition of the TMDL provides a simple means to do this. Under the models on which the TMDL is based, the implementation of riparian forest buffers generates expected nutrient reduction at a rate defined by the prior land use on the acres that are converted to forest, plus a hydro-geomorphic region-specific reduction efficiency for pollution effluent from four up-gradient units of land. Thus, if you know the prior land use on acres where riparian forest buffers are installed and the land use on the up-gradient acres, and if you know the hydro-geomorphic region in which the buffer is implemented, then you know how many annual pounds of Nitrogen reduction to expect from implementing the practice.

At some fixed value per pound of nitrogen reduction, the number of pounds of nitrogen reduced per acre (as defined by the foregoing Bay Model parameters) times price per pound defines the value of the riparian buffer BMP on any given acre. If acres of riparian buffers were priced in this manner, then those acres that generated larger reductions would be paid a higher price and acres that generated less reduction would be paid a lower price. In this way, greater reductions would be achieved at any given level of expenditure, compared to current policy.

In order for such a pricing scheme to be practical, there needs to be some way to communicate to both buyers and sellers the value per acre of the range of possible load mitigation practices. One means of doing this is to use a computer-based algorithm to collate load reduction values for specified practices. We have created several such tools using hypothetical prices and Chesapeake Bay Model (5.3) parameters for delivered loads and posted them on the web at www.mainstreeteconomics-b.com. Currently, these tools only address cover crops and riparian buffers in Maryland, but similar tools could be built for other practices, in other jurisdictions.

While the accuracy of Chesapeake Bay TMDL-based pollution loads and load reductions is open to argument, the fact that the regulation is based on those expectations provides a means for jurisdictions to minimize their costs in complying with the regulation. It is not clear how the model-based TMDL expectations can be accurate in total, if they are not accurate at finer scales. Moreover, if TMDL-based pollution reduction expectations are used for experimental trading programs, it is not clear why they would not be adequate for existing public sector support for pollution reducing practices.

The problem in promoting this innovation in the context of Chesapeake Bay restoration policy-making is that it is not apparent who to present it to. Who has the capacity, authority and incentive to adopt a more precise pricing scheme among the current federal and state programs aimed at reducing non-point source pollution?

I’m on a couple of listserves that send daily links for news stories about the Chesapeake Bay. Those listserves have recently taken up items from a pretty flimsy source – though I didn’t know that when I read the headline for a recent link. It read: Chesapeake Bay Oysters Making a Comeback. I had to check that out.

When the latest Fall Survey of Oysters was made public a few weeks ago, I got a brief boost reading about improved survival and spat set across the Chesapeake. But then I thought about the last time there was a good spat set and decent survival and what happened three years after that. There were oysters where there hadn’t been oysters for awhile and people who had pretty much hung up their tongs said, well golly, I’m going oystering. And there went that age bracket.

Of course now we have 24 percent of the oyster bottom set aside as sanctuaries and, if those restrictions can be enforced, spat that sets in those areas will grow and three years hence maybe some will create progeny instead of providing human nourishment. But also of course, if you had some positive underlying growth rate for oyster stocks in the Bay, accepting just 24 percent of that growth rate means that you have to wait four times as long to get the stock growth possible if it were all set aside. But I digress.

I was kind of waiting for somebody in the press to pick up this news and declare victory in the battle to restore Maryland’s oyster fishery. And here it was. The link took me to a page that billed itself as the Environment and Climate News. I wondered why the name Heartland Institute up at the top of the page sounded familiar, but the article read ok until I got to the heading, Private Sector Efforts Successful. Somebody from some group thought that this good news about oysters was a result of all the homeowners who have been growing oysters in floats off their docks. Yes sir, that ought to do it.

That’s when I noticed that there was a video link next to the text offering to give me the real story on “Climategate”. Maybe I need to say that I believe that the purloined e-mails from the East Anglia’s Climate Research Center have been pretty well vetted by the mathematicians of the world. If they say that there was no smoking mushroom cloud, I am going to go with them. So, anyone who is still hawking a Climategate video is probably, well, let’s say, wrong. I went to the homepage for Environment and Climate News and the big story there asked angry and impatient questions about why we can’t see James Hansen’s (the NASA climate scientist) ethics file. Yikes.

So this was not a serious article from a serious source. I’m not sure what it was. Toward the end the author started talking about tradable fishing quotas – as if that is something that is ever going to happen in Maryland’s oyster fishery. It was sort of amusing to see a libertarian group like the Heartland Institute be shown so far to the left of our Maryland watermen. They got your tradable quotas.

Clearly, the listserves do not have very high standards for what they count as “news”. But otherwise, nothing was revealed.

Howard Ernst has posted an argument for greater regulation of nutrient and sediment pollution from agriculture, here: www.bayactionplan.com/2011/03/chesapeake-bay-farm-regulation/ . In the post, Professor Ernst develops an example that shows how the pursuit of higher returns from agricultural land can motivate more intensive (and, more intensively polluting) agriculture. He uses that result as a justification for imposing regulations on farmers, such that their pollution and profits per acre are restricted.

Case solved. On to the next problem. But of course, if you squeeze the already thin margins of farmers so that more of them are forced to find some other way to make a living from their land – like growing houses on it – the next problem would be what to do about the additional pollution loads from all the additional families living in houses on what used to be farmland.

If regulations on farmers in the Chesapeake Bay drainage are more onerous than the regulations facing farmers elsewhere in the country, our farmers will be placed at a competitive disadvantage. Wealthy individuals, who can afford to buy and maintain underperforming assets may well step in and keep some farmland operating. But Professor Ernst is basically suggesting that we give up commercial agriculture around the Chesapeake Bay. Let me try to justify that interpretation with a non-numeric example.

Early in my career I worked as a Surge Dairy Equipment serviceman on the Eastern Shore of Maryland. I was maybe 19 or 20 at the time and had limited experience in the world. Even so, it was clear to me when I looked at the amount of money these farmers had tied up in their herds, milking parlors, land, farm equipment, and when I looked at the way they worked, and the return that they got on all that effort and investment, that you had to really love milking cows to be a dairy farmer on the Eastern Shore of Maryland. They could have made a lot more profit putting their money into T-bills, and still slept later in the morning.

Over the next ten to twenty years, most of those dairy farmers did sell out. I don’t know of any dairy operations on the mid-shore these days. And the reason is, apparently farmers elsewhere could produce milk more cheaply(i) . So, the dairy farms on the Shore shifted out of pasture and on-farm feed crops to row crops and we traded a manure problem for a commercial fertilizer problem. In this shift, we have a taste of how Professor Ernst’s proposed regulations would affect farming in the drainage. If, at current prices, farmers cannot make a decent return on their preferred agricultural practice, then they will shift their fundamental asset – land – to some other use. Or they will sell the asset to someone who can afford to dabble.

In addition to being ineffective with respect to its ultimate goal, Professor Ernst’s proposal also raises equity issues. Specifically, if you are going to tell farmers that land under their operations cannot export more than X pounds of nutrient and sediments to the Bay over the course of a year, shouldn’t you apply that same rule to all land uses? I would venture that the US Naval Academy, sitting as it does at the edge of the Severn River, exports more nutrients per acre to the Chesapeake Bay than most well-managed farmland.

I agree with Professor Ernst’s fundamental contention that nutrient and sediment loads from agriculture need to be reduced in order to restore water quality to the Chesapeake Bay. But I think that you need to look at the likely consequences of policies targeting that goal. One would like policy to be both equitable and effective with respect to its stated goals. Whether it is either can best be assessed by considering the economic incentives that it generates. Maybe we should think in terms of having food eaters, rather than food producers pay the cost of reducing agricultural pollution loads in the Chesapeake region.

ⁱOr, more precisely, they could get it into the product chain more cheaply.

In The Capital, an Annapolis newspaper, a Farm Bureau Federation water quality specialist is quoted as saying, “We want the government to get it right”. Now, I understand that interest groups endeavor to apply a favorable spin to their efforts. But this statement did not come out of marketing or management. It came from a water quality specialist. He, more than most, should be aware that the Farm Bureau Federation does not want the government to get it right.

Getting it right, in this context, means correctly attributing nutrient pollution to the Chesapeake Bay across its various sources. Anyone familiar with the process by which the Chesapeake Bay’s “pollution diet” has been devised knows that there is a certain amount of politics involved. The science by which one attributes nutrient pollution across sources is limited by the data that are available. And for agricultural sources, state agricultural departments have been an important gatekeeper for much of the data.

State agricultural departments serve the agricultural producers (and up-stream enterprises) of their state; that’s who their constituency is. Given an opportunity to serve their constituency in the forum where nutrient load allocations were being determined, state agricultural departments have fought valiantly and thoroughly. I am not suggesting politicized science here. Just the intimation that if there were some opportunity to err on the side which minimized costs to agriculture, that is often the preferred error.

If an effort is made to remove those vague biases, I think that some may be surprised how much larger a share of the Bay’s water quality problem agriculture can be held accountable for. The USGS’ National Water Quality Assessment tells us that the shallow ground water under most of our nation’s cropland is laden with nitrogen and, less often, volatile organic compounds (particularly, agricultural fumigants). Pesticides are found in waters draining agricultural basins.

There is in fact a lot of compelling information out there that squeezing ever higher levels of agricultural production from the land is not as inexpensive as it appears at first. Some costs, such as resultant water quality impairments, have not been factored into the equation. When those costs do get factored into the equation, the question will inevitably arise, “who pays them?”

One could view payments that the government makes to farmers to get them to plant cover crops or riparian buffers or any other pollution mitigating practice as acceptance of cost liability by the public sector. As Ronald Coase pointed out many years ago, this is an okay allocation of property rights for the pollution problem. But it is not an example of the “polluter pays” principle. New confined animal feeding operations (CAFO) regulations will, on the other hand, put agricultural producers out of pocket. That, in all likelihood, is what the Farm Bureau has a problem with.

The risks that the Farm Bureau takes in its suit against the EPA are at least three-fold. First, if the science of pollution loads and load mitigation practices is improved, agriculture may be shown to have a lot more work to do. Second, budget constraints in the public sector might cause a re-evaluation of who the pollution costs from agriculture should belong to. And, third, by appearing the spoiler in the Bay clean-up, agriculture might undermine the widespread public support that it currently enjoys.

The payoff for the Farm Bureau’s lawsuit is that CAFOs may be taken off the hook; either literally, by stopping the Chesapeake Bay TMDL altogether, or though promised subsidies for mitigation requirements. When playing hearts, this is called shooting the moon.

It might be argued that since the policy intervention I model is a tax/subsidy on land use, not carbon emissions and sequestration, it does not lead to the true (minimum) carbon sequestration marginal cost function. This criticism is not valid in a realistic policy context. It would be virtually impossible to levy a tax on carbon emissions or a subsidy on sequestration, because the costs of administering such a policy would be prohibitive.

As important an issue as atmospheric carbon may be, I do not really have a dog in that fight. So the veracity of Professor Stavins’ assertion about the costs of administering a unit pricing scheme for carbon markets is not what interests me about this quote. What interests me about the assertion that unit pricing could raise total costs instead of reducing them is that it might be generalized to other pollution problems. Like non-point source nutrient pollution reduction in the Chesapeake Bay drainage.

Let’s be clear on what we are talking about. If we buy pollution reduction on the basis of an easily measured proxy such as acres on which pollution reduction practices are employed, then we are accepting an average price for all of the acres available for those pollution reduction practices. Realistically, we know that some of those acres will reduce more pollution than others, even given the same pollution reduction practice. But by pricing pollution reduction by the acre, we are accepting an average return of pollution reduction for our payment.

The alternative to buying pollution reduction by the acre is buying it by the pound. That is, using what we think we know about the reduction efficiency of a practice on various sorts of acres to figure out how many pounds of pollutant were reduced on any particular acre and to price that acre accordingly. Such a payment system would induce suppliers of pollution reduction to line up from most efficient to least efficient, and we would expect to achieve greater pollution reduction with any budget, short of buying it all.

This alternative, unit-based pricing approach is what Professor Stavins asserts to be prohibitively expensive in carbon markets. Would it be prohibitively expensive in nutrient pollution mitigation programs in the Chesapeake? Well, let’s look at cover crops. What do we need to know to make payments per acre dependent on the number of pounds of nitrogen that are expected to be reduced by planting cover crops on that acre?

We need to know whether the acre is on the coastal plain or the non-coastal plain. We need to know how and when the cover crop was planted and what cover crop seed was used. And, we need to know what was planted on the acre the previous growing season and how it was grown. This may seem like a lot of information to collect, but it is all being collected by Maryland’s current Cover Crop Program. So collecting the information that is needed to change to a unit-based payment system would not impose additional costs. Perhaps using it would.

To use the information described above, which is thought to be sufficient for predicting loads and load reduction for the TMDL regulation, one would need a way to collate it so that suppliers could easily find out what they might be paid under the available alternatives. We have devised a way to do that and posted it here: www.mainstreeteconomics-b.com. In our schematic pricing tools, we have pulled “per-pound” prices out of our hats. Real prices would need to be set by policy-makers figuring out how to get the most nutrient reduction for the least money.

The only way that this pricing tool would be costly is if we obtained a patent for the process and charged a toll every time it was used. This is not a bad idea, but even if we did that, I doubt that we could make it as costly as it would be cost-reducing. So I don’t believe that Professor Stavins’ assertion about unit pricing applies to programs targeting nutrient pollution reduction in the Chesapeake Bay drainage. Not for cover crops or riparian buffers, anyway.

¹ Robert Stavins, The Costs of Carbon Sequestration: A Revealed Preference Approach. The American Economic Review; Sept. 1999, 89,4, pp. 994 -1009.