In Favor of Pollution Trading

A few days after Governor Hogan released plans for a renewed nutrient pollution trading initiative in Maryland, Scott Edwards of Food and Water Watch wrote a letter to the Baltimore Sun claiming that “No one who is serious about water quality should support trading”. His evidence for this was an assertion that after 10 years of nutrient pollution trading in Pennsylvania, the only thing that had happened was that point pollution sources had been made as unaccountable as agricultural sources. It sounds as though pollution trading is pretty worthless. Is this true?

Since the start of its effort to restore the Chesapeake Bay, the Chesapeake Bay Program has sought “equitable” ways to allocate pollution abatement obligations around the watershed. Over time, equitable has come to mean that all polluters should reduce their pollution by roughly the same percentage. So, if my widget factory exported 100 pounds of pollution to the Bay and the rule was that all sources had to reduce their pollution by 40 percent, then I would have to cut my pollution export back to 60 pounds. If my neighbor’s widget factory exported 200 pounds of pollution to the Bay, he would have to reduce his pollution to 120 pounds. The question arises, is it “equitable” for my neighbor to be able to send 120 pounds of pollution to the Bay, while I only get to send 60 pounds? Even more problematic, suppose that it cost me $1,000 to reduce each pound of pollution export from my widget factory, while my neighbor could do it for $100 per pound. Although I only send half as much pollution to the Bay as he does, my abatement costs would be $40,000 while his costs would only rise to $8,000. Is this equitable?

It does not seem equitable to require someone who pollutes less to bear a higher cost to meet their pollution reduction obligations. But in the absence of precise cost information, it was never feasible for the Chesapeake Bay Program to allocate reduction obligations in an equitable manner. Therefore, they allocated reduction obligations in a simple manner. And, when they allowed the possibility that reduction obligations could be exchanged under a trading program, they opened an avenue for improving the fairness of their original, simple allocation.

Following the example of my neighbor and I as widget producers, if, instead of reducing 40 pounds of my own pollution, I offer to pay my neighbor to reduce 40 pounds of pollution for me at a price of $200 per pound, we will both be better off and it is not clear that our exchange will make any difference to the Chesapeake Bay clean up. I will meet my reduction obligation for a price of $8,000 as opposed to $40,000 and my neighbor will get a $4,000 profit (which would pay half his costs of reducing his own pollution). Between the two of us, there will still only be 180 pounds of pollution going to the Bay; the same amount that would have been exported if we each had to reduce our own pollution.

Perhaps Mr. Edwards thinks that getting the cheaper reductions is less effective with respect to the restoration that we all want for the Chesapeake Bay. Or, perhaps he thinks that no polluter, even one as well-intentioned as I, should be excused from reducing their own pollution. Or, perhaps he believes that when we allow economic incentives to motivate restoration behavior, the purity of environmental protection will be lost. I don’t know. I only know that he believes that no one who is serious about water quality in the Chesapeake Bay should support water pollution trading. I believe the opposite. I believe that anyone who is serious about water quality in the Chesapeake Bay should help to figure a way to advance the idea.

Political Economy and the Environment

On the one hand, we have conservative politicians who seem to feel that no environmental problem is worth burdening the economy with any monetary cost. And on the other hand, we have liberal politicians who seem to believe that greater spending for environmental protection will necessarily generate greater economic growth. Both of these arguments are specious and make one wonder why they are the only arguments on offer. Why is the public conversation about economic costs and benefits of environmental protection so off-base?

We can probably all agree that, while free markets are great for economic opportunity, it is better if we don’t allow people to sell hand grenades or heroin, even though we know that this restriction will reduce economic activity in those industries. We restrict trade in things that we think might impose unacceptable social costs. In order to protect our air and water, we impose significant regulatory costs on industries that impact air and water. This limits those industries’ share of the economic pie, but the broad consensus seems to be that protecting environmental health is worth this cost. I would wager that, since the Elk River incident last winter, many West Virginians wish that their government did a better job of protecting their drinking water.

There are obvious benefits to ensuring clean air and water and a healthy environment. But we should not confuse costs with benefits. People’s well-being is improved when environmental harm is mitigated. But when there is already harm done, and we want to fix that, it is implied that someone is going to have to bear a money cost that they did not bear, previously. That will limit their current economic activity. The more inexpensively we can resolve environmental harm, the less cost the economy will bear. Jobs, be they green, blue or red, are costs.

Whether we are talking about global environmental problems such as atmospheric carbon or regional problems such as loss of water quality and diminished fisheries in the Chesapeake Bay, resolving those problems will generally entail trade-offs in the economic status quo. Most people do not wish to pay more for fuel and electricity, but that is likely to be necessary to resolve the atmospheric carbon problem. Farmers and funders of stormwater systems do not want to face higher costs in pollution abatement, although they are important sources for the Bay’s water quality problems. Watermen do not want to be forced to reduce their effort even though that may be required to get the Bay’s fisheries back in shape.

So, on the one hand we have a group of political leaders who say none of it is worth spending money on, and on the other side leaders who say that the more we spend on it, the richer we will all be. Nobody boils it down to the simple point that the way we live is generating significant environmental problems and we are going to have to make some adjustments in order to fix them. It is as if both sides have determined that the American voting public is simply too selfish to ever accept anything looking even vaguely like sacrifice, so let’s not talk about that.

There are important questions to address regarding how to achieve environmental protection at least cost and how we should pay for it. But as long as all people hear is, “we won’t let your money be spent that way”, or “the more of your money we spend, the richer we will all be”, we will never get around to those important questions. This is not good. We need a conversation that starts with, we have a problem here. How are we going to fix it and how do we pay for it?

In 1994, William Nordhaus, a Nobel Prize-winning economist at Yale, wrote a discussion paper that evaluated a couple of different ways of tracking price changes over time. To make his point, he created a time series for the labor cost of a lumen of light (i.e., lighting services) from Babylonian times to the present. Nordhaus estimates that in Babylonian times it took over 36 hours of work to pay for one kilolumen hour of artificial light. In 1800 it took about 5 hours of work to pay for one kilolumen hour of light. In 1992, at average wage rates, it took 0.00012 hours of work to pay for one kilolumen hour of lighting service. It is difficult to comprehend how anyone can sit at this end of that story and say that they won’t accept any increase in energy costs, even if that is what it takes to solve a significant environmental problem.

Accountability versus Liability (Part 2)

This difference between accountability and liability is an important but not widely discussed aspect of the Chesapeake Bay TMDL. The TMDL is not a regulation. But meeting the pollution load allocations in the TMDL will probably require new regulations. This implies that the accountable parties (state and local staff and officials) will need to create liable parties, whether they be farmers, developers, or the rest of us. Since regulations imply the imposition of costs on segments of the electorate, the people charged with organizing all of this would rather talk about anything else.

As with taboo subjects in general, because policy-makers aren’t talking about how liability is going to be imposed in the context of the TMDL doesn’t mean they are not thinking about it. There seems to be an in-group/out-group thing going wherein if you do talk about it, you talk about it within your group. Partnership not-withstanding. Still, information that gives you a hint of what various players think about additional liability is broadly available. If you want to see what the farm bureau has to say about it, you can go here: http://mdfarmbureau.com/wp-content/uploads/2013/07/MFBPolicy2013.pdf. If you want to know what the developers are saying about it, you can go here: http://www.sagepolicy.com/wp-content/uploads/2009/06/builders4-14.pdf‎. And, if you want to know what the Counties think of it, you can go here: http://conduitstreet.mdcounties.org/2012/09/07/17779/.

Mostly, people would rather not see their or their constituency’s ox gored. No big surprise, there. More interesting is how these various concerns get incorporated into policy and whether all of that is a good thing vis-à-vis policy objectives. Under its “Accounting for Growth” discussion (see Appendix S of the TMDL), the State of Maryland has shown a light on how stakeholder concerns get handled in a facilitated setting. They have been transparent about that discussion and you can read a blow-by-blow, here: http://www.mde.state.md.us/programs/Water/TMDL/TMDLImplementation/Pages/Accounting_For_Growth.aspx.

Accounting for growth (AfG) is all about “development”, or, taking land from a lower valued use and moving it to a higher valued use. Such change is generally assumed to increase environmental harm to the Chesapeake Bay either directly, though higher polluting land use, or indirectly, through the additional pollution generated elsewhere to accommodate the new land use. Since we are putting too much pollution into the Bay at our current level of economic activity, it is implied that along with reducing what we already contribute, we have to worry about what might be added through “development”. In an effort to garner stakeholder input for its AfG policies, the state brought together representatives from agriculture, development, environmental organizations, local government and, ambitiously, representatives of the public interest.

It would be arrogant and foolish to forget that the representatives of each of the stakeholder groups is an accomplished person with ideas of their own about the issues put before them. Still, it would also be foolish to ignore the incentives implicit in their representation. That is, we might expect the development and local government representatives to be less enthusiastic about the imposition of higher costs on future development. We might expect agricultural representatives to be somewhat ambiguous about clamping down on development and we could expect the environmental representatives to want to squeeze down as hard as can be done on developers. If you read their deliberations, that is sort of how it comes out.

The point of all this, to me, is that making policy with all the stakeholders present requires that somebody have a plan for how to achieve the greatest good for the largest number over a longish time horizon. In general, when we are talking about policies that reduce environmental harm, we are talking costs so maybe the goal is the greatest good at the least cost to the entire economy. Without some anchor like that, it is not clear why we shouldn’t expect groups like the AfG workgroup to spiral down into log-rolling (don’t tax you), defensiveness (don’t tax me), and procrastination (tax that fellow behind the tree).

I’m not sure who brought the plan to the AfG workgroup sessions.

Accountability versus Liability (part 1)

Internet access is so empowering. I have been thinking recently about the difference between the concepts of accountability and liability. I am thinking about it with reference to the Chesapeake Bay TMDL and its promise of “increased accountability” in efforts to restore the Chesapeake Bay to ecological health. Uncertain as to the legal ramifications of these two words, I searched the internet for the phrase in the title. Below, is the lead paragraph of the first and best reference that came up under my search:

[Helen?] Nissenbaum writes that a key difference between accountability and liability is the ground on which each is appraised: liability is appraised on the victim’s plight while accountability is on the relationship of an agent to an outcome. Another difference is that accountability is closely linked to the notion of moral blameworthiness which has as one of its necessary conditions that a harm done is brought about by a faulty action by the agent. On the other hand, “to be strictly liable for harm is to be liable to compensate for it even though one did not bring it about through faulty action” (Nissenbaum, p. 15).

This is interesting. I had wondered whether one of these words had a more general and binding legal implication than the other. Nissenbaum’s analyst seems to be saying that “liability” binds more broadly than “accountability”. Perhaps that is the general case among the legal theorists. So, maybe the designers of the Chesapeake Bay TMDL use the term “accountability” and not “liability” in all of their public statements for good reason. Perhaps states are accountable but not liable for their contributions of nutrient and sediment pollution to the Chesapeake.

When you do a search on accountability on the Chesapeake Bay Program’s website, you get a lot of references for monitoring and tracking Bay restoration activities and outcomes. Most of it focuses on the verification of actions taken to achieve the outcome “restored Chesapeake Bay”. In keeping with the distinction made in the cribbed internet paragraph, accountability seems to be all about “the relationship of an agent [the states, counties and municipalities] to an outcome.”

When one does a search on liability on the Chesapeake Bay Program’s website, most of the results are from contracts among the partners. Contracts, of course, generally have liability clauses. But also in the mix is a 1995 piece by Kurt Stephenson, Waldon Kerns and Len Shabman discussing market-based mechanisms for achieving Chesapeake Bay restoration goals. There is actually a very nice paragraph in that paper that goes to the heart of my original question about liability versus accountability in Bay restoration activities. They say this about liability with respect to conditions that have to be met in order for market-based environmental policies to work:

A system of liability rules assigns financial responsibility to parties whose actions could impose harm or damage on third parties. Although compensatory damages are not paid until harm has occurred, the potential for environmental harms creates incentives for those held potentially liable to undertake preventative measures rather than paying for the damages they cause. Thus, liability imposes a cost on those engaging in environmentally risky activities by forcing these parties to account for the risk imposed on others.

The other place where the word liability crops up in Chesapeake Bay Program documents is in more contemporary work relating to pollution trading and offsets. That literature holds that, when we are talking about market-based restoration, our operating assumption is that someone has liability for the “bad” that is causing environmental harm and that liable party can be made to pay for it. Our existing framework for managing restoration of the Bay by way of public sector agencies and academic institutions only implies the less binding condition, accountability. If it rains too much and chlorophyll-a, or DO goals are not met, public sector agents are not liable. But an agent who operates in some future market will be. I suppose this is progress. What I wonder is what were the public sector agents before they were accountable?

Spitting in the Ocean, Batting 1000

After disparaging the idea of a 2:1 trading ratio for nascent water quality trading schemes in the Chesapeake Bay watershed (https://spittingintheocean.wordpress.com/2012/10/25/whats-a-progressive-to-think/), I came across a draft technical memorandum detailing EPA Region III expectations for nutrient trading and offsets in the Chesapeake Bay states. They like the idea of a 2:1 trading ratio (http://www.chesapeakebay.net/channel_files/19160/draft_uncertainty_tm_6_18_13_for_review.pdf).

EPA’s prime rationale for recommending a 2:1 trading ratio between a point-source buyer and a nonpoint-source seller is that point source loads are more certain than nonpoint source loads. Since there is uncertainty surrounding loads and load reductions from nonpoint sources, they argue that it would be better to guarantee the reduction being bought by adding in a 100 percent margin of error in the purchase arrangements. They also argue that their recommendations are consistent with other aspects of the Chesapeake Bay TMDL.

Insurance is a worthwhile service (my father sold it), but a premium priced at the full cost of the insured good seems a bit steep to me. EPA could strengthen their argument with some empirical evidence justifying the need for such a large insurance margin. It might also be useful for them to explain why this uncertainty matters in the case of traded reductions but not in the accounting of non-point source reductions obtained under existing programs.

With respect to consistency with other aspects of the TMDL, it is difficult to square the 2:1 trading ratio with the way in which the states account existing (publicly funded) nonpoint source pollution reduction. Under the current TMDL/WIP process, riparian buffers bought by USDA’s CREP funding (for example) are credited with a specific amount of nutrient and sediment reduction; not one half their expected reduction. Under EPA’s proposal, the same practice that is counted at full value when USDA or MDA pays for it or when a seller qualifies for their baseline only gets half that value in any water quality trade.

Because costs are so vastly different between high cost urban stormwater reductions and lower cost agricultural reductions, it is possible that imposing a “buy two – get one” deal on pollution credit buyers will not reduce traded volumes at lower levels of trading. If an agent’s choice is paying $500,000 to get 1000 pounds of pollution reduction from stormwater practices, or paying $200,000 to buy 2000 pounds of agricultural pollution reduction (to offset her 1,000 pound overage), she is still better off buying the agricultural reductions. Not as well off as she would have been if she only had to buy 1,000 pounds of agricultural reductions, but better off than paying the full cost implied by her reduction obligation.

Perhaps EPA’s market designers calculate that they could double the credits bought (i.e., twice the number of credits accounted) “for free” this way. Perhaps they think that buyers in these markets will not notice. But if I were a buyer in this market, I would wonder why my purchased reductions only count half as much as those paid by public sector agencies. And, on that basis, it will surprise me if local politics allow this proposal to prevail.

In another recent post (https://spittingintheocean.wordpress.com/2013/06/20/the-trouble-with-normal-is-it-always-gets-worse/), I concluded that the Chesapeake Bay was sick and not visibly getting better. In fact, according to a recent story in the Baltimore Sun (http://articles.baltimoresun.com/2013-07-03/features/bs-md-bay-report-card-20130703_1_chesapeake-bay-health-grade-um-scientist) University of Maryland scientists have assigned the Chesapeake Bay a better grade – a “C” – than it earned the previous year. So, by those lights, things are getting better for the Bay.

How are things getting better for the Bay? Because they aren’t getting worse any faster. Seriously. In a wonderful twist of imagination, the University of Maryland scientist suggests that worsening water clarity seems to be hitting a plateau. As noted in my earlier post, there was a 95 percent failure rate for water clarity in 2012. A plateau is not wholly unexpected that close to 100 percent. What is less clear is how that’s a good thing. It is a peculiar sort of pitch. And yet, its author is the science communication walla for UMCES.

Perhaps there is other data than that posted by the CBPO at http://www.chesapeakebay.net/track/health/bayhealth, and perhaps that other data indicates different trends for the Chesapeake Bay’s health. But the CBPO data does not paint a positive picture at all. It is not whether the glass is half empty or half full. It is whether your black lab can jump in the water without fear of getting skin-eating bacteria that makes his hair fall out. It is about being unable to see far enough into the water in the middle of the Choptank to be able to tell whether there are sea nettles there or not. It’s about having to think twice before you chow down on a bucket of crustaceans so recently living and eating in that muck.

Fortunately for the scientists whose job it is to put a positive spin on whatever is happening to the Chesapeake Bay, not many people live at the head of a creek where the water is so nasty it smells like despair. And those who do, know to keep their dogs out of it. So am I batting 0 or 1,000?

Step Right Up (Everyone’s a winner)

After 400 years of degrading the Chesapeake Bay, we now learn that, in fact, we will all be richer if we restore instead of degrade it. This is shocking in its implications. Instead of taking more oysters from the Bay than nature is able to replace, we might be better off to limit our annual harvests and maintain larger stocks? Instead of using the Bay as a place to deposit sewage and storm water, we might be better off doing something else with them? Instead of importing large infusions of nitrogen and phosphorous to grow our food, we will be better off doing agriculture some other way? And the economy grows from all of this?

It would be great if we could all become richer by stopping the degradation of the Bay. But, if watermen have to reduce harvests so that stocks can recover, how are they going to be better off in the short run? If we have to pay more to deal with our sewage and stormwater, won’t that be less money in our pockets for baby’s shoes? If we ask farmers to stop generating the nutrient pollution that their cropping and animal production systems generate, how are they supposed to make money off of their land?

Don’t get me wrong. I entirely believe that restoring the function of an ecosystem as large and important as the Chesapeake Bay will make our society better off. It might even be good practice for the atmospheric carbon problem. I just think it is short-sighted to ignore the fact that some of us are going to be paying costs that we did not previously pay. Up to the present, we have accepted ever smaller oyster stocks as the cost of over-harvesting oysters. We accepted the costs of our nutrient and sediment pollution as degraded water quality. That is where we are now.

If we want to remove the problems of degraded fisheries and poor water quality, we have to imagine that it is going to cost somebody something. But, given the need to sell the idea of restoring the Bay to the wider citizenry, who wants to talk about new and potentially onerous costs? The Bay restoration effort is driven at the top by political leaders and political leaders in modern day America are loath to say to their constituents, “this is going to cost you something.”

Consider these two messages: 1) Cleaning up the Bay is going to cost a lot of money and you are going to have to provide some of it, versus, 2) Spending money to clean the Chesapeake Bay will boost our regional economy. It does not require a focus group to know which of those will be the easier message to sell. In the first instance. But, having sold the citizenry on the double benefit of the restoration effort (i.e., a stronger economy and a healthier Bay), now consider what we must say to the waterman who is being told he can’t fish stocks down to zero, or the farmer who is told, we can’t let you send that much nitrogen into our shared surface water and shallow ground water. Do we say, “don’t worry about being out of pocket for the restoration because it will generate benefits elsewhere in the economy”?

It seems to me that we would be better off telling people the truth upfront, then working to assure them that the costs are being allocated equitably and that we are working to do the restoration at the least possible cost. Saying that would make the challenge of allocating the costs equitably and achieving least cost restoration more obvious. It would focus our attention where the goal of restoring the Bay needs it to be focused. I suppose the question is how well speaking that sort of truth would fit with the aspirations of our political leaders?

The Trouble with Normal is it Always Gets Worse

Coming into the 31^st year of Chesapeake Bay restoration, it seems reasonable to expect news and highlights from the restoration leadership about what has been achieved over the first 30 years of effort.  But it turns out that this is actually quite difficult to do.  When we compare where things were in the bad old days to where they are now, it is not clear what there is to crow about.

The Chesapeake Bay Program (CBP) tracks the following indicators of the health of the Chesapeake Bay’s eco-system.  The full data and methods information can be had here: http://www.chesapeakebay.net/track/health/bayhealth.

Bay Grasses One of the early problems that helped focus public attention on the Bay’s problems was the tremendous decline in Bay grasses (submerged aquatic vegetation) in the 1970s.  This change deprived fish and shellfish of an important component of their habitat and increased the harmful effects of wave action in the Bay.  Historic abundance of Bay grasses is thought to have been about 185,000 acres and achieving that level of Bay grass beds is the CBP’s stated goal.

In 1985, there were about 49,000 acres of Bay grasses.  In 2012, there were about 1,000 acres less than that.  But the number of acres changes considerably from year to year, and in 1984 there were only 38,000 acres of Bay grasses.  There does not appear to be a trend in the status of Bay grass abundances and the CBP does not claim one.  Although, their statement regarding long-term trends says that acreage has increased from 38,000 acres in 1984 to 48,000 in 2012.  A reader unschooled in probability theory might believe that comparing those two numbers says something statistically significant.  Of course, it does not.

Phytoplankton The CBP tracks the phytoplankton situation with a measure called the phytoplankton index of biotic integrity (PIBI).  The PIBI takes an average of scores for a number of quantifiable characteristics important to phytoplankton’s ecological function.  Those scores range from one to five with five being best.  A PIBI of three or greater qualifies as better than “poor”.  The CBP tracks the PIBI over time, allowing one to see our progress in getting things better than “poor”.

From a starting place in 1984 in which 54% of the samples qualified as poor, only 44 percent did in 2011.  (We don’t know about 2012 because apparently Maryland stopped funding this monitoring in 2011.)   There is a lot of variance over the period, and no discernible trend for better or worse.  On average, over the period, the numbers say that about half of the Chesapeake Bay sampling sites have a poor PIBI score.  So far, that does not seem to be changing.

Bottom Habitat  In general, we would like to see more organisms living and growing on the bottom of the Bay.  The CBP measures this characteristic by means of a Benthos Index of Biotic Integrity (B-IBI).  This index ranges from one (bad) to five (no problem).  Their goal is that all bottom samples will have a B-IBI of three or better.

In 1996 (the first year in CBP’s online data) only 48 percent of their samples had a B-IBI less than three.  In 2012, 55 percent of the sample set was less than 3.  However, over the period there does not seem to be a trend for improvement or degradation.  But in a confusing pitch, the CBP says that we are 47 percent of the way to our goal.  Never mind that we started out 52 percent of the way there.

Tidal wetlands  There is no specific CBP goal for conserving or increasing the amount of wetlands in the Bay drainage, and wetland area has dropped by about 2,500 acres since 1996.

Fish and shellfish  Between 1990 and 2012, the average number of female crabs was 117 million.  The goal is to have 215 million female crabs.  In 2012, it was estimated that there were about 97 million female crabs in the Bay.

Since 1994, when a goal of a ten-fold increase in the biomass of oysters was announced, oyster biomass has not shown any discernible trend away from the baseline.

Striped bass are a rare success story.  Their stocks increased dramatically from 1990 to 1996 due to a harvest moratorium and stocks are currently 135 percent of their target.

Among the bait fish, shad stocks are trending upward and menhaden appear to be trending downward.

Water quality  A prime measure of the quality of the Bay’s water is whether or not it has enough dissolved oxygen for creatures to live in it comfortably.  The CBP has established a standard for this.  In 1985-87, 39 percent of the waters tested qualified as meeting the CBP standard.  In 2009-11, only 34 percent of the waters tested qualified.  In the time between those two periods, there does not appear to have been a trend up or down.

Water clarity is measured in terms of how far one can submerge a secchi disk before it disappears from view.  The goal is for all sample points to have a specific amount of clarity, depending on salinity.  In 1985, 37 percent of their sample points met the water clarity goal.  In 2011, only 5 percent did.  There appears to be a downward trend for water clarity in the Bay.

Chlorophyll a is a measure of the amount of algae present in the water.  As noted in the phytoplankton discussion, we want there to be some algae, but too much is a problem.  So CBP has a standard for chlorophyll a that they would like to see met across all their sampling points.  In 1985, 48 percent of their samples met the chlorophyll a standard.  In 2011, only 18 percent did.  There is great variability from year to year, depending on a wide range of factors.  Still, over the period there seems to be a negative trend for the chlorophyll a goal achievement.

Clearly, we do not want chemical contaminants in the water column of the Bay or its tributaries, so there is a CBP goal for this as well.  In 2006, 37 percent of the water samples taken showed no or acceptable levels of chemical contaminants.  In 2012, only 28 percent qualified as attaining the goal.  There are no long term data for chemical contaminants in the Bay but, in the short term, there appears to be a decline in water that is not contaminated with toxic chemicals.

So those are the CBP Chesapeake Bay Health indicators.  Except for Striped Bass and Shad, none of them indicates an improvement in the Bay’s health.  Some of them indicate negative trends.  It seems to me that if we step back and view it with some perspective, we have to say that the Bay has fallen into a degraded state and we are not achieving restoration.  We may be holding the line in the face of increasing human impact, but we are not restoring the Bay, yet.

While the CBP’s website provides the information that I have used to conclude that the Bay is sick and not getting better, neither the CBP, nor any of its partners, nor the popular press comes to this same conclusion in their public offerings.  Instead, nearly every day, there are articles and press releases describing restoration efforts that have generated new acres of wetlands or stories about how many tons of trash volunteers have removed from streams and rivers. Given this onslaught of positive news stories, the general public can be excused if they are not aware that the Bay is sick and not getting better.

During the last presidential campaign, Larry David made an amusing campaign video for Barack Obama called, “It Could Have Been Worse”.  Part of what made this parody funny was that it was true, but totally unacceptable for a promotional campaign.  In today’s world, where marketing is supreme, no one wants to market the idea that all of the money and effort extended to restore the Chesapeake Bay has merely kept things from getting worse.  And yet, if the public does not know this, it is not clear how we are ever going to make things better.

One understands that those who work to improve the health of the Bay would rather accentuate positive news about their efforts.  And one understands that political leaders would rather describe the restoration effort in positive terms when they are in office.  It is less understandable that the general press does not care to tell the grimmer story.  As I understand it, grim exposés sell papers as well as, if not better than, happy stories.  Perhaps the press does not get it.

So perhaps we cannot expect an advocate for brutal honesty regarding the Chesapeake Bay restoration.  Perhaps everyone already understands that the Bay is sick and not getting better.  They just would rather not think about it.  Perhaps people are willing to accept this as the new normal and Bruce Cockburn is right.  The trouble with normal is it always gets worse.

What’s a Progressive to Think?

A lovely sliver of moon hung in the southwestern sky tonight. Shining in the fading light of the sun over a recently harvested soybean field, it could almost seduce one into thinking that all is well in the world. But, being mindful of our political world and the world that economics can explain on October 17, 2012…, we are not seduced.

Why, for heaven’s sake, is the Center for Progressive Reform (CPR) agitating against water quality trading ? To figure this out, I read their paper “Water Quality Trading in the Chesapeake Bay”. It recently has got considerable press, and it is being leveraged by groups who oppose letting economic efficiency be an element in environmental policy-making. An article in the Huffington Post used it along with a lot of anti-wall street invective to argue against trading.

Actually, when you read the CPR piece carefully, they do not find much to oppose about water quality trading. They start out recognizing that water quality trading as an environmental management tool has not yet lived up to its promise. That’s true, but hardly a reason not to try to get it right. And they rightly note that it won’t work if there is no effective demand. They then assert a bunch of ways in which they believe demand should be limited.

In their introduction, the authors note the need to avoid “hot spots” in water quality trading. If you limit trading so that only demanders who are discharging into waters that meet water quality standards can buy water quality credits, then you are significantly decreasing potential demand. Reasonably, as we don’t want hot-spots. And eventually they admit that this is how current rules are written for trading. But, on top of this reasonable limitation, CPR recommends that, since pollution reduction from non-point sources is uncertain, programs should require “at least two units of nonpoint source reductions for every one unit of point source reduction credited”.

Requiring that demanders only get credit for one half of the nutrient pollution reduction that is thought to occur when they implement a qualifying mitigation practice could reduce traded quantities quite a bit. To see this, consider a lawyer who can only work 40 hours per week at a fixed hourly rate. A law is then passed saying that lawyers can only bill half the hours that they work. If the hourly rate is fixed, lawyers will lose half their salary and presumably a lot of them will leave the industry (i.e., the market supply of lawyer service will diminish). If the hourly rate can move, however, we might expect it to rise to compensate for the loss of billable time. When price of the service rises, we expect less of it to be demanded so, again, amounts traded in the market would decline.

Demand for lawyer services is probably somewhat price inelastic. That means there would not be a large change in quantity demanded even with a significant change in price. Demand for water quality credits may be either price elastic or price inelastic – I don’t know that the research has been done to find that out. But when a non-point source agricultural pollution reduction practice is bought by the government under existing programs, it is given full reduction credit. Why should practices paid through trading be different?

When the reduction efficiencies for non-point source pollution abatement practices in the Chesapeake Bay drainage were developed, the evaluators surveyed empirical research in a way that weighted the lower-mitigation research results more heavily than results showing greater pollution abatement. At the end of that process, the evaluators took 20 percent off of each effectiveness estimate to account for the contention that implementation by operators in the general economy would not be as effective as implementation by scientists doing the experiment.

If the presumption that scientists can implement practices better than economic actors is wrong, then when we talk about a water quality credit representing a pound of pollution reduction, we are, in probabilistic terms, talking about 1.2 pounds of pollution reduction. When we require a 2 to 1 trading ratio, we are talking about trading one pound of point source pollution for 2.4 pounds of non-point source pollution. This policy would foreclose a great deal of trading in water quality credits. (Note: Virginia already applies this rule and there is no trading there.)

Later in the article, the authors discuss the problem of the credit sellers’ requirement to meet “baseline requirements”. Those require water quality credit generators to reduce pollution export to some specific level before they are allowed to sell credits for additional reductions. The authors rightly make the argument that this requirement will increase the credit price required to get sellers interested in trading. If the operator must reduce pollution export before being allowed to participate in trading, then clearly for each pound of nutrient pollution sold more than one pound must be generated. With the baseline requirement and the unequal trading ratio and the conservative reduction efficiencies, we may be up to three or more pounds of nonpoint pollution for each pound of point source pollution. CPR is obviously not averse to exacerbating the supply/demand problem that they identify at the start of their report.

In their recommendations regarding “Monitoring and Oversight to Avoid Waste, Fraud and Abuse”, CPR recommends that programs follow the guidelines established for water quality trading by the CBPO and its partners. It is not a very damning critique to say, “Yes, do what you say you are going to do”. The authors cite a need for additional staffing, but then note by inference that if trading requires underlying contracts (which it does), participants in the market will be held to account under commercial law. Therein lies one of the more powerful aspects of trading’s potential to increase accountability. Verification is still required, but in the event of non-performance there is, with contracts, a way to go after the non-performer.

The basic worry that CPR seems to have with water quality trading is its foundation in asking regulated sources to pay for reductions from unregulated sources. The alternative to this is to either have the government pay for it all or to regulate the unregulated sources. Given our nation’s current fiscal conversation, it does not seem likely that the government can buy all of the pollution reduction that we need to see. And, I dare say that we will have an uphill climb in imposing nutrient effluent regulations on agriculture. Politically and practically, it seems rather unlikely that we will see wholesale regulation of row crop production any time soon.

Much of the remainder of the CPR report is given over to concerns about monitoring and verification of pollution reductions from nonpoint sources. These are real and substantive issues. But they are not limited in any way to pollution reductions gained through trading. They apply just as much to current programs and to any regulatory approach that one can imagine as they do to trading.

In short, nothing in the CPR paper justifies the negative attitude toward water quality trading that permeates its conclusions. Yes we need to follow the rules that have been established. Yes we need to keep a careful eye on both credit generators and other market agents to ensure that they are doing what they say they are doing. Yes, we need to monitor water quality to ensure that it is improving as expected. And yes, we should have a plan B describing what we will do if water quality trading in the Chesapeake does not work as hoped. But none of this amounts to a crippling indictment of water quality trading.

The bone we have

I can’t remember the source, but I remember reading to my children a story of a greedy dog with a bone who saw his reflection in the water.  Thinking his reflection was another dog with a bigger bone, he barked and lost his bone to the river.  There are a couple of morals to this story: Be satisfied with the bone you have; Think before you bark; Beware imperfect perception and conception; etc.

I am reminded of this story reading Dr. George Van Houtzen’s recent report on nutrient trading in the Chesapeake Bay Watershed (http://www.chesbay.us/nutrienttrading.htm).  In that report Dr. Van Houtzen takes pollution reduction requirements as currently configured and then uses expectations about unit costs of pollution reduction to show a different allocation of reductions that lowers the total cost of achieving them.  Point being, that when you examine the cost of reducing pollution from all the accounted sources as allocated by the States’ watershed implementation plans (WIPs), you can identify other allocations of nutrient pollution reduction that generate the same aggregate reduction at lower total costs.

Unless we were expecting the pollution allocation authorities to be omniscient with regard to pollution reduction costs and omnipotent with regard to their allocation, Dr. Van Houtzen’s findings should not surprise us.  Leaving aside what is known and not known about nutrient pollution reduction costs, most of us understand that the government authorities are constrained in allocating pollution reduction costs across sources.  Regulated sources can be imposed upon much more easily than non-regulated sources.  Un-regulated sources have to be asked or paid and we spent 25 years testing the possibilities of “voluntary” approaches in the Bay Program.  We know the answer to the question, “how much additional cost will you accept to ensure a public good?”  Not enough.

So what does any of this have to do with the story of the greedy dog?  Well, trading is currently a chimera, worth at most a few tens of thousands of dollars across the entire watershed.  It is the promise of a bigger bone.  But in Maryland alone, for just the two pollution reduction activities, riparian buffers and cover crops, we currently spend almost $30 million per year.  That’s the bone we have.  It seems to me unwise to chase the chimera and ignore what we have.

A large part of the cost savings achieved through nutrient trading derives from making pollution reduction the traded good.  Current public programs that pay for riparian buffers and cover crops use the less specific metric, acres.  If those programs were re-jigged to pay adopters by the pound of nutrient pollution reduced, then some of the cost savings expected from trading programs could be achieved through existing programs, without creating water quality trading markets.

This is not an argument against water quality trading markets.  I think that someday we will be able to keep our pollution production low enough to avoid harming the Bay through offsets and trading.  But I believe that that day is probably a long way off.  And, in the meantime, I wonder why those who support efficiency gains through trading do not pursue similar gains by way of performance pricing in existing programs.  The fact that they have not successfully done so is not promising for their prospects in creating trading markets.

Does Accountability Roll Downhill?

The Chesapeake Bay Total Maximum Daily Load (TMDL), or “pollution diet,” is supposed to result in increased accountability in the effort to restore to the Bay. What increased accountability means exactly has been up for grabs over the past few years. It was presumed that the states would be made accountable by being given an absolute limit on the amount of nitrogen, phosphorus and sediment pollution they could send to the Bay as of 2025. But what the states were going to do with those new requirements was always an open question.

Since the imposition of the TMDL in 2010, Maryland and the other Chesapeake Bay partner states have all developed Watershed Implementation Plans (WIPs) expressly to answer the question, “How will you achieve the nutrient and sediment pollution requirements in your state?”  As part of their guidance for writing these WIPs, the states were requested to describe their sub-allocation of load reductions by geographic area and source sector.  This looks a lot like accountability rolling downhill.

Maryland’s TMDL agreement is mirrored in its WIP.  Point sources of pollution are made accountable for almost all their reducible load.  (Reducible load is the difference between the loads that would result from doing everything possible – to the limit of available technology and beyond the limit of available funding – and the loads that would obtain if we did not try to reduce them at all.  It is a hypothetical thing, and it is the basis of the TMDL pollution load allocation both within and across states.)   Other pollution sources such as stormwater, septics and agriculture are made accountable for a smaller share of their reducible loads, either because the costs of reductions from those sources are very high or because imposing the reduction cost on the polluter is thought likely to create serious economic dislocation.

While decision-makers have attempted to take into account costs and practical prospects for achieving the pollution reductions that they are allocating, difficulties remain.  Maryland’s sub-allocation of load reductions leaves stormwater pollution sources with a $6.27 billion bill.  But many of the counties and municipalities who are responsible for those stormwater sources are strapped for funds even before we start talking about this obligation.  It is not clear that the public that funds those counties and municipalities will be willing to bear those costs.  And given the current budget realities of state and federal agencies, it does not seem likely that funding for those reductions can come from them.

Ultimately, responsibility for pollution should rest with those who generate it.  (Yes, accountability does roll downhill to the polluter.)  But in specifying how much load reduction each source is accountable for (or, conversely, how much pollution it is allowed to contribute), it is not necessary that those load reductions all actually come from that source.  To see this, bear with a simple numeric example:

Imagine a total load reduction requirement of 8x which is allocated among three sources.  Source 1 is accountable for 1x; source 2, is accountable for 3x, and source 3, is accountable for 4x.  If source 1 finds it much cheaper to buy 1x amount of reduction from source 3 (who must have additional reduction capacity) and does so, then the reduction requirement of 8x is still being met.  Source 1 doesn’t reduce anything and now source 3 has to reduce 5x.  If a lot of other conditions are met, allowing source 1 to buy its reduction allocation from source 3 does not change anything.  Except in economic terms.  In economic terms, the cost of achieving the desired outcome has been reduced.

As people cotton on to the fact that we are the polluters and we must bear the costs of reducing our pollution, the reasonableness of allowing, say, stormwater sources to get some of their pollution reduction allocation from other sources will become more apparent.  If all the reductions required from stormwater sources must come by stormwater retrofits, and if this raises costs so high that voters come to question the whole process, it is not clear how we are better off.  Nor would we be better off if the pressure to achieve impractical reductions from some particular source turned the accounting process into a sham.

Through its allocation of accountability for pollution loads, the TMDL has specified pollution reduction requirements only in a very general sense.  But there remains the hazard that rigid regulation of this accountability will cause the process to come undone.  Flexibility in how the reduction obligations are met does not mean backing off the total load reductions that restoring the Bay demands.   It just means allowing the polluters a way to do the job at the lowest cost feasible.  And, since we are the polluters, why would we not want to do the job at least cost?