Progress 07/01/06 to 06/30/12
Outputs
OUTPUTS: In terms of specifics, a total of five journal articles have been published or accepted for publication as a result of this project, and one working paper on the financial feasibility of water quality trading (WQT) in the Bear River Basin has greatly informed both local and regional water quality policy. These articles deal with issues relevant to (1) WQT theory, and (2) empirical analysis and development of models and methods to assist policymakers in identifying financially feasible trades and pollution-control scale economies in a given watershed. The titles and publication outlets for these articles are included in my Publications/Intellectual Contributions section of Digital Measures. In addition, presentations were made at three international conferences and symposia based on this research, and one presentation was made as part of the Applied Economics seminar series. The main output of this project was successfully meeting the goal of demonstrating the extent to which BMP subsidies, such as those currently offered through the NRCS's Environmental Quality Incentives Program (EQIP), can encourage NPS participation in WQT. To meet this goal, this project explored the effects of incomplete information (with respect to "hidden cost information" on the part of the NPS) on the regulator's ability to obtain a least-cost allocation of abatement in compliance with the watershed's TMDL. The study assumed a hydrologic model developed by the USU Water Lab can be used to relax the inherent uncertainty associated with environmental equivalence of the NPS loadings of nutrients, such as phosphorus. Optimal trading network research was also undertaken as a result of this project; research that derived a benchmark for measuring WQT's potential success in the Bear River Basin. PARTICIPANTS: An organizational partner, in the form of James Bowcutt of the NRCS, was originally identified as the key person to help with the dissemination of a prototype WQT calculator that was developed by myself and Dr. David Stephens of the Department of Civil and Environmental Engineering and the Utah Water Research Laboratory. The calculator was made available to Mr. Bowcutt with the help of extension specialist Dr. Nancy Messner, Associate Dean of the College of Natural Resources. In addition, I outreached the results of both the theoretical/normative and empirical research mentioned above in the Outputs Section of this report with National Resource Conservation Service (NRCS) personnel who attended my session at the Western Economic Association International 85th Annual Conference in Portland, Oregon, July, 2010. As this project has drawn to a close, I have one remaining research paper that needs to reach closure, with co-authors Dr. Bethany T. Neilson (Department of Civil and Environmental Engineering, USU) and Dr. Matthew Baker (Department of Geography and Environmental Systems, University of Maryland), who are working to revise the hydrologic model used in the remaining working paper mentioned above in the Outputs Section ("Going With the Flow: Water Quality Trading in an Integrated Hydrologic Modeling Framework"). TARGET AUDIENCES: The target audiences for this project were (1) academicians writing in the fields of environmental and resource economics, as well as the broader context of water resource management, (2) the National Resource Conservation Service (NRCS) and the Utah Deptartment of Environmental Quality, who are responsible for crafting localized abatement regulations, and (3) interested stakeholders in the Bear River Basin, e.g., agriculturalists/ranchers. PROJECT MODIFICATIONS: Nothing significant to report during this reporting period.
Impacts
A primary outcome of this project was to enhance and change the knowledge of academic researchers in understanding the link between subsidization of best management practices (BMPs) by regulatory authorities such as the National Resource Conservation Service (NRCS) and non-point source (NPS) participation inWQT. My research has shown that the flexibility of this link is a crucial determinant of whether agricultural watersheds such as the Bear River Basin (where NPS loadings are the primary source of nutrient pollution) will be able to meet their Total Maximum Daily Load (TMDL) restrictions under the Clean Water Act. A primary outcome and impact of this project was therefore to change the knowledge of stakeholders by demonstrating the extent to which BMP subsidies, such as those currently offered through the NRCS's Environmental Quality Incentives Program (EQIP), can encourage NPS participation in WQT. Finding a least-cost solution to the NPS loading problem in the Bear River Basin could potentially save millions of taxpayer dollars which are currently used to subsidize NPS efforts at reducing their nutrient loadings. This fact was conveyed to stakeholders and regulators in a variety of forums in an effort to change their knowledge of the role WQT can potentially play in delivering a least-cost solution to the Bear River Basin's water quality problems. In particular, the numerical results of this WQT study offer insight into what least-cost BMP subsidization rates might be in the presence of NPS participation in WQT (which I have estimated to be roughly 50% cost-share for the NRCs, which in turn are lower than the general EQIP rates (past and present) of 70%). Assessing the extent to which economies of scale exist for NPSs in terms of abatement effort can also help NRCS determine whether it makes economic sense to target BMP subsidies to the basin's largest farms/ranches, thus changing the NRCS's base of knowledge. My research suggests that economies of scale do indeed exist, and that they are positively correlated with loadings per acre. In other words, if the NRCS is able to rank-order NPSs according to loadings per acre, then the NRCS is by default rank-ordering them by scale economies (within a 5% statistical margin of error). Finally, assessing the financial feasibility of WQT in general throughout the basin can assist both local policymakers and the Utah Department of Environmental Quality (DEQ) in determining whether WQT should be promoted in the first place, and thereby change conditions within the Bear River Basin. Our results suggest that WQT is indeed financially feasible in the Bear River Basin, especially among NPSs, i.e., the total cost of regulation (to meet a TMDL) can be reduced significantly if a WQT market is set up that allows NPSs to trade among themselves.
Publications
- Caplan, A. J., Nielson, B. T., Baker, M. 2012 Going With the Flow: Water Quality Trading in an Integrated Hydrologic Modeling Framework.. (In Preparation; Not Yet Submitted).
- Caplan, A. J., Sasaki, Y. 2012 Matching Traders in a Pollution Market: The Case of Cub
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Progress 01/01/11 to 12/31/11
Outputs
OUTPUTS: This year was spent completing work on four papers related to (1) water quality trading (WQT) theory, and (2) empirical analysis and development of models and methods to assist policy makers in identifying financially feasible trades and pollution-control scale economies in a given watershed: 1. Parametric and Non-Parametric Tests for Economies of Scale in Nonpoint Pollution Control: The Case of Bear River Basin, Utah (Caplan, Arthur J., John Gilbert, and Devalina Chatterjee), under submission at Agriculture and Environmental Resource Review. 2. Going With the Flow: Water Quality Trading in an Integrated Hydrologic Modeling Framework (Caplan, Arthur J., Bethany T. Neilson, and Matthew Baker), under revision. The hydrologic model developed by co-authors Neilson and Baker is being fine-tuned, which necessitates minor revisions to the WQT section of the paper. We plan to submit the paper to a multi-disciplinary journal in the general field of water resources this coming year. 3. Matching Traders in a Pollution Market: The Case of Cub River, Utah (Caplan, Arthur J. and Yuya Sasaki). This paper is completed and is under submission at the Journal of Applied Agricultural Economics. 4. Water Quality Trading in the Presence of Abatement Cost Sharing (formerly Sharing the Surplus from Noncooperative Cost Sharing: The Case of Nonpoint Associations and Water Quality Trading (Caplan, Arthur J.) has been accepted for publication by Contemporary Economic Policy. Publication is expected in 2012. All told, four papers based on research conducted as part of this project have been published in peer-reviewed economics journals (including the one mentioned above, slated for publication next year). One paper is currently under submission, one is ready for submission, and one remains in progress. Presentations were made at three international conferences and symposia based on this research, and one presentation was made as part of the Applied Economics seminar series. The majority of the project's outputs and impacts have occurred through the writing and presenting of research papers. In terms of influencing local water policy, the paper concerned with the financial feasibility of WQT has been shared with Bear River Watershed Coordinator, James Bowcut, as well with Logan Enviroment Department Director Issa Hamud, to better inform the TMDL revision process for the Bear River Basin and local and state regulators' understanding of the potential for WQT in the basin. This work has also been presented to regional EPA officials in Denver, CO as part of a wider Bear River Watershed Initiative funded by the EPA in 2005, and is available online through the Initiative's website, The Bear River Watershed Information System (http://www.bearriverinfo.org/wqtrading/default.aspx). The paper to be published next year was originally presented at the Western Economic Association's annual international conference in Portland, Oregon (July 2010). In attendance was a national official with the NRCS, whose interest in the subject was piqued by the presentation, and who provided useful feedback on the paper (which will be used in a subsequent revision). PARTICIPANTS: An organizational partner, in the form of James Bowcutt of the NRCS, was originally identified as the key person to help with the dissemination of a new WQT calculator that has been developed by myself and Dr. David Stephens of the Department of Civil and Environmental Engineering and the Utah Water Research Laboratory. The calculator was made available to Mr. Bowcutt with the help of extension specialist Dr. Nancy Messner, Associate Dean of the College of Natural Resources. In addition, I have outreached the results of both the theoretical/normative and empirical research mentioned above in the Outputs Section of this report with National Resource Conservation Service (NRCS) personnel who attended my session at the Western Economic Association International 85th Annual Conference in Portland, Oregon, July, 2010. As this project ends, I have one remaining research paper that needs to reach closure, with co-authors Dr. Bethany T. Neilson (Department of Civil and Environmental Engineering, USU) and Dr. Matthew Baker (Department of Geography and Environmental Systems, University of Maryland), who are working to revise the hydrologic model used in the second paper mentioned above in the Outputs Section ("Going With the Flow: Water Quality Trading in an Integrated Hydrologic Modeling Framework"). TARGET AUDIENCES: The target audiences for this project have been (1) academicians writing in the fields of environmental and resource economics, as well as the broader context of water resource management, (2) the National Resource Conservation Service (NRCS) and the Utah Deptartment of Environmental Quality, who are responsible for crafting localized abatement regulations, and (3) interested stakeholders in the Bear River Basin, e.g., agriculturalists/ranchers. PROJECT MODIFICATIONS: Nothing significant to report during this reporting period.
Impacts
Understanding the link between subsidization of best management practices (BMPs) by regulatory authorities such as the National Resource Conservation Service (NRCS) and non-point source (NPS) participation in water quality trading (WQT) is a crucial determinant of whether agricultural watersheds such as the Bear River Basin (where NPS loadings are the primary source of nutrient pollution) will be able to meet their Total Maximum Daily Load (TMDL) restrictions under the Clean Water Act. A primary goal of this project has been to demonstrate the extent to which BMP subsidies, such as those currently offered through the NRCS's Environmental Quality Incentives Program (EQIP), can encourage NPS participation in WQT. To meet this goal, this project has explored the effects of incomplete information (with respect to "hidden cost information" on the part of the NPS) on the regulator's ability to obtain a least-cost allocation of abatement in compliance with the watershed's TMDL. The study has assumed a hydrologic model developed by the USU Water Lab can be used to relax the inherent uncertainty associated with environmental equivalence of the NPS loadings of nutrients, such as phosphorus. Finding a least-cost solution to the NPS loading problem in the Bear River Basin could potentially save millions of taxpayer dollars which are currently used to subsidize NPS efforts at reducing their nutrient loadings. In addition, the numerical results of this study have offered insight into what least-cost BMP subsidization rates might be in the presence of NPS participation in WQT (which are estimated to be roughly 50% cost-share for the NRCs, which in turn are lower than the general EQIP rates (past and present) of 70%). Optimal trading network research has also been undertaken; research that has derived a benchmark for measuring WQT's potential success in the Bear River Basin. With respect to assessing the financial feasibility of WQT in the Bear River Basin, this research has promoted WQT as a least-cost alternative to traditional command-and-control regulation. Assessing the extent to which economies of scale exist for NPSs in terms of abatement effort can also help NRCS determine whether it makes economic sense to target BMP subsidies to the basin's largest farms/ranches. Our research suggests that economies of scale do exist, and that they are positively correlated with loadings per acre. In other words, if the NRCS is able to rank-order NPSs according to loadings per acre, then the NRCS is by default rank-ordering them by scale economies (within a 5% statistical margin of error). Finally, assessing the financial feasibility of WQT in general throughout the basin can assist both local policymakers and the Utah Department of Environmental Quality (DEQ) in determining whether WQT should be promoted in the first place. Our results suggest that WQT is indeed financially feasible in the Bear River Basin, especially among NPSs, i.e., the total cost of regulation (to meet a TMDL) can be reduced significantly if a WQT market is set up that allows NPSs to trade among themselves.
Publications
- No publications reported this period
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Progress 01/01/10 to 12/31/10
Outputs
OUTPUTS: This year was spent working on four separate papers related to water quality trading (WQT), or the support of WQT through empirical analysis and the development of models and methods designed to assist policy makers in identifying financially feasible trades in a given watershed. The four papers are in various stages of completion. 1. Parametric and Non-Parametric Tests for Economies of Scale in Nonpoint Pollution Control: The Case of Bear River Basin, Utah (Caplan, Arthur J., John Gilbert, and Devalina Chatterjee) is in its final form and close to being ready for submission to an environmental/natural resource field journal early next year. The motivation for this paper needs to be revised in order to clarify its contribution to the literature. 2. Going With the Flow: Water Quality Trading in an Integrated Hydrologic Modeling Framework (Caplan, Arthur J., Bethany T. Neilson, and Matthew Baker) is in the process of being revised. The hydrologic model developed by co-authors Neilson and Baker is being fine-tuned, which will necessitate minor revisions to the WQT section of the paper. We plan to submit the paper to a multi-disciplinary journal in the general field of water resources this coming year. 3. Matching Traders in a Pollution Market: The Case of Cub River, Utah (Caplan, Arthur J. and Yuya Sasaki) submitted (as invited paper) to the Journal of Regional Analysis and Policy for its special edition on market-based environmental management. 4. Sharing the Surplus from Noncooperative Cost Sharing: The Case of Nonpoint Associations and Water Quality Trading (Caplan, Arthur J. and Yuya Sasaki) is currently under review at the American Journal of Agricultural Economics. This fourth paper, "Sharing the Surplus from Noncooperative Cost Sharing: The Case of Nonpoint Associations and Water Quality Trading," was presented at the Western Economic Association International 85th Annual Conference, Session title: "New Frontiers in Nonpoint Pollution Control," Portland, OR, July 1, 2010. The majority of the project's outputs and impacts have occurred through the writing and presenting of research papers. The paper concerned with the financial feasibility of WQT has been shared with Bear River Watershed Coordinator, James Bowcut, as well with Logan Enviroment Department Director Issa Hamud, to better inform the TMDL revision process for the Bear River Basin and local and state regulators' understanding of the potential for WQT in the basin. This work has also been presented to regional EPA officials in Denver, CO as part of a wider Bear River Watershed Initiative funded by the EPA in 2005, and is available online through the Initiative's website, The Bear River Watershed Information System (http://www.bearriverinfo.org/wqtrading/default.aspx). The paper concerned with incomplete information was recently presented at the Western Economic Association's annual international conference in Portland, Oregon (July 2010). In attendance was a national official with the NRCS, whose interest in the subject was piqued by the presentation, and who provided useful feedback on the paper (which will be used in a subsequent revision). PARTICIPANTS: An organizational partner, in the form of James Bowcutt of the NRCS, was originally identified as the key person to help with the dissemination of a new WQT calculator that has been developed by myself and Dr. David Stephens of the Department of Civil and Environmental Engineering and the Utah Water Research Laboratory. The calculator was made available to Mr. Bowcutt with the help of extension specialist Dr. Nancy Messner, Associate Dean of the College of Natural Resources. In addition, I have outreached the results of both the theoretical/normative and empirical research mentioned above in the Outputs Section of this report with National Resource Conservation Service (NRCS) personnel who attended my session at the Western Economic Association International 85th Annual Conference in Portland, Oregon, July, 2010. As this project draws to a close, the main participants will now be Dr. Bethany T. Neilson (Department of Civil and Environmental Engineering, USU) and Dr. Matthew Baker (Department of Geography and Environmental Systems, University of Maryland), who are working to revise the hydrologic model used in the second paper mentioned above in the Outputs Section ("Going With the Flow: Water Quality Trading in an Integrated Hydrologic Modeling Framework"). TARGET AUDIENCES: The target audiences are (1) academicians writing in the fields of environmental and resource economics, as well as the broader context of water resource management, (2) the National Resource Conservation Service (NRCS) and the Utah Deptartment of Environmental Quality, who are responsible for crafting localized abatement regulations, and (3) interested stakeholders in the Bear River Basin, e.g., agriculturalists/ranchers. PROJECT MODIFICATIONS: This project was recently approved for a one-year extension in order to complete the revisions of the hydrologic model used in the "Going With the Flow: Water Quality Trading in an Integrated Hydrologic Modeling Framework" paper mentioned above in the Outputs section.
Impacts
Understanding the link between the subsidization of agricultural best management practices (BMPs) by regulatory authorities such as the National Resource Conservation Service (NRCS) and non-point source (NPS) participation in water quality trading (WQT) is a crucial determinant of whether predominantly agricultural watersheds such as the Bear River Basin (where NPS loadings are the primary source of nutrient pollution) will be able to meet their Total Maximum Daily Load (TMDL) restrictions under the Clean Water Act. A primary goal of this project has been to demonstrate the extent to which BMP subsidies, such as those currently offered through the NRCS's current Environmental Quality Incentives Program (EQIP), can encourage NPS participation in WQT. One of the project's primary focus areas explores the effects of incomplete information (with respect to "hidden cost information" on the part of the NPSs) on the ability of the regulator to obtain the least-cost allocation of abatement in the watershed, in compliance with the watershed's TMDL. The study assumes that a hydrologic model is used to relax the inherent uncertainty associated with environmental equivalence of the NPS loadings of nutrients, such as phosphorus (this hydrologic model forms the basis of a companion paper, which is a second major study area of the project). Finding a least-cost solution to the NPS loading problem in the Bear River Basin could potentially save millions of taxpayer dollars which are currently used to subsidize NPS efforts at reducing their nutrient loadings. In addition, the numerical results of this study offer initial insight into what appropriate (i.e., least-cost) BMP subsidization rates might be in the presence of NPS participation in WQT. Optimal trading network analysis research is also ongoing as part of this project; analysis that helps derive a benchmark for measuring WQT's potential success in the Bear River Basin. With respect to assessing the financial feasibility of WQT in the Bear River Basin, this research helps promote WQT as a least-cost alternative to traditional command-and-control regulation of water pollution. Assessing the extent to which economies of scale exist for NPSs in terms of abatement of loadings can also help policymakers determine whether it makes economic sense to target their BMP subsidies to the basin's largest farms/ranches. Finally, assessing the financial feasibility of WQT in general throughout the basin will assist both local policymakers and the Utah Department of Environmental Quality (DEQ) in determining whether WQT should be promoted in the first place.
Publications
- No publications reported this period
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Progress 01/01/09 to 12/31/09
Outputs
OUTPUTS: The central hypotheses underscoring this research proposal are that (1) subsidy programs like the National Resource Conservation Service's (NRCSs) Environmental Quality Incentives Program (EQIP) can be used to foster pollution trading among nonpoint sources (NPSs) and between NPSs and a watershed's point sources, and (2) the EQIP program can cost-effectively allocate these subsidies across the NPSs. In the process of testing these hypotheses, three main outputs have thus far been generated. First, analytical solutions have been computed for the NRCSs best management practice (BMP) subsidy problem with and without incomplete information. Because these solutions have proven to be cumbersome, the BMP subsidy problem has been solved numerically for a host of alternative scenarios (i.e., for alternative parameter values and abatement-cost functional forms) and is continually being updated with new parameter values. The goal here is to first identify a set of plausible scenarios and then determine for each scenario the cost-minimizing NRCS subsidy rates that foster the associations' participation in a water quality trading (WQT) market. In addition, characterization of a particular surplus-sharing rule (the Shapley value) has been completed. This rule could conceivably be adopted by a given NPS association to derive a core allocation, i.e., a sharing of the profit attained through participation in a WQT market that induces each member of the association to voluntarily remain in the association. As a result of these efforts, the NRCS can conceivably determine whether it should promote NPS associations within the watershed as a precondition for both receiving a BMP subsidy and participating in the WQT market. This work is being written up and continually revised in a working paper that will be submitted for publication at a peer-revied journal. The work has also involved the assistance of a former Master's student, Yuya Sasaki, who is currently pursuing his PhD in Economics at Brown University. Second, in an effort to assess the presence of economies of scale among NPSs in the Bear River Basin, and thus assist the NRCS in achieving cost effectiveness through its EQIP program, parametric (panel-data estimation) and nonparametric (estimation of Spearman Rank Coefficients) tests have been performed on a new dataset that includes hydrologic estimates of phosphorous loadings and delivery ratios, as well as (probabilistic) control cost and BMP effectiveness estimates gleaned from the literature. This work is being written up and continually revised in a working paper that will be submitted for publication at a peer-revied journal. The work has involved the assistance of a former USU Economics PhD student, Devalina Chatterjee. Third, in support of promoting WQT in Bear River Basin, a trading calculator has been created in collaboration with Dr. David K. Stevens at the USU Water Lab. The calculator has been field tested in a series of workshops with local regulatory authorities and stakeholders. Our goal is to ultimately make the calculator available online (via the new Bear River Watershed Information System website). PARTICIPANTS: An organizational partner, in the form of James Bowcutt of the NRCS, has been found for dissemination of the new trading calculator. At a later stage I will be attempting to coordinate with officials at the National Resource Conservation Service (NRCS) and the Utah Department of Environmental Quality (DEQ) in order to share the results of both the theoretical/normative and empirical research mentioned above in the Outputs and Changes Sections of this report. TARGET AUDIENCES: The target audiences are (1) academicians writing in the field of environmental and resource economics, (2) the National Resource Conservation Service (NRCS) and the Utah Deptartment of Environmental Quality, and (3) interested stakeholders in the Bear River Basin, e.g., agriculturalists/ranchers. PROJECT MODIFICATIONS: The project has continued its shift toward more empirical analysis. The economies of scale research is based on hydrologic data assembled through a new water quality model developed at the USU Water Lab, as well as probabilistic cost-of-control and BMP effectiveness data which is based both on estimates gleaned from existing literature and probability measures generated using the GAMS software (assuming both uniform and normally distributed parameter values). The development of a trading calculator is the result of collaborations with Dr. David K. Stevens at the USU Water Lab. Our goal is to further refine the calculator in terms of the information it is able to generate regarding both phosphorous allocations and credits, to make the calculator available online through the new Bear River Watershed Information Systems website, and to eventually "publish" the calculator, along with a "how-to" manual in an online section of a journal such as the Journal of Economic Education. Lastly, I am collaborating with two other researchers at the Water Lab - Drs. Bethany T. Neilson and Matthew Baker (now at the University of Maryland) - on a working paper that discusses how we have used the new hydrologic model of the Bear River Basin to support a WQT model that assess the feasibility of trading among point and nonpoint sources located in the basin. This paper is more empirical than theoretical in its assessment of trading opportunities in the basin.
Impacts
Understanding the link between NRCS subsidization of best management practices and NPS participation in water quality trading (WQT) is a crucial determinant of whether predominantly agricultural watersheds, such as the Bear River Basin, will be able to meet their Total Maximum Daily Load (TMDL) obligations under the Clean Water Act. This project demonstrates the extent to which the NRCS might be able to use its EQIP subsidies to encourage NPS participation in WQT. It also provides a method for EQIP to determine a cost-effective allocation of its subsidies, and it provides the NRCS with a practical tool, a trading calculator, that it can use to match traders in a WQT market. The project explores the effects that incomplete information on the part of the NRCS (in terms of its inability to perfectly observe the NPS associations' respective abatement efforts as well as the inherent uncertainty associated with environmental equivalence of the NPS loadings of nutrients, such as phosphorus, and NPS control costs) is likely to have on the least-cost solution to the watershed's problem of meeting its TMDL obligation. Finding a least-cost solution to the NPS loading problem in the Bear River Basin could potentially save millions of taxpayer dollars which are currently used to subsidize NPS efforts at reducing their nutrient loadings. In addition, the numerical results of this study will serve as estimates of what appropriate NRCS subsidization rates might be in the presence of NPS participation in WQT. At this point, the subsidy rates chosen for the numerical analysis are ad hoc. However, they might nevertheless serve as benchmarks against which the NRCS might revise its existing rates. Optimal trading network research also being conducted as part of this project will likewise help form a benchmark for measuring WQT's success in the Bear River Basin. With respect to empirical research into the feasibility of WQT in the Bear River Basin, this research helps promote WQT as a least-cost alternative to traditional command-and-control regulation of water pollution. Assessing the extent to which economies of scale exist for NPSs in terms of abating their pollution loadings helps the NRCS determine whether it makes economic sense to target their EQIP subsidy resources to Bear River Basin's largest farms/ranches or those farms/ranches with the largest (delivered) loads per acre. Also, assessing the feasibility of WQT in general throughout the basin assists both the NRCS and the Utah Department of Environmental Quality (DEQ) in determining if WQT should be promoted in the first place. Development of a user-friendly trading calculator has provided a natural outreach to local regulators, in particular James Bowcutt of the NRCS office located in Logan, Utah. James was recently introduced to the calculator through a series of workshops sponsored by the Environmental Protection Agency. The calculator is an example of a tool regulators such as Mr. Bowcutt can use to match traders in a WQT market and to assess trade-by-trade cost savings.
Publications
- Caplan, Arthur J., John Gilbert, and Devalina Chatterjee 2009. Parametric and Non-Parametric Tests for Economies of Scale in Nonpoint Pollution Control: The Case of Bear River Basin, Utah. Economic Research Institute Working Paper 2009-03, Utah State University.
- Caplan, Arthur J., Bethany T. Neilson, and Matthew Baker 2009. Going With the Flow: Water Quality Trading in an Integrated Hydrologic Modeling Framework. Economic Research Institute Working Paper 2009-05, Utah State University.
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Progress 01/01/08 to 12/31/08
Outputs
OUTPUTS: To help find a least-cost solution to the nonpoint (NPS) loading problem in the Bear River Basin, this project extends in both a theoretical/normative and an empirical direction recently completed empirical research that assess the financial feasibility of water quality trading (WQT) in the Bear River Basin. With respect to the theoretical dimension of the project, I have completed (in first-draft form) my examination of how a regulator (e.g., the National Resource Conservation Service (NRCS)) might ideally subsidize the participation of different associations (or teams) of NPSs in a watershed or sub-watershed wide WQT market. This has entailed the adaptation of the subgame-perfect equilibrium concept from the non-cooperative game theory literature to model the relationship between the NRCS and the NPS associations. The Shapley Value surplus sharing rule has also been applied from the cooperative game theory literature to model the relationship among NPSs within a given association. Analytic models (with full and incomplete information) of the relationship between the NRCS and the NPS associations have been solved, where incomplete information refers to the NRCS' inability to perfectly observe the NPS associations' respective abatement efforts as well as the inherent uncertainty of the natural environment. In addition, numerical models based on plausible parameters and functional forms (e.g., for abatement technologies) have been constructed and have been tested in order to simulate the effects of different environmental conditions (e.g., environmental equivalence ratios) on this relationship. The Shapley Value has been calculated analytically, and a characterization of its properties within the context of a WQT market has been completed. Lastly, work on constructing an algorithm to determine an optimal trading network within a given watershed has also been completed. Another (empirical) goal of the project is to apply this trading algorithm to actual data from the Bear River Basin in order to establish an optimal benchmark to which actual trading outcomes can be compared. To meet this goal, a dataset including information on pollutant loads and abatement costs for over 1300 NPS and 5 point sources has been compiled and will soon be analyzed. Two papers have been been published based on this project - "Matching Traders in Pollution Trading Markets with Heterogeneous Trading Ratios" (with graduate student Yuya Sasaki) in the Journal of Computational Economics and "Incremental and Average Control Costs in a Model of Water Quality Trading with Discrete Abatement Units" (solo authored) in Environment and Resource Economics. The first draft of a working paper on the relationship between the NRCS and NPS Associations has been completed, entitled "Sharing the Surplus Generated from Noncooperative Cost Sharing: The Case of Nonpoint Associations and Water Quality Trading." Lastly, Ph.D graduate student Devalina Chatterjee has begun non-parametric testing of the above-mentioned dataset for the presence of economies of scale among the NPSs. Work on another paper characterizing the feasibility of WQT in the Bear River Basin has also commenced. PARTICIPANTS: At this stage in the project there are no organizational partners involved in the research. At a later stage I will be attempting to coordinate with local directors and field officers from the National Resource Conservation Service (NRCS) and the Utah Department of Environmental Quality (DEQ) in order to share the results of both the theoretical/normative and empirical research mentioned above in the Outputs and Changes Sections of this report. TARGET AUDIENCES: The target audiences are (1) academicians writing in the field of environmental and resource economics, (2) the National Resource Conservation Service (NRCS) and the Utah Deptartment of Environmental Quality, and (3) interested stakeholders in the Bear River Basin, e.g., agriculturalists/ranchers. PROJECT MODIFICATIONS: Two changes have occured in the project's objectives this year, both of which shift the focus of the remainder of the project toward answering more empirical questions (since answering the project's initial theoretical/normative questions has been completed ahead of schedule). The first change deals with estimating (non-parametrically) the extent to which economies of scale in abating pollutant loadings exist among 1300 NPSs located along the Cub and Bear Rivers, both of which feed to a receptor point located at the Cutler Reservoir. I am currently working with Ph.D graduate student Devalina Chatterjee on this analysis. She will first identify which statistics - both for ordinal variables (rank order statistics) and continuous variables (means tests) - are appropriate for determining the presence of scale economies in the data. She will then conduct Monte Carlo analysis to determine the extent to which scale economies exist under various distributional assumptions about the effectiveness and per-acre costs of best management practices (BMPs) among our sample of NPSs. The second change deals with assessing the financial feasibility of WQT in the Bear River Basin, based on the EPA's Water Quality Trading Assessment Handbook and modifications to this handbook recommended in my recently published paper, "Incremental and Average Control Costs in a Model of Water Quality Trading with Discrete Abatement Units" (mentioned above in the Outputs Section of this report). Using a recently completed water quality model for the basin (developed by researchers at the USU Water Lab), I will demonstrate the feasibility of WQT in a simple Excel spreadsheet framework; a framework that will eventually be shared with the NRCS and Utah DEQ to assist in operationalizing the management of WQT in the Bear River Basin.
Impacts
Understanding the link between NRCS subsidization of best management practices and NPS participation in water quality trading (WQT) is a crucial determinant of whether predominantly agricultural watersheds, such as the Bear River Basin, will be able to meet their Total Maximum Daily Load (TMDL) obligations under the Clean Water Act. This project demonstrates the extent to which the NRCS might be able to use its EQIP subsidies to encourage NPS participation in WQT. The project explores the effects that incomplete information on the part of the NRCS (in terms of its inability to perfectly observe the NPS associations' respective abatement efforts as well as the inherent uncertainty associated with environmental equivalence of the NPS loadings of nutrients, such as phosphorus, and NPS control costs) is likely to have on the least-cost solution to the watershed's problem of meeting its TMDL obligation. Finding a least-cost solution to the NPS loading problem in the Bear River Basin could potentially save millions of taxpayer dollars which are currently used to subsidize NPS efforts at reducing their nutrient loadings. In addition, the numerical results of this study will serve as estimates of what appropriate NRCS subsidization rates might be in the presence of NPS participation in WQT. At this point, the subsidy rates chosen for the numerical analysis are ad hoc. However, they might nevertheless serve as benchmarks against which the NRCS might revise its existing rates. Optimal trading network research also being conducted as part of this project will likewise help form a benchmark for measuring WQT's success in the Bear River Basin. With respect to empirical research into the feasibility of WQT in the Bear River Basin, this research will help promote WQT as a least-cost alternative to traditional command-and-control regulation of water pollution. Assessing the extent to which economies of scale exist for NPSs in terms of abating their pollution loadings will help the NRCS determine whether it necessarily makes economic sense to target their EQIP subsidy resources to Bear River Basin's largest farms/ranches. Also, assessing the feasibility of WQT in general throughout the basin will assist both the NRCS and the Utah Department of Environmental Quality (DEQ) in determining if WQT should be promoted in the first place.
Publications
- Sasaki, Y. and Caplan, A. 2008. Matching Heterogeneous Traders in Quantity-Regulated Markets. Computational Economics 31(4):341-362.
- Caplan, A. 2008. Incremental and Average Control Costs in a Model of Water Quality Trading with Discrete Abatement Units. Environment and Resource Economics 41(3):419-435.
- Caplan, A. and Y. Sasaki 2007. Interactive Geometry for Surplus Sharing in Cooperative Games. Journal of Economic Education 37(3):382.
- Caplan, A. and Y. Sasaki 2008. Sharing the Surplus from Noncooperative Cost Sharing: The Case of Nonpoint Associations and Water Quality Trading. Economic Research Institute Working Paper, Dept. of Economics, Utah State University, Logan, UT.
- Caplan, A. 2007. Incremental and Average Control Costs in a Model of Water Quality Trading with Discrete Abatement Units. Economic Research Institute Working Paper 2006-6. Dept. of Economics, Utah State University, Logan, UT.
- Sasaki, Y. and Caplan, A. 2007. Matching Traders in Pollution Trading Markets with Heterogeneous Trading Ratios. Economic Research Institute Working Paper 2006-12. Dept. of Economics, Utah State University, Logan, UT.
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Progress 01/01/07 to 12/31/07
Outputs
OUTPUTS: To help find a least-cost solution to the nonpoint (NPS) loading problem in the Bear River Basin, this proposal extends in a theoretical/normative direction ongoing empirical research that is assessing the financial feasibility of optimal water quality trading (WQT) in the Bear River Watershed. Specifically, the proposal examines how a regulator (e.g., the National Resource Conservation Service (NRCS)) might ideally subsidize the participation of different associations (or teams) of NPSs in a watershed or sub-watershed wide WQT market. Toward this end, a subgame-perfect equilibrium concept is adapted from the non-cooperative game theory literature to model the relationship between the NRCS and the NPS associations. The Shapley Value surplus sharing rule is then applied from the cooperative game theory literature to model the relationship among NPSs within a given association. Interviews with key NRCS scientists and other stakeholder groups (both local and statewide) will be
conducted in order to assess the practicality of forming associations within the watershed to promote WQT. To date, analytic models (with full and incomplete information) of the relationship between the NRCS and the NPS associations have been solved. In addition, preliminary numerical models based on plausible parameters and functional forms (e.g., for abatement technologies) have been constructed and will now be tested in order to simulate the effects of different environmental conditions (e.g., environmental equivalence ratios) on this relationship. The Shapley Value has also been calculated analytically, and preliminary work on establishing its properties within the context of a WQT market has commenced. Lastly, work on constructing an algorithm to determine an optimal trading network within a given watershed has also been completed. A future goal of the project is to apply this algorithm to actual data from the Bear River Basin in order to establish an optimal benchmark to which
actual trading outcomes can be compared. This in turn will enable policy makers to determine how successful an actual WQT market in the basin is in matching buyers and sellers of abatement credits. Two working papers have been completed in relation to this project. The first paper, entitled Matching Traders in Pollution Trading Markets with Heterogeneous Trading Ratios has developed the optimal-trading algorithm mentioned above. The second paper, entitled Incremental and Average Control Costs in a Model of Water Quality Trading with Discrete Abatement Units is spinoff of the subgame-perfect analytical models mentioned above. However, the focus of this latter paper is on the effect of discrete abatement technology on the outcome of a trading equilibrium.
TARGET AUDIENCES: The target audiences are (1) academicians writing in the field of environmental and resource economics, (2) the National Resource Conservation Service (NRCS) and the Utah Dept. of Environ. Quality, and (3) interested stakeholders in the Bear River Basin, e.g., agriculturalists/ranchers.
Impacts
Understanding the link between NRCS subsidization of best management practices and NPS participation in WQT is a crucial determinant of whether predominantly agricultural watersheds, such as the Bear River Basin, will be able to meet their Total Maximum Daily Load (TMDL) obligations under the Clean Water Act. This project demonstrates the extent to which the NRCS might be able to use its EQIP subsidies to encourage NPS participation in WQT. The project explores the effects that incomplete information on the part of the NRCS (concerning environmental equivalence of the NPS loadings of nutrients, such as phosphorus, and NPS control costs) is likely to have on the least-cost solution to the watershed's problem of meeting its TMDL obligation. Finding a least-cost solution to the NPS loading problem in the Bear River Basin could potentially save millions of taxpayer dollars which are currently used to subsidize NPS efforts at reducing their nutrient loadings. In addition,
the numerical results of this study will serve as estimates of what appropriate NRCS subsidization rates might be in the presence of NPS participation in WQT. Alongside ongoing empirical research into the feasibility of WQT in the Bear River Basin, this research will help promote WQT as a least-cost alternative to traditional command-and-control regulation of water pollution. The optimal trading network research also being conducted as part of this project will likewise help form a benchmark for measuring WQT's success in the Bear River Basin.
Publications
- No publications reported this period
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Progress 01/01/06 to 12/31/06
Outputs
To help find a least-cost solution to the nonpoint source (NPS) loading problem in the Bear River Basin, this proposal extends in a theoretical/normative direction ongoing empirical research that is assessing the financial feasibility of optimal water quality trading (WQT) in the Bear River Watershed (the empirical research effort is funded through a 2004 National Watershed Initiative Grant from the U.S. Environmental Protection Agency). Specifically, the proposal examines how a regulator (e.g., the National Resource Conservation Service (NRCS) might ideally subsidize the participation of different associations (or teams) of NPSs in a watershed-wide WQT market. Toward this end, a subgame-perfect equilibrium concept is adapted from the non-cooperative game theory literature to model the relationship between the NRCS and the various NPS associations. Common surplus-sharing rules (e.g., the Shapley value) are then applied from the cooperative game theory literature to
model the relationship among NPSs within a given association. Informal discussions with local and state NRCS scientists and other stakeholder groups identified by the NRCS will be conducted in order to assess the practicality of forming associations within the watershed to promote WQT. To date, analytic models (with full and incomplete information) of the relationship between the NRCS and the NPS associations have been solved. Numerical models will next be constructed in order to simulate the effects of different environmental conditions on this relationship. Initial work on calculating the Shapley value has also begun. The properties of this surplus sharing rule in the context of the WQT market will ultimately be characterized. In addition to developing these noncooperative and cooperative models that explain the relationship between the NRCS and NPS associations and behavior of NPSs within a given association, respectively, this project will also construct an algorithm to determine
an optimal trading network within the watershed. The optimal network can then be used as a benchmark to which actual trading outcomes can be compared, which, in turn, will enable policy makers to determine how successful an actual WQT market is in matching buyers and sellers of abatement credits.
Impacts
Understanding the link between National Resource Conservation Service (NRCS) subsidization of (agricultural) best management practices and nonpoint source (NPS) participation in water quality trading (WQT) is a crucial determinant of whether predominantly agricultural watersheds, such as the Bear River Basin, will be able to meet their Total Maximum Daily Load (TMDL) obligations under the Clean Water Act. This project will demonstrate to what extend the NRCS is able to use its subsidies to encourage NPS participation in WQT. In particular, the project explores the effects that incomplete information on the part of the NRCS (concerning the environmental equivalence of different NPS loadings and NPS control costs) is likely to have on the least-cost solution to the watershed's problem of meeting its TMDL obligation. Finding a least-cost solution to NPS loading of nutrients such as phosphorus could potentially save millions of taxpayer dollars which are currently used to
subsidize NPS efforts at reducing their nutrient loadings in the Bear River Basin. In addition, the numerical results of this study will serve as estimates of what appropriate NRCS subsidization rates should be in the presence of NPS participation in WQT.
Publications
- No publications reported this period
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