Water Quality Trading in the Presence of Conservation Subsidies

Patrick M. Fleming, Erik Lichtenberg and David A. Newburn

Abstract

Most studies of water quality trading analyze its cost-effectiveness in isolation from existing policies like conservation subsidy programs that pay farmers to use conservation practices. We investigate the interaction between trading and conservation subsidy programs using an integrated assessment model that combines farmer behavioral responses with a biophysical water quality model. Current subsidy program enrollees with comparative advantage in nitrogen abatement will sort into the trading program, worsening adverse selection. Actual increases in abatement from trading depend on incentivizing additional conservation practice acreage without inducing the conversion of vegetative cover to cropland. (JEL Q52, Q58)

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