Grantee Research Project Results
2007 Progress Report: Integrating Economic and Biophysical Models to Assess the Impacts of Water Quality Trading
EPA Grant Number: R831774Title: Integrating Economic and Biophysical Models to Assess the Impacts of Water Quality Trading
Investigators: Peterson, Jeffrey M. , Fox, John A. , Leatherman, John C. , Marsh, Thomas L. , Mankin, Kyle R.
Institution: Kansas State University
EPA Project Officer: Hahn, Intaek
Project Period: January 1, 2005 through December 31, 2008
Project Period Covered by this Report: January 1, 2006 through December 31, 2007
Project Amount: $392,105
RFA: Market Mechanisms and Incentives for Environmental Management (2003) RFA Text | Recipients Lists
Research Category: Environmental Justice
Objective:
The overall goal the project is to assess and quantify the effect of various factors on the economic and environmental performance of a point-nonpoint Water Quality Trading (WQT) program. In particular, the following objectives are being pursued:
- Quantify the firm-level costs of participating in a trading program for both point and nonpoint sources, accounting for both explicit accounting costs and perceived intangible costs; quantify the effects of socio-demographic attributes on perceived costs
- Simulate trading under alternative institutional rules, accounting for the bilateral, sequential nature of the trading process
- Develop an integrated modeling tool to assess the economic and water quality performance of WQT programs in different situations, compared to other policy approaches
- Provide general economic and econometric recommendations about designing WQT programs in different settings
The research results will identify the situations where trading programs have the greatest advantage over other policies, as well as the types of rules necessary to facilitate trading and maximize the impact on water quality in different watersheds. The work in the project consists of the following tasks:
Task 1: Collect Data on trading preferences from point and nonpoint sources
Task 2: Construct Models that simulate economic trading behavior
Task 3: Construct biophysical watershed model
Task 4: Develop a trading simulation model
Task 5: Integrate biophysical and trading models to simulate a WQT market under different scenarios
Progress Summary:
Task 1: Data Collection
Following a parallel approach to the data collection from nonpoint sources in 2006, a choice experiment survey and questionnaire were developed for wastewater treatment plant (WWTP) operators across the state of Kansas. The point source survey was similar to that for nonpoint sources (Peterson et al., 2007), except it was structured around the assumption that point sources are buyers of credits. Eighteen choice sets were developed with varying levels four attributes. WWTP managers chose an alternative based on: (1) the number of hours they need to spend learning about WQT and educating city officials about it, (2) the number of hours they will need to spend brokering trades, (3) the chance that they’ll have to upgrade technology in the future because of new regulations even if WQT works, and (4) the cost savings from buying credits instead of upgrading technology now.
The survey was developed based on input obtained from a presentation and follow-up discussion at the Kansas Water Environment Association (KWEA) annual meeting in April. It was further refined and pre-tested in meetings with industry consultants and regulators at the Kansas Department of Health and Environment.
Data were collected from personal, on-site interviews with WWTP managers. Interviewees were sent some brief information about water quality trading (WQT) before the interview. The interviews themselves consisted of a brief presentation of WQT concepts, followed by administration of the questionnaire, which elicited plant information, manager demographics and attitudes/perceptions. The manager then completed the choice experiment survey with the interviewer available for help and explanation.
Task 2: Econometric analysis of choice experiment data
The demographic and general conservation behavior/attitudes data from the WQT experiments were compiled and analyzed (Smith, Peterson, and Leatherman, 2007). In summary, we found that 98% of producers use one or more BMPs on their farming operation, but only 36% utilize four or more BMPs on their farm. In general a high percentage of producers are aware of available conservation programs; however, less than half of those indicate that they have participated in the programs. Our survey results suggest there is no single, simple answer to speeding the rate of producers’ BMP adoption and participation in conservation programs. We advocate that participation rates can be raised substantially through a multifaceted approach that may include increased payment levels, but also acknowledges the gap in perceptions, provides more flexible enrollment options, and simplifies enrollment procedures and rules, while continuing to ensure compliance. A WQT program could, in principle, be designed to meet these criteria.
The choice experiment data, collected from 136 farmers in 2006, were analyzed with a random parameters logit model (Peterson et al. 2007). All five trading attributes were found to have a statistically significant effect on market participation, but with the effects varying across different groups of producers. The average producer’s decision to enroll in WQT was not sensitive to the method of monitoring (spot check vs. annual verification). This finding was supported by qualitative responses like “I am assuming I will be in compliance, so I am not concerned with monitoring.” Producers indicated a strong preference for flexibility. Other trading rules, such as the size of the penalty for violations and the time required to complete the enrollment process, were found to have widely differing impacts across different farmers; some farmers did not respond at all to increased stringency in these rules while others were highly sensitive to them. Farmers displayed a strong preference for flexibility in their eligible practices. For example, they would be much more likely to participate in a WQT market if they were given the options of haying and grazing a filter strip and/or using rotational no-till (as opposed to 100% no-till). Finally, the perceived fear of future regulation was not widespread, but would reduce WQT participation by some producers.
Task 3: Watershed Model Simulation
In the biophysical modeling part of the project, in order to incorporate the choice experiments of producers (nonpoint sources) and link the watershed modeling results with economic model analyses on cropland area, several advanced Best Management Practices (BMPs) were simulated. The specific BMPs were corn-soybean rotation, a haying and grazing vegetated filter strip, and utilizing rotational no-till (as opposed to 50% no-till and 50% minimum tillage). The modeling cases for economic analyses on cropland area are shown in table1. As in the previous work on the biophysical modeling part of project, a set of multi-attribute trading ratios were developed to address the WQT uncertainties. These scenarios were designed based on combinations of four attributes: crop rotation, tillage method, edge-of-field BMP, and fertilizer application. The tillage methods are no-till, rotational tillage (50% no-till), reduced tillage, minimum tillage, and conventional tillage; edge-of-field BMPs are with/without a 20-meter vegetative filter strip with/without grazing; fertilizer application is surface broadcast or sub-surface application. The crop rotations include continuous and/or rotational corn, soybean, grain sorghum, and winter wheat. The design attributes and levels of alternative scenarios for modeling WQT effects are in the table2.
Table 1: the Design and Description of Modeling cases for Economic Analyses on Cropland
Case # |
Crop |
Scenario # |
Tillage |
Fertilizer |
Filter Strip |
Grazing |
Description |
Baseline |
CORN-SOYB |
CS4SB |
MT |
Surface Application |
2yr-Rotation Minimum Tillage |
||
Case 1 |
CS1SB |
NT |
2yr-Rotation No-till |
||||
Case 2 |
CS2SB |
OT |
2yr-50% No-till/Minimum Rotation |
||||
Case 3 |
CS4SB/FS |
MT |
Yes |
Baseline applied filter strip |
|||
Case 4 |
CS4SB/FS/GZ |
MT |
Yes |
Yes |
Case 3 applied grazing method |
Table 2: The Design Attributes and Levels of SWAT Model for Potential WQT Scenarios
Variable Name | Attribute |
Levels |
Crop |
Growing crops or crop rotation |
BBLS, SWCH, FESC, CORN, GRSG, SOYB, WWHT, WWHT-SOYB, CORN-SOYB, GRGS-SOYB, WWHT-CORN, WWHT-GRSG, WWHT-GRSG-SOYB |
Tillage |
Tillage method applied on the field |
NT: No-till; OT: Rotational Tillage (50% No-till: Corn: No-till, Soybeans: Minimum Tillage); RT: Reduced Tillage; MT: Minimum Tillage; CT: Conventional Tillage |
EOF_BMP |
The Edge-of-field BMPs |
Blank (void), /FS (with vegetative filter strip); /FS/GZ (with grazing vegetative filter strip) |
Fert_App |
Fertilizer application method |
SB (surface broadcast), DB (sub-surface (deep-band) application) |
Based on the four categories on table2, a total of 228 scenarios were modeled to create a watershed-wide WQT multi-attribute trading ratio database. To model the watershed responses of these potential alternative scenarios, each scenario was simulated with 39 years actual climate data (1968 to 2006) in 286 sub-watersheds as well as 5,395 hydrologic response units (HRUs) on annual and/or monthly basis. 1,043 of these HRUs represent land used for row-crop agriculture. For better precision and accuracy, the model parameters for land management practices and soil erosion properties were based on previous studies that calibrated and validated these parameters to northeastern Kansas.
Task 4: Develop Trading Simulation Model
This task was completed in the first year of the project.
Task 5: Integrate Trading and Biophysical Models
The model developed in Task 4 was recalibrated so that each nonpoint trader corresponds to a single HRU in the study watershed. In particular, 1,043 “virtual” producers were created, differing from one another in terms of farm size, age, gender, primary occupation, and several attitude and perception factors. The variation in the virtual population was constructed to be consistent with data from the Census of Agriculture and our questionnaire responses.
Future Activities:
A manuscript is being developed describing the results from the econometric analysis of the nonpoint source trading data, for publication in the American Journal of Agricultural Economics. Additionally, the choice experiment data from point sources are being entered and analyzed. Finally, the estimated equations from the analysis of the point- and nonpoint-source data will be inserted into the trading simulation model to assess market performance under different types of rules to assess their effect on market performance. Publications describing the econometric analysis of the point source data and the integrated market simulations will be developed later in 2008.
Journal Articles on this Report : 1 Displayed | Download in RIS Format
Other project views: | All 10 publications | 1 publications in selected types | All 1 journal articles |
---|
Type | Citation | ||
---|---|---|---|
|
Smith CM, Peterson JM, Leatherman JC. Attitudes of Great Plains producers about best management practices, conservation programs, and water quality. Journal of Soil and Water Conservation 2007;62(5):97A-103A. |
R831774 (2007) |
Exit |
Supplemental Keywords:
water, drinking water, watersheds, discharge, aquatic, integrated assessment, public policy, decision making, cost benefit, nonmarket valuation, preferences, engineering, social science, modeling, surveys, Midwest, Kansas, KS, EPA Region 7, agriculture, municipal,, RFA, Economic, Social, & Behavioral Science Research Program, Scientific Discipline, Economics, decision-making, Market mechanisms, Economics & Decision Making, Environmental Law, equilibrium analysis, market incentives, auctioning permits, impact of federal policy instruments, policy making, economic research, decision making, economic benefits, NutrientNet, cost benefit, socioeconomics, environmental impact comparison, biophysical model, environmental Compliance, environmental policy, pollution fees, tradable pollution permits, bioeconomic model, water quality value, allowance allocation, cost effective, pollution allowance trading, econometrics, permit trading, environmental economicsRelevant Websites:
Water Quality Trading Resources: http://www.oznet.ksu.edu/olg/programs/enviro_mgmt/wtr_resources/index.html Exit
Progress and Final Reports:
Original AbstractThe perspectives, information and conclusions conveyed in research project abstracts, progress reports, final reports, journal abstracts and journal publications convey the viewpoints of the principal investigator and may not represent the views and policies of ORD and EPA. Conclusions drawn by the principal investigators have not been reviewed by the Agency.