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Ecosystem Services and Environmental Markets in Chesapeake Bay Restoration
Van Houtven, G., R. Loomis, AND J. Baker. Ecosystem Services and Environmental Markets in Chesapeake Bay Restoration. U.S. EPA Office of Research and Development, Washington, DC, EPA/600/R-15/061, 2015.
The report provides an analysis of alternative market-based incentives to support Chesapeake Bay restoration.
This report contains two separate analyses, both of which make use of an optimization framework previously developed to evaluate trade-offs in alternative restoration strategies to achieve the Chesapeake Bay Total Maximum Daily Load (TMDL). The first analysis expands on model applications that examine how incorporating selected co-benefits of nutrient reductions into the optimization framework alters the optimal distribution of nutrient reductions in the watershed (U.S. EPA, 2011). In previous applications, the analyzed co-benefits included carbon sequestration and recreational hunting benefits from certain agricultural best management practices (BMPs). In this report we expand the optimization framework to also include benefits from water quality improvements in freshwater river and streams. We find that these nontidal water quality co-benefits are larger than the other co-benefits combined and would result in greater nutrient control efforts in upstream portions of the watershed. Compared to cost-minimization results that do not account for co-benefits, including all co-benefits in the optimization would increase annual nutrient control costs by $16 million in the Susquehanna River Basin in Pennsylvania; however, the co-benefits would increase by $31 million, for a net gain of $15 million per year. In the James River Basin in Virginia, considering monetized co-benefits results in an estimated increase in nutrient control costs of $17 million but an increase in co-benefits of $42 million (net gain of $25 million per year). The second analysis expands on previous applications of the optimization framework that have focused on the potential cost savings from allowing nutrient trading in the Chesapeake Bay watershed (Van Houtven et al., 2012). These applications do not include the co-benefit estimates. Instead they examine how the costs of achieving TMDL goals could be reduced under alternative trading scenarios. For this report, we apply the optimization framework to assess how nutrient trading may interact with other incentives for agricultural nutrient reductions, as well as how simplified crediting of nutrient reductions influences the nutrient control costs, load reductions, and participation in a nutrient trading market. We estimate that nutrient trading can act as an incentive for some agricultural entities to adopt nutrient controls and meet their load allocation under the TMDL. However, we also find that the incentive of nutrient trading alone would only support achieving 11 percent of the required agricultural nitrogen load reductions in the Susquehanna River Basin in Pennsylvania and 4 percent of the required agricultural phosphorus reductions. In the James River Basin in Virginia, we estimate nutrient trading would be a more effective incentive to achieve the required agricultural nutrient reductions, with 35 percent of the nitrogen reduction and 41 percent of the phosphorus reduction achieved through nutrient trading. Finally, we estimate that simplified crediting of nutrient reductions results in higher costs (by 8 percent across the watershed) for achieving significant wastewater and industrial discharge nutrient reductions through nutrient trading because it discourages placement of nutrient controls where they would be most effective. In addition, simplified crediting of nutrient trading is estimated to result in failure to meet the load reduction requirements in 11 of the 14 basin-state combinations in the Chesapeake Bay watershed due to practices in certain agricultural areas receiving more credit for nutrient reductions than would be achieved.