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Will Nutrient Credit Trading Ever Work? An Assessment of Supply and Demand Problems and Institutional Obstacles

May 2003

Citation: ELR 10352

Author: Dennis M. King and Peter J. Kuch

Despite the compelling economic logic of nutrient credit trading, widespread support for it, years of research into how it should work, and about 37 on-the-ground prototype trading programs in the United States, very few nutrient credit trades have actually taken place. This Article addresses questions about whether the obstacles preventing nutrient credit trading seem to be supply-related, demand-related, or the result of institutional problems that inhibit buyers and sellers from consummating trades. We conclude that institutional obstacles are significant, but of secondary importance and capable of being overcome. The problems related to inadequate supply and demand are more important, more difficult to overcome, and largely outside the control of regional groups attempting to develop and manage nutrient trading systems at the watershed level.

Changes in state and federal water and agricultural policies that would be required to stimulate the supply and demand for regional nutrient credits are unpopular, often considered inequitable, and not likely to take place any time soon. Therefore, we recommend that market-style nutrient credit trading be promoted only in areas where favorable supply and demand conditions can be demonstrated. Since such areas are not widespread, we also recommend that enthusiasm about the concept of market-style nutrient trading not be allowed to divert attention away from other incentive-based solutions to "overnutrification" problems.

Dennis M. King is a professor at the Center for Environmental Science at the University of Maryland, and principal in the firm of King and Associates, Inc. in Solomons Island, Maryland. He may be contacted at dking@cbl.umces.edu. Peter J. Kuch is an environmental economics consultant in Springfield, Virginia. He may be contacted at kuchp@aol.com. This Article is based on research funded by the U.S. Department of Commerce, National Oceanic and Atmospheric Administration; U.S. Environmental Protection Agency, Office of Policy Analysis; and U.S. Department of Agriculture, Economic Research Service. The analysis and conclusions presented do not necessarily reflect the views of these agencies.