Water Quality and Agriculture

Contemporary agricultural systems excel in their capacity to meet increasing food and fiber demands of growing populations and higher-income societies at ever-decreasing cost to consumers. The contributions to human welfare of modern agricultural systems are tremendous. But these systems also cause environmental degradation, the most important being water pollution. This book is about public policies for managing water pollution from agriculture. The public policy challenge that motivates this book is the essential need for policies that restructure agricultural systems to provide a balance between production efficiency, agricultural prosperity, and environmental protection. The approach presented in the book is that of economics, but the book is designed to be accessible to readers who are not trained in economics or environmental economics. While based on economics, the book provides a multi-disciplinary understanding of the agricultural problem that is essential to economic and policy analysis.

This chapter presents basic economic and institutional background material essential for the book. The first part of the chapter introduces concepts and methods used in economics to explain environmental externalities and the need for public policy to address them. The first part also discusses economic issues in the choice of environmental policy targets and choice of policy instruments to achieve them. The second part of the chapter introduces water pollution control policies for agriculture with a focus on the United States and European Union. The discussion identifies weaknesses in existing policy architectures that limit water quality gains while unnecessarily increasing the social costs of pollution control. The chapter establishes a need for new approaches to water pollution control in agriculture and introduces economic concepts and methods useful for analyzing existing policies and strategies for improving the economic and ecological performance of water quality protection policies for agriculture.

This chapter introduces topics, concepts, relationships, and tools that are essential to understanding the effects of agriculture on water quality, the significance of these effects, and economic and technological drivers of water pollution from agriculture. The chapter also introduces a systematic watershed-based paradigm for understanding and addressing agriculture and tools used for watershed planning. The chapter begins with a description of the types of water quality problems that result from agricultural production and their economic and ecological significance. The evolution of agriculture as a significant source of water quality problems is connected to economic and technological developments in agricultural production. The chapter turns from causes and consequences to introducing physical processes and relationships at multiple spatial scales, from field to watershed, that must be understood to design effective and efficient solutions. The chapter concludes with the introduction to the watershed-based management and various types of modeling tools used in planning and policy design.

A key theme of this book is that producers’ economic choices are the key determinants of water quality problems. Designing and implementing policies that are effective in managing water pollution from agriculture and do so without imposing undue social costs require an understanding of farm decisions making. This chapter introduces economic concepts and tools for analyzing farm decision making affecting key choices determining water quality outcomes. It begins with a brief introduction to key choices and objectives in farm decision making. The chapter then introduces standard economic models used to explain producers’ choice of crops, production inputs, and the spatial distribution of agricultural activity. These models are used to illustrate how various choices affecting water quality outcomes differ between market driven agricultural landscapes in which the costs of water pollution are external to producers, and agricultural landscapes in which choices balance the social benefits and costs of agricultural production. Subsequent sections introduce additional concepts and tools relevant to farm decision making on polluting inputs, crops, the spatial structure of production, and the use of best management practices. Concepts and models are illustrated by simple numerical examples and by empirical applications to significant water quality problems in the Gulf of Mexico and Chesapeake Bay.

Agriculture poses a unique set of challenges for water pollution control policy that emerge from the large spatial scope of agricultural production, the small-scale spatial heterogeneity and complexity of agricultural operations, the complex and diffuse pathways by which pollutants move from agricultural land to water resources, and the importance of weather to pollution events. This chapter explores the implications of these characteristics for the choice of water quality goals and policy instruments for agriculture. The chapter presents a framework for characterizing policy instruments based on property rights, policy targets, and regulatory mechanisms; discusses essential features of policies that are effective and efficient; and presents and illustrates concepts and methods for policy optimization using simple numerical examples and empirical case studies. The chapter evaluates contemporary agricultural nonpoint pollution controls given the criteria and the principles for efficient policy. These policies are dominated by voluntary compliance approaches that rely on information programs to encourage producers to adopt pollution control practices and participate in programs that provide subsidies in various forms to facilitate adoption. The effectiveness and efficiency of the voluntary compliance approaches are generally limited by a variety of factors. These include the reliance on farmer self-selection into pollution control programs, a reliance on public spending to purchase pollution controls, suboptimal targeting of locations for public expenditures on pollution control, muddled policy objectives, and unproductive economic spillovers. Policy reforms that can improve the voluntary approach are suggested but the fundamental limitations of the approach suggest a need for innovative alternatives. The chapter presents examples that are in the Pigouvian tradition of internalizing externalities through policies requiring mandatory compliance. The chapter provides overall guidelines for better policies but concludes that no single option stands out for all circumstances. Identifying the best choice for a particular problem requires place-based evaluation of options.

Chapters 6, 7, and 8 examine three specific policy approaches that are drawing substantial interest as innovations for agricultural nonpoint pollution control. These are water quality trading (Chap. 6), water quality auctions (Chap. 7), and credit stacking (Chap. 8). Both have potentials for addressing many of the limitations of conventional approaches including consideration local conditions.

Water quality trading refers to emissions trading in water pollution. The mechanism has not had wide application but is an interesting candidate for water pollution policy innovation. It is a performance based economic incentive and can be implemented to integrated management of point and nonpoint sources. Water quality trading is receiving considerable interest as a mechanism to improve the effectiveness and cost-efficiency of water quality protection. This chapter presents the theory of trading, significant challenges that must be addressed when using trading to manage agricultural nonpoint pollution, and a review and assessment of the practice of water quality trading, and lessons for future application. The overall conclusion is that trading has significant merit provided policy makers have the technical capacity and resources to implement performance-based trading programs.

Water quality auctions provides a means to promote spatial targeting of water protection and improve budgetary cost-efficiency relative to widely applied flat rate policies producing higher water quality benefits from a given conservation budget. Using performance-based indicators as a part of auction mechanism helps to further improve environmental outcomes of conservation auctions. The chapter collects experience from conservation auction, mostly applied to promote multiple environmental goals at the same time. The preferred auction for water protection purposes is water quality auction. They are rare but Great Miami River and Pennsylvania Nutrient Credit Trading Programs provide the first positive examples. Water quality auctions complement the toolbox of nutrient policies; they can be used as such in sensitive watersheds or as a part of water quality trading programs or traditional practice-based policies.

Water quality protection in agriculture often provides environmental co-benefits. Nutrient pollution controls, for example, may reduce carbon emissions. Policies to pursue pollution control in agriculture can be pursued independently of policies to provide other benefits, or in coordination. Credit stacking is an approach to coordination that assumes the use of market mechanisms for each environmental benefit and allows producers to participate in multiple markets with the intent of increasing the overall incentives for pollution control. This chapter illustrates the design of stacking in the case of nitrogen and carbon pollution control, examines environmental integrity issues in the design of stacking, and demonstrates that stacking can in theory increase water quality protection when supplying complementary environmental goods. Practical examples of stacking are still rare but interest in stacking is high.

It is widely recognized that conventional policies for managing nutrient and other types of water pollution from agriculture are neither effective nor efficient. Policy change is essential to improve and protect water quality. Designing and implementing policies that are effective in managing water pollution from agriculture and without imposing undue social costs constitute policy challenge. The need for policy innovation is made increasingly urgent by rapidly growing demands for food driven by global population, income growth, and new uses for agricultural output, and effects of climate change on agricultural productivity and water resources. The chapter draws together the lessons developed in the book on basic principles of policy design. These include clear water quality targets, accountability frameworks, spatial targeting, and policy coherence. The chapter also draws lessons developed in the book about instrument choice and policy designs within the basic principles. General themes are that incentives are preferred to standards, and performance-based policies over practice-based policies. A strategy for constructing policy mixtures based on the scope and severity of agriculture’s contributions to water quality problems is suggested. For problems with limited scope and severity, decentralized approaches relying on property rights or liability rules may serve society well. With increased scope and severity, more intense intervention becomes necessary. “Soft” instruments such as nudges, technical assistance, minimum farm planning standards, and perhaps threats of increased regulation may serve society well. But where agriculture is a significant contributor to significant problems, mandatory approaches are essential. We argue for the use of price-based instruments, especially water quality trading, water quality auctions, and credit stacking, possibly augmented by limited regulatory measures. A key conclusion of the book is that main barriers to effective and efficient policies of the kind we describe are not technical or economic, but the necessary political will and ambition to abandon the status quo.