The differential benefits of market-based water pollution control policy

In this paper, we examine the water quality benefits of Wisconsin's phosphorus rule, which created the most stringent water quality standards for phosphorus in the US. We highlight the differential benefits realized downstream from point sources that comply with the rule through offset trading vs. those that comply via treatment technology upgrade. To our knowledge, ours is the first study to empirically estimate the water quality benefits of water quality markets compared to those of traditional (command-and-control) regulation over a large spatial scale. We find that Wisconsin's phosphorus rule decreases surface waterbody concentrations of total phosphorus downstream of regulated point sources by 26%. The reductions are larger for facilities with technology upgrades (30%) than those that participate in offset trading (21%), but offset trading represents the cost-effective option. Upgrading facilities pay roughly $34,000/year in capital costs to produce the same water quality improvements as offset trades that cost $5,900/year.