Opinion: What is a Market-Based Approach to Water Quality?

Last month, the U.S. Department of Agriculture (USDA) and the U.S. Environmental Protection Agency (EPA) released a joint letter encouraging market-based, collaborative approaches to reduce excess nutrients in waterways. But, few other details were offered on how to best take this approach.

There are three possible market-based strategies for water quality improvement: nutrient reduction exchange, wetland mitigation banking, and environmental impact bonds.

Comparable to a cap and trade program, the nutrient reduction exchange ties downstream municipalities to upstream partners through voluntary efforts. This approach focuses on reducing nitrogen and phosphorus by leveraging cost-effective projects that would be more affordable than removing nutrients at a water treatment plant. This strategy has been tried in the Ohio River Basin.

With wetland mitigation banking, flood risks can be minimized by holding and slowing the flow of water—also allowing nutrients and sediment to filter out. In addition, wetlands can provide a natural habitat for birds and waterfowl. The idea behind this approach is to encourage new investments in water quality and flood mitigation by restoring wetlands.

Environmental impact bonds have been used recently by major cities to finance infrastructure projects to improve water quality, particularly from stormwater runoff. Washington, D.C. first used this tool in 2016, followed by Baltimore and Atlanta. What makes environmental impact bonds different from other green bonds is that they use a “pay for success” model focused on achieving environmental outcomes, which requires them to have a measuring and monitoring component for investors.

Any of these three market-based strategies could play a key role in building a cleaner, healthier, and more productive future. Learn more at cfra.org.

By Katie Rock, katier@cfra.org, Center for Rural Affairs

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