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Nutrient Trading and Dead Zones – Can they wake each other up?

Amanda Hawn

Throughout the world, there is now an abundance of so-called marine dead zones; areas where an excess of nutrient runoff from agriculture makes life for many creatures impossible. One way of dealing with these dead zones is by encouraging a market-based cap-and-trade approach to nutrient runoff.

Throughout the world, there is now an abundance of so-called marine dead zones; areas where an excess of nutrient runoff from agriculture makes life for many creatures impossible. One way of dealing with these dead zones is by encouraging a market-based cap-and-trade approach to nutrient runoff. The Ecosystem Marketplace explores how these two facts could lead to the creation of new environmental markets. In 1991 scientists estimated that roughly one billion tons of comb jellyfish – a biomass ten times that of the world's entire commercial fish catch – could be found in the Black Sea. To Black Sea fishermen, the abundance of this stingless, but inedible species was extremely bad news. During the 1980s, as comb jelly numbers shot up, the stocks of commercially valuable fish plummeted. By 1991, the Black Sea was an ecosystem seriously out of whack. The cause of this jellyfish surge is no mystery. The jellyfish were originally brought by mistake into the Black Sea from their native waters in the Eastern US, probably in the ballast water of some cargo ship. Finding no natural predators, the jellyfish multiplied. The invasion, however, was exacerbated by the fact that two decades earlier, an oxygen starved dead zone had begun recurring in the Black Sea as fertilizers from industrial and agricultural regions throughout Eastern Europe flowed down the local rivers and into coastal waters. Like oil at the top of a bottle of vinaigrette, the nutrient rich waters spilling out of the mouth of the Danube formed a layer on the surface of the Sea. The excess nutrients then fueled algal blooms that blocked light from reaching deeper waters. The blooms also used up oxygen as they decayed and sank, creating a dead zone where neither fish nor seafloor algae could survive. As a result, commercially valuable fish died or fled the area, and comb jellies – capable of surviving the low oxygen conditions – began to dominate. Dropping oxygen levels in deep waters characterize an environmental event known as hypoxia. Hypoxia can occur naturally, but is more frequently caused by the human-driven contamination of surface waters. There are now at least 150 man-made hypoxic dead zones in global waters. North America, South America, Europe and Asia all suffer from dead zones of varying severity, and some dead zones affect an underwater territory the size of a small country?or two. The fact that the number of serious dead zones created by hypoxia has grown by some 800% during the past four decades is an even more sobering statistic for concerned scientists. In the last century, "over-fishing was the leading environmental issue affecting our seas," Robert Diaz of the Virginia Institute of Marine Sciences told Science News, "In the new millennium, it's going to be oxygen." The good news is that – if caught in time – ecosystems seem capable of bouncing back from hypoxia. The dead zone in the Black Sea, for instance, has largely disappeared in the last decade and marine biologists report that hypoxia events in the region now are rare. Scientists attribute this fortunate turn of events to the not-so-fortunate economic collapse of Eastern European countries in the 1990s. As industrial and agricultural enterprises folded in places like Russia, Bulgaria and the Ukraine after the fall of communism, nitrate run-off into the Danube and the Black Sea dropped off sharply. While the environmental result was a good one, the economic forces that drove it are hardly of the type that policy makers will willingly unleash elsewhere. And so – with dead zones on the rise around the world – experts have been searching for another way to achieve the same environmental results without the crippling economic costs. Some think they may have found it: an innovative environmental market-mechanism called nutrient trading.

The History of Nutrient Trading

Most watersheds contain two types of polluters – point sources and non-point sources. Point sources are industrial enterprises that emit nutrients (i.e. pollutants) directly into a watershed from a single pipe or point. Non-point sources, on the other hand, are agricultural or municipal polluters whose pollution washes into a watershed over a diffuse area. For a variety of political, social, economic, and logistic reasons, point sources usually are regulated, while non-point sources are not. Here's the rub: Studies in the United States have found that non-point sources – in particular agricultural polluters – account for more than 80% of the country's nitrogen and phosphorous discharges. Clearly, if eutrophication (caused by an excess of nitrogen, phosphorous and/or silica) is to be avoided in many watersheds, non-point sources must be incorporated into schemes for curbing nutrient discharges. The idea of nutrient trading has risen to ascendancy during the last decade because it offers a cost-effective way of doing just this. After years of regulation, many factory owners have already invested enough in pollution abatement, that further efforts to reduce their discharges (i.e. an upgrade to the next-better technology) would be prohibitively expensive. Farmers, by contrast, often can reduce their pollution levels relatively cheaply by changing tilling, planting and/or fertilization practices. Studies suggest that, in some instances, point source reductions can be up to 65 times as expensive as non-point source reductions. Nutrient trading schemes capitalize on this cost discrepancy by setting discharge limits for point sources without stipulating how the limits must be met. The result is that industrial polluters often opt to pay farmers to reduce their pollution emissions along a river rather than invest in expensive technology to further limit their own discharges. This system allows industrial factories to operate within the watershed's overall discharge caps at a lower cost than they otherwise might. In effect, the factories are purchasing pollution permits from farmers at a market price that is amenable to both parties. Such 'cap-and-trade' systems, many argue, allow communities to meet pollution standards in the most cost-effective way possible. Trades between point sources also are feasible, but the significant cost savings associated with nutrient trading derive, at least in theory, from the non-point/point trades just described. "When tighter standards are put in place," writes Paul Faeth, Vice-President of the World Resources Institute (WRI), "trading increases flexibility and reduces costs. This flexibility produces a less expensive outcome overall while achieving – and even going beyond – the mandated environmental target." This compelling logic has not been lost on policy-makers in the United States. Indeed, there is a long history of experience with these so-called "cap-and-trade" environmental markets in the US. One of the first was the Acid Rain trading scheme aimed at controlling emissions of sulfur dioxide, the gas most responsible for acid rain. Similar schemes are currently being implemented around the world to control emissions of various other pollutants, carbon dioxide among them. The U.S. Environmental Protection Agency (EPA) first drafted a Framework for Watershed-Based Trading in 1996 and – after funding numerous pilot studies – the agency released a Final Water Quality Trading Policy in 2003. Now, the EPA says it may look to nutrient trading schemes to help fight one of the most pernicious environmental problems it faces – the huge hypoxic dead zone in the Gulf of Mexico.

Hypoxia in the Gulf

Like that afflicting the Black Sea in the '80s and '90s, the dead zone in the Gulf of Mexico is caused by nutrient rich waters washing into it from inland watersheds. Roughly 1 million tons of nitrate gush past Memphis each year as the Mighty Mississippi wends its way past that city en route to the northern Gulf of Mexico. When the nitrates hit the Gulf, a nutrient rich broth forms in the top half of the water column and huge numbers of algae begin to bloom. As these blooms die off and the algae decay, they use up oxygen in the deeper waters, creating a seasonal dead zone that stretches from Louisiana to Texas each summer. The lack of oxygen associated with this algal bloom can be disastrous for local fish. While the dead zone has not dented fish catches in the Gulf to date, scientists stress that, unless something is done, the worst is yet to come. It is simply a matter of time. Initially, dead zones can actually boost catches as oxygen-deprived fish leave safe habitat in search of oxygenated waters. Shrimp trawlers, for instance, often haul in large catches along the edges of the Gulf Dead Zone where shrimp will swim into nets as they try to flee hypoxic waters. The problem is that, at some point, oxygen-stressed populations hit a tipping point and collapse. Whole ecosystems can go, warn the experts, and they can go quickly. Their warning is economic as well as ecological. Fishing is big business in the northern Gulf of Mexico – generating roughly 3 billion dollars a year and providing over 200,000 Americans with jobs. The regional economy can't afford to lose it. To reverse the growth of the dead zone in the Gulf of Mexico (and thus limit the likelihood of a fishery crash), scientists estimate that the United States will need to reduce the amount of nitrates that wash into the Mississippi by approximately 40%. That means reducing industrial and, especially, agricultural run-off throughout the entire Mississippi Basin, from Minnesota to New Orleans. If it is to accomplish this goal, the Mississippi River/Gulf of Mexico Watershed Nutrient Task Force – the government organization created to deal with hypoxia in the Gulf – will have to induce large-scale changes over a broad area, and quickly. Recognizing this, Suzie Greenhalgh and Amanda Sauer, two economists from the World Resources Institute (WRI), recently undertook an analysis of the possible policy approaches to reducing nitrogen run-off in the Mississippi Basin. The researchers used a complex model to test the environmental and economic effects of six options: nutrient trading, greenhouse gas (GHG) trading, conservation tillage subsidies, an extension of the Conservation Reserve Program (which pays farmers to take land out of production), a tax on the use of nitrogen fertilizer, and nitrogen trading in combination with a payment program for GHG reductions. The study concluded that, "The use of market mechanisms like nutrient trading provides not only the greatest overall environmental benefits but also is the most cost-effective strategy." Specifically, when point sources were limited to a theoretical pollution level of 8 mg/l/day, the model indicated that the introduction of trading schemes would save factories some $5 billion in capital costs compared to a simple requirement for technology upgrades. When pollution limits were reduced to 3 mg/l/day (the level that likely would be necessary to combat hypoxia in the Gulf), the model suggested that trading schemes would generate approximately $21 billion in savings. In other words, there are some 21 billion reasons for using nutrient trading to help remedy the dead zone in the Gulf. Indeed, as dead zones proliferate around the world, the concept might prove capable of generating environmental and economic benefits throughout the world, from China to Chile. The only problem is that active nutrient trading currently represents something of a dead zone itself.

The Problem

"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," notes Dennis King, a professor at the Center for Environmental Science at the University of Maryland, "very few nutrient credit trades have actually taken place." Only a handful of projects have brokered actual nutrient trades and the majority of these have occurred as bilateral agreements between point sources. The number of point/ non-point, market-style trades can be counted on one's hands. The reality is even bleaker outside of the United States. "As far as water quality trading programs, the only ones we know of are in the US and Australia," says Mindy Selman of WRI (at least one other exists on the South Nation River in Canada but the pickings are, indeed, slim). In Australia, a clever scheme in the Hunter River Valley allows point sources to trade salinity discharge permits with one another when the river is in high flow. When the river is in low flow, no discharges are allowed. The permits are auctioned off to qualified bidders every couple of years and are subsequently traded online via a governmental website. The innovative scheme was officially introduced in 2002 (a pilot project began in 1995) and the New South Wales Environment Protection Authority (EPA), the agency in charge of running the scheme, boasts that "The River is now as fresh as many bottled mineral waters." Given the success of the few nutrient programs that are operating, the notable lack of active nutrient trading on a widespread level is surprising. "I think market based programs will be very effective in the future," says Mark Keiser, the Acting Coordinator of the US EPA's Environmental Trading Network, "but we have some hurdles to overcome first." Some of those hurdles appear to be strictly institutional and, with work, probably will disappear in the near future. For instance, measuring pollution reductions from non-point sources is difficult because many factors – including location, soil characteristics and weather patterns – influence how much of a farm's nutrient run-off ultimately reaches a watershed. Measuring pollution reductions from point sources is much easier since nutrient concentrations can be determined before discharges leave factories or wastewater treatment centers. Thus, in order to account for the uncertainty associated with nutrient reductions from non-point sources, trading ratios generally are applied to non-point/point trades (e.g. 5 lbs of non-point reduction required to equal 2 lbs of point reduction). Getting these ratios right is important for both economic and environmental reasons. If the ratio is set too high, few point sources are likely to purchase non-point source credits. If it is set too low, water quality will end up suffering rather than improving. Fortunately, new monitoring efforts and technologies are allowing scientists to hone in on appropriate ratios, so the uncertainty is likely to abate sooner rather than later. Government and nonprofit efforts have also made progress towards solving another big institutional obstacle: inadequate infrastructure to match buyers and sellers. Specifically, the U.S. government has created a resource – the Environmental Trading Network (ETN) – to help connect buyers and sellers of pollution credits online. NutrientNet, a similar trading platform sponsored by WRI, also is up on the web and ready to facilitate the emergence of new nutrient markets. In their recent review of the obstacles to nutrient trading, King and Peter Kuch, an environmental economics consultant, thus suggest that the institutional obstacles to nutrient trading, while significant, are capable of being overcome. On the other hand, they argue "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." Several forces may contribute to the current paucity of nutrient credit supply. First, a lack of coordination between state and federal laws may mean that policies are, in essence, 'competing' with one another to induce farmers to reduce their pollution. In particular, subsidies aimed at encouraging farmers to switch cropping patterns and/or tillage practices likely have decreased the supply of nutrient credits on the market. If farmers undertake the most cost-effective pollution reductions available to them in response to subsidies, then any subsequent changes they make are likely to be more expensive, thus raising the price of the credits they have to offer on the market. A second, more subtle, obstacle to the ready supply of nutrient credits is the expressed fear of some farmers that, because engaging in trading schemes would demonstrate their ability to reduce pollution relatively efficiently, generating credits would set an environmental precedent that might later be required by law. There are also problems on the demand side. While most industrial polluters support market mechanisms in theory, many feel that current nutrient trading schemes are based on an unfair allocation of pollution rights. Namely, point sources argue that the government is beating them over the head with a stick while parceling out a bag of carrots to their agricultural neighbors. Since many legislators and environmental groups are willing to concede this point, introducing the stricter pollution caps necessary to spur demand has been politically unpopular to date. "When the cap is not that stringent," says Faeth, "businesses tend to look at on-site opportunities to achieve small pollution reductions instead of looking to purchase credits from external sources." In summary, then, nutrient markets seem to require two big policy changes before willing buyers and willing sellers are likely to show up and make them work. First, federal and state (or indeed national and international) regulations concerning water pollution need to fit together more cohesively so that various programs can work in concert -rather than at odds- with one another. And second, the political willpower to lower caps on point sources and to force non-point sources to assume responsibility for their pollution must be generated at regional, national and international levels. Proponents of nutrient trading, it seems, need a rallying point and a little political leverage. Might they find both in the growing threat of hypoxic dead zones?

Dead zones as a catalyst

As hypoxia spreads, the economic and public health risks associated with the over-fertilization of the world's waters are becoming increasingly clear. Consequently, the political will power to reduce these risks is mounting. The need for states and countries to ally their aims across entire river basins in order to combat hypoxia thus represents both a challenge and an opportunity. Scientists long have stressed that environmental policies need to be implemented at the level of ecosystems, across political boundaries, rather than at the level of counties or even nation-states. In the Danube river basin, at least, it would seem that hypoxia has granted them their wish. There, a multidisciplinary team from seven European countries is currently researching the link between water management practices along the Danube and hypoxia in the Black Sea. "The level of co-operation is astonishing," says Helmut Kroiss, the project coordinator. "In each country we have partners who recognize the relationships between the different variables in the ecosystem – the land, the rivers, and the marine environment. This has enabled us, for the very first time, to link models for land transport with those for rivers and for sea quality." Ivan Zavadsky, the Project Manager of the UNDP/GEF Danube Regional Project, says that once they are armed with the appropriate scientific data, policymakers will decide which water policies to pursue in the Danube Basin. Nutrient trading schemes for nitrogen and phosphorous, he says, are under active consideration. As the economies of Eastern Europe bounce back, the hope is that effective water management policies can prevent the return of pre-1989 nutrient levels in the Black Sea. Stimulated by the new cooperation and research, nutrient trading could help the Black Sea sidestep the return of the one billion tons of jellyfish. The Danube basin is not alone; new opportunities for collaboration also seem to be cropping up in the United States. The Mississippi River/Gulf of Mexico Watershed Nutrient Task Force includes legislators at the state, federal, and tribal levels. Ideally, this team might help to unify the water management goals of the 31 states whose waters drain into the Mississippi Basin. If policies are well coordinated, observes Faeth, subsidies and trading schemes could help one another. "It is not impossible that government subsidies and nutrient trading schemes could work together. Markets may emerge where the government and point sources both act as buyers of nutrient credits." All other things being equal, farmers should prefer a steady stream of credit buyers instead of fickle subsidies that may dry up after the next election. Similarly, when push comes to shove, industrial buyers of nutrient credits should prefer the flexibility of cap-and-trade schemes to the stricter command-and-control approaches of yesteryear. The trick will be generating the political will and regulatory cohesion to push both buyers and sellers to make these decisions, which is why some are looking to dead zones with hope as well as fear. "As study after study indicates that the most cost effective way to combat the problem [hypoxia] is through the use of market incentives, I think real progress will be made with nutrient trading," says Faeth. If he is right, there is poetic justice here: as the political will generated by dead zones breathes life into the use of nutrient trading, nutrient trading will slowly help combat the problem of dead zones. As with most happy endings, however, Faeth predicts this one will require plenty of work. "It will still be hard," he says, "nothing is going to happen overnight." Amanda Hawn is a regular contributor to The Ecosystem Marketplace. She is an evolutionary biologist and science writer currently living in Minneapolis. She has written about science and the environment for a variety of publications including The Economist, Sierra Magazine, and others. Amanda Hawn is a regular contributor to The Ecosystem Marketplace. She is an evolutionary biologist and science writer currently living in Minneapolis. She has written about science and the environment for a variety of publications including The Economist, Sierra Magazine, and others.

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