Trading, Manure, and the Free Market

Recently, I have been noticing a number of connections between the environmental policies or issues that I’ve been studying and modern economic doctrine. I’m not sure if the number or strength of these connections are enough to claim that we’re seeing a rise in “laissez faire environmentalism” in the Chesapeake Bay region, but the implications are interesting to consider nevertheless.

Nutrient trading is the best example. There is little question that the notion of pollution trading stems directly from economic principles, ultimately leading to a sulfur dioxide trading program to control acid rain during the George H.W. Bush years. I don’t have to work very hard to draw those parallels. And while pollution trading in the context of water is less pervasive or understood than it is in the context of air, more than a few papers have catalogued the dozens of current or extant local and regional water pollution trading programs.

The epicenter of water pollution trading is here in the Chesapeake Bay. The concept is so well engrained that, at least in one context (offsetting new pollution loads), the idea of buying and selling nutrient pollution credits was built right into the Chesapeake Bay Total Maximum Daily Load (Bay TMDL). Within the Chesapeake Bay region, nowhere are prospects for nutrient trading rosier than in Maryland, where officials have designs to become the leader in the use of this “innovative” policy to maximize the economic efficiency of the pollution reduction efforts to restore the Bay and its tributaries. The problem, of course, is that maximizing economic efficiency should be a means to an end and not the end goal itself. That end goal is restoration of the Bay, not proving that nutrient trading can work.

I am quite confident that a well-crafted nutrient trading policy can be created that meets the goals of the Bay TMDL at a lower cost, but I’m very skeptical that a policy with the right rules would result in a robust trading system. Establishing the rules to create a robust trading system is theoretically not difficult. Establishing the rules to create a trading system that meets the requirements of the Clean Water Act and protects the health of local waterways and the communities that depend on them is similarly doable. But creating rules that do both may prove to be impossible.

Nutrient trading may work well in limited circumstances (for example a small watershed with a relatively even mix of urban and rural landscapes and only one or two pollutants of concern), but if the rules of the policy are designed to maximize its use everywhere, the result is artificial incentives to reduce pollution in one community at the expense of another community, or that prioritize one pollutant (like nutrients or sediment) over another (including much more dangerous pollutants). The key is an effective set of rules, set down in enforceable regulations.

If the link between nutrient trading policy and free market economics is straightforward, the link between economics and nutrient management is perhaps less clear. But it’s equally instructive. When most of us need fertilizer for the home or garden, we go to the store. For farmers, the same is true, at least some of the time. In the Chesapeake Bay region, U.S. Department of Agriculture (USDA) data tell us that there is a pretty even mix in the number of acres of field crops that are fertilized by commercially obtained fertilizer compared with manure. But whereas a farmer has to pay good money to obtain fertilizer, the manure comes much more cheaply (if not free). And that price differential goes a long way toward explaining differences in how the two types of fertilizer are used.

Proper nutrient management involves the “4 R’s” – the right rate, right timing, right method, and right form. The USDA has periodically surveyed farmers in the Bay region to determine how often they are following the 4R guidelines and, importantly, it split the survey results among farmers that exclusively use commercial fertilizer versus manure. Not surprisingly, the farmers who have to pay money for relatively expensive fertilizer use it accordingly, with far higher rates of compliance with appropriate nutrient rate application criteria as compared with farmers who use manure. Price matters, and supply dictates price.

As far as the supply of manure, the same USDA report noted that the number of acres of fields receiving manure increased substantially in just the few years between surveys, such that by 2011 (the year of the second survey) nearly half (48 percent) of fields in the Bay region received manure. An increase in the amount of land receiving manure means an increase in the number of acres receiving applications inconsistent with appropriate rate criteria. As the USDA authors put it “the majority of the acres in the region lack consistent use of the 4Rs on each crop in every year of production. This is especially true for manured acres, on which the 4Rs are not being met through comprehensive nutrient management plans.” In other words, to reduce phosphorus overloading in the Bay, we need policies that address the supply of manure, and not just the demand side of the equation.

Instead, what we see is a continued expansion of concentrated animal feeding operations (CAFOs) particularly in some regions (like the Delmarva Peninsula) and some animals (broiler chickens). More CAFOs mean more chickens, which means more manure, and a greater availability of low price fertilizer, leading to lower rates of appropriate fertilizer applications, which ends up in greater pollution levels. Right now there is a significant increase in global investment in CAFOs right here in the Bay watershed. Without policies that address the distorted incentives (such as requiring these investors to pay for the cost of cleaning up after themselves) we will continue to see rising pollution levels in the Bay. It’s just economics.