The differential benefits of market-based water pollution control policy

Abstract

This paper examines the water quality benefits of Wisconsin’s phosphorus rule, which created the most stringent water quality standards for phosphorus in the US. We estimate the impact of this policy on phosphorus concentrations downstream of affected point sources and investigate the differential benefits realized from compliance with the rule via treatment technology upgrade versus compliance through offset trading. Leveraging an upstream-downstream research design, we find that the phosphorus rule reduces total phosphorus concentrations downstream of regulated point sources by 27%. We further find that technological upgrades yield larger reductions (31%) than offset trading (22%), but offsets represent the cost-effective option. Upgrading facilities pay roughly $34,000 per year in capital costs to produce the same water quality improvements as offset trades that cost $6000 per year.