A pollution offset system for trading non-point source water pollution permits

Abstract

Water pollution from non‐point sources is a global environmental concern. Economists propose tradable permit systems as a solution, but they are difficult to implement due to the nature of non‐point sources. We present a pollution offset system for trading non‐point source water pollution permits. Conventional pollution offset systems suffer from thin markets and transaction costs. In this paper, we show how to overcome these problems with a centrally managed common‐pool market. We define permits as allowable nitrate loading to a groundwater aquifer. This trading system utilizes estimates of potential nitrate leaching from land uses, a set of transport coefficients generated from a simulation of nitrate transport in groundwater, an online trading system, and a linear program to clear the market. We illustrate the concept using a hypothetical case study.