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Article, Refereed Journal

Moving pollution trading from air to water: potential, problems, and prognosis

Journal of Economic Perspectives 27(1): 147-172.

Olmstead, Sheila

While nearly three dozen water pollution trading programs have been established in the United States, many have seen no trading at all, and few are operating on a scale that could be considered economically significant.The global experience with water quality trading is not much more extensive. While water quality trading holds substantial promise, many challenges remain to be worked out by economists and by environmental managers. These challenges involve both physical aspects of water pollution problems that require modifications to the typical structure of pollution trading as practiced for air quality, as well as constraints imposed by current regulatory approaches to water pollution control that limit market function, including the implied assignment of rights to pollute. This paper assessors the current status of water quality trading and identifies possible problems and solutions. We offer some background on US water pollution regulation, present an informal assessment of the current status of water quality trading, describe six criteria for successful pollution trading programs, and consider how these apply to standard water quality problems, as compared to air quality. We then highlight some important issues to be resolved if current water quality trading programs are to function as the

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