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Selected Economic Aspects of Water Quality Trading: A Primer and Interpretive Literature Review

The economic objective of environmental regulatory design is to achieve a targeted reduction of pollution at the lowest possible cost. Conceptually, this “cost– effectiveness” objective can be achieved through voluntary adoption of new technologies, strict regulatory approaches, and/or market-based incentive programs such as tax/subsidy mechanisms or marketable permit systems. Encouraged by the singular success of the highly visible United States (U.S.) acid rain program in accelerating reductions in sulfur dioxide pollution, while also providing substantial savings relative to alternative command-and-control measures, environmental policymakers are increasingly directing their attention to market-based approaches that allow flexibility in meeting caps set on aggregate pollution levels.