The enactment of the Clean Water Act in 1977 drastically improved the quality of US waterways by regulating point sources such as industry or wastewater treatment facilities. While there were marked improvements in water quality in the early days of point source regulation, further reductions from point sources will likely be costly and yield fewer reductions as the initial ‘low-hanging fruit’ has been exploited, and point sources are not able to meet more stringent regulatory requirements. One key aspect of water quality has yet to be addressed: the overwhelming majority of nutrient pollution in most watersheds today comes from non-point sources, primarily agriculture, whose impact on water quality is not regulated.

Improving water quality through performance-based approaches is beginning to be explored as a way to engage non-point sources and find more cost-effective methods to improving water quality. Performance-based approaches target an environmental outcome rather than the sources of pollution and are frequently market-based, i.e., pounds of nutrient pollution reduced is the commodity of interest, not the implementation of the conservation best management practice (BMP) or technology upgrade that results in the reduction in nutrient losses.

One performance-based approach gaining popularity throughout the US is nutrient trading. Nutrient trading allows those sources who can’t meet their water quality goals, such as point sources with high upgrade costs or zero discharge permits, to purchase nutrient reduction credits from sources who are able to reduce nutrients at a lower cost. Generated credits could come from either point sources or non-point sources, such as agriculture.

There are many benefits to water quality trading, however to date many programs have not been very successful. This is primarily because of high transaction costs due to few buyers and sellers; the fungibility of non-point source credits; and the difficulty quantifying non-point source load reductions.

WRI has developed NutrientNet (www.nutrientnet.org), an online credit estimation tool and marketplace, to address these known hurdles to trading outlined above. NutrientNet’s estimation tool allows point and non-point sources to quantify existing nutrient loads and reduction options using robust, site-specific calculations. A Geographical Information System (GIS) mapping interface is an important element of NutrientNet’s non-point source estimation tool, as it is used to pinpoint the location of the relevant operation or facility and provide any underlying spatial information needed to estimate nutrient loadings. Users can post offers to buy or sell credits on NutrientNet’s online marketplace.

NutrientNet has been and will continue to be developed for various water quality trading programs throughout the US. The website has also been used for other types of performance-based approaches such as reverse auctions, which are effective for markets with many sellers and a single buyer. This approach is ideal for agriculture, as it helps to distribute funding for agricultural best management practices and ensure that the funding purchase the greatest environmental outcome at the least cost.

In addition, NutrientNet is being developed as an educational website to teach market-based policies to environmental economics and management classes. NutrientNet-EDU enables students to go beyond theoretical knowledge and learn about environmental markets by using a hands-on approach.

Another important aspect of WRI’s performance-based incentives project is the dissemination of information. WRI has become a leading expert in the water quality trading arena, and plays a key role in sharing lessons learned in watersheds where performance-based approaches such as nutrient trading, pollutant trading, or reverse auctions are being tried or considered.