The Dead Zone in the Gulf of Mexico is a seasonal phenomenon in which depletion of oxygen in the water column kills bottom-dwelling organisms and drives mobile marine life from the area. In the summer of 2002, the affected area was the size of Massachusetts. This hypoxia, or seasonal reduction of oxygen in the waters of the Gulf, is caused by nutrient pollution, primarily nitrogen, which is believed to come mostly from agricultural sources. Decreasing the size of the Dead Zone and its negative effects on marine organisms will require reducing the amount of nitrogen reaching the Gulf by 20 percent to 30 percent.

In an attempt to identify a cost-effective strategy to alleviate the problem of hypoxia in the Gulf of Mexico, the World Resources Institute undertook an analysis of possible policy approaches. This analysis specifically included other associated environmental benefits, such as climate change mitigation and improved local water quality, resulting from different policy approaches.

Although very different environmental issues, climate change mitigation and water quality improvements are interrelated, since any decreases in nitrogen reaching waterways from agricultural land have implications for nitrous oxide emissions, a potent GHG. For instance, lower nitrogen fertilizer use reduces both the nitrogen that is leached into waterways and the amount that is volatilized as GHGs.

Moreover, agricultural practices and management decisions that slow the rate of nutrient losses to waterways frequently improve carbon sequestration and storage in the soil. Agriculture has an important role to play in climate change mitigation because the sector is a large emitter of nitrous oxide in the United States and also captures and stores carbon from the atmosphere. Thus, a single environmental strategy has the potential to address multiple problems simultaneously.

Our analysis shows that the use of market mechanisms like nutrient trading provides not only the greatest overall environmental benefits but also is the most cost-effective strategy. Nutrient trading allows sources with high mitigation costs to obtain credits from sources that can reduce their contribution of pollutants to waterways at a lower cost. Trading focuses on reducing the cause of the environmental concern at hand rather than promoting a specific practice or set of practices.

For instance, under a nutrient trading program, farmers would be paid according to size of the reductions they achieve in nitrogen or phosphorus loss-- not on the number of acres placed in conservation tillage or the buffer strips they plant. This approach provides greater flexibility for local policymakers and farmers to identify and implement the most appropriate solutions in their region.

Other potential policies examined in this study did not perform as well as nutrient trading in reducing the amount of nitrogen delivered to the Gulf or in providing any associated environmental benefits. GHG trading at $14 per metric ton of carbon provided reductions in GHG emissions and nitrogen delivered to the Gulf as well as improvements to local water quality and farm income.

However, at the current world price of around $5 per ton of carbon, incentives are insufficient to attract widespread participation by farmers in trading. Consequently, this policy option produces fewer GHG reductions, significantly lower water quality improvements, and smaller increases in farm income. Combining nitrogen trading with payments for reducing GHG emissions provides similar benefits to the Gulf and local water quality as nitrogen trading alone, but offers slighter greater climate benefits.

Other policy options examined, such as a tax on nitrogen fertilizer or a subsidy to farmers converting from conventional tillage practices to conservation tillage, provided some water quality and climate change benefits, but also led to declines in farm income. The latter effect makes taxes on nitrogen fertilizer or subsidies for conservation tillage less appealing options.

The final policy tested, an expansion of the Conservation Reserve Program to 40 million acres, produces all around positive benefits, but the magnitude is typically lower than those achieved under nutrient trading and thus does not provide an adequate solution to the problem.

To more effectively address the problem, the Mississippi River/Gulf of Mexico Watershed Nutrient Task Force (the federal, state, and tribal taskforce dealing with hypoxia in the Gulf) or its constituent agencies can set a target and provide a mechanism to reduce the size of the Dead Zone. This can be achieved by introducing a reduction goal to support the Task Force’s Action Plan and endorsing programs that embrace performance-based nutrient reduction opportunities, such as nutrient trading.

Federal and state agricultural policy can also provide further motivation for farmers to reduce their nutrient losses by focusing incentive mechanisms, like nutrient trading, in those areas that contribute the greatest amount of nutrients to waterways and the Dead Zone.