Examining the Effects of Ecological and Political Boundaries on the Potential for Water Quality Trading: Lessons from a Southeastern Trading Framework

Water quality trading (trading) as a means to improve water quality has become an increasingly popular instrument considered by environmental policy makers. Although the U.S. Environmental Protection Agency lists more than forty current trading programs in the U.S., only a few active markets exist. The literature identifies several hurdles to trading, overcoming which requires a deeper understanding of the interaction between local environmental, legal, and economic conditions. Particular challenges include thin markets, uncertainty related to the course and fate of nutrient flows, varying degrees of political support, and high transaction costs related to market infrastructure, monitoring, and enforcement. These hindrances often arise from and contribute to the confinement of trading to tight ecological and political boundaries. This paper explores the effect of these boundaries on the potential for trading in two southeastern reservoirs and their respective watersheds. Results provide insight into the effects of the spatial expansion of markets. These findings contribute to the current dialogue that seeks to better understand barriers to trading.