Ecological Economics 177 (2020) 106762

Contents lists available at ScienceDirect

Ecological Economics
journal homepage: www.elsevier.com/locate/ecolecon

Analysis

A method for predicting participation in a performance-based water quality T

trading program
Joshua M. Dukea, Hongxing Liub, , Tyler Monteithc, Joshua McGrathd, Nicole M. Fiorellinoe
⁎

a
Department of Agricultural Economics and Rural Sociology, Auburn University, USA
b
Department of Economics, Lafayette College, USA
c
DNREC, USA
d
Department of Plant and Soil Sciences, University of Kentucky, USA
e
Department of Plant Science & Landscape Architecture, University of Maryland, College Park, USA

ARTICLE INFO ABSTRACT

Keywords: One innovative way to solve water pollution problems is through water quality trading programs. However,
Performance-based water quality trading participation levels and the price of offsets/credits tend to be low, which raises questions about the effectiveness
Nonpoint source pollution of the policy. To offer more tools for policymakers, this paper provides a method for predicting participation in
Best management practice performance-based water quality trading programs, which accounts for field-level heterogeneity. We frame the
Policy design
economic problem in terms of derived demand, i.e., as a farmer Best Management Practice (BMP) input decision
rather than a farmer output decision about supplying offsets. Specifically, this approach offers a straightforward
way for farmers and policymakers to frame the decision to add a marginal unit of BMP—rather than a marginal
unit of abatement—and take advantage of existing performance-based scientific models of nutrient loading. The
paper uses actual market and field data in Maryland to illustrate the method and demonstrate the heterogeneity
within and among BMPs. We also run sensitivity analyses to test the effects of different levels of farmer subsidies
and transaction costs. The application results find, first, the extensive field-level heterogeneity in BMP abate-
ment productivity. Second, the results show that far more farmers will adopt the high-abatement, medium-cost
buffer BMPs than low-abatement, low-cost and high-abatement, high-cost BMPs.

1. Introduction and background
Every coastal state in the U.S. suffers harmful algal blooms, which
impact an average of $82 million a year on the coastal economy
(NOAA). These problems are largely caused by excessive nutrient runoff
from wastewater treatment, urban runoff from point sources, and
agricultural runoff. Economists favor the efficiency and cost effective-
ness of incentive-based policies over command-and-control. Cap-and-
trade policies have been successful in sulfur dioxide (SO2) reduction
globally (Burtraw et al., 2005; Schmalensee and Stavins, 2015; Stavins,
1998a), but not in other areas such as carbon dioxide (CO2) or water
quality trading. This may be due to the degree of pollutant mixing,
uncertainty, policy design issues, distributional impacts, and emission
leakage (Schmalensee and Stavins, 2015). Water quality trading (WQT)
programs—including point-nonpoint trading—have been promoted in
many states for decades to address water quality problems; however,
participation levels and the price of offsets/credits tend to be low,
especially in the presence of other cost sharing programs or asymmetric
information (Fleming, 2017; Hanson and McConnell, 2008; Newburn
and Woodward, 2012; Nguyen et al., 2013; Stephenson and Shabman,
2008; U.S. EPA Water Quality Trading Evaluation – Final Report,
2008).
Well-known examples of WQT are the state-level programs in the
Chesapeake Bay Watershed, where a capped regulated sector can pur-
chase offsets from the unregulated, nonpoint sector through agri-
cultural best management practices (BMPs). If the trades are optimized
and all regulated sectors are included, then Van Houtven et al. (2012)
estimated an 80% abatement cost savings by using robust offsets from
agricultural BMPs. However, practical challenges have reduced the
overall effectiveness of WQT efforts in the Chesapeake Bay Watershed.
On one hand, the nonpoint source credit supply is limited because of
high transaction costs, stringent regulations on the WQT program such
as baseline policies, and farmers being reluctant to enter contracts
(Motallebi et al., 2017; Stephenson and Shabman, 2017b). On the other
hand, point source credit demand is also limited because of the permit
requirements, direct or complex overlapping regulatory requirements,

⁎
Corresponding author: Department of Economics, Lafayette College, 30 S College Drive, Easton, PA, 18042, USA
E-mail address: liuho@lafayette.edu (H. Liu).

https://doi.org/10.1016/j.ecolecon.2020.106762
Received 9 August 2019; Received in revised form 1 June 2020; Accepted 16 June 2020
Available online 07 July 2020
0921-8009/ © 2020 Elsevier B.V. All rights reserved.
J.M. Duke, et al.
or regulatory compliance preferences of dischargers (Stephenson and
Shabman, 2017a, 2017b). When prices for nitrogen (N) and phosphorus
(P) offsets are very low, the BMP adoption incentive may be only $10 or
less per acre.1 In such cases, the transaction costs of signing up for such
incentive programs are likely not worth any other net benefits to
farmers. Lower caps, triggering higher offset prices, are not always
possible because lower offset prices outweigh farmer opportunity costs
of participation, but higher prices deter the buyers (Stephenson et al.,
2010). From the policy designer's perspective, there are also problems
of targeting, implementation, and compliance measurement (Shortle,
2013). Furthermore, in a performance-based WQT system, this low-
farmer-incentive problem is not obvious to the policy maker because of
the complex agronomic models and heterogeneity that translates BMP
adoption into offsets. These issues all suggest that policy makers would
benefit from additional tools for predicting participation in WQT before
the program is implemented. This paper describes one approach.
We offer an alternate framing of the economic problem as a farmer
BMP input decision rather than a farmer output decision about sup-
plying offsets. This method predicts participation in WQT-offset pro-
grams by farmers who adopt BMPs, and we use actual market and field
data to illustrate the method. Unlike previous studies that focus on
estimating a willingness to accept compensation curve for farmers in a
point-nonpoint offset market, this paper proposes that a farmer will
supply into an offset market by optimally selecting BMPs as inputs. In
effect, the NPS supplier has a derived demand curve for BMPs, which is
estimated using actual abatement-productivity data that informs the
WQT market in the Chesapeake Bay Watershed. Such market data come
from certain nutrient trading platforms that are performance-based, like
Maryland's Nutrient Trading Tool (MDNTT), and these agronomic
models provide the functional relationship between a given farm's un-
ique land, location, and management practices, and their productivity
in supplying nutrient abatement. We observe the marginal physical
product (MPP) of any farmer's effort to adopt any available BMP—just
as if they were actually supplying this abatement service. Using a range
of possible offset prices, the researcher can provide the range of any
farmer's marginal revenue product (MRP). Comparing the aggregated
MRP for farmers in a region to agronomic estimates of BMP adoption
costs offers an alternative approach to predict WQT participation.
In the input framing, the farmer's marginal decision involves the
marginal benefits and marginal costs of an additional unit of BMP(instead
of generating a lb. of P or N), which is more natural and easily under-
standable for a farmer. This way of framing is common in cost-share
programs; however, to our knowledge, there have not been studies using
this framing for performance-based WQT. In addition, our unique market
and field data in Maryland allow us to observe field-level heterogeneity in
agricultural productivity, both within and among different BMPs, which
previous studies on WQT do not (Kaufman et al., 2014; Stephenson et al.,
2010; Van Houtven et al., 2012; Wainger et al., 2013).
1.1. Application area and MDNTT
The Chesapeake Bay area, which extends into six states (NY, PA,
MD, DE, WV, and VA) and the District of Columbia, has been the focus
of government efforts to reduce nutrient runoff and improve water
quality. The U.S. Environmental Protection Agency (EPA) established
Total Maximum Daily Load (TMDL) requirements in the Chesapeake
Bay Watershed in 2010 to restore clean water in the Chesapeake Bay
and the region's streams, creeks, and rivers.2 The TMDL identifies the
1 selling offsets. Although our model assumes farmers participate when
One relatively successful example is the WQT program in Virginia. By in-
troducing “perpetual credits” that increased the credit duration and credit
price, the program also greatly increased participation (Stephenson and
Shabman 2017).
2
https://www.epa.gov/chesapeake-bay-tmdl/chesapeake-bay-tmdl-
document
2
Ecological Economics 177 (2020) 106762
necessary pollution reductions from major sources of N, P, and sedi-
ment across the Bay jurisdictions and sets pollution limits necessary to
meet water quality standards. The jurisdictions developed Watershed
Implementation Plans (WIPs) that detailed how and when the jur-
isdictions would meet pollution reduction goals.
The WQT system in Maryland was set up to meet the TMDL goal and
was facilitated by the Maryland's Nutrient Trading Tool (MDNTT during
our data collection, now expanded to represent Chesapeake Bay
“Chesapeake Bay Nutrient Trading Tool v. 2”, at http://www.cbntt.org/
). Although nonpoint loadings from agriculture are unobservable,
farmers can use MDNTT to estimate their offset supply to inform their
decisions. The MDNTT processes field level land and agronomic man-
agement decisions, current and future BMPs, and other details through
the USDA/NRCS Nutrient Tracking Tool (NTT). This tool is based on the
Agricultural Policy Environmental eXtender model (APEX), and the
Chesapeake Bay Watershed Model and calculates estimates of edge of
farm loadings, edge of segment delivery, current load at edge of seg-
ment, and the TMDL baseline. APEX simulates land use/management
for many crops, modeling key variables/impacts such as climate, hy-
drologic balance, and P cycling (see https://epicapex.tamu.edu/apex/).
The Chesapeake Bay Watershed Model also has inputs including at-
mospheric deposition, land use, EOF targets (http://ches.
communitymodeling.org/models/CBPhase5/datalibrary/model-input.
php). Farmers (or aggregators) can run different scenarios of different
future BMPs and other management decisions to examine the offsets
they can derive given the baseline calculated specific to their own fields
(Walker et al., 2012). More details about how farmers interact with the
model can be found in the Chesapeake Bay Nutrient Trading Tool User
Manual (http://www.cbntt.org/pdfs/CBNTT_User_Guide.pdf).
The baseline load maps the Chesapeake Bay Watershed Model with
the WIPs targets into an expected load allocation for each field. The
calculated baseline is the minimum level of performance or practice
that a nonpoint source must meet before additional abatement can be
used to generate offsets. The choice of baselines, often between a time-
based (D-type) and a practice/performance based (M-type) baseline, is
likely the most important institutional choice in the design of WQT
because of its impacts on early adopters and overall efficiency (Ghosh
et al., 2011; Duke et al., 2014). The nutrient trading system in Maryland
uses performance-based baseline, which means above-baseline farms
will have to bear some of the abatement costs on their own to meet the
baseline before generating any offsets. Thus, the expected income from
an offset market may be insufficient to induce participation among
those farms that have not already met the baseline to enter the market
(Ghosh et al., 2011). In this paper, we choose to focus on a subset of our
overall agronomic and MDNTT data collection—i.e., the 77 below-
baseline fields on the Eastern Shore of Maryland in our sample. Because
they are below-baseline, any additional BMPs adopted on the fields
would generate offsets. We focus on only four illustrative BMPs, three of
which are highly productive—forest buffer, grass buffer, precision
agriculture, and land use conversion. Among them, forest and grass
buffers fall under the category of riparian/conservation buffer, which is
essentially a type of land conversion. These types of BMPs are common
and effective in the sandy, flat, and extensively ditched Eastern Shore
landscape.
2. Methods
2.1. Theoretical model
Our approach predicts participation based on farmers' net benefit of
net private benefits per acre are positive, the results also can be used to
calculate other participation thresholds (such as when a farmer must
overcome a certain level of transaction costs). Importantly, we also do
not adjust the results for the observed farm acreages; a large farm ought
to be more likely to overcome transaction costs ceteris paribus.
J.M. Duke, et al.
$ $
S-NPS
BMP MRC
D-PS
MRP-NPS
Q-Offsets BMP Adoption
Fig. 1. Stylized Supply and Demand of the Offset Market and MRP and MRC of
BMP Adoption Decision
Our approach is based on profit-maximizing farmers selling offsets,
which is standard practice; however, we refocus the profit-maximiza-
tion decision on the inputs (BMPs) rather than the outputs (offsets).
Fig. 1 shows the familiar WQT market framing: farmers (NPS) supply
offsets, while point sources (PS) are demanders (Fig. 1). In economic
theory, the demand for inputs in a supplier's production function are
derived from the market for the final goods. We use this analogy to
frame the demand for BMP inputs being derived from the market for
offsets in WQT. Obviously, researchers cannot easily survey—or pos-
sibly ever hope to observe—any farmer's technology function. One in-
sight that drives this research is that, in our framing, the researcher
does not need to observe anything about the farmer's technology be-
cause the technology is a function of an agronomic modeling process.
The actual technology is immaterial to the performance-based WQT
system. A farmer who adopts a BMP receives offsets that reflect what
the model estimates is abated rather than what is actually abated.
Second, our framing is more natural to the decision required of a
farmer—i.e., what are the costs and benefits of adding another acre of
BMP. In contrast, the market for offset supply and demand requires a
farmer to figure out how one more acre of BMP will generate the
marginal cost of supplying one more unit of N or P abated. Although
both these decisions are profit-maximizing decisions, we believe the
framing is cognitively simpler in the derived-demand-for-inputs
framing. We use this insight to know each farmer's technology (MPP)
for abatement and thus predict farmer behavior.
A farmer's abatement decision is a function of both MPP of the
adopted BMP and the market price of the offset. Adoption in this case is
not modeled dichotomously; rather, adoption is a continuous variable
such as square feet of buffers installed or acreage applied to decision
agriculture. Additional input of BMP increases nutrient abatement and
thus offsets. Multiplying MPP by the market price of offsets calculates
the total value added by the input unit, which is the MRP. This MRP is a
monetary measure of the abatement productivity of a farmer's BMPs,
i.e., MRP represents the additional revenue yielded by providing an
additional unit of BMP in the nutrient trading market. To predict
farmers' participation decisions, the analyst compares the MRP to the
MRC, or cost of BMP adoption. Optimizing farmers will adopt BMPs to
sell offsets until MRP = MRC (Fig. 1). Most simple microeconomic
analyses assume that input demanders are price takers. In this study, we
assume farmers buy BMPs by the acre in a well-functioning BMP
market. This reflects conditions in which farmers employ a company to
install buffers, conduct land use conversion, or provide equipment and
expertise to pursue decision agriculture. A limitation of this study is
that we assume all these costs are homogeneous per acre, and that also
includes the idiosyncratic lost opportunities for farmers' any lost pro-
duction. If the farmers are doing their own BMP installation work, if
farms vary significantly in size, etc., then the representativeness of our
results is weaker on the cost side.
The advantage of our approach is modeling directly the hetero-
geneity in MPP because it is the heterogeneity introduced by the WQT
system. The performance-based agronomic models estimate hetero-
geneity in N and P abatement among farmers' adoption of various
BMPs, using their heterogeneous location, soil characteristics, and land
management decisions. States such as Maryland are using these per-
formance-based metrics to run their real-world WQT platforms and to
3
Ecological Economics 177 (2020) 106762
create the value in market trades. As with most WQT studies, certain
assumptions are made to estimate behavioral responses. This study
assumes two types of homogeneity. First, BMP adoption costs are
homogeneous as discussed above. This assumption is made in many
Chesapeake Bay policy optimization models (EPA 841-K-18-002, 2018;
Shortle et al., 2014; Talberth et al., 2015), and these costs are largely or
entirely derived from an expert-panel study (Wieland et al., 2009).
Second, N and P offset market prices are assumed to be a range of
prices.
2.2. Water quality trading institutions in Maryland
We apply the theoretical model to the performance-based nutrient
trading program in Maryland using the Maryland's Nutrient Trading
Tool (MDNTT), and thus the study does not necessarily apply to in-
stitutions developed in other Bay states. Maryland developed a baseline
allocation for agriculture in response to the TMDL, which acts like a
nonpoint “cap” before any farm can earn WQT offsets. The baseline
consists of a minimum set of BMPs (such as complying with nutrient
management regulations and having a nutrient management plan) and
achieving a minimum level of estimated N and P abatement perfor-
mance. Farms with losses beyond or above the baseline have to first
take actions to meet the baseline before they can adopt more BMPs to
generate offsets. Baseline performance consists of an adjusted agri-
cultural load distributed among farm fields in watershed segments, and
then specifically allocated to various farm fields using MDNTT. Walker
et al. (2012) explain how MDNTT functions: in brief, a web user
identifies a field in MDNTT's dynamic GIS map, which called on existing
data on land, soil, and spatial characteristics, then users manually input
agronomic management characteristics, current and future BMPs, and
other details. The MDNTT is user friendly and the user may view esti-
mates of current and future N and P loads (in lbs. acre−1 and total lbs),
the N and P baselines, and the N and P offsets generated (if the field is
below baseline). The key for this paper's data collection is that the
amount of N and P abated is calculated by the MDNTT and these
amounts are easily marketable by the farmer.3 Furthermore, although
the models are updated periodically —to reflect new baselines or other
model adjustments—the general patterns of heterogeneity should be
stable because the underlying scientific models are largely consistent
over time.
3. Data
3.1. Data on the sample fields in MDNTT
Data collection involved three steps. First, the researchers used an
original dataset on agronomic, soil, and other characteristics of 196
farms located on the Eastern Shore of Maryland. This paper builds on
the data originally collected for the working paper Duke et al. (2014);
however, that paper studied the additionality, ran a regression on
abatement productivity heterogeneity, but did not examine BMP
adoption, as does the current paper. Second, data on these fields were
entered in the MDNTT interface as a farmer might, with a set of non-
essential assumptions (such as planting date) made consistently across
all fields. This allowed researchers to identify the subset of 77 fields
that were below the baseline without requiring additional BMPs. These
below-baseline farms could adopt new BMPs and deliver all the abated
N and P to the WQT market. As such, only the subset of 77 below-
3
During early presentations of this paper, we received comments on trans-
action costs. Unlike payment for ecosystem service (PES) programs' high
transaction costs for farmers, the MDNTT system allow farmers to estimate their
expected benefits and participate in WQT with little transaction costs and
therefore higher participation rate. We do recognize the high monitoring costs
of the WQT programs, but they are borne by the government.
J.M. Duke, et al. Ecological Economics 177 (2020) 106762

Table 1 characteristics and management practices required to calculate

Annualized BMP costs range. Maryland's old (Coale et al., 2002) and proposed revised phosphorus
Cost Estimates (acre/year) Source site index (Fiorellino et al., 2017). Statewide, information was collected
for 364 individual fields. These fields were selected by contacting nu-
Forest Buffer trient management planners in each University of Maryland Extension
$163 - $291 Wainger et al. (2013)
county office and agricultural consultant companies that had an ex-
Grass Buffer
$99 - $226 Wainger et al. (2013)
isting relationship with the authors. The nutrient management planners
Land Conversion were asked to recommend farmers who were willing to grant access to
$129 - $257 Wainger et al. (2013) the researchers to collect soil samples and review and copy information
Decision Agriculture from their nutrient management plans. The planners were also asked to
$13 - $30 Chesapeake Bay Commission: 2012 Economic Study
try and limit their selection to farmers who had fields where the soil
phosphorus concentrations were above 150 on the fertility index value
baseline fields are included in the sample. One expects that the above- (FIV) scale. This is the legal threshold for soil P concentration above
baseline fields would deliver more expensive abatement—because some which a farmer would have to run a P site index to determine risk of P
of their BMP MPP would go to meeting baseline—and thus the parti- loss and guide further P applications to that field. However, this last
cipation results herein should not be systematically affected by ex- criterion was not always met as the requirement for access took pre-
cluding the above-baseline sample. The third step was to run BMP cedence. The goal was to construct a data set containing approximately
scenarios for each field. 200 fields on the Maryland's eastern shore. In addition, the original goal
was to bias the selection towards fields located on the lower Eastern
Shore (Wicomico, Somerset, and Worcester Counties), because this is
3.2. Agronomic data
where Maryland's poultry industry is most concentrated and as a result
incidence of soil P concentrations above 150 FIV is known to occur most
The original data set contained information on physical

Fig. 2. N and P Reductions for four BMPs.

4
J.M. Duke, et al. Ecological Economics 177 (2020) 106762

Table 2 in MDNTT, each in turn: grass buffers, forest buffers, decision agri-
Expected Participation Rate for the Four BMPs. culture, and land use conversion. Thus, we generate 77 × 4 = 308
Practice Offset Per-acre cost for Expected participation observations on P and the same amount on N. Efforts to look at other
price⁎ BMP⁎⁎ (%) BMPs such as conservation planning (high and low till) and water
control structures were dropped due to lack of cost studies. These BMPs
Grass buffer Low High 1.3
were applied to certain percentage of the field within MDNTT. Decision
Low Low 42.9
High High 98.7
agriculture was applied to the entire field, while land use conversion
High Low 100.0 was applied to 25% of the field by converting crop to forest.4 Forest and
Forest buffer Low High 1.3 grass buffer sizes were calculated through a series of steps. First, each
Low Low 37.7 field was identified in a GIS system and the side of field closest to
High High 98.7
surface water was determined. Then the length of that side was mea-
High Low 100.0
Decision Low High 0 sured, because that is the area where the buffer would be implemented.
agriculture Low Low 0 The buffer length (in feet) was multiplied by 45 ft., which represented
High High 0 the expected buffer width and which was then converted to the unit of
High Low 0
acres. Therefore, abatement heterogeneity comes from both the varied
Land use Low High 0
conversion Low Low 0
sizes of the buffers and other varying geophysical inputs into MDNTT.
High High 24.7 MDNTT estimates future load reductions for N and P. These future re-
High Low 71.4 ductions represent the possible offsets that could be sold in the trading
market. Scenarios were run for each field and each BMP, generating 77
⁎
Low offset prices: $4/lb. for N, $20/lb. for P reduction. High offset prices: different expected reductions for each BMP measured per acre per year.
$20/lb. for N, $100/lb. for P reduction.
⁎⁎
Low and high per acre cost for BMPs are the lower bounds and upper
bounds shown in Table 1. 3.5. Offset prices and BMP costs

frequently.
Of the original 364 fields, 196 fields were located on the Eastern
Shore with 96 of those located in the southern three counties. The
average soil P concentration for the 196 fields in the current data set
was 264 FIV. The true mean of the entire population is unknown, but
one may assume that this dataset was somewhat biased, resulting in a
higher mean soil P concentration than the population. In addition, the
data set, due to the requirement of access to fields and nutrient man-
agement records, was likely biased towards farmers who are following
current nutrient management regulation. As a result, these farmers may
be more likely to participate in WQT. Due to the selection bias, the data
set may over sample farmers who are more likely to have more BMPs in
place. In general, these known sources of bias should not affect pro-
duction management practices, as methods for growing the primary
grain crops present on the Eastern Shore of Maryland are relatively
standard. While the data set may be biased towards farmers who have
historically used manure as a nutrient source and therefore have above
average soil P concentrations, other management practices should not
be influenced. Finally, selection of fields for the initial data set was not
geographically weighted and multiple fields managed by one operator
may have been sampled. Therefore, management may be more con-
sistent across our data set than in the natural population.
3.3. Data on sample fields in MDNTT
The 196 fields were entered Maryland's Nutrient Trading Tool
(MDNTT). The trading tool takes into account the agronomic data that
reflects the farmers on field activities such as fertilizer application, crop
rotation, location, and soil type. A list of assumptions made for the data
entry process can be found in Appendix Table 1, which originally was in
Duke et al., 2014, Table 1. Through a series of calculations through
several different models, the program generates an estimated current
load of N and P measured in lbs. acre−1. This load is compared to the
baseline load, and a message tells the user whether that specific field
meets the baseline requirements. Of the 196 fields, 7 were unable to be
entered in MDNTT due to lack of data. Of the 189 fields left in the
sample, 77 (40.7%) met baseline requirements for both nitrogen and
phosphorus, prior to the implementation of any BMP.
3.4. BMP scenarios and final data set
The 77 fields that met baseline requirements had four BMPs applied
For more robust results and to account for the uncertainty in the
nutrient reduction and offset markets, we applied a range of offset
prices and BMP costs: $4 to $20 per offset for N and $20 to $100 per
offset for P. True prices were unknown because there was no func-
tioning market at the time of data collection; however, these were the
approximate ranges being discussed in professional meetings attended
by the lead author. These ranges allow the calculation of a single low-
to-high range of MRPs—i.e., the MRP for N and P together expressed in
dollars. The annualized BMP costs include initial capital costs, oper-
ating costs, maintenance, labor, installation, and very importantly,
current opportunity costs of lost agricultural productivity and ex-
pectations of future commodity price increases. Wainger et al. (2013)
and Wieland et al. (2009) provide the upper and lower bound of the
cost range (Table 1). We also recognize that if these farms are highly
productive land, the participation rate would be lower. Wieland et al.
(2009) is the original source of many or all of these costs.
4. Results
The results are divided into three sections. First, abatement pro-
ductivity heterogeneity found in the data is presented graphically for
each of the four BMP treatments. Then, the minimum and maximum of
expected participation is calculated by: (1) making a high and low as-
sumption on N and P offset prices in WQT; and (2) making a high and
low assumption on BMP adoption costs. These results show the range of
predicted net benefits for each field in adopting a BMP to sell offsets
into WQT. Lastly, two additional sensitivity analyses show how ex-
pected participation might be change if farmers have to bear different
levels of transaction costs or the government applies subsidies to these
BMPs.
4.1. N and P marginal physical product
Heterogeneous fields generated heterogeneous N and P reductions
under the four BMPs (Fig. 2). For each BMP, we sorted the fields by the
N reduction (pounds per acre of area treated by the buffer per year) and
the corresponding P reductions are shown on the secondary axis. The
4
We thought it unrealistic to convert entire fields to control nutrients from
farming, so we modeled each land-use conversion at 25% of acreage. This
number is the same as the Conservation Reserve Program maximum county
cropland acreage enrollment.

5
J.M. Duke, et al. Ecological Economics 177 (2020) 106762

1200

1000

Net Benefits ($/acre/year)

800

600

400

200

0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77

-200

Maximum net benefit Minimum net benefit Average net benefit

Fig. 3. Net Benefit Range of Grass Buffer.

buffer area was calculated as explained in section 3.d. Our abatement and conversion BMPs stem from the BMP efficiencies (an assumption in
efficiency calculations are in relation to the entire field—because the the agronomic models) but also the locations at which the BMPs were
field and buffer combined deliver the treated BMP loading reduction. installed (buffers were close to ditches/waterbodies). Decision agri-
Although the buffer efficiency appears unexpectedly high relative to culture has a very low productivity.
land use conversion, this is a slightly misleading comparison. We ap-
plied the conversion BMP to a percentage of the field without specifi-
4.2. Combined N and P in MRP versus MRC
cally targeting riparian lands, but the buffer was always applied to ri-
parian lands. Riparian BMPs are more efficient in the MDNTT model.
For each scenario, we generated the MRP range by multiplying the
Note that decision agriculture only affects N, so the P reduction is null.
N and P reduction by the corresponding offset price ranges. We also
All other BMPs generated more lbs. of N reduction than P reduction (the
estimated the range of MRC by multiplying the BMP adoption acreage
magnitudes are different on the axes) but the two are not highly cor-
by the cost ranges in Table 1. With the high/low benefits and high/low
related.
costs, we predict the range of participation. The results are in Table 2.
When one compares the reductions across BMPs, the buffers have
For all BMPs, the lowest participation rate occurred when the offset
relatively high abatement productivity for many fields. Land-use con-
prices (benefit) are low and the BMP cost is high, and highest partici-
version tends to be less productive. The differences between the buffer
pation when the benefit is high and the cost is low. The results show

1800

1600

1400
Net Benefits ($/acre/year)

1200

1000

800

600

400

200

0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77
-200

-400
Fields

Maximum net benefit Minimum net benefit Average net benefit

Fig. 4. Net Benefit Range of Forest Buffer.

6
J.M. Duke, et al. Ecological Economics 177 (2020) 106762

0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77

-5

Net Benefits ($/acre/year) -10

-15

-20

-25

-30

-35
Fields

Maximum net benefit Minimum net benefit Average net benefit

Fig. 5. Net Benefit Range of Decision Agriculture.

high expected participation rates for grass and forest buffers when the Table 3
benefits are high: 98.7% when costs are also high, 100% when costs are Predicted Participation Rate under Subsidies.
low; but very low or moderate level of participation when benefits are Participation rate (%) by BMP
low: 1.3% when costs are high, 42.9% or 37.7% when costs are low. In
other words, buffer adoption will be most sensitive to offset prices. Subsidy level Decision Forest Grass Land use
For decision agriculture, even with high benefit and low cost we still (per acre) agriculture buffer buffer conversion
expect 0% participation rate, due to its low productivity. The expected $0 0 94.8 94.8 2.6
participation rate of land use conversion is 0% if the benefit is low, $10 0 96.1 96.1 5.2
regardless of the cost level. However, when benefit is high, the parti- $50 100 98.7 100 28.6
cipation rate could be 24.7% or 71.4% depending on the cost. $100 100 100 100 49.4
The net benefit sensitivity range for each field for each BMP is
shown in Figs. 3 to 6, where the red line is 0 net benefit, or breakeven,

400

300
Net Benefits ($/acre/year)

200

100

0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77

-100

-200

-300
Fields

Maximum net benefit Minimum net benefit Average net benefit

Fig. 6. Net Benefit Range of Land Use Conversion

7
J.M. Duke, et al. Ecological Economics 177 (2020) 106762

Table 4 5. Conclusion and discussion

Predicted participation rate with transaction costs.
Participation rate (%) by BMP This paper provides a different approach for predicting participation
in a performance-based WQT market and uses actual market and field
Transaction cost Decision Forest Grass Land use data to illustrate the method. A key result is the estimated hetero-
($/lbs./year) agriculture buffer buffer conversion geneity in N and P abatement across our sample of Maryland farms. It is
0 0 94.8 94.8 2.6 this heterogeneity that leads to vast differences in the estimated field-
4 0 94.8 94.8 2.6 level MRP of adopting each of four BMPs. Under the likely range of
9 0 88.3 88.3 1.3 offset prices, Maryland's Nutrient Trading program alone is not likely to
30 0 88.3 88.3 1.3 generate further adoption of the land-use conversion and decision
agriculture BMPs. This means that the actual prices observed might rise
if there is enough demand. Given that some PSs will be willing to pay
and above which the specific field should adopt that particular BMP.
low amounts for offsets because they can abate on the margin at a lower
Each bar represents the range of net benefits, from high benefit low
cost, the results suggest that the WQT market will continue to be thin
cost, to low benefit high cost. We rank the fields based on their highest
until the cap starts to bind (in the future due to population growth) or
estimated net benefit.
by lowering the cap. Currently, forest and grass buffers, which are more
comprehensively addressed by state land use policies and federal con-
servation programs, have the highest estimated participation rate. This
4.3. Sensitivity analysis: expected participation with subsidy
means that those most likely to participate in the offset market may
have already responded to existing policies. Thus, the effectiveness of
This sensitivity analysis, alternately, captures unmeasured private
WQT may be limited by systematic selection from previous cost-share
benefits from BMP adoption, stacked benefits from other cost-share
policies.
programs, joint effects in an economy of scale in adoption of other
In the first sensitivity analysis, we show that a new subsidy policy
BMPs, or potential subsidies from other organizations outside of offset
from the state could incentivize higher participation rates today. This
trading. In short, there are various reasons why the net benefit ranges in
may be warranted as a policy goal if policy makers seek to trigger
the preceding sections might be too low. We conceptualize the sensi-
trades. However, in terms of economics, if nonpoint sources are re-
tivity as a subsidy, which would encourage participation.
ceiving the subsidies, the offset market could be distorted. Increased
We estimated participation rates using an average cost between the
benefits would shift the BMP supply curve to the right in Fig. 1,
high and low cost estimates above. Similarly, we used an average of the
meaning suppliers of BMPs would be able to do so at a lower cost,
assumed N and P offset prices. Then, additional subsidy levels of $0,
which creates a distortion.
$10, $50, and $100 per acre of BMP were applied to each scenario.
Although our approach was framed with respect to performance-
Collectively, these assumptions suggest that this analysis is more ac-
based WQT, the method has a broader application to payment for
curate for “average” type farms and market conditions. As shown in
ecosystem services (PES) or any other performance-based policies that
Table 3, the additional incentives have different effects on the four
depends on the production output. We also emphasize the importance
BMPs, which depends on their original adoption rate. A $50/acre
of integrated assessment models such as the MDNTT that incorporates
subsidy can incentivize decision agriculture from 0 to full participation,
physical characteristics, climate inputs, and management decisions. It is
but even with $100/acre subsidy the land use conversion participation
only with these models that individual farmers or policymakers can
rate is still below 50%. Forest and grass buffer already have high par-
estimate the field-level MPP.
ticipation rate and the subsidy can increase the participation to 100%.
One thing to notice is that our paper focused on the 77 below
The sensitivity analysis also shows how our framing can help design
baseline fields where any additional adoption of BMP can generate
more cost-effective mechanisms for incentivizing adoption of BMPs and
credits. However, other farmers may also choose to participate in the
participation in the offset market focusing on the different features of
WQT programs if their net benefit is above zero, although they face a
different BMPs. Incentive programs should also take into account the
higher cost because they have to take actions to meet the baseline first.
actual benefits of these subsidies in terms of nutrient reduction for cost-
Therefore, our prediction of adoption rate could be a best-case scenario
benefit analysis.
given the baseline regulation.
One problem not addressed in this paper is additionality. An im-
portant issue in the offset market is who is more likely to participate
4.4. Sensitivity analysis: expected participation with transaction cost
(Fleming et al., 2018). Those who are likely to sell in the offset markets
are often time current providers of BMPs, and the chance that non-
In trading programs, BMPs that receive cost-share payments cannot
additional offsets will enter the system rises with the state's monitoring
generate offset credits (Horan et al., 2004). However, one of the reasons
costs (Duke et al., 2014). Because in Maryland the already-adopted,
for the low adoption rate of BMPs in performance-based policies is the
below-baseline BMPs cannot generate offset credits, additionality is not
high perceived transaction cost (Palm-Forster et al., 2016; Rees and
likely to be a large problem. There could be cases where certain BMPs,
Stephenson 2014; Stephenson and Shabman, 2017a, 2017b). Transac-
such as decision agriculture or nutrient management, generateaddi-
tion costs can be broadly defined to include both the cost of developing
tional private benefits other than the benefits of nutrient abatement,
trading program rules and the costs involved in program and trade
resulting in “win-win” situations. However, we also acknowledge that
implementation (Rees and Stephenson 2014) or only on the farmer's
monitoring efforts and the unmonitorability of certain BMPs will de-
side of applying for a program and complying with rules and regula-
termine how important this additionality issue will be. Although
tions (Palm-Forster et al., 2016). Using an average cost between the
structural BMPs such as buffers are easier to monitor, non-structural
high and low cost and an average of the assumed N and P offset prices,
BMPs such as decision agriculture in our study are harder to monitor
we test a range (in Table 4) of transaction costs from $0 to $30/lb./
and enforce. How to better monitor BMP adoption and capture the
year, which represents a range of complexity and length of WQT con-
private and public benefits could be a potential topic for future studies.
tracts (DeBoe and Stephenson, 2016). Higher transaction costs lead to
lower participation rates for the buffers and land use conversion, while
decision agriculture was already at 0%.

8
J.M. Duke, et al.
Declaration of Competing Interest
The authors declare that they have no known competing financial
interests or personal relationships that could have appeared to influ-
ence the work reported in this paper.
Appendix A. Appendix
Table 1
Assumptions used to augment and reconcile agronomic survey data in MDNTT.
Agronomic Factor
Planting Method
Soil P Test Values
Planting Date
Harvest Date
Commercial Fertilizer Application Date
Commercial Fertilizer Incorporation Depth
Manure Type
Manure Application Date
Manure Consistency
Manure Nitrogen Concentration
Manure Phosphorus Type
Poultry Manure
Manure Incorporate Depth
Manure Moisture Content
If Land Use Conversion BMP
Source: Working paper Duke et al., 2014.
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Acknowledgements
This publication was supported by the Alabama Agricultural
Experiment Station and the Hatch program of the National Institute of
Food and Agriculture, U.S. Department of Agriculture.
Assumption(s) Made
If no-till is used, assumed no-till drill as the planting method
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All units measured in FIV
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