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Testing the Potential to Implement Collective Enforcement Agreements in Point-Nonpoint Source Pollution Trading and Voluntary Incentive Agreements

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Description
This project tests whether collective enforcement mechanisms can be used to achieve water quality improvements from groups of farmers within a watershed. Collective enforcement arrangements hold groups of farmers responsible for reductions in pollution, and allow the group to determine collectively how to allocate payments for pollution abatement to individuals. The basic notion is that farmers are more suited to understanding how their own and their neighbor's land management practices affect pollution outputs than distant entities. Cost savings arise because collective arrangements focus on performance rather than specific abatement technology, and flexibility in abatement technology choice may promote further innovation.

Objectives/Hypothesis:
The collective enforcement mechanisms developed here are hypothesized to be more acceptable to stakeholders than others suggested in the economic literature. This research goes beyond existing studies by testing the mechanisms with focus groups, and eventually implementing them in a watershed. The specific objectives of this proposal are to: (1) develop and refine a collective enforcement mechanism; (2) test and refine the mechanism among groups of farmers in watersheds; (3) work with stakeholders to implement the resulting mechanism; and (4) develop empirical trading models of point and nonpoint source trading to estimate efficiency gains.

Approach:
An initial set of three focus groups will assess farmer understanding of collective enforcement arrangements and willingness to participate. Tests of the mechanism will occur in two additional focus groups. The project will work with a watershed group to secure funds for implementing the mechanism. Economic models will be developed to assess potential cost savings.

Expected Results:
The collective arrangements designed by this research will help reduce the costs of achieving pollution reductions with existing voluntary incentive programs, such as Section 319 of the Clean Water Act. Because the arrangements are likely to be more efficient, they can also be used in point-nonpoint pollution trading programs to reduce the high trading ratios and transactions costs that hinder many existing programs. Collective enforcement arrangements may provide a mechanism to include nonpoint sources in the TMDL initiative.

Supplemental Key Words: collective enforcement, nonpoint source pollution, tradable pollution permits, watersheds, voluntary incentive programs

Metadata

EPA/NSF ID:
R828627
Principal Investigators:
Sohngen, Brent
Randall, Alan
Technical Liaison:
Research Organization:
Ohio State University
Funding Agency/Program:
EPA/ORD/Incentives
Grant Year:
2000
Project Period:
September 1, 2000 to August 30, 2002
Cost to Funding Agency:
$200,291
Project Status Reports:
For the Year 2001

Objective:

The objective of this research project is to test whether collective enforcement mechanisms can be used to achieve water quality improvement from groups of farmers within a single watershed. Collective enforcement arrangements that focus on the performance of pollution abatement provide potential cost savings when compared to traditional command and control approaches that focus on pollution abatement technology, such as best management practices (BMPs). Cost savings may be attributed to at least two factors. First, collective enforcement mechanisms concentrate on collective abatement performance, rather than specific abatement technology, and they provide flexibility in abatement technology choice. Second, this flexibility in abatement technology choice can promote further innovation. This research project will test whether collective incentives can encourage farmers to work in teams to cost-effectively reduce their pollution emissions within a watershed.

The specific objectives of this research project are to: (1) develop and refine a collective enforcement mechanism that can be used in the field to substitute for traditional application of technology standards (i.e., BMPs) in voluntary incentive programs; (2) test the collective enforcement mechanism among groups of farmers in watersheds, and to further refine the mechanism based on the results of the test; (3) work with stakeholders in a watershed to implement the resulting collective enforcement mechanism; and (4) develop empirical watershed models of point and nonpoint source trading to estimate the economic efficiency of trading systems that rely on trading ratios, and systems that rely on collective enforcement mechanisms.

Progress Summary:

This research project has continued to refine a potential collective enforcement mechanism that potentially can be used in the field. We have progressed in both the theoretical and applied aspects. Graduate students funded by the project have been conducting theoretical research on how joint liability contracts can be designed for groups of farmers in small sub-catchment basins (groups of 10 or less). This research continues to progress, and we anticipate two theses to be completed during the 2002-2003 academic year.

During winter 2001, we conducted four focus groups with farmers. The focus groups were developed to test several aspects of potential joint liability contracts, including size of potential payments, timing of potential payments, allocation of payments to fixed and variable components (to deal with moral hazard), bidding strategies, group formation, strength of social relationships among farmers in sub-catchments, and other factors. The focus groups were conducted with farmers in four different regions of Ohio. Forty farmers participated in the focus groups. The participants were selected according to specific criteria by phone interview. We obtained the farmers' phone numbers from Ohio's farmer mailing lists and from several farm publications.

The overall goals of the focus groups were to gain a better understanding of farmers' perceptions of water quality issues, performance standards, cooperation, and group contracts. The focus groups were free-flowing discussions without specified or controlled output. Moderators asked a series of questions and led the group through a discussion of their responses. Given our interest in structuring contracts, farmers also were asked to participate in a simulated group contract. The simulation allowed them to voluntarily participate in the simulation, to bid on their pollution abatement, to observe the outcome, and to make the same decisions a second time. We proposed a contract for the participants and recorded their responses. The general flow of the focus groups remained constant throughout all of the sessions: (1) introduction of participants and concepts; (2) treating pollution as a commodity; and (3) group contract simulation.

Currently, we are undertaking content analysis of the focus groups' responses to categorize the farmers' responses. The analysis will allow us to analyze trends in their responses to specific questions within and across focus groups. We will attempt to correlate responses to group dynamics and individual characteristics. While a detailed analysis of the focus groups' responses is being conducted, several key elements of optimal contract design with farmers have been discovered. First, joint liability contracts require farmers to estimate their own costs and pollution abatement. We were initially concerned that farmers would not know their costs or their pollution levels (i.e., nitrogen or phosphorous loadings). If farmers are to make commitments to supply specific quantities of pollution abatement, they must know how much they can provide at a given cost. The focus group discussions indicate that farmers are very comfortable estimating their costs of different practices, and they have extensive knowledge about the practices that can be used to reduce nitrogen or phosphorous loadings. There was clear indication that the farmers have less familiarity and confidence with estimating the impact of those practices on water quality downstream. However, farmers thought that if programs were implemented over several years, they could learn how their practices affect downstream loadings fairly quickly.

Second, initial testing of the focus groups among students at OSU indicated that farmers are most familiar with programs that target BMPs rather than pollution (i.e., they focus on installing particular practices in a given region). We were concerned that the farmers in our focus groups would immediately discuss programs where everyone in their group would try the same thing to reduce nutrients. We asked farmers whether it would be better if the program paid willing individuals to install a single, agreed-upon practice, or if the program paid willing individuals to install the practices they thought would work best for them. Farmers strongly responded that they thought they are best suited to choosing which practices on their farm will help meet the pollution reductions. They agreed that a flexible contract that does not dictate a specific nutrient reduction practice to be used would be more effective and cost efficient.

Third, we were concerned about how comfortable farmers would be in a contract where they were jointly liable for the outcome. We designed our hypothetical contract so that individuals would not have a payout if the target was not met, and a collectively agreed-upon payment if the target was met. Subsequent discussion of this contract led to a few conclusions. There was general concern about not having a payout; participants felt that some initial payment would have to be made. They agreed that the initial payment should not be 100 percent of the total payment, but should be large enough to induce cooperation. This general issue is being explored theoretically, and will be explored with followup focus groups. In addition, farmers are concerned about monitoring each other and having to report their neighbors. Nevertheless, they recognize that they cooperate on numerous other projects (such as ditch maintenance petitions, farm equipment sharing, etc), so they may be in a position to help their neighbors select optimal practices, and accomplish their objectives.

Future Activities:

There are two remaining objectives for this research project. First, we propose two additional focus groups to explore several of the issues discussed above in more detail (initial payment required to attract participation, length of program, and how to encourage farmers working together). These focus groups are planned for winter 2003. Second, we hope to obtain funding to implement a performance-based system (Objective 3). We are seeking funding from the Ohio EPA to implement a test of a performance-based collective enforcement arrangement starting in 2003. One of the project's principal investigators has presented the concepts and ideas from this proposal to numerous watershed groups in Ohio, and several of them have expressed interest in trying it.

Presentations:

Taylor M, Sohngen B, Randall A. Point-nonpoint source pollution trading using collective performance incentives. Presented at the Annual Meetings of the American Agricultural Economics Association, Chicago, IL, August 2001.

Taylor M, Sohngen B, Isik H, Randall A. Testing group performance contracts for controlling agricultural pollution. Presented at the Second World Congress of Environmental and Resource Economists, Monterey, CA, June 2002.

Supplemental Keywords: collective enforcement, nonpoint source pollution, tradable pollution permits, watersheds, voluntary incentive programs.

Project Reports:

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