Water quality trading opportunities in two sub-watersheds in the northern Lake Okeechobee watershed.

For decades, the increase of nutrient enrichment has threatened the ecological integrity and economic sustainability of many rivers, lakes, and coastal waters, including Lake Okeechobee, the second largest freshwater lake in the contiguous United States. Water quality trading programs have been an area of active development to both, reduce nutrient pollution and minimize abatement costs. The objective of this study was to apply a comprehensive modeling framework, integrating a hydrologic-water quality model with an economic model, to assess and compare the cost-effectiveness of a water quality trading program over a command-and-control approach in order to reduce phosphorus loadings to Lake Okeechobee. The Upper Kissimmee (UK) and Taylor Creek/Nubbin Slough (TCNS) sub-watersheds, identified as major sources of total phosphorus (TP) loadings to the lake, were selected for this analysis. The effect of different caps on the market potential was assessed while considering four factors: the least-cost abatement solutions, credit prices, potential cost savings, and credit supply and demand. Hypothetical trading scenarios were also developed, using the optimal caps selected for the two sub-watersheds. In both sub-watersheds, a phosphorus credit trading program was less expensive than the conventional command-and-control approach. While attaining cost-effectiveness, keeping optimal credit prices, and fostering market competition, phosphorus reduction targets of 46% and 32% were selected as the most appropriate caps in the UK and TCNS sub-watersheds, respectively. Wastewater treatment facilities and urban areas in the UK, and concentrated animal feeding operations in the TCNS sub-watershed were identified as potential credit buyers, whereas improved pastures were identified as the major credit sellers in both sub-watersheds. The estimated net cost savings resulting from implementing a phosphorus trading program in the UK and TCNS sub-watersheds were 76% ($ 34.9 million per year) and 45% ($ 3.2 million per year), respectively. It is important to note that the realization of the environmental and economic benefits of this market-based alternative is also contingent on other important factors, such as the market structure, the specific program rules, the risk perception, and the education and outreach to develop trusted relationships among regulatory agencies, the public sector, and other stakeholders. Nevertheless, this research provided the foundation for stakeholders to better understand whether water quality trading has the potential to work in the Lake Okeechobee watershed and to facilitate the development of a pilot program.