I am in the middle of my first water quality trading (WQT) project. The project covers WQT markets in 10 states spread from Washington state to Florida. Exploring this new market, I am seeing striking similarities to the water quantity market. This observation was further highlighted by the The Water Resource Institute’s publication Water Quality Trading Programs: An international Overview. This paper identified five key factors that drive water quality trading. Below, I’ve listed each of these five factors recognized in the WQT program paper and provide additional narrative of how these factors play out in the water quantity market.
1. Strong regulatory and/or non-regulatory drivers, which helped create a demand for water quality credits.
Water Quantity Market. Although simple supply and demand can drive water quantity markets, the most active markets include regulatory closure and mitigation or augmentation requirements for new demand.
2. Minimal potential liability risks to the regulated community from meeting regulations through Trades.
Water Quantity Market Regulatory risks plays a prominent role in water transactions. I’d even argue these risks are driving use of exempt wells and other means to avoid the regulatory uncertainty (e.g. time and expense of a new permit).
3. Robust, consistent, and standardized estimation methodologies for nonpoint source actions.
Water Quantity Market. The water quantity equivalent of this statement is the need for clearly defined water rights.
4. Standardized tools, transparent processes, and online registries to minimize transaction costs.
Water Quantity Market. A water rights deal where the transaction costs exceed the cost of water is not uncommon. Standards (e.g. 2 AC-FT acre) will increase efficiency and decrease regulatory risks. Water rights are complex- really complex – developing standards and transparency will help expedite transactions.
5. Buy-in from local and state stakeholders.
Water Quantity Market. The ability to object to water rights changes and transfers make this element essential to even the smallest of water rights transaction.