In the 1980s, a group of North Carolina business and government leaders figured out a way to reduce water pollution when the Clean Water Act could not achieve it.
The Tar-Pamlico River (which is one river with two branches) flows into the Pamlico Sound. Many small creeks and streams feed into the river. Historically, the towns around the sound have been tourist destinations. People use the Pamlico Sound for recreational boating, fishing, and swimming, as well as commercial fishing.
As North Carolina’s population and industrial production increased, the Pamlico Sound became polluted with nitrogen and phosphorus. These chemicals removed oxygen from the water, resulting in oxygen depletion, or eutrophication. This eutrophication caused many fish to die. By 1988, the sound’s annual fish catch had declined by 50 percent from what it had been just a few years earlier. Also, nitrogen and phosphorus had caused algae to spread. An official of the North Carolina Division of Marine Fisheries called Pamlico Sound “commercially dead.” In fact, citizens of the river town of Washington held a mock funeral ceremony for the Pamlico Sound to call attention to the problem.[1]
The Limits of Laws
What could be done? Under the Clean Water Act of 1972, federal and state governments had set water pollution standards for factories, other industrial facilities, and municipal wastewater treatment plants. Government officials call these facilities “point sources” because they emit wastewater into creeks or rivers at a specific, identifiable point. Government officials confirmed that all the point sources along the Tar-Pamlico River and its tributary creeks were meeting the federal standards, but the Pamlico Sound remained polluted. So, what to do?
There was a second cause of the pollution, agriculture. The fertilizers that farmers were using on their crops contained high levels of phosphorus and nitrogen. Also, the manure of hogs and cows contain high levels of nitrogen and phosphorus. Rain was washing fertilizer and animal waste from farms and dairies throughout the northeastern region of the state into the creeks and streams that flowed into the Tar-Pamlico River. Eventually these chemicals reached the Pamlico Sound.
The farmers weren’t deliberately dumping chemicals into the water, but the natural forces of rain and gravity caused the chemicals in the soil to run off into the river basin and the sound. Unfortunately, the Clean Water Act was not designed to address this “non-point pollution” problem. No individual farmer could be identified as having caused a specific amount of pollution, so no individual farmer could be required to pay the cost of cleaning it up.
Some environmental activists wanted the government to press harder on the point sources by setting tighter standards. But businesses and government wastewater treatment facilities would have to spend millions of dollars to meet the standards—and the additional expense probably wouldn’t have had a measurable effect on the overall level of water pollution.
Cooperation to the Rescue
So, a group of concerned people, including wastewater treatment plant managers, federal and state government officials, and members of a conservation group, the Environmental Defense Fund, came up with a solution—a “market” solution. There was already an association of public and private water treatment facilities, and this Tar-Pamlico River Basin Association agreed to pay farmers to reduce the nitrogen and phosphorous runoff from their farms.
Members of the association each agreed to pay a fee, and the money collected was used to pay farmers throughout the Tar-Pamlico River Basin to operate their farms and dairies differently. Farmers could, for example, create buffers of vegetation (trees and shrubs) along the water’s edges of their property to hold back pollution. They could also keep hog waste out of the water and reduce their use of synthetic fertilizers by using hog waste as fertilizer for crops.
The point-source facilities were willing to pay the farmers to take these steps because doing so was much cheaper than spending the dollars needed to drastically reduce their own effluent. In a way, this arrangement created a market for labor to reduce water pollution in the Tar-Pamlico River Basin. Essentially, point sources were agreeing to “hire” farmers to reduce their nitrogen and phosphorus runoff.
On the other side of the transaction, the farmers were agreeing to “sell” their labor to the association by working to reduce nitrogen and phosphorus runoff on their farms in return for payments from the industrial wastewater emitters. According to economist Bruce Yandle, an industrial facility at the time would have to spend $35 to reduce a unit of wastewater discharge by itself, but it could accomplish that reduction—or more—by paying farmers at $13 a unit. Yandle calls this a “market for water quality.” The trades made each side better off and significantly improved the overall water quality in the region. [2]
Today, even though some of the rules of the arrangement have changed, this market-based arrangement continues to exist. In general, market-based solutions like this one create incentives for people to act voluntarily in a beneficial way. In contrast, “regulatory solutions” rely on a government law or regulation that punishes people for certain types of behavior. In this case, the industrial wastewater emitters essentially bought the right to emit slightly more pollution by paying farmers to significantly reduce their water pollution. Thus, the overall quality of the water improved, the industrial wastewater emitters avoided costly additional regulations, and farmers gained a new source of income.
(Note: Educator Michael Kauder contributed to this article. A teachable lesson on this topic is part of our Educational Resources section.)