Integrating cobenefits produced with water quality BMPs into credits markets: Conceptualization and experimental illustration for EPRI's Ohio River Basin Trading
2016
Liu, Pengfei | Swallow, Stephen K.
This paper develops a method that incorporates the public value for environmental cobenefits when a conservation buyer can purchase water quality credits based on nonmarket valuation results. We demonstrate this approach through an experiment with adult students in a classroom laboratory environment. Our application contributes to the study of individual preference and willingness to pay for cobenefits associated with the production of water quality credits in relation to the Ohio River Basin Trading Project. We use three different methods to elicit individuals' willingness to pay (WTP), including (1) a hypothetical referendum, (2) a real referendum lacking incentive compatibility, and (3) a real choice with incentive compatibility. Methodologically, our WTP estimates suggest individuals are more sensitive to the cost changes and reveal the lowest value in the real choice with incentive compatibility. Practically, we find individuals value certain cobenefits and credits as public goods. Incorporating public value toward cobenefits may improve the overall efficiency of a water quality trading market. Based on our specification of a planner's welfare function, results suggest a substantial welfare improvement after identifying an optimal allocation of a buyer's budget across credits derived from agricultural management practices producing different portfolios of cobenefits.
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