The Economics of Water

UW-Stout associate professor analyzes cost-benefit of water quality trading programs in Wisconsin

Zach Raff, assistant professor of economics at UW-Stout, has spent his career looking at how policies stemming from the Clean Water Act and the Clean Air Act can be both economically sound and environmentally friendly.

This year, he received a Lone Mountain Fellowship from the Property and Environment Research Center (PERC), a conservation and research institute dedicated to free market environmentalism. As part of the fellowship, he spent two weeks in residence at the PERC offices in Bozeman, Mont., networking with other economists and lawyers who work on environmental policy and getting feedback on his research paper, which examines water quality trading in Wisconsin.

Raff has been working with the Wisconsin Department of Natural Resources to examine the state’s water quality trading programs for phosphorus, which causes harmful algal blooms at high levels.

In 2010, Wisconsin instituted the strictest total phosphorus emission standards in the country. Wastewater treatment plants had to make expensive technology upgrades or participate in water quality trading programs to meet the reduced overall levels in their local watersheds.

Raff provides this example: A wastewater treatment plant could install a $10 million upgrade, or it could pay a local farmer to plant cover crops or retire some of its cattle. Both options could reduce the overall pollution in the local water source, but the costs are vastly different.

Would lower costs to the utility also benefit consumers? Raff wanted to test this theory.

“There have been very few analyses of programs like this in the country, so this is a rare opportunity to examine the benefits and costs,” Raff says.

His analysis shows that consumers who get their water from a utility company that participates in a trading program paid 6 to 8 percent less than those receiving water from a utility that had replaced its system. From an economic point, the programs are successful — but what about the environmental impact?

“Theoretically we get the same reduced phosphorus level but in a different way,” Raff says. “The next step in my research is to examine the water quality impact.”

He plans to work with the WDNR to determine which water quality trading programs offer the highest environmental benefits at the lowest cost to consumers. Raff’s research, though not funded through the Freshwater Collaborative of Wisconsin, ties in nicely with one of the top two grand water challenges the Collaborative has identified.

“Agriculture water management is a huge challenge for Wisconsin and throughout the country,” says Marissa Jablonski, executive director for the FCW. “As a Collaborative, we need to look closely at this issue, and Zach’s research will provide insight into how we can work with farmers and utilities to improve Wisconsin’s water.”