Including non-point sources in a water quality trading permit program

There has been overwhelming interest in addressing water quality issues through the use of economic instruments. Much of this attention has focused on the cost efficiencies offered by Transferable Discharge Permit (TDP) systems. Unfortunately, the attempts to start up permit markets which are able to exploit abatement cost differences between sources have not met with the success expected. Two of the reasons for the lack of success that have been taken up in analysis of these programs have been the problem of transaction costs and in the case of non-point sources (NPS), undefined property rights. The composite market design is a proposal for a TDP system which specifically includes agricultural non-point source (NPS) dischargers and addresses both property rights and transaction cost problems. The composite market consists of three interrelated markets each serving a particular function. When the composite market is mature, the total number of permits issued represents the cap on discharges allowed in the catchment. The structure of the composite market allows this system to be phased in over time with existing institutions and limited demands on financing.