Does encouraging the use of wetlands in water quality trading programs make economic sense?

This paper examines a proposal to incorporate the use of wetlands in water quality trading (WQT) programs in order to meet national wetlands goals and advance WQT. It develops a competitive WQT model wherein wetland services are explicitly considered. To participate in a WQT program, an agricultural producer could employ wetlands as his nutrient management practice. Unlike most other management practices, wetlands not only remove nutrients from agricultural runoff but also provide ancillary benefits like wildlife habitat and flood control that do not exclusively accrue to the farmer. Thus, when appropriate, a WQT program should be coupled with additional incentives for wetland creation and restoration, such as using a wetland subsidy. Despite the water quality enhancement properties of wetlands, the model reveals that implementing a wetland subsidy will not necessarily translate into water quality improvements. While wetland creation is externally incentivized, the farm's opportunity cost of fertilizer usage in the WQT market is also reduced. In this sense, a wetland subsidy acts like a fertilizer subsidy. Conditions under which a wetland subsidy will help expand WQT include some degree of farmland area fixity, which is resembled in some, but not all, watersheds, and high efficiency of the wetland abatement technology.