Water quality trading schemes as a form of state intervention: Two case studies of state-market hybridization from Canada and New Zealand

The agricultural sector is considered as an important contributor to diffuse nutrient pollution within watersheds. While hierarchical models of environmental governance are costly to implement when targeting diffuse pollution, market-based water quality trading (WQT) is viewed as a win–win solution. Based on economic incentives, WQT promoters suggest that it offers greater flexibility to implicated actors for attaining environmental goals within watersheds, provides private funds to finance agro-environmental practices and diversifies income sources for farmers. These programs, however, have produced few results, and where they are successful, WQT schemes appear strongly dependent on institutional support from public agencies. This paper explores the gap between what is theorized on WQT institutional operation and what occurs in practice. In particular, this work adopts a lens of hybridization to understand how institutional forms that emerge around WQT blend both market-based techniques, while retaining top-down hierarchical structures. Through analysis of two case studies – South Nation Total Phosphorus Management Program (Canada) and Lake Taupo Nitrogen Trading Program (New Zealand) – we argue that WQT programs serve as a novel intervention framework for public authorities to retain their influence on the way watershed management takes place. In both case studies, we find the state also uses the WQT discourse and established institutional structures to channel new funding sources, target a broader range of actors and manage a suite of environmental and socio-economic objectives. These new institutional arrangements reframe traditional modes of environmental management and affect the way private and public resources are used and distributed among implicated actors. Both case studies illustrate how hybrid forms of financing and governance strategies, in which heterogeneous private and public institutions are brought together, are a response to the transaction costs and particular socio-ecological contexts faced in the implementation of WQT.