Covariant Risk and Nutrient Credit Training

Brian Sawers

Every summer, a dead zone is created in the Chesapeake Bay. The dead zone is created by too much of a good thing: nutrients, especially nitrogen and phosphorus. The largest source of excess nutrients in the Chesapeake is agriculture; manure and artificial fertilizers are washed into streams that eventually reach the bay. In the bay, nitrogen and phosphorus create an algae bloom, which consumes all the dissolved oxygen. Some fish escape, but other creatures expire in this dead sea within the Chesapeake Bay.

To reduce the excess nutrients reaching the bay, several states are experimenting with nutrient credit trading. A large part of the appeal is political: Nutrient credit trading is popular in an ideological climate hostile to regulation. Part of the appeal is a response to policy success. Pollution trading reduced acid rain at low costs, which raised hopes that environmental markets can produce outsized benefits at low costs. To date, nutrient credit trading has disappointed and it is likely to continue to disappoint. Better market design cannot remedy the inherent defects in nutrient credits. This Article identifies previously unidentified defects in nutrient credit markets, contributing to an already large literature on the shortcomings of nutrient credit trading. This Article adds to the weight of mounting evidence that nutrient credit trading cannot deliver improvements in water quality.