Toward market control of agricultural runoff.

"Way back in the day", when I was still seemingly suffering from or perhaps just getting over the loutish aversion to environmentalism that free-marketeers catch like the flu, I remarked on Dani Wenner's long-defunct liberty-news.com (revived thanks to archive.org) about the inability to rein in the Gulf of Mexico's Dead Zone through traditional means like emissions bans or the tort process, noting that perhaps some market-based solution could be brought to bear.

I lost sight of the issue between then and now, until the Nature Conservancy's newsletter brought it back to my attention. That ever-innovative group, having concluded a paired-watershed study exploring different means to buffer waterways, has begun a pilot program which may be a major step toward the institution of markets in wetlands' ecological services. To quote:

Faced with spiraling land-acquisition costs, the Conservancy is exploring how environmentally friendlier practices might be woven into existing farming operations. On the Mackinaw River, a tributary of the Illinois River, the Conservancy is carrying out a pilot program to test the feasibility of “nutrient farming.” Conservancy staff have built micro-wetlands at the ends of farm fields to catch nutrient-laden water before it reaches the river (in the wetlands, many nutrients are either taken up by plants or metabolized by bacteria and then released into the air).

Nutrient farming could form the basis of a market modeled after an existing cap-and-trade system that has helped curb emissions of the pollutants that cause acid rain. Farmers could be paid for nitrogen and phosphorus they take out of the water with micro-wetlands, reducing the overall nutrient load flowing to the Gulf of Mexico.

Porter Hypothesis now on sound footing, but does it apply to our world?

As a physical scientist, I take a very negative view of the "talk arguments" still common in economics. Qualitative explanation is nice, but one cannot prove or argue anything with mere qualitative work. There is no qualitative scientific methodology.

Michael Porter put forth a few years ago an idea with great appeal: under some circumstances, strict environmental regulations can be a win-win situation, both reining in the negative externality and inducing firms to eliminate waste and innovate, simultaneously increasing profits and R&D spending.

More recent work by Stefan Ambec and Philippe Barla puts this onto more solid footing. Note that the result is parameter-dependent. One would have to be a slob to say that the Porter Hypothesis (which really should now be called the Ambec-Barla Theorem) implies that there is no such thing as a bad environmental regulation.

In a recent review, Ambec and Barla appraise the empirical evidence, and find that, while case studies can be found on either side, most of the time there are no Porter effects. Whether this is an artifact of the existence of pollution havens is one of many open questions.

Win-win environmental regulations remain a tantalizing possibility but not an everyday reality. Perhaps we'll never be able to "have our cake and eat it too". Science, including economics, should inform our policy decisions to the greatest reasonable extent, but problems such as this make it clear that we'll always be caught with value judgements and shades of grey.