Additionality and reverse crowding out for pollution offsets in water quality trading

Market-based environmental policies frequently include offset provisions that allow polluters who are not subject to a binding cap to participate in trading programs. When offsets are used for compliance, it is important that they are additional in the sense that the payment from the trading program induces environmental benefits that would not occur without the program. In this paper we analyze a water quality trading program in Ohio, U.S., to estimate the extent to which the offsets are additional. Using data from the program and a farmer survey, we estimate the number of additional conservation practices that are adopted by farmers who participated in the trading program relative to the counterfactual outcome without the program. Using matching methods, we find no statistically significant increase in the number of conservation practices due to the trading program. We also examine whether the trading program may have crowded out government funding. We also do not find significant evidence for such crowding out, instead finding some evidence that the trading program may have led to greater participation in federal cost-share programs.