Water quality trading (WQT) is generally described as a market-based mechanism that enables individual water pollution sources to purchase environmentally equivalent pollution reductions from other pollution sources. Active water quality markets to date are small in number and in economic and geographic scope, but there is substantial interest in WQT as a means to achieve unmet water quality goals at a lower cost than the highly inefficient regulatory approaches that currently dominate water quality protection regimes. In this chapter, we examine the theory and practice of water quality markets and outline research issues essential to advancing the capacity of environmental policy makers to make the best use of water quality trading.

JEL classifications: Q25, Q53, Q58