February 2012 Article (Early View): “Crop Discharge Permits for Reduction of Nitrogen Loads to the Baltic Sea,” by Dennis Collentine and Holger Johnsson
A major share of the anthropogenic nitrogen loads coming from the countries around the Baltic Sea originate from farmland. This article describes how a permit system based on the composite market model can be used to evaluate measures that create a demand for permits from nonpoint agricultural sources.
Markets in the Composite Market Model.
The composite market model disaggregates permit transactions into two primary markets and one secondary market with a central role played by a regulatory authority. A system based on three markets allows permit transactions to be separated into individual functional components. This separation into functions allows each of these markets to be developed independently while at the same time contributing information from the transactions to the other markets.
The demand for discharge permits is dependent on regulation. Policies targeting pollution reduction based on economic incentives need to include an element of source control to create markets. Only when discharge sources are forced by regulation to either choose to purchase a permit or cease the load generating activity will there be demand for permits. Requiring a discharge permit for cultivation of particular crops is one form of regulation.
The effect of implementing crop discharge permits are studied on two scales. In the first of these two, retention estimates are available at a high degree of resolution so that estimates can be made of the change in the net load of N from requiring crop discharge permits. On a broader regional scale, while changes in leaching from requiring permits can only be estimated for gross N loads, this scale gives a better indication of the potential for crop permits to meet the reduction targets.
This study demonstrates how the proposed permit system can generate measures that lead to cost efficient reduction of N loads to the Baltic Sea. It is possible to estimate the reduction in N leaching from implementing a system that required discharge permits for cultivation of specific crops. While this reduction is a result of regulation, the proposed permit system allows agricultural producers flexibility in complying with the regulation by allowing a permit to be held that corresponds to the marginal cost of abatement. The advantage is although the regulation achieves the expected reduction the permit system allows for a cost efficient response. The cost to producers creates an economic incentive to allocate crop production in a cost efficient way. The requirement for discharge permits imposes a ceiling on leaching which can successively be lowered by including more crops.
Sure doesn’t look like Kansas! 
[Please note: I have quoted and paraphrased freely from the article, but the interpretation is my own.]
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Tags: trading, water quality