The cost-effectiveness of total maximum daily load (TMDL) programs depends heavily on program design. We develop an optimization framework to evaluate design choices for the TMDL for the Potomac River, a Chesapeake Bay sub-basin. Scenario results suggest that policies inhibiting nutrient trading or offsets between point and nonpoint sources increase compliance costs markedly and reduce ecosystem service co-benefits relative to a least-cost solution. Key decision tradeoffs highlighted by the analysis include whether agricultural production should be exchanged for low-cost pollution abatement and other environmental benefits and whether lower compliance costs and higher co-benefits provide adequate compensation for lower certainty of water-quality outcomes.

Water-quality markets that allow point-nonpoint trades assume that nonpoint best management practices (BMPs) achieve the targeted reductions as soon as they are implemented. However, changes in water quality in response to BMPs occur over time—from a few months to decades. We simulate emission allocations using static and dynamic-optimization models to determine whether a simple static allocation can produce results comparable economically and environmentally to complex multi-period designs for nitrogen emissions to Chesapeake Bay. We find that static rules provide relatively large cost savings compared to dynamic rules but result in a delay in achievement of water-quality targets.