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Water quality trading (WQT) has been suggested as a cost effective approach to achieve water quality goals for many watersheds (EPA, 2007), including the Jordan Lake watershed in North Carolina. Although, theory supports the concept, its implementation has experienced a numbers of failures in the United States. A broad spectrum of physical, social, economic, and intuitional factors have diverted success. One of the institutional hindrances is the WQT baseline. WQT baseline is a reference point that must be met by credit sellers and buyers before being allowed to buy or sell credits. Favorable (unfavorable) weather compared to the baseline can result in gains (losses) attributed to conservation technology. We construct a WQT market applied to the new Jordan Lake Watershed program in North Carolina to examine the role of weather on baseline period as related to total nitrogen (TN) loads in Jordan Lake. Results of our models show that the baseline weather condition has a profound impact on the water quality credits supply. The purpose of this study is to alert policy makers to this issue and to suggest ways to better match the baseline incentives with emission reduction goals when taking weather variability and trends into account.


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