Water quality trading (WQT) could be an innovative policy to incentivize farmers to implement best management practices (BMPs) for their activities. This study focused on assessment of involving unregulated agricultural nonpoint sources (NPS) into the WQT market in Gharesoo watershed in the west of Iran. It also proposes a methodology to determine location-based trading ratios as well as environmental penalty cost to achieve a more well-designed market structure. Trading activities in different scenarios were described by trading volume (TV), participation rate (PR), total exchanged value (TEV), and other market parameters in order to achieve a better comparison of market performance. Results showed that, by applying NPS to the Gharesoo watershed, total phosphorous (TP) trading market could increase TV, PR, and TEV up to 11, 1.7 and 7.5 times, respectively, depending on which level of BMPs are implemented by them. Additionally, it could save 29% of the total cost of implementing a TP total maximum daily load in this watershed compared to the ‘command and control’ approach. Furthermore, the agricultural sector could profit by $5.49 million (or $75/ha) by choosing solutions such as terrace systems and filter strips to register into the market. This profit can be allocated to the development of new agricultural technologies.

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