An Introduction to Water Quality Credit Trading in the Mid-Atlantic Region

1. An Introduction to Water Quality Credit Trading in the Mid-Atlantic Region

2. Learn about water quality credit trading

3. Water quality credit trading – the big picture What is water quality credit trading? Who should be informed about water quality credit trading? What will a state trading program require? How does water quality credit trading work? Why is there increased interest in water quality credit trading?

4. Water quality credit trading – the big picture What components are required for a trading program? What challenges exist? How will trading advance water quality goals? Or other societal goals? Where can other resources on water quality credit trading be found?

5. What is “water quality credit trading”? Water quality credit trading is one tool To reduce the cost of meeting environmental goals by removing pollutants that degrade lakes, streams, rivers, and estuaries. Pollutants like: Nutrients (nitrogen and phosphorous): Cause algal blooms and oxygen depletion in water Sediments: Diminishes water quality and reduces available habitat for aquatic life Excessive nutrients and sediments threaten the health of aquatic plant and animal life

8. Why is water quality credit trading being considered in the Mid-Atlantic States? States with watersheds that contribute to the Chesapeake Bay The 2000 Chesapeake Bay Agreement obligated the states to reduce nutrient and sediment pollution to help restore the Bay Trading is being considered by some states in the Bay watershed as a tool for meeting this obligation

9. Who should be informed about water quality credit trading? Farmers Wastewater treatment plant operators and their boards Municipal officials Watershed organizations Citizens who are concerned about the costs of pollution control and environmental quality

10. Simplified example of a water quality credit trade Point sources (end of pipe discharge)– like wastewater treatment plants – have an NPDES* permit that allows them to discharge their wastewater into a receiving water Nonpoint sources (no pipe discharge) – like farms – have pollutants coming from fertilizers or manure that may run off under wet conditions into natural waters But no NPDES permit for doing so

13. Simplified example of a water quality credit trade The point source may “pay” to have pollution reduced by the nonpoint source The “credit” for pollution reduction is created by the farm – where a practice is implemented to reduce a particular pollutant and then sold to the point source

14. Simplified example of awater quality credit trade To remove 1 unit of phosphorous, the wastewater treatment plant costs are $30* using an available technology Example: EBPR – Enhanced biological phosphorous removal in activated sludge

15. Simplified example of awater quality credit trade To remove 1 unit of phosphorous, the cost to a farm is $20* using a best management practice (BMP) Example: Planting a riparian buffer (trees and shrubs adjacent to stream)

16. Example of pollution reduction costs without trading 1 unit of phosphorous removed for $30 by the wastewater treatment plant 1 unit of phosphorous removed for $20 by the farm

17. Example of pollution reduction costs with trading Wastewater treatment plant pays the farmer to remove an additional unit of phosphorous 2 units of phosphorous removed for $20 each by the farm

18. Comparative costs for removal of2 units of phosphorous Cost without trading for removal of 2 units of phosphorous (1 unit from the wastewater treatment plant and 1 unit from the farm) Cost with trading for removal of 2 units of phosphorous (both units from the farm)

19. State trading programs Who can sell and buy credits – depends on how a state sets up a program Some states may allow point source – point source trades (PS/PS) Wastewater treatment plant generates, sells to-, and buys credits from other wastewater treatment plants Some states may allow point source – nonpoint source trades (PS/NPS) Farm generates credits to sell to wastewater treatment plants that have to meet NPDES permit requirements

20. State trading programs To establish a trading program, states must have these key components: Public water quality goal Pollution cap for a watershed Regulated baseline Unregulated baseline for agricultural nonpoint sources Credit and credit price Buyer and seller Trading ratio Regulator

21. Public water quality goal Set by federal, state, or local authorities Based on public input Can be defined in terms of ecosystem restoration, improvement of fish population, public safety, or pollution load reduced EXAMPLE: The Clean Water Act’s “fishable and swimmable” waters

22. Pollution cap for a watershed The limit on the total pollution load from all sources to a water body Usually, the cap is set for an annual load of specific pollutants The size of a cap is based on the public water quality goals EXAMPLE: a TMDL (total maximum daily load) or a tributary strategy

23. Regulated baseline The level of pollutant load allowed at a particular point in time EXAMPLE of a Point Source Baseline: An NPDES permit defines how much of a particular pollutant a point source can discharge EXAMPLE of a Nonpoint Source Baseline: A TMDL may set allowable pollution limits for nonpoint sources for a particular watershed

24. Unregulated baseline for agricultural nonpoint sources A “threshold” – or minimum level of pollution abatement an agricultural operation must achieve to be eligible to participate in a trading program

25. Credit and credit price Credit – The unit of “goods” (pollution reductions) to be traded in the market Credit price – is determined through negotiations between a buyer and seller Example of credit refers to earlier “trade” example in this PP.Example of credit refers to earlier “trade” example in this PP.

26. Buyer and seller Buyer – The demander of credits

27. Trading ratio The number of load-reduction credits from one source that can be used to compensate excessive loads from another source Different kinds of trading ratios

28. Trading ratio The number of load-reduction credits from one source that can be used to compensate excessive loads from another source Different kinds of trading ratios

29. Regulator Carries out actions to meet public water quality goals Establishes the pollution caps Approves and administers a state’s trading program Monitors and enforces the rules

30. Challenges in water quality credit trading Most challenges relate to PS/NPS trades – where the regulated meets the unregulated Challenges include: Setting pollution caps Establishing baseline pollution loads Complexities in establishing credits Transaction costs Enforcing contracts and liability issues

31. To create a “demand” for trades, a maximum loading or cap must be set for a watershed The cap must be defined for specific pollutants Consistent enforcement of the cap is necessary for trading to occur Setting pollution caps

32. NPS pollution load is spread over large areas and varies due to site-specific factors and weather – making the selection of a baseline difficult Questions about who is responsible for pollution clean-up, property rights of landowners, fairness Establishing baselines pollution load

33. Complexities in establishing credits Accurately measuring pollution reduction BMP efficiency depends on site specific conditions – e.g. age, how BMP is maintained Scientific models estimate load reductions from BMPs Models are imperfect Magnitude of water quality improvements from a trade is uncertain Should publicly funded BMPs be eligible for trading?

34. Transaction costs Trying to find trading partners Distance between sellers and buyers Clearinghouse or a bank could help reduce transaction costs Negotiating and implementing a trade

35. Enforcing contracts and liability Buyer – typically the wastewater treatment plant – is legally liable for achieving pollution reductions defined in the NPDES permit Must the buyer monitor seller to enforce trade agreement? If not the buyer, then who will monitor and enforce?

36. Questions to ask about emerging state programs How will the state evaluate whether its trading program meets the goal of improving water quality? Will the state’s program have unintended consequences? (such as the creation of ‘hotspots’ – concentrated areas of pollution) Has the state assessed the costs of a trading program versus the benefits of improved water quality?

37. Questions to ask about emerging state programs Is a monitoring program in place that will assess the effectiveness of the BMPs? Is trading the best tool for helping to reach the state’s water quality goals? Is the trading program coordinated with other programs that are addressing the same or other pollutants?

38. State resources for water quality credit trading Search your state environmental agency’s website: keywords “nutrient trading” or “water quality credit trading” Delaware, www.dnrec.state.de.us Maryland, www.mde.state.md.us/Programs/WaterPrograms/index.asp Pennsylvania, www.dep.state.pa.us/river/river_trading.htm Virginia, www.deq.state.va.us/vpdes West Virginia, www.dep.state.wv.us

39. Other resources for water quality credit trading Chesapeake Bay Program, www.cheapeakebay.net/trading.htm Mid-Atlantic Regional Water Quality Program http://mawaterquality.org Nutrient and Water Policy Update and “A Primer on Water Quality Credit Trading in the Mid-Atlantic Region” http://agenvpolicy.aers.psu.edu/ USDA, www.nal.usda.gov/water qualityic/trading.shtml

40. Mid-Atlantic Regional Water Program state contacts on trading Delaware: David Hansen, University of Delaware, djhansen@udel.edu, (302) 856-7303. Maryland: Douglas Parker, University of Maryland, dparker@arec.umd.edu, (301) 405-8042 Pennsylvania: Charles Abdalla, Penn State University, cabdalla@psu.edu, 814-865-2562 Virginia: Brian Benham, Virginia Tech University, benham@vt.edu, (540) 231-5705. West Virginia: Tatiana Borisova, West Virginia University, Tatiana.Borisova@mail.wvu.edu, (304) 293-4832, ext. 4472.

41. Mid-Atlantic Regional Water Program University of Delaware Delaware State University University of the District of Columbia University of Maryland University of Maryland, Eastern Shore Penn State University Virginia State University Virginia Tech University West Virginia State University West Virginia University