Chesapeake Bay Watershed Nutrient Trading Program

1. Chesapeake Bay Watershed Nutrient Trading Program

2. What are the goals of this presentation? • Background information on legislative and regulatory drivers for nutrient trading • Regulatory development process • Permit Requirements • Frequently asked Questions • Question and Answer session

3. Photo by Bill Portlock, CBF We’re united by our confrontation of a common problem!

4. The 2004 Virginia Water Quality Assessment 305(b)/303(d) Integrated Report indicates that 83% of the mainstem Bay does not fully support the aquatic life use support goal.

5. Dead Zone Consumes One-Third of Chesapeake Bay Updated: Tuesday, Jul. 26, 2005 - 2:05 PM ANNAPOLIS, Md. (AP) - More than a third of the Chesapeake Bay was a low-oxygen "dead zone" during monitoring in July, meaning the nation's largest estuary is on pace to have one of its most unhealthy summers on record, according to data released Monday.

6. A significant amount of Virginia drains to the Chesapeake Bay

7. Recent regulatory initiatives • Water quality standards (including chlorophyll and dissolved oxygen) (9 VAC 25-260) • Tributary Strategy(in conjunction w/DCR) • Water Quality Management Plans (9 VAC 25-720) • Established waste load allocations for significant dischargers as part of point source component of tributary strategy • Technology Based limits for dischargers (9 VAC 25-40) • Established concentration limits for facilities installing nutrient control technology through new construction, expansion or upgrade

8. Nutrient Trading Legislation (Senate Bill 1275) • Signed on March 24, 2005 by Gov. Warner • Authorizes Chesapeake Bay Watershed Nutrient Credit Exchange Program • Directs DEQ to issue a watershed general permit for point source discharges of nutrients (Nitrogen and Phosphorus) to the Chesapeake Bay and its tributaries. • DEQ is seeking input regarding the permit development.

9. Senate Bill 1275 builds upon these previous initiatives July 1 2005 – SB 1275 became effective June 2005-Feb. 2006 Regulatory development Oct. 2005-Jan.2006 Public information meetings June 2006 – SWCB approves final version of regulation Jan. 2007 – Permit becomes effective

10. What was the intent of SB 1275? Nutrient trading should assist in: • Meeting the nutrient cap load allocations cost-effectively and as soon as possible, • Accommodating continued growth and economic development in the Chesapeake Bay watershed, and • Providing market-based incentives to help achieve the Chesapeake Bay Program's nonpoint source reduction goals.

11. Nutrient trading permit • Currently under development and will be made available to the public in the spring of 2006. • The general permit will be issued to facilities in addition to the individual permit that the facilities are already required to hold. • The general permit will supersede some conflicting or redundant conditions in the individual permits.

12. Nutrient trading permit • The general permit will cover: • Facilities required to register for permit • Effluent limits • Compliance plans/schedules • Monitoring and reporting requirements • Trading conditions • Requirements for new/expanded facilities

13. What is nutrient trading? • Nutrient trading, simply put, is an agreement between two parties that involves payment for additional nutrient removal, often referred to as “credits” or “offsets”. • “Additional” removal means above and beyond requirements such as: • Limits contained in a discharge permit • Management goals in the Chesapeake Bay Tributary Strategy

14. Credits and offsets are both measured in “delivered pounds”; i.e., how much of a discharged pound of nitrogen or phosphorus reaches the impacted areas of the Bay or its tributaries. Facilities in different locations on a tributary will most likely have different delivery factors.

15. Nutrients may be exchanged as compliance credits, or as offsets: • Compliance credits are exchanged when facilities acquire pounds of nitrogen or phosphorus in order to comply with the previous year’s annual load limit.

16. Nutrients may be exchanged as compliance credits, or as offsets: • Credits may only be acquired from facilities with a waste load allocation in the Water Quality Management Plan (larger facilities that built or started construction of their plants before July 1, 2005)

17. Nutrients may be exchanged as compliance credits, or as offsets: • Permittees may generate credits by: • improving treatment plant performance; • Reducing the flow and mass loading of nutrients into wastewater treatment facilities; • implementing pollution prevention measures and • (in the future) reuse of treated wastewater.

18. New and Expanded facilities (>40,000 gallons per day flow, that are not operating, or under construction, before July 1, 2005) • …cannot cause a net increase of nutrients to the Bay by their new or expanded discharge, and must offset the nutrients in advance.

19. New and Expanded facilities (>40,000 gallons per day flow, that are not operating, or under construction, before July 1, 2005) • Offsets may be acquired from existing facilities (who pledge in advance to restrict their discharges accordingly) • The transfer of allocation from one facility to another will be recorded on a registration list maintained by DEQ.

20. New and Expanded facilities (>40,000 gallons per day flow, that are not operating, or under construction, before July 1, 2005) • Offsets may also be acquired from a non-point nutrient management or land use practice. • Performance of this practice must be verified as a condition of the new or expanded facility’s permit.

21. Plan B - Water Quality Improvement Fund (WQIF) • The WQIF is a credit or offset source of last resort. Credits may be purchased from WQIF only after diligently seeking to purchase credits from other facilities. • The price of credits/offsets from WQIF will be set to not undercut the developing market and to make the construction of better treatment facilities a more attractive option.

22. Trading Restrictions • Credits or offsets purchased from other facilities must be: • acquired for the purpose of achieving compliance in the same year in which the credits were generated, • generated in the same tributary, • acquired and certified to DEQ by June 1 of the following year. Credit or offset purchases that would result in “hot spots” or exceedance of local water quality standards are not permitted!

23. Annual requirements • By February 1, permittees report annual discharge loads for prior year • By April 1, DEQ publishes summary of loads discharged and credits to be bought or sold • By June 1, permittees report credit purchases to DEQ • By July 1, DEQ publishes notice of all credit exchanges for the previous calendar year DEQ is investigating ways to make this information more accessible to the general public and regulated community.

24. DEQ nutrient trading initiatives (continued) • DEQ is submitting a grant application tothe National Fish and Wildlife Foundation under their Chesapeake Bay Targeted Watersheds Grant Program. • This proposal involves a point source-nonpoint source trading pilot project in Culpeper County. • If successful in obtaining this grant, DEQ will commence work on this project in the summer of 2006 and complete its implementation in the summer of 2008.

25. Goals for point source – non point source pilot project • Catalog existing levels of Best Management Practice and land conversion practice (collectively referred to as BMP) implementation by property owners; • Model where money can be most effectively spent on new BMPs that are intended to offset proposed wastewater discharges; • Create a user-friendly, Internet-based interface for owners of proposed dischargers, owners of existing or prospective BMPs, consultants, and local agricultural agents to evaluate offset requirements, determine a property’s viability for BMP installation and to conduct trades;

26. Goals for point source – non point source pilot project (continued) • Develop tools necessary for DEQ to track and report offset purchases and ensure that the expected nutrient reductions are achieved to comply with discharge permit requirements; • Develop tools necessary for DCR to track progress toward the nonpoint tributary strategy regarding BMP installation, and • Determine manpower and material requirements for statewide administration of the point source – non point source trading program.

27. Public outreach in support of this draft regulation DEQ hosted informational meetings for the general public at the following locations, with the targeted tributary listed: October 25th, 2005, 7:00 PM VMI Preston Library, Lexington (Upper James) November 16th, 2005, 10:00 AM DEQ-SCRO, Lynchburg (Upper, Middle James) November 16th, 2005, 3:00 and 7:00 PM DEQ-VRO, Harrisonburg (Shenandoah) November 28th, 2005, 7:00 PM RADCO, Fredericksburg (Rappahannock) November 29th, 2005, 7:00 PM King William Fire and Rescue, Aylett (York) January 3rd, 2006, 3:00 and 7:00 PM DEQ-NVRO, Woodbridge (Potomac) January 4th , 2006, 1:00 PM Onancock Town Hall (Eastern Shore) January 4th, 2006, 7:00 PM DEQ-TRO, Virginia Beach (Lower James) January 5th, 2006, 3:00 and 7:00 PM DEQ-PRO, Glen Allen (Middle James) Presentations on the draft regulation were given at the following events: September 26th, 2005 Fauquier Riparian Easement Team, Warrenton November 1st, 2005 Culpeper SWCD meeting, Orange December 6th, 2005 VASWCD conference December 7th, 2005 Rappahannock River Basin Commission meeting December 7th, 2005 VA Water Env. Assoc. “Treat or Trade” seminar December 12th, 2005 Meeting with Virginia Manuafacturers Assoc. January 23rd, 2006 Virginia Crop Production Association conference

28. What happens in the time between the effective date of the law and when the trading program is fully functional? • New and expanded facilities will have to obtain offsets as a condition of obtaining a discharge permit from DEQ, and the maintenance of non-point source offsets will be a permit compliance issue for those facilities. • DEQ is still working with DCR on the review and approval mechanisms for proposed non-point source offsets.

29. How is the price of a credit calculated? • In party-to-party trading, the price of a credit will be negotiated between the buyer and seller, whether by auction, reverse auction or private contract. • In the case of a payment to the WQIF, the price calculations will account for current prevailing costs of nutrient reduction plus “any additional incentives reasonably necessary to ensure that there is timely and continuing progress toward attaining and maintaining each tributary’s combined waste load allocations”

30. If a tributary meets its overall point source allocation, what performance incentives exist for facilities that can’t sell their credits? In the long term, each of the tributaries will be operating at or just under the cap; at that time, unless each facility is operating at or just under its allocation, there will be a trading dynamic. In the meantime, facilities that have installed nutrient removal technology will receive concentration limits in their individual permits; meeting the WLA with a hydraulically underloaded plant will not ensure compliance without operating the installed equipment to a minimum performance standard. New and expanding facilities may purchase offsets from point sources, and in some cases may prefer this option to purchasing offsets from nonpoint sources. This will maintain some demand for point source credits (or allocations) even when the tributary strategy goals are met.

31. What are possible sources of non-point source offsets? • Offsets may be generated by a variety of pollutant management and land use practices, on farms or other common non-point sources of nutrient release to state waters. Some include: • Nutrient Management Plans • Grass or Forested Buffers • Cover Crops

32. Does point source-non point source trading undermine the non-point goals of the Tributary Strategy? No. On the contrary, the requirements of Senate Bill 1275 provide an incentive for the farmers to install nutrient removal practices that will exceed the non-point tributary strategy goals. DEQ and DCR are working to set a minimum baseline (whether a base BMP technology or a minimum nutrient removal efficiency, TBD) for the non-point tributary strategy goals. Any nutrient removal in excess of this baseline would be eligible for exchange by the landowner.

33. How will the perpetuity of the BMPs installed under the trading program be confirmed? The offset contract for the construction and maintenance of the BMP will cover a specified period; however, there will always be an offset requirement for the discharger who originally acquired the offset, so it’s unlikely that the BMP would be abandoned. A preservation instrument (easement) could be used to maintain the BMP in spite of land use conversion.

34. How will farmers be reimbursed for land lost from production, especially in the case of forested buffers? As part of its pilot project, DEQ proposes creating a cost calculator that would account for land being taken out of production, and would enable the farmer to calculate the break-even price of a proposed BMP. Presumably, the “reimbursement” would be part of the negotiated price of the offset.

35. Have urban/suburban BMPs been considered? DEQ and DCR are aware that these BMPs represent a source of offsets and will be working on these once agricultural offsets have been more thoroughly established. Other sources of offsets (such as waste-to-energy conversion) are also being considered.

36. Thanks for your time! If you have any additional questions/comments after this meeting, contact: • Kyle Ivar Winter, P.E. (804) 698-4182 or e-mail at kiwinter@deq.virginia.gov External Web page link: http://www.deq.virginia.gov/vpdes/