For years, making nutrient reductions to help the Chesapeake Bay has meant extra work for farmers and extra expenses for wastewater treatment plants.

Soon, making an extra effort may mean something else: Extra cash.

The Bay Program is actively looking at creating a nutrient “market” in which someone who does more than their fair share to control nitrogen and phosphorus would get “credits” that could be sold to someone who has not been able to do as much.

The idea is to help make nutrient control profitable — and to get more reductions faster than might otherwise occur.

Referred to as “nutrient trading,” proponents envision a system in which the Bay Program’s nutrient reduction goals are achieved and maintained through a market-based system. Buyers and sellers would buy and sell the rights to release certain amounts of nitrogen and phosphorus.

“A trading program is designed to give individuals more incentives to move the process along,” said Waldon Kerns, a Virginia Tech economist who chairs the Bay Program’s Scientific and Technical Advisory Committee. “It’s a tool that will allow us to reach those goals, hopefully a lot faster, and a lot cheaper.”

After the Bay Program reaches its nutrient reduction goal, the amount of nitrogen and phosphorus allowed to enter the Chesapeake will be capped at a specific number.

At that point, the entire watershed will have to live within a specific nutrient budget. Wastewater treatment plants, for instance, will have to keep nutrient discharges at a set level even as the population — and the amount of sewage they must treat — grows. Likewise, farmers who want to expand may need to find ways to offset the new animal wastes.

Someday, wastewater treatment plant operators may find that the best way to stay within their limit is to find a farmer willing to plant an extra-wide, nutrient-absorbing streamside buffer and say, “let’s make a deal.” Conversely, the day could come where an expanding farm operation seeks out an over-achieving wastewater treatment plant to purchase surplus nutrient “credits” so it can raise more hogs or chickens.

That may sound far-fetched. But as the watershed’s population grows, living within nutrient caps will get harder, and the price of each pound of nitrogen or phosphorus kept out of the water will rise.

As a result, trading proponents argue, a farmer may find it profitable to turn some of his cropland into wetlands, streamside forest buffers or grass waterways to earn credits that can be sold to someone else. Or, a wastewater treatment plant may install innovative technologies that go far beyond what is required to sell the surplus to other facilities pressed by growth.

“Oftentimes, a market-based system will encourage engineers to develop technologies that get additional reductions more cost effectively, because they know there is a market to sell the results of that technology,” said Allison Wiedeman, of the EPA’s Bay Program Office.

The pollution trading concept has been around for years, although it has mainly been used to control air pollution. New industries locating in highly polluted cities are required to find offsets for any new emissions they would add to the area.

The most celebrated example is for acid rain, where a trading program has been used to help reduce sulfur dioxide emissions. When a revised Clean Air Act was passed in 1990, some analysts estimated it would cost anywhere from $350 to $1,000 a ton to reduce emissions. The actual cost, partly because of the trading program, has been between $62 and $170 a ton — and emissions have been reduced more than required.

Eager to see such results in the realm of water pollution, the EPA several years ago endorsed effluent trading within watersheds to achieve water quality goals.

A handful of programs have been established, some with promising results. The state of Connecticut estimates that its trading program for wastewater treatment plants may help meet Long Island Sound nitrogen goals at a savings of $200 million.

Still, there are few examples of pollution trading for water programs. If the Bay states establish a nutrient marketplace — and all have expressed interest — the Bay Program could soon have the largest trading program for water pollution credits in the nation.

Others will be watching. The EPA considers nutrients to be one of the leading causes of water quality problems nationwide. The success, and pitfalls, of any program will be carefully scrutinized.

“The concern about trading is that, one, it becomes a paper exercise, and two, what is reflected on paper is not reflected on the resource,” said Roy Hoagland, an attorney with the Chesapeake Bay Foundation.

Big questions loom. Any program must prove that trades result in real water quality improvements and don’t become, in the words of one environmentalist, a big “shell game.” Someone would have to oversee trades to make sure reductions take place. Some believe trades should only take place between nearby sources, while others support trading from one river basin to another. And those are just a few issues.

To help iron out those issues, the Bay Program for the past year and a half convened a special “negotiation team” to hammer out the broad details of what a nutrient trading program should look like in the region. The team represented diverse groups: environmentalists, wastewater treatment plant operators, local governments, and state and federal agencies.

Working through consensus, the team required an agreement by all members on how different issues should be addressed. It recently released a draft nutrient trading guidance document that is available for review through Oct. 27. A final document — which could serve as the basis for state programs — is expected early next year.

The group agreed on “fundamental principles” that must guide any program. For example, no trade could result in a local, or downstream water quality impact that violates water quality standards or adversely affects living resources or habitat. Also, programs must be consistent with existing laws and regulations.

Beyond that, the team tackled the issues of who can trade and what they can buy and sell.

To participate, farmers must have implemented, as a baseline, a nutrient management plan. Such plans help to guide the use and storage of fertilizer and manure to minimize the potential for runoff. Also, nutrient control practices that were funded with government cost-share money would not be eligible for trades, and nutrient reductions taken before a trading program is developed would not be tradable.

Likewise, wastewater treatment plants would not be able to trade nutrient reductions achieved through upgrades partially funded with state or federal grants. Any plant selling credits would have to meet all their normal permit requirements.

Overseeing the trades is more difficult. The team agreed that states should set up and administer their own programs, but the Bay Program should have some oversight to ensure consistency among states.

Trades, the team agreed, needed to be governed through permits or a regulatory program.

States would have to take on new responsibilities such as certifying the eligibility of participants. “We can’t have snake oil nutrient credit salesmen out there pedaling bogus credits,” said Cy Jones, of the Maryland Association of Municipal Wastewater Agencies, and a member of the negotiation team.

Perhaps the most important — and difficult — job of state programs would be accounting for trades. For point sources, which have discharge permits, that is straightforward. Monitoring is in place to make sure reductions take place.

For nonpoint sources — mainly farms — the job is more difficult, and filled with uncertainty. The effectiveness of streamside buffers, changes in cultivation practices, grass waterways or other activities varies from place to place depending on soil conditions, the slope of the land and other factors.

“From our perspective,” said CBF’s Hoagland, a member of the negotiation team, “if you are going to have point-to-nonpoint trading, you’re going to have to have increased monitoring, you’re going to have to do some edge-of-the-field monitoring and some additional upstream and downstream monitoring and to look at the actual water quality impacts of the trades.”

The draft guidance document agrees that more monitoring will be needed, and the states will need to inspect nonpoint runoff control practices to make sure they are maintained. But the details of just how much additional work is needed are left up to the states.

Don Robinson, district manager of the Lancaster County Conservation District in Pennsylvania, said that if the program becomes too prescriptive, farmers won’t participate. “Farmers don’t like strings attached,” he said. “That doesn’t mean they are trying to deceive the public.”

Robinson acknowledged that measuring nutrient reductions from farms is difficult. It may take years for on-the-land actions to result in stream quality improvement, because nutrients often travel through slow-moving groundwater.

“We can’t quantify everything,” he said. “If I know that a farmer used to put on 300 pounds of nitrogen to get 150 bushels of corn, and now he puts on 100 pounds to get the same yield, I know that we’ve improved the environment. Ask me to prove it; I can’t.”

At the same time, some worry that a big increase in monitoring or other regulatory oversight would increase the cost of administering a trading program. That could dampen interest in participating — especially if the cost of the program is tacked onto the cost of the credits being bought and sold, thereby making them more expensive.

“For an effective trading program, I think it needs to be truly market driven, and it can’t be controlled by bureaucracy,” said Bill Leary, executive director of the South Central Wastewater Authority In Petersburg, VA, and a member of the negotiation team. “I fear if it is controlled by bureaucracy, the cost of that bureaucracy, when passed on to the traders, is going to kill it.”

To help address uncertainties, especially for nonpoint sources, the team calls for using trading “ratios” when a wastewater treatment plant or industry buys credits from a farmer. Rather than a pound-for-pound exchange, the plant may need to purchase two, three or four pounds of credits if they come from a nonpoint source.

As a further safeguard, sellers could lose their certification to participate in a program and even face legal action by the buyer if they fail to maintain their responsibilities. Ultimately, though, the buyer would be responsible for making reductions. States may maintain an emergency “pool” of credits to sell in such a situation, or be able to direct buyers to other sources of credits if a trade goes bad.

The draft guidance also suggests that — at least initially — all trades be confined within individual river basins. If trades are made too far away, some argue, it would be difficult to track water quality improvements.

Some, though, worry that this would limit the number of potential traders and dampen the prospect for trading. The team called for that provision to be re-evaluated in the future. “I think if that restriction stays in place permanently, it imposes serious constraints on the trading markets in Maryland,” Jones said.

How fast trading emerges in the Chesapeake watershed is hard to say. After the guidance document is finalized by the Bay Program, probably early next year, it would likely take a year or two before states could adopt their own programs, which would have to be even more detailed.

Even then, the negotiating team recommended a phased-in approach. Until the Bay Program meets its 40 percent reduction goal, point sources would only be allowed to trade with point sources and nonpoint sources with nonpoint sources. Trades between point and nonpoint sources would be permitted only after the goal is achieved.

The program could still be slow to develop. Farmers, especially in Maryland, are facing increased regulations to control runoff, and will be busy meeting those nutrient reduction requirements. In recent years, large new cost-share programs have been established in all the states to help pay for streamside buffers and other conservation programs.

Because required and subsidized nutrient control actions aren’t tradable, many potential credits will be “off the plate,” noted John Rhoderick, administrator of the Maryland Department of Agriculture’s Office of Resource Conservation Operations. “We support the concept of trading wholeheartedly,” he said. “We’re just not sure at this point what we have in the nonpoint source arena to carry forward.”

Also, because no one knows how much nutrient credits will sell for, no one knows if they will be worth more than existing cost-share programs, at least initially.

But trading could lure new players into the market. In Pennsylvania’s Lancaster County, for example, half of the 5,000 farms are owned by “plain sect” farmers, who often won’t participate in government programs. “An Amishman,” Robinson said, “will be much more likely to do business with the private sector.”

It’s this type of benefit, which eludes regulatory programs, that trading proponents hope to tap.

Still, while the negotiation team reached an agreement on major components of a trading program, there is little consensus as to how important trading may become in the watershed.

Some see relatively few trades to resolve specific, local water quality issues. Environmentalists remain skeptical of programs that don’t have strict regulatory oversight. “The market took its course,” Hoagland said, “and the Cuyahoga River burned.”

Others see a wide-open program that becomes the driving force in developing new technologies that continually drive down nutrient levels in the Bay.

“The closer we get to that ultimate nutrient limit, the harder we are going to work to do that, and the more expensive it is going to be for each little incremental bit that we can squeeze out,” Jones said. “Trading will provide a lot of flexibility in dealing with that growth. The trading tool will become more and more valuable and useful the closer we get to that ultimate constraint.”

The ultimate verdict on how big a friend the marketplace will be for the Bay is years away. But Kerns, the Virginia Tech economist, said no one will know the answer unless efforts begin soon to establish the programs and resolve difficult issues that are sure to crop up.

“There’s one thing we’ve learned,” Kerns said. “If you’re going to set up one of these trading programs, it takes several years to get the thing established and get it in place. What we did in this guidance document will make it possible to cut down on the time it takes to establish and implement a trading program.”

The draft Chesapeake Bay Program Nutrient Trading Guidance Document is available on the Bay Program’s web site, www.chesapeakebay.net

Fundamental Principles of Nutrient Trading

The Nutrient Trading Negotiations Team agreed on a set of fundamental principles that must be met for a successful nutrient trading program. Their intention is to provide a foundation when determining the appropriateness of a trade. Although not required, it is recommended that state programs follow these principles.The fundamental principles for nutrient trading in the Chesapeake Bay are:

1) Trades must not produce water quality effects locally, downstream or Baywide that:

  • violate water quality standards or criteria;
  • do not protect designated uses; or
  • adversely impact living resources and habitat.

2) The nutrient trading program must be consistent with federal, state and local laws and regulations, yet:

  • be flexible enough to adapt to future changes in these laws and regulations and
  • enable participation of all potential sources as determined by the marketplace.

3) The nutrient trading program must be consistent with the Chesapeake Bay Program’s nutrient reduction goals and state tributary strategies.

4) Each trade must achieve no change in nutrient loadings or a net reduction in nutrient loadings.

5) Every source should strive to do its part in reaching the 40 percent reduction goal before considering the nutrient trading option.

6) Trading will be allowed only within each major Bay tributary (i.e., Susquehanna, Potomac, Rappahannock, York, James, Patuxent, Maryland Western Shore, Virginia Western Shore, Maryland Eastern Shore, Virginia Eastern Shore) among all signatory states and non-signatory states if they adopt the appropriate allowance and are consistent with the Chesapeake Bay Program’s nutrient trading guidelines and state tributary strategies.

7) Traders must be in substantial compliance with all local, state and federal environmental laws, regulations and programs.

8) The involvement of a diverse group of stakeholders must be sought in the design and implementation of state trading programs and related public education initiatives.