Basic Requirements

Before an entity can trade, it has to meet certain basic requirements.

For agriculture, farms must meet “baseline” measures which include compliance with existing regulations, such as nutrient management requirements, sediment and erosion control plans and confined animal operation rules.

In addition, farmers must meet “threshold” requirements: They may not apply manure within 100 feet of a stream unless they have a minimum 35-foot vegetated buffer along the stream. As an alternative, a farm may meet threshold requirements if it can demonstrate that it has reduced nutrients 20 percent beyond baseline compliance.

For point sources, facilities must be under the nutrient discharge limit, measured in pounds, that is set for each facility. (Those limits are determined by estimating the number of pounds of nutrients that would be discharged if the plant were operating at its maximum design flow while reducing nitrogen concentrations in effluent to 6 milligrams per liter and phosphorus concentrations to 0.8 mg/l.)

Generating Credits

For agriculture, operations have to install best management actions or take other actions that would reduce nutrient and sediment runoff beyond what is accomplished in baseline and threshold requirements.

For point sources, plants must treat effluent at a level that exceeds requirements in their discharge permits.

A credit is a unit of compliance that corresponds with a pound of reduction of nutrient or sediment, as recognized by the Department of Environmental Protection, which may be used in a trade.

Application of Trading Ratios

After credit-generating nutrient reduction efforts take place, several cautionary “ratios” are applied to provide a safety margin in ensuring water quality goals are met. Three types of ratios are applied:

  • Delivery Ratio: Pound for pound, actions taken farther from the Bay have less impact on the Chesapeake than those close to the Bay, because many nutrients are lost during transport. A formula is applied to adjust the value of a nutrient reduction based on where the action was taken.
  • Reserve Ratio: Ten percent of the nutrient reduction is subtracted and “held in reserve” by the Department of Environmental Protection to cover failures of best management practices and uncertainty as well as to provide liquidity to the market.
  • Edge of Stream Ratio: Figures from the Bay Program Watershed Model are used to determine the amount of nutrients kept out of a stream by a given activity on the land.

Certification of Credits

Credits are certified by the Department of Environmental Protection, which ensures baselines and thresholds are met, determines the amount of nutrient reductions an activity would generate, applies trading ratios and determines the number of credits available to trade from the action. Credits from an activity must be recertified each year.

Making a Trade

After credits are certified, they can be made available on the NutrientNet on-line marketplace. Buyers and sellers would negotiate a price and enter into contract. The department will generally require a review of the contract to ensure that credits meet legal requirements. A trade is valid for only one year.

Monitoring & Evaluation

The entity buying the credits is responsible for ensuring that they are certified by the DEP. They are also responsible for ensuring that the actions generating the credits take place. The department can take enforcement actions against a permit holder if the nutrient reductions it bought in a trade do not occur. The DEP can choose not to take action, though, if it determines the failure to produce credits was caused by an unforeseen event, such as severe weather which destroys a best management practice. In that event, the credit would be made up from nutrient reductions created using the reserve ratio.

In addition, the department will verify baselines and thresholds are met and that reduction activities and technologies are in place and working, which may include performing spot checks or using monitoring data when or where appropriate.