With the looming Bay cleanup expected to cost billions of dollars, some believe it may be time to go shopping at the farmers market.

But the visitors won’t be looking for lettuce or tomatoes. In the market some envision, the shoppers will be wastewater treatment plant operators, industries — or even cities with lots of stormwater runoff.

Faced with stiff — and likely expensive — nutrient reduction requirements, those dischargers may find it cheaper to meet their obligations by purchasing pollution “credits” from a farmer who has planted a grass buffer or restored a wetland.

Welcome to the world of nutrient trading, where the market is a place to purchase environmental improvements.

Eying the success of air pollution trading programs, where acid rain goals were reached years ahead of schedule at a fraction of the estimated cost, trading proponents hope to do the same for water quality, where success in controlling nutrient-laden runoff has proved to be elusive.

Trading, they say, may be just the tool to help clean the two-fifths of the nation’s waterways, including the Bay, that fail to meet water quality goals three decades after the Clean Water Act was passed.

“Trading can be a cheaper answer to solving water quality problems in the United States and around the world,” said Paul Faeth, managing director of the World Resources Institute and the author of a recent study, “Fertile Ground,” which touts nutrient trading as the most cost-effective way to help troubled waters such as the Chesapeake Bay and Gulf of Mexico.

The idea of a water pollution trading program has been around for more than a decade, but so far there is little evidence that trading will do for water quality what it did for air. More than three dozen water quality trading programs exist in the country, and the vast majority are still waiting to see their first trade.

That may change soon. The EPA in January released a new policy intended to promote trading among water polluters. (See “EPA releases guidelines for water quality trading,” March 2003.) The policy broadly outlines the conditions under which trading must take place in order to secure EPA approval. For instance, all trades must take place within the same watershed, and no trade can result in a local violation of a water quality standard.

“It’s a definitive promotion of trading on a national level,” said Allison Wiedeman, of the EPA’s Chesapeake Bay Program Office. “Now the states know they have official EPA support.”

Unlike the Clean Air Act, which specifically sanctions trades, the Clean Water Act says nothing about trading. By giving trading its seal of approval, agency officials hope to jump-start pilot programs that have the potential to become successful models for others to follow. In the past year, the EPA has funded 11 pilot programs, two of which are in the Bay watershed.

So far, the Bay watershed— like the rest of the country — has been slow to realize any potential benefit from trading.

In 2001, it produced a detailed set of principles to guide nutrient trading within the watershed, the product of nearly two years of work by government officials and various stakeholder groups. The document was intended to guide the development of state and local trading programs. Two years later, no such programs are operating.

That may also change soon. The Bay Program at the end of April is expected to set new nutrient limits for all major Chesapeake tributaries. “I have not been surprised that there has not been any trading activity,” Wiedeman said. “Everyone is waiting for these new caps to come. When they appear in April, that will be the greatest framework around which to develop a trading program.”

Some estimates suggest the new nutrient reductions could cost $1 billion or more a year, unless cheaper ways are found to do the job. And trading could be one of those cheaper ways. A recent Maryland study estimated that wastewater treatment plants in that state alone could save between $9 million and $12 million annually if allowed to trade.

Trading is not a substitute for regulation. In fact, it can only be successful if there are strict regulatory programs that force pollution reductions: Without these, there is no incentive to trade.

The theory, basically, is this: As regulations become more strict — as will be the case with the Bay’s new nutrient goals — places with discharge permits are forced to cut back on pollution. Because most dischargers already employ the most cost-effective pollution control technologies, any additional reductions are likely to be disproportionately expensive.

As their costs go up, it becomes more and more advantageous to seek alternative reductions. In some cases, those reductions may come from other dischargers who are generating “credits” by doing more than is required by their permit; this is usually called a point source-to-point source trade.

In most watersheds, including the Chesapeake, the majority of nutrients come from largely unregulated runoff, mainly agriculture. Pound for pound, controlling that “nonpoint” source pollution is usually cheaper than upgrading wastewater treatment plants. Therefore, plants may want to buy credits from farmers. That’s called a point source -to- nonpoint source trade.

In concept, it’s a win-win strategy. Point sources save money, and good stewards — whether farmers or very efficient point sources — get rewarded for their efforts, which creates an incentive to do even more. Many think it will be the way of the future.

“We’re trying to come up with programs that meet or exceed our environmental goals, but at the same time helps us do it better from an economic viewpoint,” said Andy Zemba, of the Pennsylvania Department of Environmental Protection.

Zemba, along with several conservation groups, the local conservation district and others are trying to develop a trading program for the Conestoga River, which drains about a third of Lancaster County. If any trading happens in the Bay watershed, it will likely happen in the Conestoga watershed first — it is the only nutrient trading effort under development in the basin.

Those involved say that arranging the first trade is months, if not a year or more, away. Right now, extensive efforts are under way to engage various sectors that might be interested in trading, and to develop specific rules: how a trade takes place, who is responsible for monitoring compliance, and who approves the trade, among other details.

It’s a steep learning curve for many. “A lot of people don’t even know what pollution trading is,” said Todd McNew, of the Conservation Fund, one of several environmental organizations participating in the effort.
Apart from potential savings, a successful trading program could have another benefit in Lancaster County, according to Don Robinson, manager of the county’s conservation district. More than half of the agricultural land in the watershed belongs to Amish farmers, who are normally reluctant to participate in other government programs, such as conservation initiatives supported by the Farm Bill. A representative from the Amish community is participating on the trading team.

“If their local wastewater treatment plant wanted to buy some credits from them, that would be looked upon a little differently than dealing with the federal or state government,” Robinson said.

In another pilot project being supported by the EPA, Faeth, of the World Resources Institute, is working to develop an electronic marketplace for nutrient trading. The project will create a web site focused on a specific Bay tributary where interested parties can go to determine whether buying or selling nutrient credits makes sense for them.

Using standardized information, the web site will give a wastewater treatment plant operator a ballpark estimate of how much it would cost to upgrade the plant to different levels of treatment. If the price is low enough, the plant operator may opt to control nutrients beyond what is required, and sell the excess to credits to others. If it’s expensive, the plant might explore buying credits from another plant, or a farmer.

Likewise, a farmer could make estimates about how many credits could be generated from various conservation practices, and at what costs.

In another level of complexity, the web site will factor in location information. Many nutrients entering a river far upstream never make it to the Bay; they are used by aquatic life in the stream. As a result, nutrient credits from upstream sources are worth less than reductions taking place close to the Bay.

“It will tell you, based upon geography, how many credits you are likely to generate, and what the value of those are,” Faeth said. “If you have to go hire a bunch of consultants to figure all this out, you are never going to trade.”

The idea is for the web site to help to introduce people to trading, and to give people first-cut information about whether it may make sense for them. WRI will first develop the program for a small watershed, probably in Maryland. If successful, it is expected to be expanded to cover the entire Bay watershed.

As people begin to realize that there is money to be made in generating nutrient credits, it may spur more conservation initiatives across the landscape. Farmers in the Williamsburg area of Virginia have experimented with implementing a suite of conservation measures which tests show are highly effective at curbing both nutrient and sediment runoff.

A market that would allow them to sell nutrient credits would reward the farmers for their efforts and provide added income to encourage them to keep working their land, rather than sell to developers, said Brian Noyes, manager of the Colonial Soil and Water Conservation District. “We believe trading may be an option that has not been seriously looked at and which could provide a lot of success,” he said.

And some in the regulated community are interested. “Everybody realizes that if something doesn’t change, their permits are going to become more restrictive, and consequently there is going to be a higher cost associated with that,” Noyes said. “We believe we can put practices on the land that are very cost-effective.”

As credits become more valuable, some believe it will fund more wetland creation, streamside forest plantings — even oyster restoration projects. “When people realize there is a buck to be made for any type of nutrient reduction,” Wiedeman said, “they are going to figure out some cost-effective technologies to do that. The market is going to spur innovation and additional reductions we wouldn’t have had otherwise.”

Those types of success, though, are theoretical. Substantial obstacles stand in the way of a successful water trading program, especially if it involves nonpoint sources.

The often-touted success of the acid rain program, some point out, is a poor comparison. It was aimed at getting sulfur dioxide reductions from large, easily monitored, smokestacks.

The most apt comparison for water trades would be a program limited to “point sources” — industries and wastewater treatment plants where all discharges come out of a pipe and can be reasonably measured. And there are signs such programs can work: A new trading program in Connecticut for wastewater treatment plants in the Long Island Sound basin appears to be ahead of schedule in attaining nitrogen reductions, and is doing it at reduced costs.

“Point to point trading strikes me as a no-brainer,” Faeth said. “They are doing that now in Long Island Sound and expect to meet their obligations five years sooner and save $200 million bucks.”

“Extending that to nonpoint sources,” he added, “will take a little while.”

Trading with nonpoint sources would be like having an air program that included not just smokestacks, but cars — each one having a different emission rate.

Measuring nutrient reduction credits for any particular nonpoint source control action is problematic. Actual reductions depend not only on actions taken by a farmer, but also on factors such as soil type, hydrology, historical land use patterns, crop rotations and many more. Further, the amount of rain that a site gets will vary the amount of runoff from year to year.

Complicating the picture further is that some management actions, such as planting a forest buffer, could take years to become effective. Likewise, nitrogen often seeps into waterways through groundwater. That’s not only hard to monitor but it takes years for benefits to be seen in the waterway as the nitrogen molecules move through aquifers.

Because of the uncertainty, trades between point sources and nonpoint sources most likely would not be even-up. Trading programs generally require trading ratios: It may take two pounds of a nonpoint source reduction to equal a pound from a point source.

Trades usually would require the use of consultants; not to mention, some kind of government-sanctioned “board of trade” to evaluate and approve all transactions. Monitoring and inspections may have to be increased. When that is factored in, the trades don’t look so cheap anymore.

In a sense, the need to ensure that reductions are taking place works against cost-effective trading programs. But without the safeguards, the odds increase that promised reductions will never take place.

Those types of problems are a big reason why so few trades have taken place. Dennis King, an economist with the University of Maryland’s Center for Environmental Science, and Peter Kuch, a Virginia-based environmental economics consultant, examined nearly 40 water pollution trading programs in the country and found that fewer than half a dozen had actually had a trade, and almost all of those were between point sources.

King said that while almost everyone supports trading in concept, they rarely agree on the details of how to make the program work — and the levels of risk various parties are willing to accept. Generally, the lower the risk — and the more safeguards, such as higher trading ratios or greater oversight — the less incentive either buyers or sellers have to participate.

Also, while the EPA promotes nutrient trading, other federal policies work against it. The 2002 Farm Bill contained record amounts of money to fund conservation efforts on farms that would control runoff.

Many trading programs, including the Bay Program’s nutrient trading guidelines, prohibit any trades using credits generated by reductions achieved through publicly financed cost-share programs. That means more Farm Bill money actually reduces the pool of tradable credits from farmers.

King and Kuch said in their paper that it is unlikely that most farmers would give up Farm Bill programs to participate in an uncertain trading program. Farmers have other reasons to be wary of trading programs. In order to have something to trade, a farmer has to acknowledge that a certain amount of nutrients are flowing off his land. Some farmers believe that the tacit admission of being a “nutrient polluter” may open the door to more regulation, the economists wrote in their paper, “Will Nutrient Credit Trading Ever Work?” which will soon be published in the Environmental Law Reporter, the journal of the Environmental Law Institute.

Also, if a farmer participates in a trade, he would almost certainly incur liabilities that don’t exist with a Farm Bill payment. Under trading programs, point sources are responsible for achieving goals even if they buy credits from others. If the purchased reductions don’t materialize, they would face penalties which, in turn, means they would likely seek reparations from whoever sold the credit.

As a result, the two economists state that point-nonpoint trades “will not contribute in any significant ways to near-term ‘overnutrification’ problems, and should be attempted first in a few watersheds where supply and demand conditions are favorable. Hopes about trading should not divert attention away from other regulatory or incentive-based solutions to ‘overnutrification’ problems that may have more near-term potential.”

Proponents such as Faeth believe there are fixes for most concerns. Much of the problem, he said, is that too little has been invested in water quality monitoring. Pollution reductions from nonpoint sources, in many cases, is a “knowable fact” with the right investment, Faeth said.

The nation has put too little emphasis on monitoring in general, he said, even as it has ratcheted up payments for farmers to take conservation actions. “We spend billions of dollars in the Farm Bill on programs that nobody monitors, and no one really has any mandate to check on whether the performance is any good. That is really silly.”

Because of the accountability — ultimately permit requirements must be met — Faeth contends that trading is ultimately a better way to get nonpoint source reductions than traditional cost-share programs. The 2002 Farm Bill, in fact, sets aside a small pot of money, the Conservation Innovation Grants Program, which will help support experiments with new concepts such as trading.

Still, Faeth said, it’s possible that programs today can be designed so nutrient control efforts that are based on actual performance — using monitoring — get more credit than those based on expectations.

To further reduce risks and make large-scale trades happen, Faeth said trades may be orchestrated by large nutrient “aggregators.” Acting as middle men, these aggregators would arrange for nutrient reductions by dozens, maybe hundreds, of farmers, and sell large bundles of credits to point sources. They may hold chunks of credits in reserve to reduce risks to both individual farmers and point sources in the event that some reductions do not occur. “A farmer may not have to do anything except sign up for the service.”

The middle men might be already-existing agriculture cooperatives that sell fertilizer to farmers, Faeth said. Trading programs would help the cooperative offset revenue lost by declining fertilizer sales as farmers implement nutrient management plans, and allow point sources to get all of their nutrient reductions through a single trade rather than negotiating with hundreds of farmers.

But the biggest reason to try trading, some say, is because not much else has been shown to work to control nutrient pollution in runoff. “It is a problem that is only getting worse,” McNew said. “Trading, as a concept, is accepted across the political spectrum. I think it is really going to be the wave of the future. It’s not going to be easy, but nothing good is.”