A $2 billion paper and fertilizer plant under construction near Richmond is more than just the first U.S. venture for a Chinese company that claims to have revolutionized the papermaking process. It’s also the first project to test Virginia’s ability to add new industrial facilities to the Chesapeake Bay watershed while maintaining pollution caps set for the James River more than a decade ago.

Shandong Tranlin Paper Co., which is operating in the United States under the name Vastly, has more than 200 patents on its process to turn wheat straw from local farms into pulp for paper products and soil amendments that could then be sold to farmers.

Pulp and paper production are among the dirtiest industries in the world, releasing a variety of noxious pollutants into the air and discharging nutrients, dissolved organic matter and other contaminants into the water. But in its operations in China, Tranlin says it has eliminated many of those drawbacks. Instead, it produces unbleached paper in a fashionably brown hue as well as fertilizers from the organic residue that would otherwise be discarded as waste.

Virginia Gov. Terry McAuliffe deemed the operation “the largest greenfield project ever done in the United States” when he announced last year that state officials had recruited the company to locate there.

But, for months before that announcement, according to emails obtained by the Bay Journal via a public-records request, the state’s environmental regulators were laboring to figure out how to accommodate a project like none they’d seen before. They expressed concern that it could undercut Virginia’s efforts to reduce nutrient pollution to the James River and the Chesapeake.

The Department of Environmental Quality set pollution caps for the state’s largest dischargers in 2005 and 2006, determining how much nitrogen and phosphorus could be released by facilities on each waterway. Discharge limits on the James were set to be reduced over time as part of Virginia’s plan to improve the health of both the tributary and the Bay.

At the same time, a nutrient credit exchange program was established to give some flexibility to big dischargers — wastewater treatment plants, in particular —  so they could meet tighter discharge limits without all of them having to make costly upgrades at the same time. But that program essentially gave existing facilities all of the nutrient loadings that officials believed the James River could handle, and many plants now have more credits than they actually need.

In theory, those plants could sell their excess nutrient discharge allowances or credits to other facilities. But the program was set up to only allow for trades among existing facilities and left little to no room for new businesses that might discharge a significant amount of pollutants. That wasn’t a problem for the state during the economic recession or the years that followed — but it is now.

Bob Burnley, former director of the DEQ when the allowances were set, now works as a senior adviser to Vastly. He’s helping executives navigate the complex process of acquiring a first-of-its-kind trade to accommodate nutrient discharges for a new facility.

“My thought at the time was that we ought to hold back some (credits) for future growth and expansion of existing facilities, but that wasn’t a very popular idea,” Burnley said. Then, he noted, “there wasn’t any big industrial development in the watershed until this Tranlin project came along. This is really the first test.”

When Vastly first approached other facilities on the James River about buying the excess credits, Burnley said, none wanted to sell. They preferred to keep their unused discharge capacity as a hedge against future growth or against future pollution reductions that might be required.

With Vastly unable to get the credits it needed, government officials who had recruited the company to the state realized the nutrient trading program they had created to accommodate new growth wasn’t working — at least not in the way they wanted it to. The McAuliffe administration had already heralded the arrival of the company, touting its multi-billion-dollar investment in the local economy and creation of 2,000 jobs by 2020. But behind the scenes, the state’s environmental agency was grappling with how to add a sizable new polluter to the substantial industrial activity already on the James River while continuing to improve water quality in the Bay tributary.

First test

According to emails and documents obtained by the Bay Journal, DEQ officials expressed concerns early on about Vastly’s ability to comply with environmental regulations. The first engineer to review the company’s plan, Curtis Linderman, a 37-year veteran of the agency, said the more he looked at the documents concerning it, “the more this project starts getting complicated.” A wastewater discharge permit would be just one of more than 20 permits needed.

He noted in a September 2013 memo that the plant’s process for converting straw and other materials into paper pulp and fertilizer would generate a large amount of nitrogen and some phosphorus.

By early 2014, the Virginia Economic Development Partnership had the lead in the state’s effort to attract the Chinese company. The General Assembly formed the agency in the mid-’90s to use aggressive business recruitment to expand Virginia’s economy, tax base and employment opportunities. Tranlin’s plan to build a huge manufacturing facility that would buy from Virginia farmers fit squarely into that mission.

Meanwhile, the Chinese company recruited a CEO with Virginia connections for its Virginia facility. Jerry Peng, a former executive with Goldman Sachs, has an MBA from the University of Virginia and serves as a trustee for the Darden School Foundation.

Roy Dahlquist, an economic development partnership manager, arranged meetings between the DEQ and company officials to discuss permitting issues and to review Tranlin’s Chinese operations and its U.S. plans. In documents obtained via the public records request, Dahlquist estimated that the Virginia facility would produce 900,000 tons of fertilizer and 600,000 tons of paper products per year once it reached full capacity.

In March 2014, Allan Brockenbrough, wastewater discharge permitting manager for the DEQ, emailed a Vastly executive to say the company would most likely need to acquire credits through the state’s nutrient trading program to be able to discharge into Virginia waters.

That wasn’t the project’s only trading-related hurdle. It represented a completely new kind of transaction that wasn’t necessarily covered by the state’s trading regulations. Until then, the state’s rules required that for a facility to participate in trading, it must already have enough credits in hand to cover its first years of operation. That essentially limited trades to existing plants.

At the time, DEQ engineers estimated the Vastly plant would discharge 237,600 pounds of nitrogen and 23,760 pounds of phosphorus annually, the emails showed. But Kyle Winter, deputy regional director for DEQ’s Piedmont Regional Office, noted in an email that under the state’s water quality improvement plan, all of the James River dischargers would be required to reduce their combined annual nitrogen discharge to the river from 10.6 million pounds in 2013 to 9 million pounds in 2023.

“Do you see a problem with this new discharger coming in at a time when the basin as a whole will be under pressure to reduce their aggregate discharge by 15 percent more over the coming decade?” Winter asked.

Brockenbrough voiced the same concern, replying in an email, “I don’t know where they will get that sort of allocation.”

In June 2014, McAuliffe threw his support behind the project, announcing it would get $20 million in state grants, many linked to the company’s commitment to provide jobs and purchase agricultural products from the state.

The company’s plan to buy straw and other products from Virginia farmers, then to market a fertilizer from the papermaking waste fit with the governor’s vocal support of the state’s agricultural industries.

The governor made it clear the state needed to make room for this project and others like it in the future. He issued an executive order in January 2016 convening a workgroup of stakeholders to revisit the state’s nutrient credit exchange program. The changes that group recommended in December — such as allowing credits to be acquired for a 20-plus-year term rather than on an annual basis — would specifically accommodate new businesses like Tranlin by allowing them to bank credits for long-term operations.

The group’s stated purpose was to ensure that any changes to the trading program allowed for economic development to continue without affecting the pollution limits for the Bay.

Adrienne Kotula, government affairs and policy manager for the James River Association, said when the group began meeting, they recognized that making room on the river for Vastly would be a tall order, as the plant would be near other big facilities, such as GE Power and Allied Concrete Products.

“At the beginning of the process, I was trying to look for other examples of how this has been handled across the country, and there were none,” Kotula said. In the end, though, she said she was satisfied that the group had figured out a way to allow for industrial growth while keeping pollution caps intact for the river.

The stakeholder group issued a report in December recommending eight major changes to the state’s nutrient credit trading program. The key changes will be presented in three bills, two of which have already been presented for the General Assembly to consider this year.

One change would permit the DEQ to revisit the distribution of pollution allowances every 10 years, starting in 2020, and possibly revoke or reallocate discharge credits that are not being used. Other changes would allow the state to offer those reclaimed credits to “valued economic development projects,” or let new facilities acquire credits from existing facilities.

Russ Baxter, Virginia deputy secretary of natural resources for the Chesapeake Bay, led the workgroup and said the recommendations weren’t focused on accommodating Tranlin so much as future economic growth.

“This isn’t the last new facility that’s going to move into the Chesapeake Bay watershed, so we are trying to prepare ourselves for what the future may hold,” he said.

The proposed changes would allow the state to offer nutrient credits as part of an overall incentive package to attract new businesses, a change Baxter said maintains the spirit of the original trading program while allowing for economic growth.

Burnley acknowledged that these changes would have made it easier for Tranlin to get the pollution credits it needs to begin operations as a new discharger in the James River. But Tranlin will likely acquire credits from another facility rather than directly from the state, he said, and the number needed has been reduced. The plant’s planned operation has been tweaked to reuse more wastewater and recycle additional nutrients. The facility is now expected to discharge 170,000 pounds of nitrogen annually and a nominal amount of phosphorous.

“It’s possible that someone could realize that they’re never going to use all the credits they’ve got and that they might want to support some economic growth in the state,” Burnley said. “They could just make a transfer of that allocation.”

Burnley wouldn’t initially say which facility might have the excess credits to supply Tranlin. But he wrote in an email to a DEQ official on Sept. 9 that the company is “pretty deeply into the process of formalizing an agreement with Dominion for a nitrogen credit transfer.”

He later confirmed the statement but added that being deeply into the process “does not mean close to an agreement.” He did not confirm whether Tranlin would be paying for them or getting them free, which he had suggested could be possible under the program. Dominion officials confirmed that they are in conversations with Tranlin about nutrient credits, but declined to say more. Dominion Virginia Power’s Chesterfield Power Station is located just downstream of the Tranlin site on the James River.

Once credits have been acquired, Burnley said Tranlin is expected to apply for a wastewater discharge permit by midyear, a process that will be subject to public hearings.

A different trade

Environmental advocates with the Chesapeake Bay Foundation and the James River Association said they are cautiously optimistic that the state could make room for the plant while maintaining water quality because of the way the trading program allows for the reallocation of unused discharge capacity while staying under the overall nutrients for the river. But some said they want to see the details before endorsing the changes.

And at least one interested observer said he feared that, in its eagerness to accommodate the Vastly plant, Virginia may hurt prospects for the development of environmental restoration projects in the state that could be used to offset other pollution discharges like this. Jeff Corbin, a former Virginia environmental official and a former senior U.S. Environmental Protection Agency adviser on the Chesapeake Bay, said that he hoped a large manufacturing facility coming to the state could be induced to buy credits from new projects such as manure-to-energy plants that would reduce nutrients rather than simply acquire unused credits.

Corbin is now senior vice president for Restoration Systems LLC, a company that is interested in building credit-generating projects in Virginia. He said he presented his ideas to the credit trading stakeholder group in November, “but the state chose to pursue another fix.”

The process that has paved the way for Tranlin, he said, amounts to a paper trading of credits that would result in a net increase of nutrients going into the river and Bay without reductions elsewhere. Such changes could go against the intent of the trading program and undermine the opportunity to leverage economic growth to finance pollution reductions, Corbin argued.

The Baywide cleanup plan, or total maximum daily load, set by EPA in 2010, establishes nutrient goals for states and the river that must be met by 2025 and then maintained indefinitely, even in the face of population growth and economic development.

“This is exactly how the Chesapeake Bay TMDL was structured to work,” Corbin said. “When a new discharger comes along, you have to find additional nutrient reductions to offset those.” Instead of allowing a paper trade among facilities, he said he thinks the state should consider “how to generate those additional reductions now so that Tranlin and the next Tranlin can have credits to buy.”

Burnley said the company briefly considered purchasing such credits from actual pollution-reducing projects but found them “extremely expensive” for the amount needed. Corbin said the cost-per-pound of trading with “nonpoint sources” — such as a manure-to-energy plant — is competitive with the cost for trades with “point sources” such as a sewage plant or factory. The going rate for the latter is $8–$12 per pound, he said.

Peggy Sanner, senior attorney and assistant director of the Bay Foundation’s Virginia office, said that she stressed to the workgroup that water quality should be on par with economic benefit when considering trades to accommodate a new discharger.

The state, she said, needs to set clear parameters for how that quality will be protected throughout the waterways. She suggested that trades such as the one being weighed for Tranlin should occur with dischargers upriver of the new facility, if possible, so that no stretch of the waterway has pollution increased. “If it’s the other way around, the intervening water would be degraded,” she said.

Dominion’s Chesterfield plant, the likely partner in the Vastly deal, is downriver from the paper and fertilizer plant site.