The upcoming Total Maximum Daily Load for the Chesapeake will establish nutrient caps for states and sectors in the Bay watershed. Existing and pending nutrient trading programs in four Bay states provide the foundation for helping to meet and maintain the TMDL in a cost-?effective manner. Expanding these programs into a Baywide nutrient market-as currently proposed in Congress-could help accelerate progress and lower costs.

Agriculture could potentially benefit from a mature Baywide trading program that would likely emerge as demand for credits grows and the states modify and strengthen their programs as they gain experience.

By implementing practices that reduce nutrient runoff beyond baselines, farms could generate and sell nutrient credits. Baselines are nutrient levels or practices that must be achieved before credits can be generated.

The World Resources Institute is analyzing the potential for nutrient trading for farms of various types, sizes and locations at a wide range of potential mature market credit prices. Using recent studies of best management practice costs and efficiencies, this analysis takes into account the costs of meeting baseline requirements, forgone income, transaction costs, cost-share funding and credit-sale revenues.

While varying widely based on farm type, location, BMPs and credit price, preliminary findings indicate that there is potential for many (but not all) farms to generate and sell credits.

In some states-and possibly all in the future-farmers will have the ability to determine the combination of BMPs and cost-share funding (if necessary) that would allow them to meet baseline requirements and thereafter generate credits at the lowest cost to themselves. Federal and state agriculture conservation cost-share funds are an important resource for helping farmers achieve their baselines. Funding shortfalls could make it harder for some farms to meet the baseline and, regardless of trading, make achieving the Bay's TMDL more difficult.

Nonpoint source credit-generation opportunities are likely to extend beyond "traditional" farm BMPs. A trading market may stimulate the implementation of innovative approaches, such as algal turf scrubbing and waste-to-energy, some of which could occur on farms. Proposals to generate credits through such innovative practices are being considered in Pennsylvania's nutrient trading program.

Furthermore, Baywide trading has the potential to benefit other source sectors. Most Bay states have adopted policies that provide no nutrient allocations to new or expanding wastewater treatment plants. Purchasing nutrient credits could allow these plants to accommodate growing populations without increasing the amount of nutrients delivered to the Bay. Existing plants with low, nutrient-reduction costs could earn revenue by reducing discharges below permit limits and selling the surplus reductions as credits.

Jurisdictions responsible for reducing nutrients from stormwater could benefit, as well. The costs to reduce nitrogen from stormwater systems through retrofits are among the most expensive measures. If jurisdictions are allowed to purchase nutrient credits to meet some of their load requirements for the Bay, the total cost of meeting stormwater goals could significantly decrease. Preliminary estimates suggest that the annual savings could reach hundreds of millions of dollars, depending primarily upon rate-of-credit utilization. (A WRI working paper is forthcoming.)

Although some questions remain about how trading would work, a number of design features are available to address most of them. Reconciliation periods and insurance credit pools could reduce compliance risks for point sources. Such features thus could generate additional credit demand from existing point sources, especially in Pennsylvania and West Virginia. Credit aggregators could help reduce the transaction costs buyers would otherwise face if interacting with numerous individual farmers.

If well-designed, trading has the potential to benefit the Bay and its stakeholders by reducing costs and accelerating nutrient reductions.