A recent analysis by the World Resources Institute found that potential benefits of a fully developed, mature Baywide nutrient trading program include:

  • Providing wastewater treatment plants with an option to reduce the costs of meeting nutrient load reduction requirements under the forthcoming Bay Total Maximum Daily Load;
  • Providing municipal jurisdictions that face requirements or goals to reduce nutrient loadings to the Bay from stormwater runoff with an option that could reduce costs;
  • Creating a new source of revenue for farmers and a financial incentive to reduce the nutrient loads leaving their farms; and
  • Increasing the ability to accommodate growth.

Some have questioned these benefits and the rationale for the trading program. Kurt Stephenson and Len Shabman stated in "Plan for nutrient trading to pay for agricultural BMPs and illusion," (February 2009) that proponents of nutrient trading are equating it with raising revenue from point sources to fund nonpoint source reductions. They express doubt that a future Chesapeake Bay trading program would depart from the past national experience of little trading activity in many smaller-scale programs. The following addresses these and other concerns.

Why is a Chesapeake regional nutrient trading program being proposed?

The purpose of the regional nutrient trading program is to provide a market-based approach to reduce loadings to the Bay and to achieve water quality goals at a lower cost. Trading is based on the fact that the cost to reduce nutrient discharges differs between sources. It allows entities with higher costs (e.g., wastewater treatment plants, municipal stormwater systems) to save money while allowing those with lower costs (e.g., some farmers) to capture new revenue. Trading is voluntary for existing wastewater treatment plants and stormwater systems and simply provides another option.

Water quality trading programs should not be used as a mechanism to force regulated point sources to pay for reductions by nonpoint sources. Such a scheme would be grossly inequitable and would likely fail under the weight of its inequity.

Would a Baywide trading program differ from past national experience?

The WRI's analysis assessed the economic benefits that a fully developed Baywide nutrient trading market might provide in the future. While the question "is this realistic?" is fair, an assertion that because trading programs have not developed to this extent in the past, they are unlikely to do so in the future ignores the reality that the need and opportunity for such a trading program is unprecedented. There has been no past national experience comparable to the situation facing the Bay states:

  • No regulatory driver of the scope, magnitude and certainty of the Chesapeake Bay TMDL;
  • No permanent "zero nutrient allocation" for new or expanded growth over a multistate area;
  • No comparable costs for large numbers of regulated point sources; and
  • No comparable opportunity to incorporate credit purchases into municipal stormwater programs.

Will there be any actual demand for nonpoint source nutrient credits?

If a well-structured and reliable regional nutrient trading program existed, significant credit demand could easily develop from the following sources:

  • New and expanding WWTPs: Most Bay states have adopted policies that provide no nutrient allocations for new wastewater treatment plants, or existing ones that must expand to accommodate growth. The only way that growth and development can be accommodated in the future will be through trading programs. A Baywide program is desirable because it would prevent local growth constraints caused by geographic mismatches between basins with high credit demand and those with adequate supply.
  • Existing wastewater treatment plants with high nutrient removal costs: The WRI analyzed a large number of these plants and found that about 40 percent of them faced nutrient upgrade costs that would make purchasing credits a cost-effective alternative. Under current state policies, only plants in Pennsylvania and West Virginia may consider doing so. It is possible though, that Maryland or Virginia might change their policies in the future.
  • Municipal stormwater systems: Urban stormwater retrofits are among the most expensive measures to reduce nutrient loads, with conservative estimates of at least $200 per pound for nitrogen reductions. Most stormwater projects are done for local flood control, water quality and stream restoration purposes. These projects may not achieve enough nutrient reductions to meet Bay goals. If the option exists to cover "shortfalls" by purchasing credits in the Baywide market, stormwater jurisdictions could save significant amounts of money compared to installing additional retrofits solely for the purpose of reducing loads to the Bay.
  • New development: If new development had to offset any increase in nutrient load to the Bay resulting from changed land use, the nutrient trading market would likely be the only source of offset credits.

Could farmers profit from trading?

Farmers typically have lower nutrient reduction costs than other sources such as wastewater treatment plants and municipal stormwater systems. This creates the opportunity for farmers to sell credits to these sources. To sell credits, a farm would first have to meet baseline load reductions to meet TMDL requirements and then install additional best management practices to generate credits.

The WRI is analyzing various scenarios to determine whether typical farms can meet these requirements and produce credits at a cost that would yield attractive profits. The analysis takes into account cost-share assistance, initial capital costs, annual maintenance costs, forgone revenues from cropland converted to permanent conservation practices, and transaction costs farmers incur to participate in the cost-share programs. While results vary by state because of differing baseline requirements and approved BMPs, results indicate that many, but not all farms could potentially profit from a trading program. The benefits for a given farm will depend on a variety of factors, including farm type, location and the degree to which BMPs have previously been implemented.

Would point sources be helped or hurt?by a regional nutrient trading program?

Stephenson and Shabman expressed concern that the TMDL will be used to lower the point source allocations to force them to purchase nonpoint source credits. But if allocations were lowered, it would more likely be due to the requirement in EPA's TMDL regulations regarding "reasonable assurance." If reasonable assurance that sufficient nonpoint source reductions can be achieved is lacking, then point source allocations must be lowered. Point sources should participate in the TMDL development process and work to ensure that its allocations are scientifically defensible and equitable.

Whatever the TMDL establishes, a regional nutrient trading program could only help point sources-by expanding their options and potentially lowering their costs for meeting TMDL requirements.

Summary

The need and opportunity for a Chesapeake Bay regional nutrient trading program is unprecedented. There has been no regulatory driver for such a program comparable to the Chesapeake Bay TMDL. The trading program could provide significant economic benefits to regulated point sources, as well as farmers and other credit generators. It could help achieve Bay water quality goals faster and at lower cost to society, and would be indispensable in accommodating continued growth under tight nutrient caps.

Bay Journal readers are welcome to learn more about the WRI's analysis of Chesapeake Bay trading. Information on this as well as the U.S. and international experiences with trading is available at www.wri.org. The WRI also welcomes questions and feedback; please contact Cy Jones at cjones@wri.org.