Recent policy actions in Pennsylvania and Virginia are moving the topic of nutrient trading (aka: water quality trading) from concept to reality. The discussions surrounding these initiatives have unleashed a vigorous debate about the key components of successful trading programs.

The Chesapeake Bay Foundation commends both Virginia and Pennsylvania for their commitment to involving a multitude of interested stakeholders in the development of their trading programs.

Unfortunately, there appears to have been little to no coordination between the two states during the development of their respective systems, and as a result, Pennsylvania and Virginia have fundamentally different trading programs.

Key differences include a lack of common eligibility requirements for participation of point sources and nonpoint sources, the use of government-funded pollution credits, and trading ratios.

This is a lost opportunity: These initiatives were driven by a regionwide collaborative effort to improve water quality across the Chesapeake Bay watershed.

Conceptually, pollution trading is appealing as a cost-effective and flexible way to achieve and maintain water quality goals.

Critics of nutrient trading will argue that trading allows point sources to “pay to pollute” rather than clean up their own effluent. But the reality is that the region’s population will continue to grow, and trading programs provide a potential framework to offset the inevitable additional pollution loads.

The key is to ensure net environmental benefits and public accountability. And in this respect, the Pennsylvania program has failed.

Pennsylvania guidelines allow the use of government-funded best management practices to generate tradable pollution credits on private lands—a practice forbidden under the Virginia trading legislation.

Effectively, this provides no reduction in the overall load because government funds have already been used to implement the practice and accomplish the pollution load reduction. It also wastes financial resources, allowing for double payments to the private sector for the same reductions.

This not only hurts pollution reduction goals, but also distorts the market by artificially deflating the price of a pollution credit; entities receiving cost-share funds can, in fact, undercut others who did not receive such funds by selling credits at a lower cost.

The Pennsylvania program also does not contain a trading ratio for trades between point and nonpoint sources to account for the uncertainty associated with the pollution reductions from nonpoint sources.

A trading ratio of at least 2-to-1 is commonly recommended: That is, two pounds of pollution reductions from nonpoint sources are needed to offset every pound of pollution from a point source. Such a margin of safety is necessary to compensate for the inability to definitively quantify, or reliably monitor, the actual pollution-reduction benefits achieved from nonpoint source reductions.

Virginia might offer a better way.

In November, Virginia announced regulations governing nutrient trading and it is in the process of finalizing a policy that specifies details on trades between point and nonpoint sources. The Virginia regulations require a 2-to-1 nonpoint to point source trading ratio.

In addition, the draft guidelines include a provision that would preclude any project or practice that increases impervious surface (e.g., the conversion of farmland to suburban development) from generating pollution credits.

The Pennsylvania policy does not contain this safeguard against a potentially endless debate about different types of land-use and their associated pollutant loads in the context of nutrient credit trading.

Now, it is Maryland’s turn.

We encourage Maryland, as it moves forward in the trading realm, not to re-invent yet another wheel. Rather, by using the Virginia program as a model, Maryland can avoid the flaws contained in the Pennsylvania trading policy and guidelines.

And. because the Potomac River is the most likely watershed for interstate trading, having similar programs in Maryland and Virginia will facilitate that cooperative process.

Lastly, a smart Maryland system could help move the Bay states toward regional harmonization of trading programs, ensuring a “level playing field” in the way nonpoint source pollution credits are generated and calculated.

But there is another reason to support regional consistency in the definition of a pollution credit. It might well facilitate the development and creation of a voluntary nutrient “market” analogous to the voluntary carbon markets that have emerged worldwide. The success of these voluntary carbon markets suggests it might be a model worth replicating in the Bay watershed as a way to enhance ongoing water quality restoration efforts.

Unlike regulated markets that rely on legally mandated pollution caps to generate demand for pollution credits, a voluntary market relies on investors that are not currently regulated. Some investors in voluntary environmental markets participate because they believe they will eventually be regulated.

For others, the motivation is altruistic or from the desire to enhance their public image.

Regardless of the reason, the result is the investment of private funds to “buy” environmental credits.

A “Chesapeake Bay Nutrient Fund” could operate in a similar fashion—a vehicle by which private funds could be used to implement practices that result in pollution reductions, targeting areas watershedwide that have the highest pollution loads.

But who would invest in such a fund? Potentially, concerned citizens, local businesses wanting to market themselves as “Bay friendly,” industries striving to improve their “corporate image,” and philanthropists interested in “on the ground” results could all get involved.

And who would manage the fund? Implement the credit generating practices? Verify the credits? There are no easy answers.

But as the 2010 deadline restoration approaches, it is clear that we need to be thinking creatively about ways to accelerate restoration and engage a broader coalition in the cleanup effort to offset the large “nitrogen footprint” we have stamped on the Bay, its tributaries and streams.