Center for Progressive Reform

The Importance of Being Earnest: Nutrient Trading in the Chesapeake Bay

by Yee Huang

In October, Senator Ben Cardin (D.-Md.) introduced the “Chesapeake Clean Water and Ecosystem Restoration Act of 2009,” signaling the beginning of a new era of federal commitment to Bay restoration. The legislation is a tremendous step in the right direction, and it includes many elements to help make the Bay Program and the Bay-wide Total Daily Maximum Load (TMDL) models for watersheds across the country. In addition to the inclusion of mandatory implementation plans and enforceable deadlines, the legislation also establishes a nutrient trading program in the Bay watershed.

Nutrient trading works where regulated entities are required to meet certain pollution caps, either in their National Pollution Discharge Elimination System (NPDES) permits or in an applicable TMDL that is then incorporated into their NPDES permits. If the cost of implementing control measures is expensive, the regulated entities may seek to buy pollution credits from other entities. These entities, either other point sources or nonpoint sources, must first meet a baseline of pollution reduction themselves. Any further reductions below that baseline can be sold as trade credits, providing a financial incentive to participate in the trade program and pollution reduction. In Pennsylvania, where a state trading program already exists, one borough reduced by 35 percent the cost of meeting its permit caps by purchasing credits from a nearby farmer who converted 900 acres to no-till agriculture, reducing sediment in runoff.

Last week, CPR President Rena Steinzor, Executive Director Shana Jones, and I submitted a letter to Senator Cardin expressing fundamental concerns with the current draft of the trading provisions. Because the trading program in the Chesapeake Bay is one of the first, if not the first, large-scale experiments in nutrient trading, it is critical that the legislation includes safeguards and accountability provisions that are in place prior to the first trade:

The trading program in the Chesapeake Bay must define specific temporal and geographic limitations. As drafted, the legislation could establish a geographic scope as large as the entire United States, or as small as each of the 92 individual tributary segments. The geographic scope of the trading program is important as it relates to the both the effectiveness of the program and the need to avoid localized impacts. At one end of the spectrum, if the trading program encompassed the entire United States, or even the entire Bay watershed, a seller in California or New York could generate credits to sell to a buyer in Washington, D.C. But because the seller and buyer aren’t discharging to the same waters, the trade would be unequal, merely benefitting the seller’s waters to the detriment of the buyer’s waters.
Similarly, without clearly defined temporal parameters, trades may amount to nothing more than paper exchanges without real benefits for the Bay. The legislation does not define the lifespan of nutrient credits, the time period during which a credit can be applied, and the time limits on using banked credits. Trade credits must expire within a certain time, otherwise buyers could stock up on credits to account for sudden and large-volume discharges. Use of credits also requires consideration of the seasonal impacts of pollutants. For example, the dead zone in the Chesapeake Bay appears during the warmer summer months. Allowing a credit-buyer to apply a credit that resulted from a nutrient reduction in the winder and thus increase its discharge during the summer would exacerbate the pollution causing the dead zone.
The trading program must explain and define environmental criteria for defining baselines. The crux of any trading program is determining the baselines on which to base trading. One baseline, the Bay-wide TMDL, is in development and expected to be finalized in December 2010. The other crucial baseline, the minimum reductions a seller must make before generating credits to sell, has not been defined by the legislation. Nonpoint source pollution is one of the primary contributors to nutrient pollution in the Bay, and these sources must first make initial reductions from the status quo before participating in the trading program. A logical option is to set the baseline with reference to the load allocation in the TMDL.
The trading program must prohibit trades that would cause high concentrations of pollutants in particular areas, or “hotspots.” Although the legislation requires that the use of trade credits not cause hotspots, the details on how to prevent them are lacking. Hotspots are avoided through a combination of geographic and temporal restrictions, as discussed above, as well as stringent pre-trade review and consistent monitoring. EPA should have the authority to disapprove of trades that may cause hotspots, as well as the authority to halt trading if hotspots should appear.
The trading program must have accountability and monitoring provisions. Nutrient trading is another way for regulated entities to meet their pollution limits in NPDES permits, which has traditionally relied on proven control structures. Enforcement of trades depends on private contracts between the buyer and seller, and these contracts should be linked to enforceable NPDES permits or list the EPA as a third-party that can sue to enforce the contract. Moreover, trading requires transparency, and the trading program should provide clear information and data on the implementation practices used to generate trade credits. Much of this information, including identification of individuals and information on specific data-gathering sites, is but should not be protected by current law. Because trading is conducted at the individual level between individual sellers and individual buyers, verifying the trade activity and ultimately the contributions to pollution reduction requires this individualized information.

Trading opens a new door to incentivizing pollution reductions from nonpoint sources, which are exempt from mandatory regulation under the Clean Water Act yet are the leading cause of water impairment across the country and in the Chesapeake Bay. Innovative and flexible approaches to achieving pollution reductions are important, but the trading program must be implemented with care and an earnest desire for the program to succeed.