Water Quality Credit Trading 101

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Water Quality Credit Trading 101
By Jim Klang Kieser Associates
Improving Conservation Agricultural Economics
with Water Quality Credit Trading the BMP
Challenge
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Learning Objectives

• Background - Watershed approach - Clean
  Water Act
• Water Quality Trading
• What is WQ Trading?
• Why allow for trading?
• Can you participate?
• - Trading examples in MN
• Why agriculture should be involved

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Watershed Approach

• Most effective comprehensive approach in
  addressing currentwater quality problems.
• Builds a broad-based community of understanding
• Community-developed desired goals
• Applies many tools to solve water quality
  concerns
• Nutrients and sediments are 2 of the most
  important pollutants affecting water bodies
• Originate from many sources
• Persistent in the environment transport,
  deposition throughout the watershed with little
  or no chemical/physical degradation
• Contribute to a loss of aesthetic, recreation and
  fishery quality

EPA Draft Watershed Handbook
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Clean Water Act

• National goal Fishable, swimmable, and drinkable
  waters
• Numeric and narrative
• water quality standards
• National Pollutant
• Discharge Elimination System (NPDES)
• Regulates Pollution
• Municipal and industrial
• Includes large livestock operations
• Minimum standards considers the source type,
  pollution strength
• and economics (Technology Based Effluent
  Limits).
• Occasionally,a waterbody requires additional
  protection and Water-Quality Based Effluent
  Limits are applied to a permit
• Total Maximum Daily Load (TMDL)
• Program for impaired watersheds (sets a budget
  for pollution)
• Regulatory correction of NPDES sources by setting
  Water-Quality Based Effluent Limits, and
• Incentive-based nonpoint source corrections

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Wastewater Minimum Requirements
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Wastewater Minimum Requirements
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Wastewater Minimum Requirements
Tradable 0
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Water Quality Credit Trading

• One of the tools used in the watershed
  management approach to achieve water quality
  goals efficiently.
• ? Introduces flexibility in the regulatory
  process Trading can be included in NPDES
  permits, allowing a point source with and high
  treatment costs to pay another to make a
  voluntary and surplus pollutant reduction for a
  lower cost.

From EPA 2004 Water Quality Trading Assessment
Handbook
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Potential Tradable Pollutants

• Pollutants that
• come from both point and nonpoint sources
• tend to be transported through stream network
  without assimilation
• have a water-quality based effluent limit

For agriculture, most commonly traded pollutants
Phosphorus, Sediment, Nitrogen
In some watersheds, physical variables are also
being traded flows, temperature
Pollutants that - are lethally toxic
- accumulate in organisms, such as fish (mercury
, PCBs, pesticides)Are not traded
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Trading Overview

• The Trading Currency
• Surplus Pollutant Reductions Credits
• (Unit of mass over a period of time)
• Credits become Units of Exchange
• Real a Point Source/Non-point Source action
  results
• in a pollutant load
  reduction
• Surplus load reduction is greater than required
  by permit and/or TMDL allocation goals
• Quantifiable load reduction can be measured by
  a standard method/equation
• Watershed-based credits can only be
  produced and traded within the same,
  pre-defined watershed
• Net improvement (trading ratio)
• trading ratio has to be greater than 11
  (account for uncertainties, provides net water
  quality benefit for water)

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Types of Trading
Point Source/Point Source (between permitted
wastewater facilities) Point source/Non-point
source (between permitted and non-permitted
sources with voluntary credits) Non-point
source/Non-point source (between regulated
municipal stormwater permittees and
unregulated agriculture)
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Why Allow for Trading? (Overview)

• Cost
• Ancillary environmental benefits
• Additional funding opportunities for BMP
  implementation
• Policy opportunities

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Why Allow for Trading? (1)

• Cost
• WWTPs face large capital costs to comply with
  more stringent water quality-based effluent
  limits (NPDES permits, TMDLs)
• Agricultural BMPs can produce pollutant load
  reductions at a much lower cost.

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Some WWTP Cost Information
Wastewater Treatment Size (Million Gallons/ Day) Type of Treatment Typically Applied Treatment Costs (/lb P)
Blue Lake 55 Continuous 0.20
Mankato 10 Continuous 2.00
Industrial 1.5 Continuous 14-18
Mid Size Rural 0.2 Continuous 5-18
Small Rural 0.05 Ponds 60
Cost examples from Minnesota Pollution Control
Agency and WWTP Representatives
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Emerging Market Information
Trading Program Location Buyer Treatment Costs (/lb P) Ag Credit Price Range (/lb P) Average Credit Price (/lb P)
Michigan 292 3 652 --
Ohio 23.37 1 12 1.50
PA 30 - 3,000 6 113 9.27
Ontario 775 156 --
Minnesota 0.2-60 3-24 --
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Why Allow for Trading? (2)

• Ancillary environmental benefits Examples
• Sediment and other sediment attached pollutant
  load reductions
• Reduced flood peaks (by reconnecting riparian
  flood plains)
• Habitat (game, fish, birds)
• Wetland restoration
• Hydrologic damping (storage and/or increased
  evapotranspiration with perennial vegetation)
• Water temperature reductions (riparian shading)
• Assimilative capacity (eroding sediments and
  sediment attached pollutants deposited and stored
  in the flood plain)

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Why Allow for Trading? (3)

• Additional incentives to implement nonpoint
  source BMPs
• Water quality credits
• Carbon sequestration credits
• Wetland mitigation banking credits
• Habitat credits (endangered species)
• Minimization of risk associated with BMPs when
  adopting different farm management techniques

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Why Allow for Trading (4)

• Policy opportunities
• Trading program could help maintain
• working lands
• Trading often accelerates practice implementation
  cycle, due to flexibility and monetary advantages
• Trading goals can result in net benefits (extra
  reductions required for each trade)
• Trading allows for equitable decisions in future
  growth management

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New and Expanding Facilities

• Minnesota River Basin management uses WQT as a
  future growth management tool All expansions
  and new facilities must buy Credits for
  Allocation Rights Currently Point to Point
  Trades (May-Sept)
• Lake Pepin management could require similar
  measures year around Credits and Point to Point
  and Point to Nonpoint Trades may be eligible

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Trading Program Participation

• Step 1- Ag. producer installs additional BMPs
  (above baseline requirements) from a selection of
  BMPs with approved crediting equations
• Consideration Setting a Baseline (Yet to be
  determined in MN)
• Baseline corresponds to a minimum BMP
  implementation goal. Options could be
• Baseline set by TMDL load allocation
• Baseline defined by state policy or formal rule
• Baseline defined through local stakeholder input
• Baseline could be a combination of all of these

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Trading Program Participation

• Step 2 - Pollutant load reductions from BMP
  calculated using standard methods such as RUSLE2
  (NRCS soil erosion model).
• Consideration Requirements for credit generation
• BMP selection
• Implementation period BMP lifespan
• Quantification of BMP reductions
• Cost of installation

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Trading Program Participation

• Step 3 Trading credits then must factor in a
  Trading Ratio calculation using an approved ratio
  that accounts for uncertainties and provides for
  net water quality benefits.
• Consideration Trading ratios may contain
• Factors to account for equivalency between
  pollutant load discharges at sellers and buyers
  locations
• Margin of Safety to ensure conservative estimates
  are applied for variability of nonpoint sources
• Net benefits included for stream
• Bioavailability differences between sources

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Trading Program Participation

• Step 4 Connecting credit sellers to buyers
  (aggregator, broker, or individual contact)
• Consideration Legally binding agreements
  compliance, and supporting framework
• Third party verification of BMP credit,
  installation, maintenance WQ monitoring
• Legally binding trading agreement between farmer
  and credit buyer/banker
• Sellers compliance with terms of contract allow
  buyer (PS) to comply with permit requirements
• Supporting framework options may have a middleman
  or a buyer to seller relationship

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Trading Program Participation

• Step 5 Registering credits with the state
  regulatory agency (MPCA, or third party)
• Consideration Credit registry types
• Reporting requirement in a NPDES permit
• Web-based registry (e.g., WRIs NutrientNet
  which includes location, contact and credit
  calculationswww.nutrientnet.org)
• Web facilitated reporting (e.g., Minnesota River
  Basin Phosphorus General Permit, includes
  contracts, reporting forms and lists current
  trades)

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Agricultural Perspectives

• Survey of Agricultural Representatives
• Main Points/Concerns Discovered
• Desire to avoid rewarding poor past decisions
• Site visits needed, but must be done by someone
  knowledgeable about farming practices
• Balance to promote working land BMPs
• Concern with setting wrong baselines (required
  BMPs before being able to generating a credit)
• Farmers should be provided good technical support
  for WQT
• Participation should always be voluntary

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MN Point Source-Nonpoint Source Trading
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MN Point Source-Nonpoint Source Trading

• Rahr Malting Company
• Goal Malt producer wanted to expand by operating
  its own permitted wastewater treatment plant.
• Issues - Minnesota River waste load allocation
  for CBOD fully allocated to other dischargers. -
  Previously high sanitary sewer district
  industrial user fees forced Rahr towards other
  options
• SolutionPoint to nonpoint source NPDES water
  quality trade permit trades with agriculture
  offset Rahrs CBOD loading by reducing several
  parameters causing dissolved oxygen stress in the
  river upstream of facility.

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Rahr Malting 8 Mile Creek
Rahr installed four erosion control sites 8 Mile
Creek Channel stabilization, livestock exclusion
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Rahr Malting Rush River Site
Results - Discharge of up to 150 lbs CBOD/day
- 212 lbs of CBOD reductions/ year from erosion
control sites
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MN Point Source-Nonpoint Source Trading

• Southern MN Beet Sugar Co-op
• Goal Cooperative wanted to expand but faced air
  water quality compliance issues
• Issues - Expanded NPDES discharge difficult to
  obtain because of Minnesota River D.O. problems
  - Air quality permit requirements regarding H2S
  gas emissions from lagoons - Prohibitive costs
  for expanding spray irrigation treatment process
• Solution Point to nonpoint source NPDES water
  quality trade permit
• facilitates continuous discharge from on-site
  wastewater treatment
• requires 2.6 times TP offset reductions from
  upstream NPS

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Spring Cover Crops
58,832 acres planted in 2005
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West Fork Beaver Creek
Results - Trading requirements exceeded- West
Fork Beaver Creek channel stabilization,
livestock exclusion- Spring cover crop contracts
with shareholders over 50,000 acres.
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Next Steps in MN (Rules are being developed)

• The MPCA is promulgating Rules on Water Quality
  Trading
• High level of Stakeholder involvement
• July 2008 draft deadline goal
• CIG Project Team includes MPCA

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Why Agriculture Should be Involved in Trading

• Potential revenue
• Discussions influence stewardship goals
• Agriculture knows what works best on the farm
• Giving agriculture recognition for what it has
  already done

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Common Questions
Can conservation practices Ive implemented in
the past be used to generate credits? Will
Depend on MPCA Rule and Guidance. What is the
life of my credits? Annually renewable/saleable
for the life of the practice. If I sell credits,
will I eventually be regulated? No. But credits
are used by someone who is regulated. What
happens if I default on implementing my
practices? You may have liability within your
private contract and MN rules. Who could buy my
credits? Any regulated facility within your
watershed. How much is my credit
worth? Determined by market demand.