Pennsylvanias Nutrient Credit Trading Program

What clean water advocates need to know

Cleaning up the Susquehanna Cleaning up the Chesapeake Bay

Chesapeake Bay is in serious trouble Susquehanna provides of the Bays fresh water Pennsylvania, Maryland and Virginia have been cooperating in cleanup for 25 years Major pollutants are nitrogen and phosphorus (nutrients) and sediment Most of the pollution comes from agriculture

Pollution caps and required reductions the Chesapeake Bay TMDL

The 2010 Chesapeake Bay Total Maximum Daily Load required reductions by 2025: Nitrogen 33 million pounds Phosphorus 1 million pounds Sediment 524 million pounds

Pennsylvanias Trading Program

Developed by DEP to meet voluntary Chesapeake Bay Tributary Strategy goals Goal
Achieve reductions in nitrogen and phosphorus pollution at lower cost

Method - Allow sewage treatment plants to comply with their nutrient caps by purchasing credits rather than by installing new, expensive pollution control technology from:
other sewage treatment plants that reduce pollution below requirements farming operations that comply with all requirements and install extra practices to get greater reductions

How does nutrient credit trading work?

Sewage treatment plant discharges 10,000 pounds of nitrogen must reduce to 7,500 pounds cost to upgrade $1 million Farms already in compliance with pollution control requirements go further and install extra conservation measures and generate nitrogen credits

Plant buys 2500 nutrient credits at $15/lb for 10 years Credits cost $375,000 Plant saves $625,000

Where do credits come from?

Farm, business or municipality proposes a project that reduces nutrient pollution below what is required by law DEP reviews proposal and approves or rejects the proposal if approved, the amount of reduction is certified creating a credit project need not be installed, but a verification plan must be in place outlining how the reduction will be demonstrated

Buyers and sellers enter into a contract specifying price per pound of reduction and length of sale. Buyers can buy directly from a credit generator, buy from a company that bundles credits or participate in the PENNVEST nutrient credit auctions DEP registers the credits once registered, the credits can be used by a discharger to comply with its permit limits registration is noticed in the PA Bulletin

Current Credits Available

Credits Certified Nitrogen
4,877,721

Phosphorus
358,170 27,576 44,782 443 17,119

Credits Verified
WWTFs treatment WWTFs under capacity Ag non-point Manure Hauling 275,993 761,105 32,981 136,966

Credits Registered

533,188

25,527

What could go wrong?

If trades occur between a downstream seller and upstream buyer, or between buyers and sellers in different watersheds, local water quality could get worse Estimates of reductions attributable to agricultural BMPs may be too high and installed BMPs may fail Minimum level of compliance with clean water requirements must be strong enough to guarantee that reductions are truly extra beyond what would be achieved by simple compliance with the law

Some important definitions

Baseline =Compliance with all legal requirements Threshold = A set of extra practices that must be installed if an entity wants to trade

Minimum requirements the allimportant baseline and threshold

Current baseline
Must be in compliance and implementing nutrient management, manure management and erosion and sedimentation plans

Current threshold must have of the following three practices:

100 foot manure setback 35 foot vegetative buffer Reduce nutrient 20% below requirement

Whats a trading ratio

Margin of safety that an non-point source pollution reduction practice will deliver adequate reductions to Chesapeake Bay PAs safety ratio is 1:1 reduced by 10%, reduced further by delivery ratios and edge of segment ratios For example: Farmer X installs practices to reduce N pollution by 100 pounds per year reduction to Chesapeake Bay calculated at 66 pounds per year 10% reserve requirement leaves 60 credits for sale

EPA Evaluation PAs Trading Program Inadequate

EPA evaluation based on optimistic assumptions found PAs trading baseline:
Falls short of meeting TMDL allocation for nitrogen by 41 percent Falls short of meeting TMDL allocation for phosphorus by 9 percent Falls short of meeting TMDL allocation for sediment by 4 percent

DEPS Proposed Changes to Trading Program Threshold

Non-point source
No change until 9/30/15 Existing credits will expire 2015 After 2015 performance based adjusted with new stricter trading ratio No more credits for manure hauling Point source
No credits for under capacity 2014 must achieve treatment of 8 mg/l TN, 1 mg/l TP 2015 must achieve treatment of 6 mg/l TN, 0.8 mg/l TP No trading ratio

DEP considering options for credit certification

Certify by location (current program) Certify by pollution reduction activity
Certify common practices Register aggregators, individuals expected to generate credits

Certify approved generators

Define pollution reduction activities and general area Identify qualifications

Tailored process
For forward sale detailed review, definition of sites For spot sale end of year, once and done, expidited verification based on pre-certification

Key consideration credit verification

Verification plan needed for credit registration Program currently allows self-verification DEP proposes random audits done by private contractor with priority for certification application comments and complaints CURRENTLY NO FUNDING

Problems with PENNVEST auction

Conflicts of interest
Acts as lender for sewage plant upgrades Acts as seller in nutrient credit marketplace Acts as liaison between buyers and sellers

Does not protect interests of purchasers Does not disclose unsuccessful buyers and sellers

Our recommendations
NO NEW CREDIT CERTIFICATIONS UNTIL BASELINE MEETS REDUCTION GOALS Baseline requirements must at least meet TMDL agricultural load allocation if not, there are no extra reductions to trade No self-verification, annual verification of compliance with baseline and threshold DEP should charge fee to process credit applications to fund verification program, administration of trading program Credit calculations must be done on site-specific basis to ensure operation meets baseline and threshold Trading ratio must include retirement of credits Discontinue or reform PENNVEST auction to eliminate conflicts of interest

Whats next?
DEP will change program through policy guidance where possible DEP will begin to develop regulations Will run changes by appropriate advisory groups The public will have the opportunity to comment once changes are published

Resources
Pennsylvanias Trading Program DEP official site http://www.dep.state.pa.us/river/Nutrient%20Trading.htm Chesapeake Bay Commission Economic Study http://www.chesbay.us/Publications/nutrient-trading-2012.pdf PennFutures evaluation of Pennsylvanias trading program http://www.pennfuture.org/UserFiles/File/Water/RespFarm/Rep ort_NutrientTradingEval_20110919.pdf Conservation Pennsylvanias comment letter -