EPA National Forum on Water-Quality Trading

July 22, 2003Chicago, Illinois

Nutrient Trading in Maryland(and Its Neighbors?)

I say, the time has come...

Saving the Chesapeake Bay

Chesapeake Bay Watershed

Slide Courtesy of Lisa Bacon, CH2M Hill

The Chesapeake Bay Program

Historically a Voluntary, Cooperative Effort by:

Maryland

Virginia

Pennsylvania

District of Columbia

U. S. Environmental Proctection Agency

Chesapeake Bay Commission

1983 Chesapeake Bay Agreement

1987 Amendments

1992 Amendments

2000 Amendments

Chesapeake Bay Program Goals(Original)

Restore Living Resources Submerged Aquatic Vegetation, Shellfish, Fish

Nutrient LoadingsReduce “Controllable Nutrient Loads by 40% by 2000, and then Hold Them There

Dissolved OxygenReduce “Anoxic Volume Days” by Twenty Percent

Maryland Tributary Strategy Approach

Nutrient Goals for Ten Subwatersheds

For POTWs: Nitrogen Goal of 8 mg/l Annual AverageYear-Round Operation50 Percent Cost Share

For Agricultural & Urban NPS:Programmatic GoalsNo Jurisdictional Specificity

No Mass Load Limits

No “Cap” Strategy

2000 Progress

Baywide Nitrogen Reductions, 1985 - 2000

338

285

0

50

100

150

200

250

300

350

400

1985 2000

Mill

ion

Po

un

ds

pe

r Y

ea

r

2000 Progress

Baywide Phosphorus Reductions, 1985 - 2000

27

19

0

5

10

15

20

25

30

1985 2000

Mill

ion

Po

un

ds

pe

r Y

ea

r

2000 Progress

Maryland Nitrogen Reductions, 1985 - 2000

83

57

0

10

20

30

40

50

60

70

80

90

1985 2000

Mill

ion

Po

un

ds

pe

r Y

ea

r

2000 Progress

Maryland Phosphorus Reductions, 1985 - 2000

6.8

3.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1985 2000

2000 Progress

Maryland Nitrogen Reduction by Sector1985 - 2000

31 32

127

16

21

14

7

0

5

10

15

20

25

30

35

Point Ag NPS Urban NPS Other

Mill

ion

Po

un

ds

pe

r Y

ea

r

1985 2000

Meanwhile, the Scientists and Regulators Have Been Very Busy...

Model Improvements

New Water-Quality StandardsDissolved OxygenClarityChlorophyll a

New Goals

Baywide Nitrogen Goal

338

285

175

0

50

100

150

200

250

300

350

400

1985 2000 Goal

Mill

ion

Po

un

ds

pe

r Y

ea

r

Maryland Nitrogen Goal

83

57

37

0

10

20

30

40

50

60

70

80

90

1985 2000 Goal

Mill

ion

Po

un

ds

pe

r Y

ea

r

Baywide Phosphorus Goal

27

19

13

0

5

10

15

20

25

30

1985 2000 Goal

Mill

ion

Po

un

ds

pe

r Y

ea

r

Maryland Phosphorus Goal

6.8

3.8

2.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1985 2000 Goal

Allocation Methodology

Second, Allocation by Major Tributary

First, Selection of Baywide Load

Potomac & Above:

Susquehanna

Potomac

Western Shore - MD

Eastern Shore - MD

Patuxent

Lower Tributaries:

Rappahannock

York

James

Western Shore - VA

Eastern Shore - VA

Allocation Methodology

Second, Allocation by Major Tributary

Third, Allocation by Major Tributary and State

First, Selection of Baywide Load

The Maryland “Four”

Potomac

Patuxent

Maryland Western Shore

Maryland Eastern Shore

Allocation Methodology

Second, Allocation by Major Tributary

Third, Allocation by Major Tributary and State

First, Selection of Baywide Load

Fourth, Maryland Allocation by Sub-Watershed

The Maryland “Ten”

Upper Potomac

Middle Potomac

Lower Potomac

Patuxent

Patapsco/Back River Upper Western Shore

Lower Western Shore

Upper Eastern Shore

Lower Eastern Shore

Choptank

Allocation Methodology

Second, Allocation by Major Tributary

Third, Allocation by Major Tributary and State

First, Selection of Baywide Load

Fourth, Maryland Allocation by Sub-Watershed

Fifth, Develop Tributary Strategy

Well?

The Necessary Elements Are All in Place

DriversBenefits

Precedents

Tools

Drivers

Tradable Pollutants - Nitrogen and Phosphorus

Widespread Interest in Trading by POTWs and Others

Readily Measurable and Quantifiable

Mainly Far Field Effects

Drivers

Removal Cost Differentials Between Individual Point Sources

Removal Cost Differentials Between Point and Nonpoint Sources

A “Soft” Cap for Nonpoint Sources

A Defined Cap for Point Sources

(Enhanced Nutrient Reduction Strategy)

Enhanced Nutrient Reduction Strategy for Point Sources

Design Goals: “Limit of Technology”Nitrogen - 3 mg/lPhosphorus - 0.3 mg/l(Annual Average Concentration)

Enhanced Nutrient Reduction Strategy for Point Sources

Federal/State Grant FundingPlanning 87.5 %Design 75%Construction 50%

Calls for Nutrient Trading(In Some Unspecified Manner)

“Load Goal”

Annual “Load Goals” Defined for Each POTW

Statewide Aggregate Annual “Load Goal”

Nitrogen 10.5 Million PoundsPhosphorus 830,000 Pounds

Annual “Load Goals” Based on Design Capacity and 4 mg/l

“Load Goal” Based on 4 mg/l and Design Capacity

Maryland Allocation of Nitrogen Goal?Million pounds per Year

10.5

26.7

Point Other

28 Percent of State Load Allocated to Point Sources

“Load Goal” Based on 4 mg/l and Design Capacity

28 Percent of State Load Allocated to Point Sources

Maryland Allocation of Phosphorus Goal?Million Pounds per Year

0.8

2.1

Point Other

“Load Goal”

“Load Goal” Allocation

Allocation Cap Individual WWTPs Statewide PS Total

Cap Cap and Trade!

Benefits

Earlier Nutrient Reductions

Lower Annual Capital Funding Needs

Lower Overall Capital Cost

Demonstrated Beneficial Economics

Benefits

Nitrogen Credit Trading in Maryland: A Market Analysis for Establishing a Statewide Framework

by

Lisa Bacon and Norm PearsonCH2M Hill

Water Environment Research Foundation

Trading can save $9 - $12 million/yr vs. the base case

Slide: Lisa Bacon, CH2M Hill

Percent savings by tributary:Point-Point Only

Slide: Lisa Bacon, CH2M Hill

Percent savings by tributary:Point-Point & Point-Nonpoint

Slide: Lisa Bacon, CH2M Hill

Bottom line on trading in Maryland (for now):

Trading could offer savings between 8% and 60% at the tributary level, reducing total cap compliance costs by 19% to 27% for 65 POTWs

Slide: Lisa Bacon, CH2M Hill

Bottom line on trading in Maryland (for now):

Trading could offer savings between 8% and 60% at the tributary level, reducing total cap compliance costs by 19% to 27% for 65 POTWs

Most cost-effective solution does not involve all POTWs upgrading to the same treatment level

Slide: Lisa Bacon, CH2M Hill

Bottom line on trading in Maryland (for now):

Trading could offer savings between 8% and 60% at the tributary level, reducing total cap compliance costs by 19% to 27% for 65 POTWs

Most cost-effective solution does not involve all POTWs upgrading to the same treatment level

Capacity to generate a sufficient supply of credits from point and nonpoint sources appears sufficient for robust, successful market

Slide: Lisa Bacon, CH2M Hill

Bottom line on trading in Maryland (for now):

Trading could offer savings between 8% and 60% at the tributary level, reducing total cap compliance costs by 19% to 27% for 65 POTWs

Most cost-effective solution does not involve all POTWs upgrading to the same treatment level

Capacity to generate a sufficient supply of credits from point and nonpoint sources appears sufficient for robust, successful market

Results depend on willing buyers and sellers and their ability to find each other

Slide: Lisa Bacon, CH2M Hill

Benefits

Earlier Nutrient Reductions

Lower Annual Capital Funding Needs

Lower Overall Capital Cost

Demonstrated Beneficial Economics

Potential for Multiple Benefits from a Single Trade

Precedents

Similarities to Successful Trading Programs

Connecticut Long Island Sound Nitrogen Trading

Tar-Pamlico Trading Association

Neuse River Compliance Association

Tools

An Outstanding Water-Quality Analytical Framework

Chesapeake Bay Program Nutrient Trading Framework and Guidelines

Viable Trading Program Design Options

A Supportive EPA and a National Trading Policy

Fundamental Issues

Fundamental Issues

State Control Versus Market Forces

Fundamental Issues

State Control Versus Market Forces

Fundamental Issues

State Control Versus Market Forces

Fundamental Issues

State Control Versus Market Forces

Fundamental Issues

State Control Versus Market Forces

Fundamental Issues

State Control Versus Market Forces

Fundamental Issues

State Control Versus Market Forces

Fundamental Issues

State Control Versus Market Forces

Fundamental Issues

State Control Versus Market Forces

Waste Control Flexibility*

Exchange Flexibility*

*Shabman and Stephenson, 2003

Fundamental Issues

How to Incorporate Point - Nonpoint Source Trading

The Nonpoint Dilemma

Initial Load = 7 + 8 = 15

The Nonpoint Dilemma

Point Sources Reduce by 4

The Nonpoint Dilemma

Point Sources Reduce by 4

The Nonpoint Dilemma

Nonpoint Sources Can Reduce by 5

The Nonpoint Dilemma

Point Sources Experience Rapid Growth and Hit Cap

The Nonpoint Dilemma

Point Sources Then Compete for NPS Credits with State Cost-Share Programs

The Nonpoint Dilemma

Final Load = 6 + 3 = 9

Fundamental Issues

How to Incorporate Trading

into

Tributary Strategies

General Conceptual Models

State-Directed “Trading”

POTWs Assigned Goals to Be Achieved over 15 Years

Connecticut Long Island Sound Nitrogen Trading

State Ranked POTWs for Priority BNR Funding

Grant Award Schedule Follows Priority List

Higher Ranked POTWs Install BNR

Other POTWs Must Buy Credits from BNR POTWs

State Sets Price for Credits

Some POTWs Will Never Receive Grants or Install BNR

General Conceptual Models

POTW “Freelancers”

Individual POTWs Given Permit Limits

Boise River Phosphorus (Rahr Malting?)

Individual POTWs Can Purchase Credits to Comply with Permit Limits

From Other POTWs

From Nonpoint Sources

Other POTWs Must Buy Credits from BNR POTWs

Trades Incorporated in Permits, Including BMP Requirements

General Conceptual Models

POTW Trading Association

Association Assigned a Cap To Be Met by Members as a Whole

Tar-Pamlico and Neuse River Basins

Waste Control and Exchange Flexibilities Among Members

Association Can Purchase Credits from State if Necessary

Best Fit?

Trading Associations

Based on Major Tributaries

Potomac No. WWTPs 28 Capacity 315, 0.5 - 170 Median 1.5

Patuxent No. WWTPs 9 Capacity 88, 2 - 30 Median 6

Maryland Western Shore No. WWTPs 17 Capacity 328, 0.6 - 180 Median 3.3

Maryland Eastern Shore No. WWTPs 19 Capacity 41, 0.5 - 8.5 Median 1.3

Potential Maryland Trading Associations

Size Distribution of Maryland Wastewater Treatment Plants71 WWTPs with Capacity of 0.5 MGD or Greater

Best Fit?

Trading Associations

Based on Major Tributaries

Start with Point - Point Trading

ENR Cost-Share Grants

Incrementally Add Point - Nonpoint Trading

Incrementally Add Interstate Trading?

Best Fit?

Trading Associations

Integrating Grants into the Trading Association Concept

Associations Need State Cost-Share Money

Associations Need Waste Control Flexibility

But...

Fundamental Issues

How to Incorporate Point - Nonpoint Source Trading

Start with Point Source - Point Source Trading and Incrementally Add Trading with Nonpoint Sources

Point Sources Buy Credits from State

Establish Firm Baselines for Nonpoint Sources

Trading Ratios

Point Sources Buy Directly from Nonpoint Sources

Solving the “Competition” Dilemma

Missing Driver:

A Deadline

Tar-Pamlico Basin Association

Mid-1980s

Pamlico River Estuary Water-Quality Problems

Algae Blooms

Low Dissolved Oxygen

Fish Kills

Declared “Nutrient Sensitive Water” in 1989

Tar-Pamlico Basin Association

Targeted Point Sources (13 percent of Nitrogen Load)

Technology-Based Nutrient Concentration Limits

Phase I

Point Sources Formed Association

Developed Trading Proposal

Annual Collective Load Cap (Decreases Annually)

If Cap Exceeded - Fund Agricultural BMPs

Optimize Existing Facilities

Upfront Funding for BMPs and State Staff

Fund Development of Estuary Model

Tar-Pamlico Basin Association

Phase I

Accomplishments

14 Point Source Dischargers Joined Association

Nutrient Loads Kept Below Cap Every Year

20 Percent Reduction in Nitrogen and Phosphorus Loads

Estuary Model Developed

$1 M in BMPs Funded (Aided by EPA Grant)

Tar-Pamlico Basin Association

New Goals

Nitrogen - 30 Percent Decrease From 1991 Level

Phase II

Phosporus - Hold at 1991 Level

Voluntary Nonpoint Source Program

1998 - Nonpoint Source Rules

Buffer Protection Rules

Nutrient Management Rules

Stormwater Rule

Agricultural Rules

Buffer Protection Rules

Requires Protection of Existing BuffersStreamsLakesPondsEstuarine Waters

Some Alteration Permitted with Mitigation

Nutrient Management Rules

Applies to Anyone Applying Fertilizer

(Except Residential Landowners)

Nutrient Management Plan

orState-Sponsored Nutrient-Management Training

Agricultural Rules

Established Goal of 30 Percent Reduction in Agricultural Nitrogen Loads

Basin Oversight Committees

Local Advisory Committee

GovernmentFarming CommunityScientific CommunityEnvironmental Organizations

Farmers and Local Ag Agency Representatives

Farmers Register with LAC

Develop Strategy, Submit Annual Report to BOC

Stormwater Rule

Requires Stormwater Programs in 11 Jurisdictions

New Development

Locate and Remove Illicit Discharges

Make Progress Toward Stormwater Retrofits

Nitrogen Loads Must Be 30 Percent Lower than in Existing Development

In Summary

What We Need in Maryland is...

Nitrogen! Get YerNitrogen!

I’ll Beat Any Price in Town!

Three Bucks a Pound?Who’s He Kidding?

$$$$

Shabman, Len and Kurt Stephenson. “Market-Like Systems for Achieving Water Quality Goals in the Chesapeake Bay” in Economics of Chesapeake Bay Workbook Series, Maryland Sea Grant Program, Working Paper, 2003

References

Bacon, Lisa and C. Norman Pearson. “Nitrogen Credit Trading in Maryland: A Market Analysis for Establishing a Statewide Framework. Water Environment Research Foundation Project 97-IRM-5E, 2002

Tar-Pamlico / Neuse Program Descriptions:

http://h2o.enr.state.nc.us/nps/tarpam.htm http://h2o.enr.state.nc.us/nps/pt-source.htm

Contact Information

Cy JonesRegulatory Planning & Compliance ManagerWashington Suburban Sanitary Commission14501 Sweitzer LaneLaurel, Maryland 20707(301) 206-8831cjones1@wsscwater.com