Pennsylvania’s Nutrient Credit Trading Program

What clean water advocates need to know

Chesapeake Bay is in serious trouble

Susquehanna provides ½ of the Bay’s 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

Cleaning up the Susquehanna Cleaning up the Chesapeake Bay

The 2010 Chesapeake Bay Total Maximum Daily Load – required reductions by 2025:

Nitrogen 33 million pounds

Phosphorus 1 million pounds

Sediment 524 million pounds

Pollution caps and required reductions – the Chesapeake Bay TMDL

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

Pennsylvania’s Trading Program

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

Credits Certified Nitrogen Phosphorus

4,877,721 358,170

Credits Verified

WWTFs – treatment 275,993 27,576

WWTFs – under capacity 761,105 44,782

Ag non-point 32,981 443

Manure Hauling 136,966 17,119

Credits Registered 533,188 25,527

Current Credits Available

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

What could go wrong?

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 all-important 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

What’s a trading ratio

Margin of safety that an non-point source pollution reduction practice will deliver adequate reductions to Chesapeake Bay

PA’s 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 based on optimistic assumptions found PA’s 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

EPA Evaluation PA’s Trading Program Inadequate

DEP’S 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

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

DEP considering options for credit certification

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

Key consideration credit verification

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

Problems with PENNVEST auction

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

Our recommendations

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

What’s next?

Pennsylvania’s 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

PennFuture’s evaluation of Pennsylvania’s trading program http://www.pennfuture.org/UserFiles/File/Water/RespFarm/Report_NutrientTradingEval_20110919.pdf

Conservation Pennsylvania’s comment letter -

Resources