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Economic Study of Nutrient Credit Trading for the Chesapeake Bay

George Van Houtven

Robert Beach

Ross Loomis

The Economics of Water Quality Improvement in the Chesapeake BayWashington, DC

October 31-November 1, 2011

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Key Questions for the Study

Study funded by partnership of the Chesapeake Bay Commission and the Linden Trust for Conservation

How large are the potential costs savings from including nutrient trading as part of a strategy for meeting the Chesapeake Bay TMDL requirements?

How are these potential costs savings affected by different restrictions on interstate and interbasin trading?

The objective is not to predict future trading levels or to model the impacts of the state’s existing trading programs

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Approach

Adapt and apply the economic modeling framework we developed for EPA/ORD

Estimate how the costs of TMDL compliance could be reduced under different trading scenarios

– Reference “No-trading” Scenario: Load levels and BMP implementation as specified in the state’s watershed implementation plans (WIPs) and the corresponding CBWM scenario

– Trading Scenarios: allow loads and load reductions to be redistributed across sources to achieve same TMDL goals at a lower cost Allow interbasin and/or interstate trading Allow PS-PS and/or PS-NPS trading Allow trading to meet TMDL (short term) and/or maintain TMDL (long

term)

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Modeling Framework

OPTIMIZATIONMixed Integer

Linear Programming

Model in GAMS

Inventory of Sources & Control Projects

Total Load Reduction Targets(lbs/yr)

• Project Costs ($/yr)• Project Load Reductions (lbs/yr)

Least-Cost Solution• Selected Projects• Total Control Costs

1 2

3

4

Total Baseline (2009) Nutrient Loads

(lbs/yr)

Total Nutrient Load Limits (TMDL) (lbs/yr)

5 6

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Approach

By identifying the lowest cost combination of available projects, the model simulates the results of an ideally functioning nutrient trading market.

Additional restrictions can make the model more realistic and policy relevant, by including– Transaction costs (% increment to BMP costs)– Uncertainty ratios– Eligibility limits for participation in nutrient trading

Credit purchases: limits on eligibility for existing point sources Credit sales: limits on nonpoint source participation, including

agricultural baseline requirements– Limits on inter-basin trading volumes– Limits on agricultural land retirement and conversion

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Key Data for Source Locations and Loads Chesapeake Bay Watershed Model (CBWM) Phase

5.3.2– Watershed network and segmentation— subdivides the Bay

watershed into a linked network of 2,468 “land-river segments.”– Land use/land cover segmentation—subdivides each land-

river segment into 30 land use categories, including 17 types of agricultural land and 11 types of urban land.

– Delivered loadings— provides total annual delivered loadings estimates of TN and TP from each land use category, point sources and atmospheric deposition by land-river segment.

National Hydrography Dataset (NHD), used to identify unbuffered riparian areas

NRCS soils data, used to identify highly erodible land (for land retirement) and hydric soils (for wetland restoration)

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Control Projects, Load Reductions and Annual Costs (I)

Point Sources– multiple tiers of wastewater treatment at 399 significant

municipal and 76 significant industrial facilities Reducing TN to 8, 5, or 3 mg/L Reducing TP to 1, 0.5, or 0.1 mg/L

– Annualized costs and nutrient removal estimates based on EPA’s ongoing cost analysis of the Chesapeake Bay TMDL

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Control Projects, Load Reductions, and Annual Costs (II)

BMP nutrient removal rates/efficiencies included in the CBWM

Annualized costs (including land, installation, and O&M) based on EPA’s ongoing cost analysis of the Chesapeake Bay TMDL

Currently Included Under ConsiderationAgricultural BMPs

Forest & Grass Buffers Conservation PlansWetland Restoration Decision AgricultureTree Planting Conservation TillageLand Retirement Off Stream Watering without FencingCover Crops (Early Drilled Rye) Upland Prescribed GrazingEnhanced Nutrient Management Upland Precision Intensive Rotational GrazingContinuous No Till Barnyard Runoff ControlLivestock Exclusion Nutrient Management

Manure Transport

Urban Stormwater BMPsDry Extended Detention Ponds Urban Nutrient ManagementWet Ponds and Wetlands Street SweepingUrban Forest Buffers Dry Detention Ponds and Hydrodynamic Structures

Urban Filtering PracticesUrban Infiltration PracticesRetrofit Stormwater Management

Nonpoint Source Contols

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Eligibility for Participation by Point and Nonpoint Sources

States currently have different eligibility requirements– MD requires ENR for PS, which in effect limits credit purchases to

offsets for future growth– VA allows PS-PS trades to meet current annual load limits– PA allows PS-PS and PS-NPS trades to meet current annual load

limits

We will include scenarios that allow PS to meet current annual load limits via trades with– Only other PS– PS and NPS

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Baseline Requirements for Agricultural BMPs

States currently have different requirements, but generally specify a minimum level of BMP implementation

We will define the baseline as the level of BMP implementation specified in the WIPS for each land-river segment – Ensures that agricultural land at a minimum meets

its load allocations– Additional ‘beyond WIP” BMPs and their associated

load reductions are eligible to generate credits

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Interbasin and Intersegment Trading Restrictions

The Bay is comprised of 92 impaired tidal segments, each with its own TMDL; however, these load limits were set primarily to meet DO objectives in the deep channel.– the 92 TMDLs are more protective than necessary to

protect “local” tidal water quality– some amount of loads can safely be redistributed

(traded) across segments and basins We will allow trading between segments and

basins, as long as the sum of segment-level TMDL exceedances is less than 9 million lbs of nitrogen and 200,000 lbs of phosphorus

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Farmland Preservation Restrictions

States have different restrictions on the amount of agricultural land that can be “idled”– MD and PA do not allow credits for idling whole or

substantial parts of farms– VA places no restrictions on this type of land

conversion for credit generation We will limit conversion (buffers, tree planting,

retirement, wetlands) to no more than 25% of agricultural acres in each land-river segment (CRP guidelines) and only allow retirement of highly erodible lands.

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Offsets for Future Growth

To maintain TMDL, new or expanded sources will be required to purchase offsets from existing PS and/or NPS

For long-term scenario (2025) we will– estimate county-level demand for new municipal

wastewater treatment capacity (based on projected population growth)

– estimate resulting demand for offset credits assuming new capacity uses highest tier nutrient removal technology

– include as additional required load reductions in the cost minimization model