Water Quality Credit Trading 101

1. Prepared by: James Klang, P.E., Senior Project Engineer and Laurence Picq, Project Scientist Water Quality Credit Trading101 By: Jim Klang Kieser & Associates Improving Conservation & Agricultural Economics with Water Quality Credit Trading & the BMP Challenge

2. 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

3. Watershed Approach • Mosteffective &comprehensive approachin 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

4. Clean Water Act Water Quality Standards Protection & Restoration Swimming, Fishing, & Drinking • 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

5. Wastewater Minimum Requirements Must Treat Tradable

6. Wastewater Minimum Requirements Must Treat Tradable

7. Wastewater Minimum Requirements Must Treat Tradable = 0

8. Water Quality Credit Trading • One of the tools used inthe watershed management approach toachieve 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

9. 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

10. 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 1:1 (account for uncertainties, provides net water quality benefit for water)

11. 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)

12. Why Allow for Trading? (Overview) • Cost • Ancillary environmental benefits • Additional funding opportunities for BMP implementation • Policy opportunities

13. 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.

14. Some WWTP Cost Information Cost examples from Minnesota Pollution Control Agency and WWTP Representatives

15. Emerging Market Information

16. 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)

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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 seller’s and buyer’s locations • Margin of Safety to ensure conservative estimates are applied for variability of nonpoint sources • Net benefits included for stream • Bioavailability differences between sources

23. 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 • Seller’s 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

24. 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., WRI’s NutrientNet® which includes location, contact and credit calculations—www.nutrientnet.org) • Web facilitated reporting (e.g., Minnesota River Basin Phosphorus General Permit, includes contracts, reporting forms and lists current trades)

25. 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

26. MN Point Source-Nonpoint Source Trading SMBSC Facility Dissolved Oxygen Impaired Reach Rahr Malting Facility

27. 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 Riverwaste load allocation for CBOD fully allocated to other dischargers. - Previously high sanitary sewer district industrial user fees forced Rahr towards other options • Solution:Point to nonpoint source NPDES water quality trade permit: trades with agriculture offset Rahr’s CBOD loading by reducing several parameters causing dissolved oxygen stress in the river upstream of facility.

28. Rahr Malting: 8 Mile Creek Rahr installed four erosion control sites: 8 Mile Creek – Channel stabilization, livestock exclusion

29. Rahr Malting: Rush River Site Results:- Discharge of up to 150 lbs CBOD/day - 212 lbs of CBOD reductions/ year from erosion control sites

30. 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

31. Spring Cover Crops 58,832 acres planted in 2005

32. 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.

33. 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

34. 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

35. Common Questions Can conservation practices I’ve 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.