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Nutrient Pollution Trading

Statement of the Issue

Virginia has operated a nutrient pollution trading program since 2005. The Commonwealth is considering expanding the program as part of its plan to implement the Total Maximum Daily Load (TMDL) “pollution diet” for Chesapeake Bay. Such an expansion carries both potential opportunities and risks. Any legislation proposed in the 2012 General Assembly session to expand the program must uphold the delivery of verifiable, cost-effective pollution reductions that restore and protect water quality consistent with the federal Clean Water Act.

Background

Pollution trading is a market-based strategy intended to more rapidly and cost-effectively meet environmental quality goals. Trading programs establish permanent pollution goals, or “caps,” for sources of pollution. The program then allows one source (the “buyer”) to meet their regulatory obligation by paying another (the “seller”) who has reduced its discharge below their own cap. Trading may involve either the acquisition of “credits” to help comply with a permit cap, or the acquisition of “offsets” to compensate for new pollution that exceeds a cap. Trading allows flexibility to capitalize on differential efficiencies (economic, physical space, time, etc.) among and between sources to help meet pollution goals more effectively. Trading is a supplement to traditional regulatory (e.g., “end-of-pipe” limits) and non-regulatory (e.g., federal “cost-share” programs) means to control pollution.

The 2005 Virginia General Assembly established the first pollution trading program in Virginia. It created the Chesapeake Bay Watershed Nutrient Credit Exchange Program (SB 1275, §62.1-44.19:12) to help “point sources” (i.e., municipal and industrial wastewater treatment facilities) meet Chesapeake Bay nitrogen and phosphorus reduction goals in the most cost-effective manner and help the Commonwealth accommodate new facilities that support economic development without harming water quality. This program allows point sources to acquire credits from other point sources to comply with assigned nutrient loading permit caps and acquire offsets from point and nonpoint sources (such as farmers and private landowners) to compensate for pollution loads from a new or expanding facility that exceeds a cap.

This program is focused on meeting and maintaining “aggregate” nutrient pollution loading caps in each of the five large river basins that make up the Bay watershed in Virginia, rather than individual facility load caps. The premise here is that thetotal nutrient loading drives the current water quality impairment in the tidal rivers and the Bay.

A “watershed general permit” (9VAC25-820) lists the individual and basin-wide nutrient loading caps and establishes the underlying trading framework. Currently more than 160 point sources are covered by this type of permit, and 46 facilities have signed contracts guaranteeing trades by the close of 2011.

In 2009, the General Assembly authorized a statewide Nonpoint Nutrient Offset Program (HB 2168, §10.1-603.8:1) to help new development activities meet the “no-net-increase in pollution” goal included in stormwater regulations that will take effect in 2014. Developers may acquire offsets from point or nonpoint sources to meet this regulatory requirement when on-site practices cannot practicably achieve necessary pollution reductions. A preference for offsets within the local watershed (8-digit Hydrologic Unit Code) is also included. Legislation in 2011 (SB 1102,§62.1-44.19:15D) prescribed some rules for the generation of credits or offsets by animal waste-to-energy and waste reduction projects.

Finalized in 2010, Virginia’s Watershed Implementation Plan (WIP) for the Chesapeake Bay envisioned an expanded role for nutrient trading to help achieve pollution reduction goals from challenging pollution sources, such as existing urban development and septic systems built in the past without adequate pollution controls. The 2011 General Assembly passed a senate joint resolution (SJR 334) that directed the Secretary of Natural Resources to study the expansion of the state’s trading program and report recommendations to the 2012 General Assembly.

Nutrient trading in Virginia has promise, particularly in its potential to deliver pollution reductions to the Chesapeake faster and less expensively than without trading. However, expansion of the program must be done carefully and with consideration to a number of issues and principles. Without appropriate parameters, an expanded nutrient trading program could (1) fail to meet its goal of assisting the Chesapeake Bay cleanup, (2) negatively impact local water quality, or (3) run afoul of federal Clean Water Act programs that underlie all state water quality programs.

Careful consideration and review of any future legislation is critical to ensure Virginia maintains a nutrient trading program that will help meet water quality goals, reduce costs, provide accountability and transparency, and offer surety for participants that the program can withstand legal scrutiny.

The General Assembly should not act to increase current nutrient caps or otherwise circumvent the restoration of state waters. Increased nutrient discharges will simply prolong the destruction of economies and communities that rely upon healthy water. Additionally, any legislation that erodes the authority of DEQ and the State Water Control Board to administer the regulatory programs designed to restore the Bay and its rivers should be opposed. Indeed, DEQ will likely have to rein in on the discharges to the lower James River by sewage treatment plants in the Tidewater area if we are to have a chance of restoring the Chesapeake and the James.

Recommendations

Below are principles and recommendations to assist in the evaluation of any nutrient trading legislation during the 2012 General Assembly. These items address rules that should be maintained in the existing program, as well as new concepts that could move forward in legislation.

· Only credits or offsets that constitute quantifiable net pollution reductions may be traded. The existing requirement in statute that new or expanding point sources may only acquire nonpoint source offsets generated by the installation of best management practices that exceed a specified “baseline” level of performance must be maintained. The baseline represents the amount of reductions a source is expected to achieve under the TMDL before it can generate credits by doing more than required. Other states have run into problems by overstating reductions from certain practices and allowing long-standing practices to be sold for new credits. Virginia should avoid such practices as it moves forward. Any revised or new baselines must be established based on consultation with appropriate experts through a formal regulatory process.
  Virginia’s nutrient credit exchange currently does not result in actual net improvements to water quality. It moves pollution from one area to another. This may serve to address certain types of additional pollution associated with future growth, but the exchange will not address current water quality impairments. Virginia should adopt provisions, similar to those in other states, which require every trade to “retire” a percentage of credits as a way to assist with meeting water quality goals. The credits retired represent a net pollution reduction.

· Protection of local water quality must be paramount. The existing requirement in statute and regulation that requires compliance with “local water quality limitations” must be maintained, and should be enhanced by specifying how this goal will be met by code or appropriate guidance. Trades should be limited to parties in relatively close watershed proximity (e.g., Chesapeake Bay segment-shed or 12-digit HUC) so that no transaction will harm local waters. While trades within river basins may be allowed, preferences should be given to those trading and offset opportunities in close watershed proximity to the sites and facilities initiating the trades. Trades should require an actual demonstration that local water quality will not be degraded. This is particularly important where the buyer is upstream of the seller, in order to ensure the waterway between the two parties is protected.

· Point sources that choose to acquire nonpoint source offsets must acquire two pounds of nonpoint source reduction for every pound they are seeking to offset. As more trades involve nonpoint sources such as farm best management practices (BMPs), it is imperative that Virginia maintain the 2:1 trading ratio that currently exists for trades that include nonpoint sources. This provision is intended to address both the inherent uncertainty of nonpoint source BMPs and the absence of site-specific discharge monitoring. Virginia’s current approach incorporates a measure of safety and recognition that BMPs can be affected by several factors. Numerous reports, including the recent National Academy of Sciences report on the Chesapeake Bay TMDL, have highlighted the uncertainty of outcome from agricultural BMPs due to improper installation and maintenance, severe weather impacts, etc. In the absence of providing site-specific monitoring that would approximate the discharge monitoring required of point sources, this 2:1 ratio must be maintained.

· All trades must be transparent to the public, subject to appropriate verification, and fully enforceable. Making Virginia’s program more transparent by allowing the public to see what trades and offsets are being offered and made will improve the public’s acceptance of the trading program. Virginia should establish a public registry as has been done in other states.  It will also be important for state agencies on behalf of the Commonwealth to have sufficient resources to carry out the additional oversight responsibilities associated with an expanded trading program. In this regard, Virginia should adopt an upfront registration fee for all new credits to help defray state program costs.  The Commonwealth should avoid leaving all oversight responsibilities to credit generators, credit brokers or permit holders.

· All trades must comply with applicable federal Clean Water Act programs. For example, consultation with EPA and appropriate legal counsel must take place for any proposal that seeks to (1) allow municipal separate storm sewer systems (MS4s) to “bubble” their permit requirements with nearby MS4s or wastewater treatment plants or (2) generate credits or offsets through BMPs installed in a water body (“in-stream treatment”). This is important because the Federal Clean Water Act is the basis for these permits that are administered by the state— state law cannot preempt it.

· Provide a reliable and transparent method for determining how new and emerging pollution reduction technologies are allowed to enter the trading marketplace. One benefit of nutrient trading programs is the ability to incorporate new or nontraditional ways of reducing pollution. Several ideas have already been mentioned by Virginia stakeholders, including oyster gardening, algal production, constructed wetlands, etc.  While such approaches (also referred to as “assimilation services”) may hold promise, greater scrutiny and expertise will be needed to determine the creditworthiness and uncertainty ratios of these approaches. Virginia should establish a rigorous review process based on the best available science to assist state agencies in making these determinations. Establishing a scientific and technical review panel may be a good first step.

· Remove existing loopholes that prevent complete offset of new and expanding pollution loads. The Virginia WIP identified an existing loophole wherein a wastewater treatment facility that discharges greater than 1,000 gallons per day but is expanding to less than 40,000 gallons per day would not be required to offset their entire new nutrient load. Further, the new Virginia stormwater management regulations for new construction allow certain future projects to be “grandfathered” and escape the “no net pollution increase” requirement in the new regulations, thereby, allowing discharges of new pollution loads without offset. Both of these loopholes should be removed.

• vcn@vcnva.org
• 804.644.0283