Pennsylvania’s Nutrient Credit Trading Program

What clean water advocates need to know

Cleaning up the Susquehanna Cleaning up the Chesapeake Bay
 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

Pollution caps and required reductions – the Chesapeake Bay TMDL

 The 2010 Chesapeake Bay Total Maximum Daily Load – required reductions by 2025:  Nitrogen 33 million pounds  Phosphorus 1 million pounds  Sediment 524 million pounds

Pennsylvania’s Trading Program
 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

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

Current Credits Available
 Credits Certified Nitrogen
4,877,721

Phosphorus
358,170 27,576 44,782 443 17,119

 Credits Verified
WWTFs – treatment WWTFs – under capacity Ag non-point Manure Hauling 275,993 761,105 32,981 136,966

 Credits Registered

533,188

25,527

What could go wrong?
 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

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 allimportant 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 PA’s Trading Program Inadequate
 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

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

DEP considering options for credit certification
 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

Key consideration credit verification
 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

Problems with PENNVEST auction
 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

Our recommendations
 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

What’s next?
 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

Resources
 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/Rep ort_NutrientTradingEval_20110919.pdf  Conservation Pennsylvania’s comment letter -