The use of water quality offset investment in riparian restoration to reduce sewage treatment costs: Part (3) lessons, opportunities and barriers.

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1 7 th Australian Stream Management Conference - Full Paper The use of water quality offset investment in riparian restoration to reduce sewage treatment costs: Part (3) lessons, opportunities and barriers. Beth Clouston 1 ; Fiona Norrie 1 ; Ross Hardie 2, Karen White 2 ; Cameron Jackson 3 ; Paul Belz 3 ; and Julian O Mara 4 1. Department of Environment & Heritage Protection, Brisbane, beth.clouston@ehp.qld.gov.au 2. Alluvium Consulting, Melbourne, Victoria, Australia 3. Queensland Urban Utilities, Brisbane, Queensland, Australia 4. SEQ Catchments, Brisbane, Queensland, Australia Key Points Water quality offsets provide an opportunity to reduce sewage treatment costs whilst improving water quality. A pilot project on the Logan River, South East Queensland demonstrates the potential to reduce both sediment and nitrogen in a cost effective manner. A voluntary water quality offset framework has been developed by the Queensland Government to allow offsets for point source discharges. Abstract Sewage Treatment Plant (STP) operators in South East Queensland are facing increasing capital and operating costs as they strive to ensure compliance with licence obligations for discharge standards while meeting increasing demand for services resulting from a growing population. These costs pressures are increasing at a time when capacity to borrow and the potential to pass through costs to consumers are being squeezed. Many of the region s receiving waters for STP discharges, its waterways and Moreton Bay, are already experiencing ecosystem health pressures, in large part due to stream bank erosion resulting from the poor riparian health of the region s waterways. Indeed, the region also faces an urgent need to invest in river restoration at a time when traditional Government funding is limited. The Department of Environment & Heritage Protection (EHP); Queensland Urban Utilities (QUU); and regional Natural Resource Management body, SEQ Catchments through its project management company SEQC Services have come together with geomorphologic specialists, Alluvium Consulting, to deliver a water quality offsetting pilot study involving river restoration. The pilot study investigates the potential to protect and enhance receiving water quality by reducing stream bank erosion through river restoration in lieu of engineering solutions to reduce end-of-pipe nutrient discharges. This paper demonstrates the policy settings that are needed to ensure any offset results in an improved water quality outcome. The paper reviews each element of the framework in turn with reference to how they were applied for the pilot study. A review of the pilot study being undertaken in the Logan River catchment with Queensland Urban Utilities describes how water quality improvements can be achieved in practice, and provides a reflection on current opportunities and constraints to expanding the scheme further. The contribution that this mechanism can make to improving water quality is currently constrained by the lack of scientific certainty for estimating nutrient load reductions, limited regulatory drivers and locational requirements. Despite these constraints, the framework is considered to be a valuable tool to deliver significant localised waterway benefits at least cost, as demonstrated by the Beaudesert pilot project. This paper is the third in a series and accompanies two other papers; Part (1) the determination of soil loss avoided through riparian restoration and Part (2) the estimation of nutrient loss avoided in river restoration. Keywords Water quality offsets, nutrients, sediment, trading, point and diffuse source pollution, river restoration. 7th Australian Stream Management Conference. Townsville, Queensland, Pages

2 Introduction Sewage treatment plant (STP) operators in South East Queensland are facing increasing demand for new services to accommodate the region s rapid population growth which is expected to grow from 2.8 million people in 2006 to 4.6 million by 2031, a figure greater than the current population of the entire State (Queensland Treasury, 2011). Ongoing investment in STP capacity is required to ensure compliance with Environmental Protection Act 1994 licence requirements so that discharges meet the required standard to achieve the environmental values designated for the waterways. However, STP upgrades and other hard engineering options to further reduce pollution are commonly very expensive and may not always deliver the best solution from a triple bottom line viewpoint. In the case of STP upgrades, utility customers bear the cost. At the same time increased nutrient and sediment loads originating from diffuse sources have placed the receiving waters of Moreton Bay at significant risk of ecological decline (Dennison and Abal, 1999). Land-use change resulting in a reduction of catchment and riparian forest cover has resulted in poor riparian condition for more than half of the streams in South East Queensland (Leigh et al., 2013). This in turn has been a major driver of declining water quality and ecosystem health in the rivers and streams in the region (Sheldon et al., 2012). Addressing this ecological decline of waterways at a time when direct government investment is limited is a considerable challenge. Market based approaches, such as water quality offsets are gaining increased prominence in Australia and internationally as a means of delivering both environmental and economic benefits. The Department of Environment and Heritage Protection in Queensland has been investigating the potential to allow more flexible mechanisms, such as water quality offsets, to meet total discharge loads in an effort to both improve water quality and reduce the cost of treatment for point source discharges, in particular for STPs. A water quality offset framework, Flexible Options for Managing Point Source Water Emissions: A voluntary market-based mechanism for nutrient management (Department of Environment and Heritage Protection, 2014) (the framework) has been developed to guide allowable offsets. Although the development of the framework was driven by the current conditions in South East Queensland, it is applicable to all of Queensland. This paper accompanies two other papers; Part (1) the determination of soil loss avoided through riparian restoration (O Mara et al., 2014) and Part (2) the estimation of nutrient loss avoided in river restoration (Jackson et al., 2014). This paper provides an overview of the development of the water quality offset framework in Queensland, how the framework elements have been incorporated into the first pilot study in Australia for a point source to rural diffuse source offset and how the pilot study has helped refine the framework. A review of the use of water quality offsets elsewhere and the economic drivers for water quality offsets are explored. The objectives of the framework, the potential participants, allowable offsets and location, offset and discharge ratios are then discussed along with the ongoing liability and monitoring requirements. Finally, the need for greater scientific certainty and the uptake of the water quality offsets will be canvassed. Application and drivers of water quality offsets Water quality offset trading is a market-based instrument to cost-effectively meet water quality goals. This is premised on the fact that the cost to reduce pollution differs between entities, locations, scale, efficiency and the source of pollutants (Selman et al., 2009). Water quality offset trading allows sources with high abatement costs to purchase pollution discharge reductions from sources that have lower abatement costs. For example, for point sources, the entity with the lower abatement cost can reduce pollution below permitted limits and sell their excess reductions to entities with higher costs. Similarly, if a diffuse source has lower pollution abatement costs it can sell reductions to point source entities with higher costs. International examples Water quality trading began in the United States, driven by the increasing costs of improving water quality through point source regulation and upgrades (Fisher-Vanden and Olmstead, 2013). In 2003 the United States Environmental Protection Agency acknowledged this emerging market opportunity with the announcement of its Water Quality Trading Policy (Stanton et al., 2010). 7th Australian Stream Management Conference. Townsville, Queensland, Pages

3 Most water quality offset programs are located in the United States (Selman et al., 2009). However as Fisher-Vanden and Olmstead (2013) point out, while nearly three dozen programs have been established, many have seen no trading at all and only a few are operating on a scale that is economically efficient. In almost all water quality trading programs established in the United States, the regulatory driver has been the establishment (or anticipated establishment) of a Total Maximum Daily Load (TMDL) essentially a pollution budget for each water body (Fisher-Vanden and Olmstead, 2013). This means that all permitted sources and land uses within the catchment drainage area, including agriculture and urban run-off, are inventoried and allocated responsibility for portions of the pollution budget (Boyd, 2000). Setting TMDL s or water quality caps provides a clear playing field for trades to occur, allowing participants to exchange pollution credits to meet their own water quality requirement (cap) at least cost. Outside of the United States there is a total phosphorus management program in Ontario, Canada and a diffuse source scheme, the Lake Taupo Nitrogen Trading Program in New Zealand (Duhon et al., 2011; Selman et al., 2009). In Australia, the South Creek Bubble Licensing Scheme in New South Wales, allows three participating STPs to adjust their individual discharges provided the overall load limits for nitrogen and phosphorus are not exceeded (NSW Environmental Protection Agency, 2013). There is also the successful Hunter River Salinity Trading scheme in New South Wales based on a load based licensing scheme which coordinates and limits saline releases from 23 coal mining and power generation facilities (Department of Environment and Conservation, 2006). The lessons learnt in other jurisdictions provide the foundations for developing a water quality offset framework in Queensland. The first is that a significant source of water pollution comes from diffuse sources and these are likely to have the lowest abatement costs. Hence, it was appropriate that an offset framework for Queensland include the potential for point to diffuse source offsets. However, there is significant uncertainty in the measurement and monitoring of diffuse abatement activities. This leads to the use of offset or uncertainty ratios that are explained in more detail in the following sections. All these elements have been included in the Queensland water quality offset framework. The second lesson is based on the fact that the physical characteristics of water pollution problems vary depending on the location. This means that offsets must take place in specific catchments and waterways. This in turn will limit the number of participants and reduce the available difference in abatement costs and result in cost savings (Fisher-Vanden and Olmstead, 2013, Selman et al., 2009). Australia is faced with a similar situation to the United States in that the abatement costs for further gains in reducing point source pollution, which is regulated, are relatively high in comparison to diffuse sources which are largely unregulated. Hall (2012) reviewed the cost effectiveness of pollution abatement options in Australia and concluded that the difference between the least and most cost effective abatement options was large which suggests that there is the potential for large cost savings. In general, point source abatement and riparian revegetation provided the most costeffective abatement measures for nutrients, while riparian revegetation and swales provided the most cost-effective sediment abatement. Given the predominance of the contribution of sediment loads to water quality problems in South East Queensland combined with the requirement for point source discharges to minimise nutrient discharges, the option of reducing both sediment and nutrients through river restoration seemed worthy of further investigation. The Queensland context In July 2012, in response to representations from water utilities in South East Queensland, the Queensland Department of Environment and Heritage Protection (DEHP) released a Water Quality Offset Discussion Paper (DEHP, 2012) that canvassed the use of offsets as a voluntary, flexible and cost effective option for STPs whose effluent discharge standards are regulated under the Environmental Protection Act 1994 (Qld). The discussion paper incorporated learnings from offset schemes operating elsewhere, analyses of the potential for a nutrient offset scheme in South East Queensland (BDA group 2005) and assessment of a water quality metric that might be used (ARUP, 2007). The discussion paper was followed by a draft water quality offset framework (draft framework) in September 2013 (DEHP, 2013), which was released for targeted consultation. Submissions received on the draft framework, along with learnings from the pilot project, informed the development of the final water quality offsets framework (the framework), released in March 2014 (DEHP, 2014). 7th Australian Stream Management Conference. Townsville, Queensland, Pages

4 Queensland Urban Utilities (QUU), a major water and sewage treatment provider in South East Queensland, demonstrated the possibility of applying the draft framework in a number of circumstances. QUU faces a large range of costs for sewage treatment per equivalent person (EP) across the region. The annual cost of treatment for a small rural population (2000 persons) is estimated to be $4500/EP/year in comparison to treatment for a large urban population (250,000 persons) of $500/EP/year (Jackson, C, pers. comms., 2013). This illustrates the potential for point to point source offsets if plants of various scales operate in the same catchment. Importantly, the relatively high capital and maintenance costs of rural Sewage Treatment Plant (STPs) also highlight the potential for point to diffuse offsets. The pilot study detailed in this series of papers sought to offset total nitrogen discharges from the Beaudesert STP. The cost of the traditional engineered end-of-pipe capital investment needed to reduce total nitrogen at Beaudesert would be $8million compared to a $1mllion investment in green infrastructure in the Logan River, which was demonstrated to produce an equivalent total nitrogen reduction. In addition, there will be ongoing savings in operating costs, in particular, energy costs. This means that a better water quality outcome could be achieved at a far lower cost than a traditional STP upgrade. By undertaking river restoration works along a highly degraded reach of the Logan River, it is predicted that total nitrogen pollution caused by river bank erosion can be reduced by an average 5 tonnes/year, while at the same time reducing sediment pollution by an average 11,000 tonnes/year. The river restoration works will also reduce other pollutants entering Logan River, including an average 7 tonnes of Total Phosphorus per year. It has also greatly advantaged local landowners, who rather than having sheer cliffs along the river that continue to eat back into horse paddocks, now have far more resilient and amenable river banks. Given the differential abatement costs and predicted water quality benefits, the pilot study which focused on the Beaudesert STP offered a good test case to meet the objectives of the water quality offset discussion paper (July 2012) and subsequent draft framework (September 2013) and helped refine the elements of the final water quality offset framework (March 2014). This paper reviews each element of the framework in turn with reference to how they were applied for the pilot study. Queensland water quality offset framework The objectives of the water quality offset framework to offer a flexible option for regulated point sources to deliver an overall improvement in water quality at least cost, are clearly demonstrated in the Beaudesert pilot project. The projected cost savings for the pilot project are approximately $7million, with no net increase in total nitrogen loads. In addition, some 11,000 tonnes of sediment will be prevented from entering the waterways discharging into Moreton Bay each year. This means that a better water quality outcome could be achieved at a far lower cost than a traditional STP upgrade. Potential Participants The water quality offset framework has been designed as a voluntary mechanism to provide flexibility to point sources regulated under the Environmental Protection Act 1994 (Qld) in meeting their nutrient load requirements and environmental obligations. The framework only applies to total nitrogen and total phosphorous and the offset must address the same pollutant. That is, total nitrogen can only be offset by total nitrogen. However, as discussed in O Mara et al., (2014) and Jackson et al., (2014) this does not preclude offset actions that reduce sediments, rather the proponent is required to demonstrate how the reduction in sediment will lead to the required reduction in nitrogen. If an offset proposal is deemed acceptable, the proponent s environmental authority will be amended to reflect the total point source load minus the load which is offset. The environmental authority holder will be responsible for ensuring that the offset is implemented diligently and maintained. Similarly, the environmental authority holder will be responsible for monitoring and reporting for both the point source and the offset site. The pilot project fits within this application as a point to diffuse source offset which reduces total nitrogen through a reduction in total sediment loads. The total nitrogen load that is being offset is a wet weather load which reduces concerns about localised toxic impacts. Further, the increased load from the STP during high flow events will be offset by the benefits of reduced sediment erosion occurring at the same time. The environmental authority for the Beaudesert STP has been voluntarily amended to reflect this condition. 7th Australian Stream Management Conference. Townsville, Queensland, Pages

5 Allowable Offsets Within the framework two types of offsets are allowed. Firstly, offsets can occur between two regulated point sources. For example, if a STP was exceeding its nutrient discharge limit it could pay another STP with lower treatment costs to reduce their discharge resulting in a net reduction in the nutrient discharge to the waterway. If the two point sources are regulated through an amalgamated authority they may combine discharge limits to meet an overall reduced discharge limit. This is commonly called a bubble licence. It should be noted that offsets will not be considered suitable if the increased load from the point source will result in an unacceptable impact to receiving waters. Point sources will be required to demonstrate the impacts of increased discharges for the near and mid field. This is of particular concern for discharges of ammonia which could have localised toxic impacts. Secondly, a point source may also secure offsets from rural, urban or other diffuse sources. For example, nutrient reductions could be achieved through riparian area restoration, water sensitive urban design, constructed wetlands, fertiliser application management and grazing land management practices. In all cases, the actions taken must be additional to what is already required by established best management practices, so that the actions are demonstrable and genuine enhancements. A review of management action efficacies was undertaken with the aim of providing a menu of abatement options with known effectiveness in the Queensland situation. However, the review indicated that while there are a wide variety of vegetative and engineered (structural) best management practice actions that are effective in reducing sediments and nutrients, a reliable measure of efficacy was rarely obtained. The Beaudesert pilot study provides an example of one type of activity that reduces rural diffuse pollution beyond that required by grazing best management practices. The actions taken to repair bank damage and stabilise against further losses are additional to meeting the duty of care required by the current landholders. Location, timing and duration The water quality offsets framework requires that offsets be located upstream from the point source discharge so that there is not a decline in water quality in the stream segment between the nutrient reduction site and the point of concern. However for tidal waters, the nutrient reduction site may be located downstream in the near field, considering neap tidal velocities. Similar to the practices adopted in the United States, the Framework requires that offsets occur within the same catchment and preferably the same sub catchment, to ensure that actions affect the same water body or stream segments and water quality standards are maintained or achieved. To ensure that the offset provides the benefit at the time of additional nutrient release they must be provided in advance or concurrently with impacts that are occurring. Water quality offsets are designed to be a temporary measure and will only remain in place for a licenced period of time. This will be negotiated on a case-by-case basis to align with the performance specifications and lifespan of the point source infrastructure. The maximum time for an offset is 20 years, depending upon the nature of the offset and the risks to its effectiveness. The proponent of an offset proposal carries responsibility for its effectiveness and durability. The Beaudesert pilot is situated 2.5 kilometres upstream of the STP on the Logan River. The amendment to the environmental authority has been limited to five years as this is a proof of concept study. If the offset is intact and effectiveness can be demonstrated at the end of the 5 year period, the licence approval will be extended for a further five years. The bank stabilisation works and riparian planting were completed prior to the commencement of the offset, allowing the benefits to be provided concurrently with any impacts of increased nutrient discharges during wet weather events. 7th Australian Stream Management Conference. Townsville, Queensland, Pages

6 Trading ratios Water quality trading schemes commonly use trading ratios to ensure that offsets deliver an equivalent water quality outcome at a particular location (Fisher-Vanden and Olmstead, 2013). The Queensland water quality offset framework employs two such ratios; an offset ratio and a delivery ratio. Offset ratio A review of water quality trading schemes in the United States found that offset ratios are typically between 1:1 to 4:1 (Branosky et al., 2011). Setting the ratio at too high a level may discourage trades that could have reduced pollution and lowered compliance costs. In an effort to balance uncertainty with the expected benefits from water quality offsets the offset ratio has been set at 1.5:1 in Queensland. The offset ratio of 1.5:1 has two purposes. The first purpose is to ensure that point to point offset exchanges result in an overall improvement in waterway health. That is, a point source wishing to increase their load by six tonnes of total nitrogen would be required to provide an offset that would deliver a reduction of nine tonnes of total nitrogen. The second purpose is to deal with the uncertainty related to the effectiveness of diffuse source pollution abatement actions. The uncertainly of the effectiveness of abatement actions has been clearly demonstrated by the need to employ novel approaches to estimating pollution reductions as provided in O Mara et al., (2014) and Jackson et al., (2014). Although an offset ratio was not required for the pilot, findings from the pilot, in particular the work associated with estimating the reduction in loads which added to the transaction costs of the offset arrangement, helped inform the Framework s development. To provide a factor of safety and deliver an overall environmental improvement the offset ratio of 1.5:1 will apply to future offsets. Delivery ratio The delivery ratio aims to account for the proportion of the offset load that is naturally removed between an offset site and where the benefit of the load reduction is measured, usually the point source discharge site. The use of a delivery ratio adjusts for the environmental impact of a pollutant discharge being moved from one part of the catchment to another as physical, chemical and biological processes can diminish the effect of some pollutants, such as nutrients, as they move downstream. The delivery ratio adjusts the load required to ensure an equivalent environmental outcome is achieved (Selman et al., 2009). As part of an investigation into the potential for a water offset scheme for Moreton Bay in 2007, a study was commissioned to develop a methodology for determining discharge ratios (then called environmental equivalency ratios) for the Logan River (ARUP, 2007; Environmental Protection Agency, 2007). A number of scenarios were investigated and discharge ratios were developed to show the difference between different abatement actions in different parts of the catchment. For example, a decrease of one tonne of total nitrogen at the mouth of the Logan River was equal to a three tonne reduction further up in the catchment. Setting delivery ratios is not an exact science but the work and methodology provided in the ARUP (2007) study provides the basis for determining discharge ratios and is an area for ongoing investigation. Given the close proximity of the offset site and the Beaudesert STP this ratio was not applied for the pilot scheme. Monitoring, Reporting and Liability The proponent bears performance risk for an offset. To demonstrate the efficacy of water quality offsets it is the responsibility of the proponent to monitor and report on water quality impacts at both the point source and the offset site. The type of monitoring will depend on the location and the nutrient reduction action selected. Given the small contribution of the offset on overall water quality in the degraded waterways of South East Queensland it is not possible to measure the contribution of the offset directly (O Mara et al., 2014). This is the situation for the offset pilot project at Beaudesert. Accordingly, the benefits of the offset in the pilot were monitored by examining bank alignment through photo points and Light Detection and Ranging (LiDAR) and demonstrated by modelling sediment erosion avoided (O Mara et al., 2014). Total nitrogen concentrations were calculated as approximately 0.04% of sediment saved. 7th Australian Stream Management Conference. Townsville, Queensland, Pages

7 The liability for the offset will remain with the proponent as a requirement of their environmental authority. This includes risk in the case of a force majeure where the whole offset site is destroyed beyond the control of the proponent. In practice this may be difficult to remedy quickly since both STP upgrades and offsets take time and resources to develop. In the United States this risk is managed by having an insurance pool of offsets which can be used to replace those destroyed in extreme events. This approach may be applicable to Queensland if a pool of offset sites could be developed. In the interim, the proponent will bear responsibility for normal maintenance and specific arrangements will be tailored for force majeure on a case by case basis. Further opportunities and constraints The implementation of the first pilot water quality offset is a significant milestone in support of water quality trading in Queensland. The novel approaches that have been applied to estimate the total nitrogen reduction for the pilot study in Beaudesert testify that this is an area of science that requires further investment if the use of water quality offsets are to be widely applied. The same methods can now be applied to similar offset actions but other potential diffuse source offsets will require the proponent to demonstrate effectiveness. As further pilot studies are instigated it is hoped that a library of suitable methodologies and effectiveness will be developed which will reduce this uncertainty. This will in turn reduce the transaction costs for proponents wishing to investigate the use of water quality offsets and provide a greater level of certainty for the decision makers when amending the environmental authority. It may also be possible to set up trading zones with set discharge ratios to reduce the need for modelling to be undertaken to determine the discharge ratio on a case by case basis. Reducing scientific uncertainty is only one constraint for the use of offsets to be expanded in Queensland. Limited demand for offsets also presents a significant barrier. Firstly, non-point sources are not regulated in Queensland and as such the offset framework is limited to point sources, for trades within the same catchment, hence there will only ever be a small number of buyers and sellers within each catchment. Secondly, the demand will continue to be driven by the individual limits placed on the point source emitter s environmental authorities. Given the major STP upgrades that have already occurred in South East Queensland many STPs are operating within the requirements of their environmental authority and may not require an offset. Due to these constraints, the offset framework will currently provide only a small portion of the level of investment that is required for broad scale river restoration. Despite this, the framework is considered to be a valuable tool to deliver significant localised waterway benefits, as evidenced by the Beaudesert pilot study. The water quality offset framework should not be considered as a stand-alone approach for improving water quality but rather should be used in combination with other regulatory and non-regulatory approaches. Conclusions The pilot study reported in this series of papers has confirmed international and national experience that water quality offset trading can provide least cost pollution abatement while enhancing environmental outcomes. In particular, there is the potential to direct investment to reduce diffuse source pollution rather than engineered end-of-pipe solutions for point sources. Further scientific studies aimed at providing sufficient rigor for the estimation of load reductions from diffuse offsets are justified. Currently, the lack of scientific certainty, limited regulatory drivers and the need for offsets to be located with the same catchment will limit the number of possible participants and the contribution that this mechanism can make to improving water quality. Acknowledgments The authors would like to acknowledge the landowners at the Beaudesert pilot study who have provided generous support to the project; and Tony Costantini of SEQC Services who project directed the pilot study, contributing to its conceptualisation, planning and delivery. We also acknowledge the role of the stakeholder reference group and the technical reference group who helped to develop the water quality offset framework. 7th Australian Stream Management Conference. Townsville, Queensland, Pages

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