Use of Market and Voluntary Approaches for Reducing Nonpoint Source Pollution in the Chesapeake Bay Watershed

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1 Use of Market and Voluntary Approaches for Reducing Nonpoint Source Pollution in the Chesapeake Bay Watershed Dr. Marc Ribaudo Economic Research Service USDA NutriTrade Workshop May 16, 2016 The views expressed are those of the author and do not necessarily represent those of the Economic Research Service or USDA 1

2 Chesapeake Bay Watershed 2

3 Chesapeake Bay Total Maximum Daily Load EPA established a Total Maximum Daily Load (TMDL) for Chesapeake Bay in 2010 Loading limits require reductions of nitrogen (25%), phosphorus (24%), and sediment (20%) Loadings allocated to the six Bay States and District of Columbia States developed implementation plans to meet their load limits Adoption of more advanced wastewater treatment Cost sharing for desired conservation practices Regulation for confined animal operations Development of environmental markets to reduce implementation costs 3

4 Trading Programs Virginia, Maryland and Pennsylvania have introduced trading programs Meet point source cap load allocations more cost-effectively (primarily wastewater treatment plants) Speed compliance Accommodate continued growth (and discharge) Provide market-based incentive for reducing nonpoint source pollution 4

5 200+ Dollars per pound of annual nitrogen reduction Stormwater WWTP Agriculture New practices Stormwater retrofits Storm water management for new development WWTP upgrades (high) Enhanced nutrient management plans WWTP upgrades (average) 7.00 Native oyster aquaculture 6.60 Algal turf scrubbing 4.70 Cover crops 3.20 Conservation tillage 3.20 Grassed buffers 1.50 Restored or constructed wetlands Source: U.S. EPA and Abt Associates, 2009; Wieland, e t al., 2009; MDNR, 2008; Stewart, E. A., 2006; WRI analysis using WWTP upgrade costs f rom MDE and VDEQ. 5

6 Virginia Trading Program Trading program for nutrients introduced in 2005 Markets defined by major river basins (York, James, Potomac, Rappahannock, Eastern Shore) Point-point trading to help regulated point sources meet their annual discharge caps Point-nonpoint trading to offset increased discharges from expansion due to growth Nonpoint-nonpoint trading for stormwater (urban runoff) Credits must be in perpetuity (implies land retirement) 6

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8 Virginia Nutrient Credit Exchange Association Voluntary corporation created by Virginia General Assembly to facilitate trading between point sources 107 facility members (a large portion of regulated point sources) operate under a bubble permit Plants that upgrade first can sell credits to plants still waiting to make upgrades; provides time cushion for implementation Association sets credit prices among members Credit or offset prices for trades outside the Association established by market, including bi-lateral trades 8

9 Virginia Nonpoint sources Nonpoint nutrient offset is a certified reduction in nonpoint loadings based on the Chesapeake Bay Watershed Model Baseline practices must be met before agricultural credits can be produced Soil conservation plan Nutrient management plan Cover crop Livestock fencing Vegetative buffers 9

10 Virginia - Nonpoint Source Nutrient Credit Registry Nutrient banks established for creating offsets that can be sold to point sources needing to meet expanding discharges or to municipalities to offset stormwater discharges All nonpoint source credits in registry are created from conversion of cropland to other uses permanent credits 10

11 Virginia Trades Since 2011, 883 thousand pounds of N and 186 thousand pounds of P have been traded within the Virginia Nutrient Exchange Association (point-point) Since 2014, VDOT has purchased over $3 million in permanent phosphorus credits from agriculture to offset releases from land disturbance, at prices ranging from $10,800 to $24,000 per pound (nonpoint-nonpoint) 11

12 Oysters as a source of credits Virginia allows crediting of nutrient removal by oysters (increase assimilative capacity of receiving waters) Nitrogen and phosphorus that are incorporated in tissue and shell of harvested bivalves from aquaculture operations can reliably be quantified Overall, less uncertainty with oyster offsets (tissue and shell) than those from managing cropland 12

13 Oysters as a source of credits Benefit extremely small at current N prices One million oysters contain 290 lbs of N in shell and tissue At $4/lb N, one oyster would receive $ in N payments Market price for oysters is about $0.40. Additionality would be an issue What portion of oyster aquaculture would have occurred without the incentive of a nutrient credit? 13

14 Maryland Trading Program Trading program for nitrogen, phosphorus, and sediment initiated in 2008 Market areas include Patuxent River, Potomac River, and everywhere else Wastewater treatment plants can only purchase credits or offsets (point or nonpoint) once enhanced nutrient removal is adopted (trading covers future growth only) Credits must be for at least 10 years; no short-term trading to achieve yearly compliance with discharge permit limits An MS4 can offset up to 10 % of its impervious surface area restoration requirement through agricultural offsets An MS4 can also sell credits to other point sources 14

15 Maryland Nonpoint sources Agricultural operations can sell credits or offsets only after they achieve their portion of the TMDL Meet per-acre annual loading rates for N and P, calculated from the applicable TMDL allotments (varies by region) Develop and implement a current nutrient management plan Develop and implement a soil and water conservation plan Agricultural credits cannot come from idling substantial portions of farms or for converting cropland to development Credits calculated with a field-level modeling tool Credit prices determined via market or bi-lateral negotiation 15

16 Maryland - Trades No trades have occurred yet in Maryland 16

17 Pennsylvania Trading Program Pennsylvania nutrient credit program initiated in 2006 Market areas include Potomac and Susquehanna watersheds Point sources can purchase credits from point or nonpoint sources to meet annual load limits New or expanding point source loads must be offset Urban stormwater cannot offset load requirements through trading 17

18 Pennsylvania Nonpoint sources Agriculture can generate credits after: Complying with all applicable nutrient, sediment, and manure regulations Implementing 100-foot manure setback Implementing 35-foot vegetative buffer Reducing farm s total nutrient balance by 20 percent below reductions achieved through regulations Nonpoint credits estimated with a modeling tool 18

19 Pennsylvania Market mechanism Credit prices determined by: Scheduled sealed-bid auctions (several times per year) Buyers and sellers submit number of credits willing to buy or to sell, and the price they are willing to pay or to accept Clearinghouse identifies the marginal trade that satisfies the most contracts Bi-lateral negotiations can occur any time (most of trades) 19

20 Pennsylvania Auction trades since 2011 Nitrogen (Susquehanna watershed) 494,000 pounds traded at an average price of $2.81/lb Prices ranged from $0.47 to $4.00 Phosphorus (Potomac watershed) 6,100 pounds traded at an average price of $2.22/lb Prices ranged from $0.68 to $4.73 Prices lower in recent years as trading program undergoes revisions to meet EPA concerns about additionality of nonpoint source credits 20

21 Trading ratios Fundamental feature of trading programs Delivery ratios for all states provided by Chesapeake Bay Watershed Model; accounts for geographic location Maryland includes a retirement ratio (5 % for point sources, 10 % for nonpoint sources) (credited to TMDL) Pennsylvania includes a reserve ratio of 10 % (to establish a credit bank) Uncertainty ratios between nonpoint and point sources differ between states Maryland 1.1:1 for BMPs not approved by Chesapeake Bay Program. Otherwise, uncertainty built into practice efficiencies Pennsylvania was 1:1 (no uncertainty assumed for nonpoint sources); EPA pushed for higher ration (2.5:1) Virginia 2:1 21

22 Voluntary subsidy programs Most nonpoint source reductions are to be achieved through voluntary programs that cover part of the cost of adopting conservation practices Federal programs managed by the U.S. Department of Agriculture provide most funding Environmental Quality Incentives Program Conservation Stewardship Program Conservation Reserve Program/Conservation Reserve Enhancement Program In general, these programs are difficult to target to those fields that contribute the most pollution (Shortle et al., 2012) 22

23 Maryland cover crop program Cover crops are an effective practice for removing nutrients remaining in the soil after the crop is harvested Maryland provides a generous payment for voluntary adoption of cover crops $25 to $100 per acre, depending on crop planted, timing, and whether crop is harvested Payment rate generally exceeds implementation costs Over 490,000 acres (198,000 ha) planted in 2015, exceeding goal established by State as part of the plan to meet the TMDL 23

24 Summary Credit trading is presented by the states as an important part of their overall strategies for meeting the TMDL Little consistency between states in trading goals, design, and how nonpoint source credits are estimated Casts doubt on likelihood of cross-state trading any time soon Research indicates baseline rules can limit the potential for trades with agriculture (Ribaudo and Savage, 2014) High performance requirements based on interpretation of what is necessary to be in compliance with TMDL adds cost to creating credits 24

25 Summary There is a high potential demand for agricultural credits from urban areas for reducing the cost of controlling storm runoff Lack of regulatory requirements on agriculture, as well as novelty of trades and uncertain contractual obligations, may limit farmer interest trading Voluntary subsidy payments are the primary method of obtaining pollution-reducing management practices Research shows farmers respond to payment rates that cover the costs of practices that fit into the farming system 25