Water Quality Credit Market Still on Cusp

2/15/2014 7:00 AM
By Philip Gruber Staff Writer

After years of effort from government and nonprofit groups, the market for water quality credits in the Chesapeake Bay watershed remains small.

While the supply-and-demand-style approach to curbing nutrient runoff has not yet become as popular as some had hoped, supporters remain optimistic that the program will gain traction as total maximum daily load, or TMDL, deadlines loom for pollution reduction.

“It’s a little hard to predict when these things might take off,” said Kari Cohen, a senior adviser at the USDA’s Natural Resources Conservation Service, or NRCS.

Farmers can generate credits by adopting conservation practices such as riparian buffers, no-till farming and grass waterways. The number of credits generated depends on the scale of the project and on how much it reduces nitrogen and phosphorus runoff.

Other entities can then buy those credits to compensate for their own pollution.

Developers and wastewater treatment plants are expected to be the two major types of credit buyers, Cohen said. Builders have to pay to offset the environmental effects of new construction, while wastewater plants can buy credits in lieu of expensive upgrades.

So far, selling credits has been a complicated process, causing issues for both would-be buyers and sellers.

“The farmer isn’t going to want to get into the nitty-gritty of the business transaction,” Cohen said.

Ideally, farmers should be able to focus on working with technicians to install the conservation projects instead of slogging through paperwork to sell the credits, he said.

Having a simpler process would also lower the transaction cost and make credits more attractive to municipalities that own sewage treatment plants, Cohen said.

Additionally, “the risk also needs to be taken out of the transaction,” he said.

The wastewater plant is ultimately liable for the pollution reduction, so the plant operators want some kind of assurance from the farmer that the credit-generating practice will stick around through the life of the credits.

The procedure for giving that assurance is still unclear, Cohen said.

Many wastewater plants in the Chesapeake Bay watershed have not run up against their phosphorus discharge limits, so they have not had to buy credits yet, he said.

“As those rules come into play on offsets, I think you’ll see a tremendous growth” in credit trading, he said.

Depending on the program, the credits can either be permanent or short-term. Fixed-length credits often last for one year. Until recently, Virginia required farmers to permanently convert or retire their land to sell credits, Cohen said.

Farmers selling yearly credits can keep offering credits every year as long as they keep their conservation projects in place.

A wastewater plant might purchase those credits every year, or for only a few years while making improvements, he said.

Cohen expects “robust” development in the credit trading market over the next few years as the process becomes more settled and regulations expand demand.

“We’ve definitely seen a lot of increased interest,” said Eric Sprague, director of the Chesapeake Forests program at the Alliance for the Chesapeake Bay.

The Alliance helps farmers answer the question “Here’s my property. What can I do?” Sprague said.

Water quality credits, grants and cost-share arrangements are all options farmers can use to help a planned conservation project make economic sense, he said.

Though credits are sold on private markets, each state in the bay watershed oversees credit trading differently.

In Pennsylvania, Maryland and Virginia, water quality credits must go through a state approval process, which the Alliance can help farmers navigate, Sprague said.

In Pennsylvania, the Department of Environmental Protection is responsible for regulating the credit market and verifying that the farmer has actually implemented the practices he says he has.

In Maryland, the state Department of Agriculture has that job, Sprague said.

As the states and the Environmental Protection Agency continue to refine their parameters for environmental credit markets, many potential participants are in wait-and-see mode, Sprague said.

In Maryland, “there’s not been one trade yet under the system,” he said.

Because of the way Maryland’s system is designed, nearly all of the demand in that state will come from developers.

Wastewater treatment plants have been a bigger player on Pennsylvania’s market so far, though more developers will get involved over time, Sprague said.

The Chesapeake TMDL is a national test case for water quality law because the pollution maximums force people to meet goals, he said.

The cap on pollutant quantities is key to ensuring that something actually gets done about pollution, Sprague said.

A federal carbon emissions credit trading proposal, known as cap and trade, sank in Congress in 2010. Cap and trade did not mandate reductions in smokestack emissions. “That’s why that market kind of floundered,” Sprague said.

The credit trading market has shown a “very modest amount” of increase in Pennsylvania over the past four years, said Jay Braund of the Division of Technical and Financial Assistance in the Pennsylvania DEP.

In 2013, DEP oversaw 150 transactions, ranging in size from two credits to more than 200,000. Most of the credits, 1.16 million, were for nitrogen, while 108,000 phosphorus credits were traded.

“I think our biggest challenge is we have modest demand from buyers,” mostly wastewater treatment plants, Braund said.

The program has been successful in reducing pollution in the Chesapeake Bay, Braund said.

“It’s a tool in the toolbox. There are many programs out there that are designed to reduce nutrient pollution,” he said.

One of the forums for trading water quality credits is Bay Bank, sponsored by the Pinchot Institute for Conservation.

Bay Bank allows farmers or other people to post classified ads for conservation projects they would like to do, Will Price, the institute’s program director, said.

The site also matches the farmers with technical service providers who can help them build those projects, and it acts as a referral service for consultants, Price said.

Bay Bank deals with credits for several types of conservation practices in the Chesapeake watershed, including water quality, forest conservation and wetlands conservation.

Bay Bank is getting some traffic but is still “mostly experimental,” Price said.

When credits eventually are trading in higher volume, the group plans to charge subscription fees to consultants and commission charges for transactions, Price said.

“At this point, it’s still kind of in the nonprofit, trying-to-make-this-work stage,” he said.

As of Feb. 12, Bay Bank had 14 credit lots available. Twelve are in Maryland, plus one in Delaware and one in West Virginia.

Only three current lots were posted within the last two years, with the rest dating from 2010 and 2011.

The credits offered for each project range from two to more than 17,000, and prices range from $1.17 to $6.6 million. The projects are posted at various levels of completion, from expression of interest to advanced credits.

In addition to the Chesapeake watershed, there has been some interest in credit trading in the Delaware River basin, where stormwater is a concern, Price said.

So far, there have been limited resources and incentives for farmers to get to the baseline runoff level that would make them eligible to sell credits, Price said.

The institute is still looking for ways to make credit trading meaningful for farmers. “These markets are maturing,” he said. “It’s not there yet.”

The Pinchot Institute also operates LandServer, a tool farmers can use to calculate the areas of their farms that they want to use for conservation.

Other environmental credit trading programs have met with some success. The federal Acid Rain Program cut sulfur dioxide levels in the air by as much as 40 percent in the Northeast between 1990 and 2002, according to the EPA.

Though the national carbon cap-and-trade plan did not pass, carbon markets are running well in California, Price said.

Municipalities are also starting transfer-of-development-rights programs as a way to mitigate the environmental effects of construction.

According to the Rutgers Cooperative Extension, such projects separate the right to build on land from the land itself.

As a result, a developer can purchase the right to build on environmentally sensitive land and move that right to land planned for development.

Transfer-of-development rights ordinances are still uncommon. Only three townships in Lancaster County have adopted a TDR program.

A list of current Pennsylvania water quality credits is available at bit.ly/Lancaster-Farming-223. State-run credit auction results are at bit.ly/Lancaster-Farming-224.

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