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ARTICLE
C(R)AP AND TRADE: THE BRAVE NEW WORLD
OF NON-POINT SOURCE NUTRIENT TRADING
AND USING LESSONS FROM GREENHOUSE
GAS MARKETS TO MAKE IT WORK
Victor B. Flatt
ABSTRACT
After several decades of improvement, water quality in the
United States is getting worse, and the problem is primarily
caused by runoff from non-point sources, such as farms and
urban development. These non-point sources have never had
regulatory mandates in the Clean Water Act, and have proven
very difficult to control. With little likelihood of comprehensive
statutory changes, the EPA and the states that administer the
Clean Water Act have looked to other regulatory means to
address this problem. One of the most prominent has been the
use of markets in pollution (particularly for nutrient pollution
from runoff) to provide incentives for control. In short, the
agencies and the regulated private sector have latched on to the

Tom & Elizabeth Taft Distinguished Professor of Environmental Law UNC
Chapel Hill; Director of the Center for Law, Environment, Adaptation and Resources
(CLEAR) at the University of North Carolina Chapel Hill School of Law; and
Distinguished Scholar of Carbon Trading and Carbon Markets, University of Houston. I
would like to thank Harvard Law School, particularly Jody Freeman and Richard
Lazarus, for organizing the 40th Anniversary of the Clean Water Act and inviting me to
speak about the issues of markets in the Clean Water Act; the faculty who participated
in the faculty workshop presentation at the University of Maryland Francis King Carey
School of Law; and also the Water Resources Research Institute and North Carolina
Water Resources Association for inviting me to present the keynote at their national
conference on nutrient trading programs. Special thanks also to J.B. Ruhl, Melissa
Scanlan, Max Stearns, Martha Ertman, Rena Steinzor, and Michael Pappas for their
helpful comments, and to a host of able research assistants, including Dylan MattawayNovak, Lev Gabrilovich, and Kyle Peterson.
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possibility of highly regulated sources (such as industrial
emitters) paying largely unregulated sources (such as
agricultural lands) to reduce runoff into the nation’s
waterbodies. In theory, this is consistent with the regulatory
push towards efficiency and using markets as rational arbiters
of pollution control. While this theory has been used on many
small scales over the last fifteen years, recently the EPA and
many states have announced a reliance on it at a very large
scale in order to reverse water pollution decline, particularly in
large waterbodies with dead zones, like the Chesapeake Bay.
While I believe these markets could work in theory at this scale,
I do not believe the administrative agencies have addressed
problems with doing so. Because of the similarity in problems
concerning environmental integrity and efficiency between nonpoint agricultural runoff and biological offsets in a carbon
trading system, I believe that much of the analysis of
addressing these offsets from a series of legislative proposals
could provide a regulatory template for dealing with non-point
source agricultural pollution. This Article proposes such a
regulatory template based on these ideas.
TABLE OF CONTENTS
I. INTRODUCTION ....................................................................... 304 II. THE EMBRACE OF NUTRIENT TRADING ................................. 307 III. THE LEGAL BASIS FOR NUTRIENT TRADING AND THE
EPA’S POLICY RECOMMENDATIONS ....................................... 310 A. The Clean Water Act, Market Mechanisms, and the
EPA ................................................................................. 310 B. The U.S. Department of Agriculture and Markets in
Nutrient Pollution .......................................................... 319 C. EPA and USDA Collaboration in Nutrient Trading .... 327 IV. NUTRIENT TRADING IN PRACTICE .......................................... 329 V. PROBLEMS WITH IMPLEMENTATION ...................................... 331
VI. CARBON TRADING OFFSETS AND NUTRIENT TRADING
WITH NON-POINT SOURCES .............................................. 334 A. Greenhouse Gas Offsets: A Comparable Reduction
System ............................................................................. 334 Do Not Delete
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B. Carbon Offsets and Nutrient Trading Suffer from
the Same Major Problems .............................................. 335 1. Co-Impacts .............................................................. 337 2. Measurements, Baselines, and Performance
Safeguards ...................................................................... 338 3. Market Liquidity ..................................................... 340 VII. CONCLUSION .......................................................................... 342 APPENDIX—DETAILS OF STATE PROGRAMS FOR CHESAPEAKE
BAY MARKET MECHANISM ..................................................... 343 March 15, 2013 – “Lake Erie is sick . . . [s]imilar blooms are
strangling other lakes in North America . . . [to reverse the dead
zones], scientists say, the habits . . . of 70,000 farmers along the Erie
shore must change.”1
August 10, 2012 – Indiana, Kentucky, and Ohio today created the
Ohio River Basin Water Quality Trading Program — “a pilot
program that will allow farmers and industrial facilities to trade
pollution credits to reduce fertilizer runoff and nutrient discharges.
Trading is scheduled to begin in 2015 from at least three power
plants and up to 30 farms for the implementation of best-practices
on agricultural land that will eliminate up to 45,000 pounds of
nitrogen and 15,000 pounds of phosphorus annually into the river.”2
December 29, 2010 – the EPA assumes that the Chesapeake
jurisdictions can meet their proposed non-point source load
reduction.3 “EPA expects that new or increased loadings of nitrogen,
phosphorous, and sediment in the . . . watershed . . . will be offset by
loading reductions and credits generated by other sources . . . .”4
1.
Michael Wines, Spring Rain, Then Foul Algae in Ailing Lake Erie, N.Y. TIMES,
Mar. 15, 2013, at A1.
2.
Brydon Ross, Indiana, Kentucky and Ohio Sign Largest Credit Trading Program
for Water Pollution, KNOWLEDGE CENTER, COUNCIL FOR STATE GOVERNMENTS (Aug. 9,
2012, 3:55 PM), http://knowledgecenter.csg.org/kc/content/ky-and-oh-sign-largest-credittrading-program-water-pollution.
3.
U.S. ENVTL. PROT. AGENCY, CHESAPEAKE BAY TOTAL MAXIMUM DAILY LOAD FOR
NITROGEN, PHOSPHORUS AND SEDIMENT § 8, at 8-1 to -2 (2010), available at http://www.
epa.gov/reg3wapd/tmdl/ChesapeakeBay/tmdlexec.html [hereinafter CHESAPEAKE BAY
TOTAL MAXIMUM DAILY LOAD FOR NITROGEN, PHOSPHORUS AND SEDIMENT].
4.
CHESAPEAKE BAY TOTAL MAXIMUM DAILY LOAD FOR NITROGEN, PHOSPHORUS
AND SEDIMENT, supra note 3, § 10, at 1.
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INTRODUCTION
Major bodies of water in our country, including the
Chesapeake Bay, the Mighty Mississippi, the Great Lakes and
the Ohio River are in trouble because of too much “nutrient
pollution.”5 Many environmentalists, and indeed some
environmental law experts, might be surprised to find out that
progress in reducing this pollution is or may soon become
dependent on trading nutrient pollution between farmers and
point sources such as sewage treatment plants—trading that, at
the time of this writing, has not been done on any large scale,
and where it has been done has been disappointing.6
If your understanding of the Clean Water Act comes from
any time before 1995, you probably view it as controlling point
source runoff into these impaired streams and other
waterbodies.7 You might also think that our regulatory agencies
are making incremental progress in ratcheting down all sorts of
this pollution from its sources. This view is mistaken.
The Clean Water Act narrative has instead undergone a
radical transformation over the last two decades. Starting in the
late 1990s, lawsuits activated the long dormant Total Maximum
Daily Load (TMDL) program, which for the first time forced
states and the federal government to actually measure exactly
how impaired waterbodies were.8 It also brought into sharp relief
the uncomfortable truth that most of the reductions that had
already occurred were the “low hanging fruit” from point sources
and that any real future reductions would have to be from the
myriad non-point sources, such as large farms and land use
5.
All over the country, sewage discharges, and runoff from agriculture and
development provide the “nutrients” for explosive algal growth that in turn is consumed
by bacterial blooms that suck most dissolved oxygen from water, creating “dead zones”
where no water species can survive. Annie Snider, EPA Appeals Judge’s Order on
Numeric Standards for Mississippi River, E&E PUBLISHING (Nov. 19, 2013), available at
https://plus.google.com/101473675488333674529/posts/WLotYhyhdrF.
6.
See generally Karen Fisher-Vanden & Sheila Olmstead, Moving Pollution
Trading from Air to Water: Potential, Problems, and Prognosis, 27 J. ECON. PERSP.,
Winter 2013, at 147, 147 (“Many have seen no trading at all, and few are operating on a
scale that could be considered economically significant.”). Many earlier articles have also
documented the slow embrace of trading. An excellent early piece is Dennis King and
Peter Kuch’s Will Nutrient Credit Trading Ever Work? An Assessment of Supply and
Demand Problems and Institutional Obstacles, 33 ENVTL. L. REP. 10352 (2003).
7.
See Victor B. Flatt, Spare the Rod and Spoil the Law: Why the Clean Water Act
Has Never Grown Up, 55 ALA. L. REV. 595, 597 (2004); see also 40 C.F.R. § 401.10 (1994).
8.
See OLIVER A HOUCK, THE CLEAN WATER ACT TMDL PROGRAM: LAW, POLICY
AND IMPLEMENTATION 54–56 (1999).
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changes, whose pollution was accelerating.9 Indeed, non-point
source pollution of nutrient loading has been getting worse,
reversing gains made in the past from control of point sources.
Lake Erie was able to recover from its point source nutrient
loading two decades ago only to fall afoul in the present day to
increased loading from agricultural runoff.10 Because non-point
sources were not under direct regulatory control,11 it became
obvious that future reductions, absent new law or regulation,
might have to come from point sources working with, and paying
for, reductions from non-point sources.12
This idea was occurring at the same time that regulators
were becoming more enamored of the power of markets to control
pollution. After the Clean Air Act amendments, passed in 1990,
had demonstrated exceptional success in market based trading of
sulfur dioxide,13 markets became the basis for negotiation in
climate change mitigation.14 As stated by Professor Michael
Faure, “the SO2 cap and trade program has . . . been qualified as
a ‘living legend’ of market effectiveness,” and “there has been
overwhelming American research to show the effectiveness of
trading in pollution rights.”15 Emissions trading has also been
added to more U.S. domestic environmental programs.16 So
perhaps it was inevitable that the proposed Chesapeake Bay
cleanup (which has been debated for decades) and the cleanup of
the Ohio River assume that they will finally become clean when
farmers can monetize and sell controls on the wastes of their
livestock.17
The scale of these proposed market incentives to control nonpoint sources is much larger than anything seen before. The Ohio
River Compact has only thirty farms enrolled, but the
9.
Flatt, supra note 7, at 597; Wines, supra note 1, at A14.
10.
Wines, supra note 1, at A1, A14.
11.
Flatt, supra note 7, at 598–99; see also William L. Andreen, Success and
Backlash: The Remarkable (Continuing) Story of the Clean Water Act, J. ENERGY &
ENVTL. L., Winter 2013, at 25, 27.
12.
Flatt, supra note 7, at 605. Alternatively, a state can simply control non-point
sources to address TMDLs. See Pronsolino v. Nastri, 291 F.3d 1123, 1126, 1140–41 (9th
Cir. 2002).
13.
Michael Faure, Effectiveness of Environmental Law: What Does the Evidence
Tell Us?, 36 WM. & MARY ENVTL. L. & POL’Y REV. 293, 315–16 (2012).
14.
David B. Hunter, International Climate Negotiations: Opportunities and
Challenges for the Obama Administration, 19 DUKE ENVTL. L. & POL’Y F., 247, 265 (2009).
15.
Faure, supra note 13, at 315–16.
16.
Robert L. Glicksman, Regulatory Safeguards for Accountable Ecosystem Service
Markets in Wetlands Development, 62 U. KAN. L. REV. 943, 945 (2014).
17.
The History of Chesapeake Bay Cleanup Efforts, CHESAPEAKE BAY FOUND.,
http://www.cbf.org/how-we-save-the-bay/chesapeake-clean-water-blueprint/history-of-baycleanup-efforts (last visited Sept. 16, 2014).
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Chesapeake TMDL may require thousands of farms to register
since agricultural sources are responsible for over 40% of the
nutrient loading of the Bay.18 According to the New York Times,
to control Lake Erie eutrophication, 70,000 farms must be
controlled.19 But in the states that currently utilize nutrient
trading or offsets, the volume has been very small so far.20
Moreover, as discussed below, market mechanisms must be
designed properly to be effective.21
It is easy to see why these proposals have multiplied and
expanded so rapidly. If they work, they give all of the
stakeholders what they want. Environmentalists get pollution
reduction and improved water quality, and point sources can
meet the more stringent targets cheaply by buying reductions
from farmers and other non-point sources.22 These non-point
sources in turn receive a new income stream. In fact, without
such low cost reductions, the ability to continue controlling water
quality solely through point sources might become prohibitively
expensive.23 But if these trades do not work, the house of cards
will fall, taking with it diverse aquatic life and the health of the
nation’s waterways. The most recent analysis of existing water
quality trading programs notes with dismay that the programs
continue to not expand to their potential.24
We thus have a problem. Trading and offsetting of pollution
rights in impaired waterbodies is being relied upon at an
unprecedented scale to reach goals in nutrient pollutant
reduction—reductions needed for aquatic life to continue and
flourish, especially in large waterbodies such as the Chesapeake.
In particular, there is a reliance on trading between point
sources and non-point sources (like farms). However, there is no
evidence that a robust market can form, and even if it does, that
it will fulfill its promise for actually controlling pollution.25 This
18.
Ross, supra note 2; GEORGE VAN HOUTVEN ET AL., CHESAPEAKE BAY COMM’N,
NUTRIENT CREDIT TRADING FOR THE CHESAPEAKE BAY: AN ECONOMIC STUDY 8 (2012),
available at http://www.chesbay.us/Publications/nutrient-trading-2012.pdf (estimating
that 42% of the nitrogen loading and 54% of the phosphorous loading comes from
agricultural runoff).
19.
Wines, supra note 1, at A14.
20.
Fisher-Vanden & Olmstead, supra note 6, at 150.
21.
See Memorandum from David Gordon to Bill Holman & Amy Pickle 2 (July 19,
2010) (on file with the Houston Law Review).
22.
VAN HOUTVEN ET AL., supra note 18, at 12.
23.
Jonathan Cannon, A Bargain for Clean Water, 17 N.Y.U. ENVTL. L.J. 608, 611–
12 (2008).
24.
Fisher-Vanden & Olmstead, supra note 6, at 163.
25.
Paul Quinlan, Cap and Trade for Water Pollution: “Trendy, Hip, Glitzy” and
Controversial, E&E PUBLISHING (May 8, 2012), http://www.eenews.net/stories/
1059964052. Note also that the most mature market for nutrient pollution offset of road
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Article proposes methods taken from developing theories
concerning greenhouse gas offsets, for making such a system
both workable and reliable.26 If this proposal is implemented,
nutrient trading and offsets with non-point sources may fulfill its
promise. Without the use of this proposal or some other workable
approach to address the problems associated with non-point source
pollution trading, these programs are doomed to failure, as may be
our hopes for real progress on cleaning up impaired waterbodies.
II. THE EMBRACE OF NUTRIENT TRADING
While nutrient trading programs have become prevalent in
the last decade or so, the concept of nutrient trading has been
around since the mid-1980s.27 The first trading program began at
the Dillon Reservoir, Colorado, in 1984.28 Although the Lake
Dillon trading program was only moderately successful, a few
trades did occur before 2000 with the first point source-to-nonpoint source trade occurring in 1997.29 The fact that some trading
occurred in the Lake Dillon trading program marks the program
as a success in the nutrient trading world.
Since the 1980s, the EPA has recognized almost forty water
quality trading programs, but only half of these have resulted in
trading.30 Besides EPA-recognized trading programs, almost
thirty other water quality trading programs have been conceived
or developed.31 All of these trading programs are spread
throughout thirty states and almost as many watersheds.32
Despite the majority of states participating in trading, most
programs have failed to maintain trading.33 Many early
programs have disappeared over the past twenty-seven years,
development has not met with success. Todd K. BenDor & Martin W. Doyle, Planning for
Ecosystem Service Markets, 76 J. AM. PLAN. ASS’N 59, 67–68 (2009).
26.
See infra Part IV.
27.
HANNA L. BREETZ ET AL., WATER QUALITY TRADING AND OFFSET INITIATIVES IN
THE U.S.: A COMPREHENSIVE SURVEY passim (2004), available at http://www.dep.state.fl.us/
water/watersheds/docs/ptpac/DartmouthCompTradingSurvey.pdf (describing all the water
quality trading programs in the United States and tracking their development over time).
28.
ENVTL. PROT. AGENCY, INCENTIVE ANALYSIS FOR CLEAN WATER ACT
REAUTHORIZATION: POINT SOURCE/NONPOINT SOURCE TRADING FOR NUTRIENT DISCHARGE
REDUCTIONS 20 (1992) (“In 1984, Summit County adopted a point/non-point source
trading system that allowed the four [publically owned treatment works] to receive
phosphorous reduction credits by funding controls to reduce phosphorous loadings from
existing urban non-point sources.”).
29.
BREETZ ET AL., supra note 27, at 70.
30.
Fisher-Vanden & Olmstead, supra note 6, at 150–51.
31.
BREETZ ET AL., supra note 27 passim (summarizing each water quality trading
and offset initiative in the United States).
32.
Id.
33.
Id. (chronicling the water quality trading programs’ shortcomings).
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but some other programs have begun to develop within the past
ten years with EPA support.34
To bolster support for water quality trading, the EPA issued its
official water quality trading policy on January 13, 2003.35 This
policy clarified that regulated point sources could avoid
implementing high-cost pollution control technologies to meet
existing water quality standards by paying for lower cost pollutant
controls elsewhere.36 Since that time, National Pollutant Discharge
Elimination System (NPDES) permits, which rely on these market
mechanisms to reduce pollution, have proliferated. There have been
at least twenty instances of trading or offsetting being used to meet
a discharge limit under an NPDES permit.37
While incorporating trading into NPDES permits is one step in
the process, the EPA has stated that TMDLs that include provisions
for nutrient trading are imperative for all trading programs.38
However, even with EPA encouragement, TMDLs with trading
provisions have been quite scarce. The first TMDL to incorporate
trading was the Neuse River Basin in North Carolina in 2001.39
Then in 2004, the Minnesota River TMDL was developed with
multiple sections on nutrient trading that even give details on
point-to-point source trading and non-point-to-point source
trading.40 The Minnesota River TMDL addresses phosphorus
pollution,41 and two trades had occurred in the watershed by 2007.42
The poster child of TMDLs with trading provisions is the
Chesapeake Bay plan, which is the largest TMDL ever developed by
the EPA.43 The TMDL was developed in 2010, and it relies on
34.
Id.
35.
Water Quality Trading Policy: Issuance of Final Policy, 68 Fed. Reg. 1608, 1609
(Jan. 13, 2003) (U.S. Envtl. Prot. Agency).
36.
Id.
37.
See BREETZ ET AL., supra note 27 passim.
38.
Water Quality Trading Policy: Issuance of Final Policy, supra note 35, at 1610.
39. See N.C. DEP’T OF ENV’T. & NATURAL RES., PHASE II OF THE TOTAL MAXIMUM DAILY
LOAD FOR TOTAL NITROGEN TO THE NEUSE RIVER ESTUARY, NORTH CAROLINA, 56–58 (2001),
available at http://portal.ncdenr.org/c/document_library/get_file?uuid=48bc46d8-c344-4f07a656-7a211157c985&groupId=38364; see also VIRGINIA KIBLER, U.S. ENVTL. PROT. AGENCY,
WATER QUALITY TRADING TOOLKIT FOR PERMIT WRITERS 8 (2009), available at
http://www.epa.gov/npdes/pubs/wqtradingtoolkit.pdf.
40. See generally LARRY GUNDERSON & JIM KLANG, MINN. POLLUTION CONTROL
AGENCY, LOWER MINNESOTA DISSOLVED OXYGEN TOTAL MAXIMUM DAILY LOAD (2004),
available at http://www.pca.state.mn.us/index.php/view-document.html?gid=7994 (describing
guidelines to follow to ensure real reductions from non-point to point source trading).
41.
Id. at 7.
42.
MINN. POLLUTION CONTROL AGENCY, LAKE PEPIN TMDL STAKEHOLDER
ADVISORY MEETING: THOMPSON PARK 7 (2007), available at http://www.pca.state.mn.us/
index.php/view-document.html?gid=8433.
43. U.S. ENVTL. PROT. AGENCY, CHESAPEAKE BAY TOTAL MAXIMUM DAILY LOAD (TMDL)
FACT SHEET: DRIVING ACTIONS TO CLEAN LOCAL WATERS AND THE CHESAPEAKE BAY 1 (2010),
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trading programs to help achieve water quality goals and offset any
new or increased pollutant discharges that were not accounted for
in the TMDL.44 The Chesapeake Bay TMDL is important because
the program strongly emphasizes trading between point sources
and non-point sources as a way to achieve the necessary water
quality standards, and the TMDL even states that regulations will
be extended to non-point sources if necessary.45 Whereas as many
as twenty-two nutrient trading programs have exclusively
addressed trading with non-point sources,46 none of them have
successfully maintained consistent trading with non-point sources.47
With only modest success, why has nutrient trading become so
prevalent, culminating in the proposed large-scale trading program
in the Chesapeake Bay? As indicated in the introduction, nutrient
trading, particularly trading with largely untapped non-point
sources, provides all sides a way forward in a dispute about the
costs of water quality improvement. In theory, such trades allow for
more rapid improvements, but at lower costs, while still
accommodating existing uses of a waterbody.48 Unlike the Clean Air
Act, the Clean Water Act’s benefits compared to costs have been
more debated, and even if reductions in pollutants are still
warranted in order to realize the goal of clean waters in the nation,
it seems as if continued reductions only in point sources would be
problematic for political and economic reasons.49
In addition, water quality trading which relies upon non-point
source and point source trading has the additional political benefit
of helping American farmers.50 Although the U.S. Department of
Agriculture (USDA) has not embraced nutrient trading as quickly
as the EPA, the USDA has recognized nutrient trading’s potential
and begun awarding grants to facilitate programs, which has been
critical in sustaining nutrient trading as a legitimate possibility.51
available at http://www.epa.gov/reg3wapd/pdf/pdf_chesbay/BayTMDLFactSheet8_26_13.pdf
[hereinafter CHESAPEAKE BAY TOTAL MAXIMUM DAILY LOAD (TMDL) FACT SHEET: DRIVING
ACTIONS TO CLEAN LOCAL WATERS AND THE CHESAPEAKE BAY].
44.
CHESAPEAKE BAY TOTAL MAXIMUM DAILY LOAD FOR NITROGEN, PHOSPHORUS
AND SEDIMENT, supra note 3, § 10, at 10-3 to -4.
45.
Id. § 8, at 8-9, § 10, 10-3 to -4.
46.
BREETZ ET AL., supra note 27, at 8–9.
47.
See id. passim.
48.
Cannon, supra note 23, at 611, 613–14.
49.
Id. at 635–36.
50.
Id. at 622–23, 629.
51. See Amanda Peterka, USDA grants target nutrients in 157 watersheds, E&E
PUBLISHING
(May
8,
2012),
http://www.eenews.net/eenewspm/2012/05/08/archive/
5?terms=grants+target+nutrients+in+157+watersheds.
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III. THE LEGAL BASIS FOR NUTRIENT TRADING AND THE EPA’S
POLICY RECOMMENDATIONS
The EPA’s official Water Quality Trading Policy was
published in the Federal Register in 2003 and is a source of the
general EPA nutrient trading policy.52 In addition to its Water
Quality Trading Policy, the EPA has published and funded
numerous handbooks and guides for water quality trading, which
contain trading practices supported by the EPA.53
A. The Clean Water Act, Market Mechanisms, and the EPA
According to the EPA, nutrient trading is a voluntary and
efficient approach to achieving water quality standards required
under the Clean Water Act for a watershed by utilizing
economies of scale and varying control costs.54 In its memo
explaining trading, the EPA asserts that trading allows
regulated point sources to avoid implementing high-cost
pollutant controls by paying for lower cost pollutant controls
elsewhere.55 Moreover, the EPA claims that the potential for
economic gain could also inspire technological innovation and
voluntary reductions, and these secondary benefits will lead to
better overall water quality than possible through standard
pollution control methods.56 Virginia environmental professor
Jonathan Cannon has been less sanguine than the EPA, but in
his proposal from 2008 on improving the Clean Water Act, he
also notes the potential for trading programs.57
Nutrient trading is essentially a mechanism to comply with
any applicable TMDL, and the attendant regulation required to
meet the TMDL.58 A TMDL is established when a water basin
fails to meet water quality standards and establishes steps
required to meet the goal at some future point.59 A timetable for
52.
See Water Quality Trading Policy: Issuance of Final Policy, supra note 35, at
1608–13 (“The final policy describes ways that water quality trading programs may be
aligned with the CWA and implementing regulations.”).
53.
See CONSERVATION TECH. INFO. CTR., GETTING PAID FOR STEWARDSHIP: AN
AGRICULTURAL COMMUNITY WATER QUALITY TRADING GUIDE app. D (2006), available at
http://ctic.org/media/users/lvollmer/pdf/GPfS_final(1).pdf; KIBLER, supra note 39, at 41.
54.
Water Quality Trading Policy: Issuance of Final Policy, supra note 35, at 1609;
Frequently Asked Questions About Water Quality Trading, U.S. ENVTL. PROT. AGENCY,
http://water.epa.gov/type/watersheds/trading/tradingfaq.cfm (last visited Sept. 16, 2014).
55. Water Quality Trading Policy: Issuance of Final Policy, supra note 35, at 1608–09.
56.
Id. at 1609.
57.
Cannon, supra note 23, at 621.
58. See Water Quality Trading Policy: Issuance of Final Policy, supra note 35, at 1609.
59.
Id. at 1610.
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achievement is put into place.60 Required reductions to meet the
water quality goal by the time specified can be allocated to
existing point sources, existing non-point sources, and future
sources. The key for nutrient trading is that part of these
required reduction allocations can be met by reductions
elsewhere.
The TMDL program was established to enforce stricter
pollutant discharge limits on facilities near impaired waters and
eventually achieve the necessary water quality for that
waterbody’s designated use.61 TMDLs were supposed to be left to
the states to develop,62 and the EPA is tasked with reviewing
each TMDL; however, if the state fails to establish a proper
TMDL, the EPA will assume responsibility of developing the
TMDL itself.63 Many of the original TMDLs were developed as a
result of litigation against the states and the EPA to fulfill Clean
Water Act requirements.64
The EPA promotes TMDLs as an important tool in
establishing a nutrient trading market, but it also supports
trading until a TMDL is established.65 Once a TMDL is
established, the EPA approves nutrient trading that takes place
within the area covered by one TMDL (if trading is allowed to
occur between sources under different TMDLs without
consistency with all of the TMDLs at issue, then there may not
be water quality maintenance with one or more of the TMDLs).66
60.
See GUNDERSON & KLANG, supra note 40, at 45–46.
61.
Waterbodies are assigned designated uses, such as agricultural, recreational, or
public water supply, and each of these uses has designated water quality standards that
must be met. See Water Quality Standards: Designated Uses, U.S. ENVTL. PROT. AGENCY,
http://water.epa.gov/scitech/swguidance/standards/uses.cfm (last visited Sept. 16, 2014).
62.
See 33 U.S.C. § 1313(d)(1) (2012); Total Maximum Daily Load (303d):
Frequently Asked Questions, U.S. ENVTL. PROT. AGENCY, http://water.epa.gov/
lawsregs/lawsguidance/cwa/tmdl/faq.cfm#responsible (last visited Sept. 16, 2014).
63.
40 C.F.R. § 130.7 (2011); Total Maximum Daily Load (303d): Frequently Asked
Questions, supra note 62; see 33 U.S.C. § 1313(d)(1). As of April 2013, 51% of the nation’s
rivers and streams (surveyed by miles) and 67% of the nation’s lakes, reservoirs, and
ponds (measured by acres) are impaired. See National Summary of State Information,
U.S. ENVTL. PROT. AGENCY, http://ofmpub.epa.gov/waters10/attains_nation_cy.control
(last visited Sept. 16, 2014). In total, there are 42,709 waterbodies that are impaired,
although most of the nation’s waters have not even been assessed. See id. Additionally, as
of July 2014, 52,251 TMDLs have been established and approved nationwide. Id.
64.
Flatt, supra note 7; Litigation Status: Summary of Litigation on Pace of TMDL
Establishment, U.S. ENVTL. PROT. AGENCY, http://water.epa.gov/lawsregs/lawsguidance/
cwa/tmdl/lawsuit.cfm (last visited Sept. 16, 2014).
65.
Water Quality Trading Policy: Issuance of Final Policy, supra note 35, at 1610.
EPA actually encourages pre-TMDL trading in the hopes that water quality standards
will be achieved and a TMDL will no longer be necessary. Id.
66.
See id. Although the EPA does not support trading across multiple watersheds,
it does support interstate trading similar to the Chesapeake Bay Program. KIBLER, supra
note 39, at 13.
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The EPA has encouraged TMDL plans that include
provisions allowing nutrient trading.67 Once trading is supported
by a TMDL, the TMDL can function as a regulatory support for
trading. First, TMDL plans should provide baselines that point
sources and non-point sources must meet before trading can
occur.68 Second, all the raw data collected on a watershed during
TMDL planning can be used to calculate the complex trade ratios
needed to ensure that nutrient trades do not sacrifice water
quality standards.69 Finally, by requiring more stringent basinwide pollution reductions for water quality, a TMDL can also act
as the primary market driver to inspire involvement in nutrient
trading.70
A nutrient trading program, as is true of any TMDL
program, must be consistent with the NPDES program. The
NPDES program is part of the Clean Water Act that enforces
mandatory pollutant discharge limits on each point source.71 An
NPDES permit must require that pollutants be reduced by “[t]he
best practicable control technology currently available,” and may
also specify higher reductions to meet water quality standards.72
Because technology reductions are mandatory and specific for all
point sources in the Clean Water Act, trading solely to meet
technology based effluent limitations (TBELs)73 is not allowed;
instead, the EPA promotes TBELs as the minimum baseline to
be achieved before a point source can purchase credits.74 While
trading cannot be used to meet TBELs, any stricter water quality
based effluent limitations specified in the TMDLs for future
reduction can be met through the purchase of nutrient credits.75
67.
Water Quality Trading Policy: Issuance of Final Policy, supra note 35, at 1610.
68. See id. A typical TMDL plan assigns enforceable wasteload allocations for point
sources and unenforceable load allocations for non-point sources. See 40 C.F.R. § 130.2(g)–(i).
69.
INDUS. ECON., INC., EPA WATER QUALITY TRADING EVALUATION: FINAL REPORT
3-4 (2008), available at http://www.epa.gov/evaluate/pdf/water/epa-water-quality-tradingevaluation.pdf. The EPA Water Quality Trading Evaluation was conducted by a third
party in 2008 to determine the success of and reaction to EPA nutrient trading policy. Id.
at ES-1. Opinions of EPA policy were gathered from EPA, USDA, and state departments
of environmental quality officials, as well as participants from a number of nutrient
trading programs. Id. at ES-3.
70.
Id. at 3-4.
71.
See 33 U.S.C. § 1342 (2012).
72.
40 C.F.R. § 125.3(a)(2)(i); see 33 U.S.C. § 1311(b).
73.
For nutrient trading, such as phosphorus and nitrogen, a TBEL is either the
best practicable control technology currently available (“BPT”) or the best available
technology economically achievable (“BAT”). See 33 U.S.C. § 1314(b); Industry Effluent
Guidelines: Frequent Questions, U.S. ENVTL. PROT. AGENCY, http://water.epa.gov/
scitech/wastetech/guide/questions_index.cfm (lasted visited Sept. 16, 2014).
74.
KIBLER, supra note 39, at 6.
75.
Id. at 15.
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As with TMDL limits generally, the EPA encourages that trading
provisions be included in each point source’s NPDES permit.76
The EPA generally requires point sources to obtain preapproval
for particular kinds of nutrient trades in the permit, but it has
also set up systems to automatically adjust permit limits to
reflect trades.77
The EPA tasks the permitting authority with designing the
applicable trading provisions and assisting in the development of
the trading program.78 To facilitate trading further, the EPA has
approved of general NPDES permits for multiple point sources of
a specific type, such as wastewater treatment facilities.79 General
permits can help reduce paperwork, ensure consistency, and save
money for the trading program.80
A nutrient trading program can only ensure that water quality
is improved throughout the watershed going forward by enforcing
baselines of current restrictions that point sources and non-point
sources must meet before trading can occur. Under EPA policy, two
types of baselines exist in a nutrient trading market: (1) a credit
purchaser baseline to be achieved before nutrient credits can be
purchased; and (2) a credit generator baseline to be achieved before
nutrient credits can be generated and sold.81
The EPA defines a point source’s credit purchaser baseline
as its TBEL assigned under an NPDES permit or the current
discharge level, whichever is more stringent.82 Thus, the baseline
might be the TBEL or any more restrictive limitation already
imposed to meet water quality standard requirements.83
76.
Water Quality Trading Policy: Issuance of Final Policy, supra note 35, at 1610.
77.
U.S. ENVTL. PROT. AGENCY, WATER QUALITY TRADING ASSESSMENT HANDBOOK:
CAN WATER QUALITY TRADING ADVANCE YOUR WATERSHED GOALS? 59 (2004), available at
http://water.epa.gov/type/watersheds/trading/upload/2004_11_08_watershed_trading_han
dbook_national-wqt-handbook-2004.pdf
[hereinafter
WATER
QUALITY
TRADING
ASSESSMENT HANDBOOK]. The EPA-supported Lower Boise Water Quality Trading Program
has constructed its NPDES permits to automatically increase the pollutant discharge limit of a
purchaser and decrease the pollutant discharge limit of the seller. See id. at 60.
78.
KIBLER, supra note 39, at 5.
79.
40 C.F.R. § 122.28(a)(2) (2011).
80.
U.S. ENVTL. PROT. AGENCY, WATER PERMITTING 101 (1999), available at
http://www.epa.gov/npdes/pubs/101pape.pdf. The Long Island Sound Nitrogen Credit
Exchange Program is an example of a nutrient trading program that utilizes a nitrogen
general NPDES permit for all of its seventy-nine wastewater treatments plants. WATER
QUALITY TRADING ASSESSMENT HANDBOOK, supra note 77, at 67–68. See generally CONN.
DEP’T. OF ENERGY & ENVTL. PROT., GENERAL PERMIT FOR NITROGEN DISCHARGES (2010)
(NPDES permit for 2011–2015), available at http://www.ct.gov/deep/lib/deep/water/
municipal_wastewater/2011_2015_nitrogen_gp.pdf.
81.
See KIBLER, supra note 39, at 28–29.
82.
Id. at 29.
83. WQBELs must be stricter than TBELs if there is an additional water quality
concern, such as avoidance of hotspots or a TBEL will be insufficient to obtain the necessary
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Despite the lack of Clean Water Act enforcement of pollutant
discharge limits on non-point sources, the EPA encourages
nutrient trading programs to institute baselines for non-point
source participants.84 Credit generator baselines for non-point
sources are based on pollutant reductions in pounds or
percentage, or the program can enforce a minimum amount of
conservation practices before credits can be generated.85 The EPA
recommends that non-point source baselines be established from
the TMDL’s non-point source load allocation, which will avoid the
cost of program-developed baselines and still provide appropriate
credit generator baselines.86 However, neither the TMDL
program nor water quality requirements generally demand that
non-point sources have any controls.87
A non-point source could enforce its own minimum
conservation practices that allow more flexibility for non-point
sources and the nutrient trading programs; for example, the
Pennsylvania Department of Environmental Protection gives
non-point sources three options to satisfy their credit generator
baseline: (1) the farm or manure application must not come
within 100 feet of surface waters; (2) a thirty-five foot riparian
buffer must exist between the farm and the surface water; or
(3) the farm meets a 20% reduction in nutrient discharge before
trading.88 In sum, the EPA supports non-point source baselines
so long as the baselines enforced are not less stringent than
current practices.89
water quality standards. See 40 C.F.R. § 122.44(d); KIBLER, supra note 39, at 6. Furthermore,
WQBELs are the necessary pollutant discharge limits imposed by a TMDL, NPDES permit, or
any pre-TMDL water quality program. See id. at 20; N.Y. DEP’T OF ENVTL. CONSERVATION,
TOTAL MAXIMUM DAILY LOADS AND WATER QUALITY BASED EFFLUENT LIMITS 3 (1996),
available
at
http://water.epa.gov/scitech/swguidance/standards/upload/2006_07_19_
standards_mixingzone_NY_Effluent_Limits.pdf.
84. See Water Quality Trading Policy: Issuance of Final Policy, supra note 35, at 1610.
85.
CONSERVATION TECH. INFO. CTR., GETTING PAID FOR STEWARDSHIP: AN
AGRICULTURAL COMMUNITY WATER TRADING GUIDE 20–21 (2006), available at
http://www.ctic.org/media/users/lvollmer/pdf/GPfS_final(1).pdf.
86.
KIBLER, supra note 39, at 29.
87.
See Paula J. Lebowitz, Land Use, Land Abuse and Land Re-Use: A Framework
for the Implementation of TMDLS for Nonpoint Source Polluted Waterbodies, 19 PACE
ENVTL. L. REV. 97, 106 (2001).
88.
25 PA. CODE § 96.8(d)(3) (2001); CONSERVATION TECH. INFO. CTR., supra note 85,
at 21.
89. KIBLER, supra note 39, at 29. This type of baseline is referred to as a minimum
standards baseline, which only allows non-point sources to generate credits through
implementation of new best management practices (“BMPs”) above a minimum standard.
Gaurav S. Ghosh, Marc Ribaudo & James S. Shortle, Do Baseline Requirements Hinder Trades
in Water Quality Trading Programs? 13 (Inst. for Future Energy Consumer Needs and
Behavior, Working Paper No. 11/2009), available at http://papers.ssrn.com/sol3/papers.cfm
?abstract_id=1620507. Consequently, a non-point source already instituting BMPs far above
the minimum standard cannot receive credits until it adopts an additional BMP. Id. at 13–14.
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Once a baseline is achieved, a facility can generate credits
and sell those credits to discharging point sources. The EPA
suggests that credits be generated and sold within the same
month, season, or year.90 The reasoning behind this policy is that
a pound of nitrogen in the summer causes more environmental
damage than the same nitrogen in the winter.91 In the majority
of cases, credits should not even last a year, unless there are vast
amounts of data to back up annual purchases, like in the
Chesapeake Bay.92
In order to ensure baselines and pollutant discharge
reductions are being achieved, the EPA encourages regular
monitoring of point source and non-point source pollutant control
efforts. The EPA deems water quality monitoring to be one of the
essential but costly necessities of a nutrient trading program.93
The EPA has supported trading programs that ensure discharge
compliance through self-monitoring reports from point sources
and compliance audits.94 While a number of technologies
installed by point sources can provide for easy accessible and
detailed nutrient discharge data,95 it is unreasonable to obtain
actual nutrient reduction data for some of the pollutant control
options, especially those employed by non-point sources.96 For
non-point sources, monitoring should ensure that the non-point
sources are actually meeting their baselines and applying the
90.
Water Quality Trading Policy: Issuance of Final Policy, supra note 35, at 1612.
91.
KIBLER, supra note 39, at 35. Due to the increased sunlight in the summer, a
pound of nitrogen will quickly result in vast algae blooms. Memorandum from James A.
Hanlon, Dir., Office of Wastewater Mgmt., to Jon Capacasa, Dir., Water Permits Div.,
EPA Region & Rebecca Hanmer, Dir., Chesapeake Bay Program Office 3 n.2 (Mar. 3,
2004),
available
at
http://www.epa.gov/reg3wapd/npdes/pdf/ches_bay_nutrients_
hanlon.pdf.
92.
Memorandum from James A. Hanlon, Dir., Office of Wastewater Mgmt., to Jon
Capacasa, Dir., Water Permits Div., EPA Region & Rebecca Hanmer, Dir., Chesapeake
Bay Program Office, supra note 91, at 1–3.
93.
KIBLER, supra note 39, at 32, 40.
94.
See Water Quality Trading Policy: Issuance of Final Policy, supra note 35, at
1612; WATER QUALITY TRADING ASSESSMENT HANDBOOK, supra note 77, at 61. These
methods of monitoring point sources can be accomplished through compliance with
NPDES monitoring requirements under 40 C.F.R. § 122.44(i) and 40 C.F.R. § 122.48. See
U.S. ENVTL. PROT. AGENCY, WATER QUALITY TRADING SCENARIO: NONPOINT SOURCE
CREDIT EXCHANGE 32 (2009), available at http://www.epa.gov/npdes/pubs/\
wqtradingtoolkit_nps-credit-exchange.pdf.
95.
Even with the more predictable point source pollutant control technology, the
EPA still insists that credits should not generate until a year’s worth of monitoring data
can be acquired to ensure the expected nutrient reductions are actually being achieved.
KIBLER, supra note 39, at 34–35.
96.
Id. at 39. The nutrient reductions from non-point sources and other
unpredictable pollutant control options are actually calculated by scientific models and
past performances. Id. at 18, 39–40.
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agreed upon Best Management Practices (BMPs) successfully.97
All the data gathered from monitoring nutrient trades can then
be used to evaluate the success of the current trading program in
achieving improved water quality.98 Some programs have cited
expensive and demanding monitoring requirements as being
barriers to developing trading programs.99
A nutrient trading program must also account for the
different types of nutrients that are at issue for that watershed,
which usually include phosphorus, nitrogen, and sediment.
Phosphorus discharge will cause the direct effect of increasing
algae and periphyton growth, which can damage the aquatic
environment by lowering dissolved oxygen, increasing pH, and
producing cyanotoxins.100 Additionally, phosphorus can lead to
“trihalomethane production in drinking water systems, and
maintenance issues associated with public water supplies.”101
Two types of phosphorus are accounted for in total phosphorus:102
(1) soluble phosphorus produced by grasslands, pastures, and
wastewater treatment plants that leads to rapid algae growth;
and (2) non-soluble phosphorus stored in sediment from
croplands that leads to sustained algae growth because it is
released over time.103
Nitrogen discharge is responsible for “habitat degradation,
algal blooms, hypoxia, anoxia, fish kills as well as direct toxicity
effects.”104 Two types of nitrogen are accounted for in total
nitrogen: (1) organic nitrogen, which is not readily available for
biological uptake and is stored in organic matter from forests,
feedlots, crops, soil erosion, wastewater treatment plants, and
industrial facilities; and (2) inorganic nitrogen, which is available
for biological uptake and comes from nitrogen fertilizers, point
source discharge, and atmospheric deposition nitrogen.105
97.
CONSERVATION TECH. INFO. CTR., supra note 85, at 33–34. The EPA supports
non-point source monitoring that is the responsibility of the credit purchasing point
sources, a credit exchange, or a state’s department of environmental protection. See
KIBLER, supra note 39, at 19 (asserting that the credit exchange can serve as a monitoring
function for non-point sources); WATER QUALITY TRADING ASSESSMENT HANDBOOK, supra
note 77, at 61 (expressing that reduction monitoring is usually assigned to point sources).
98.
See Water Quality Trading Policy: Issuance of Final Policy, supra note 35, at
1612–13.
99.
INDUS. ECON., INC., supra note 69, at 3-21.
100.
WATER QUALITY TRADING ASSESSMENT HANDBOOK, supra note 77, at 85.
101.
Id.
102.
Id. at 86. Total phosphorus and total nitrogen are measurements of the amount
of phosphorus or nitrogen available at present and in the future. Id.
103.
Id. at 85–86.
104.
Id. at 89.
105.
Id. at 90.
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Sediment is not actually a nutrient but it contains nutrients,
such as nitrogen and phosphorus. Besides adding nitrogen and
phosphorus to water, sediment can seriously hurt fish by
impairing food sources, making hunting more difficult, causing
scale erosion, and clogging gills.106 Two types of sediment are
usually measured in a TMDL: (1) suspended sediment that is
released by point sources and non-point sources; and (2) bedload
sediment that is released primarily by non-point sources.107
Nutrient trading programs must account for the different effects
and types of nutrients when developing the applicable trade
ratios.
The EPA also suggests that a nutrient trading program
must develop multiple ratio calculations to account for the
variables involved in trading. Delivery ratios arise when one
facility trades with other facilities upstream.108 The delivery ratio
will then account for the distance, geographical characteristics,
and a nutrient’s fate and transport109 to determine how many
more credits the downstream facility will need to purchase.110
Location ratios are needed when a trading program’s goal is to
improve the water quality of a particular waterbody, such as a
bay.111 The location ratio will account for the same characteristics
as the delivery ratio to determine the amount of nutrients that
will arrive in the protected waterbody.112 While delivery ratios
are focused on nutrient loads at the purchaser’s area, location
ratios are concerned with nutrient loads in the protected
waterbody.113
A sophisticated program could also specify the equivalency
ratios for trades involving different types of nutrients and crosspollutant trades. For instance, a trading program would need to
determine how much non-point source non-soluble phosphorus
would need to be bought by a point source that discharges soluble
phosphorus.114 The EPA does support cross-pollutant trading of
106.
Id. at 102.
107.
Id.
108.
KIBLER, supra note 39, at 30.
109.
Fate and transport characteristics of phosphorus and nitrogen are well known.
See WATER QUALITY TRADING ASSESSMENT HANDBOOK, supra note 77, at 87, 91. They
depend on the type of nutrient released and watershed characteristics between the two
trading partners, such as the biological material and water flow. See KIBLER, supra note
39, at 30.
110.
KIBLER, supra note 39, at 30.
111.
Id. at 31.
112.
Id.
113.
Id. at 30–31.
114.
See id. at 31–32 (denoting that a point source’s discharge will have a higher
proportion of biologically available phosphorous than a non-point source’s discharge).
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nutrients that affect biological oxygen demand;115 although, the
EPA states that further research will be needed to determine
correct cross-pollutant equivalency ratios.116
To account for the possible errors in trade ratio and
pollutant discharge calculations as well as variations of best
management practice controls over non-point sources, the EPA
recommends that trading programs should also develop an
uncertainty ratio.117 The EPA specifically states that an
uncertainty ratio should be included in any trading program that
deals with non-point source BMPs.118 While uncertainty ratios
are not normally needed for easily monitored point sources, the
EPA does suggest that uncertainty ratios can be used to allow for
point source credit generation based on reduction models instead
of actual data.119 Also, uncertainty ratios can be used to create a
reserve bank that can be drawn upon for errors in BMP credit
generation due to miscalculations or weather-related impacts.120
The EPA’s guidance on nutrient trading programs also
suggests that a state develop a “retirement ratio.” The amount of
credits set aside by a retirement ratio cannot be bought, and the
purpose here is to accelerate the improvement of impaired water
quality.121 While the EPA encourages retirement ratios, it also
states that a retirement ratio is only necessary when trading preTMDL with impaired waterbodies.122 An example of a retirement
ratio existed in the Maryland nutrient trading program, which
retired 5% of all credit generations.123
Water quality trades and offsets are enforced directly
against the NPDES permitted point source that is taking
115.
See Water Quality Trading Policy: Issuance of Final Policy, supra note 35, at
1610 (affirming that the EPA supports cross-pollutant trading for oxygen-related
pollutants).
116.
KIBLER, supra note 39, at 32.
117.
Id.
118.
Id.
119.
Id. at 33.
120.
See PA. DEP’T OF ENVTL. PROT., FINAL TRADING OF NUTRIENT AND SEDIMENT:
POLICY AND GUIDELINES 5 (2006), available at http://www.elibrary.dep.state.pa.us/
dsweb/Get/Document-48501/01%20392-0900-001.pdf (reasoning that ratios may be used
to contribute to a credit reserve); cf. WATER QUALITY TRADING ASSESSMENT HANDBOOK,
supra note 77, at 63 (describing how the trading program in the Cherry Creek Basin sets
aside a reserve bank from the TMDL limitations and non-point source projects).
121.
KIBLER, supra note 39, at 33.
122.
See id. Once a TMDL is completed, following the discharge limits should be
sufficient to achieve water quality standards without the need of a retirement ratio. Id.
123.
MARYLAND DEP’T OF AGRIC., MARYLAND POLICY FOR NUTRIENT CAP
MANAGEMENT AND TRADING IN MARYLAND’S CHESAPEAKE BAY WATERSHED: PHASE II–B
GUIDELINES FOR THE EXCHANGE OF NONPOINT CREDITS MARYLAND’S TRADING
MARKETPLACE 7 (Apr. 2008), available at http://www.mdnutrienttrading.com/docs/
Phase%20II-B_Crdt%20Purchase.pdf.
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advantage of them. Since these point sources are usually the only
player in the transaction to be directly regulated by the Clean
Water Act, the EPA encourages nutrient trading programs to
develop their own enforcement provisions to be activated if an
NPDES permit is not met.124 If need be, the EPA can bring its
own legal actions for NPDES violations.125 In the Lower Boise
River Water Quality Trading Project, the EPA, Idaho Clean
Water Cooperative, and the Idaho Department of Environmental
Quality work together on compliance audits, while the EPA is
solely responsible for legal actions against violators.126 In
contrast, Connecticut and the EPA jointly bring actions for
NPDES permit violations in the Long Island Sound, which is
home to the Nitrogen Credit Exchange Program.127 A trade can
only be enforced against an unregulated non-point source
through contractual liability to the purchaser; consequently, it
has been recommended that the EPA or regulating state agency
support private contracts that name the EPA as a third party
beneficiary, which gives the EPA the power to enforce a nutrient
trading contract.128
B. The U.S. Department of Agriculture and Markets in Nutrient
Pollution
While the Clean Water Act provides the necessary legal
authority for permitting agencies to allow pollutant trading to
meet water quality requirements, the potential for large usage
also depends upon participation by owners of agricultural lands.
Because of the large roles that farmers could play in such
schemes, the USDA has sought to facilitate some aspects of
nutrient trading through the use of its grant authority for
agricultural lands that assist with ecosystem services and
124.
See Water Quality Trading Policy: Issuance of Final Policy, supra note 35, at
1612; see also WATER QUALITY TRADING ASSESSMENT HANDBOOK, supra note 77, at 53–54
(proclaiming that enforcement actions should be taken when necessary).
125.
See WATER QUALITY TRADING ASSESSMENT HANDBOOK, supra note 77, at 61.
126.
Id.
127.
See CONN. AGENCIES REGS. § 22a-430-3(n) (2013); e.g., City of Stamford, Case
No. CT-WC5692 (U.S. Envtl. Prot. Agency Oct. 7, 2010), http://echo.epa.gov/detailedfacility-report?fid=110038450048; City of Milford, Case No. CT-WC5696 (U.S. Envtl. Prot.
Agency Oct. 18, 2010), http://echo.epa.gov/detailed-facility-report?fid=110030385214;
Stamford Water Pollution Control Facility, Case No. 01-2011-2021 (U.S. Envtl. Prot.
Agency Aug. 19, 2011), http://echo.epa.gov/detailed-facility-report?fid=110007079268.
Allowing both state and federal agencies enforcement authority seems like it could lead to
a question of which agency should bring an action when a wastewater treatment plant
overflows and violates its NPDES permit.
128.
Rena Steinzor et al., Water Quality Trading in the Chesapeake Bay 19 (Ctr. for
Progressive
Reform,
Briefing
Paper
No.
1205,
2012),
available
at
http://www.progressivereform.org/articles/WQT_1205.pdf (last visited on Sept. 16, 2014).
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restoration.129 The USDA has also produced guidance for farmers
on best practices for nutrient pollutant trading and offsets.130 As
discussed in greater detail in this section, the USDA takes a
different view of nutrient pollution trading, tending to focus more
on how to make a market work for farmers, and less on the
specific pollution control and legal aspects of the transactions.
The USDA Farm Bill has long provided generous support for
conservation programs on farm land that “protect and restore
ecosystem services provided by farmland.”131 In 2008, the Farm
Bill was amended to improve upon the specificity of
environmental protections that could be fostered with grants.132
In particular, the Farm Bill specifically targeted restoration and
enhancement of water quality.133 The USDA’s involvement in
nutrient trading has been connected to these conservation
programs. The USDA primarily uses a part of the program called
Conservation Innovation Grants to support nutrient trading.
For example, in 2010, the USDA awarded a $600,000
Conservation Innovation Grant to the World Resources Institute
to develop “an online multistate water quality trading platform
and carbon estimation tool for the Chesapeake Bay
watershed.”134 A $1.3 million grant funded the Ohio River Basin
water trading project.135 To help support nutrient trading in
general, the USDA pledged in January 2012 to dedicate
Conservation Innovation Grants specifically to nutrient trading
projects that stand out in the competitive selection process.136 In
addition to Conservation Innovation Grants, the USDA provides
cost-sharing for BMPs through the Environmental Quality
129.
See Cannon, supra note 23, at 627 (declaring that generous funding is available
under the USDA Farm Bill for conservation programs and agricultural production).
130.
See generally CATHERINE L. KLING & SILVIA SECCHI, U.S. DEP’T OF AGRIC.,
NATURAL RESOURCES CREDIT TRADING REFERENCE (2011), available at http://www.nrcs.
usda.gov/Internet/FSE_DOCUMENTS/stelprdb1045650.pdf (providing guidance and
reference for trading credits).
131.
See Cannon, supra note 23, at 627 (emphasizing that the Farm Bill offers
subsidies and support to conservation programs).
132.
Id. at 629–30.
133.
Food, Conservation, and Energy Act of 2008, Pub. L. No. 110-246, 122 Stat.
1651, 1792 (codified at 16 U.S.C. § 3839aa-9 (2012)).
134.
2010 Conservation Innovation Grant Awards, U.S. DEP’T OF AGRIC.,
http://www.nrcs.usda.gov/wps/portal/nrcs/detailfull/national/programs/financial/cig/?&cid
=stelprdb1044496 (last visited Sept. 16, 2014). This project does not appear to be
completed yet. See Publications, WORLD RESOURCES INST., http://www.wri.org/
publications/ (last visited Sept. 16, 2014).
135.
Ross, supra note 2.
136.
Press Release, U.S. Dep’t of Agric., USDA Announces Funding for Water
Quality Markets, Seeks Proposals for Projects: $10 Million Available for Projects
Nationally (Jan. 13, 2012), http://www.usda.gov/wps/portal/usda/usdahome?contentid=
2012/01/0006.xml&contentidonly=true.
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Incentives Program, originally established under the 1996 Farm
Bill.137 Additionally, farmers are awarded for conservation
practices through the Conservation Security Program,
established under the 2002 Farm Bill.138 One downside of the
connection between these conservation programs and the USDA’s
support for nutrient trading is the possibility of these programs
being curtailed in continuing budget and philosophical
disagreements of ongoing farm bills.
The USDA has also provided guidance on nutrient trading
for farmers. The USDA states that it has a limited role in
nutrient trading that includes: (1) “[e]xplain[ing] the benefits and
costs of participating in [nutrient trading] markets to potential
participants”; (2) understanding each nutrient trading program’s
policy on baselines and credit generation; and (3) “[d]evelop[ing]
tools for measuring baseline information and the potential
effect(s) of alternatives that could be used for credits.”139 The
USDA makes clear that its role is to provide credit producers
with the information and resources they need to make an
informed decision, and not to make recommendations to credit
producers.140
The areas that the USDA is particularly concerned with are
baselines and cost-sharing. The USDA notes seven primary
challenges that all nutrient trading programs must face:
(1) “measuring and monitoring” the nutrient discharges and
reductions; (2) accounting for uncertainty in nutrient credit
generation; (3) “enforcement and establishing [of] contract
liability”; (4) “establishment of a [performance] baseline”;
(5) addressing the issue of leakage; (6) whether to allow
pooling;141 and (7) reducing the costs associated with nutrient
trading.142
Due to the complexity of physically measuring nutrient
reductions from conservation practices, the USDA, contra the
recommendations of the EPA, has encouraged the use of
137.
U.S. DEP’T OF AGRIC., 2007 FARM BILL THEME PAPERS: CONSERVATION AND THE
ENVIRONMENT 6 (2006), available at http://www.usda.gov/documents/FarmBill07
consenv.pdf; see 16 U.S.C. § 3839aa.
138.
U.S. DEP’T OF AGRIC., supra note 137, at 3, 6; see 16 U.S.C. § 3838a (illustrating
that the purpose of the Conservation Security Program is to help producers promote
conservation).
139.
KLING & SECCHI, supra note 130, at 5-11.
140.
See id. (asserting that it is not the role of NRCS, a USDA agency, to make
recommendations to producers about credit trading).
141.
Id. at 4-5 to -6. Pooling occurs when nutrient credits are generated by a
conservation practice that was partly funded by a cost-share program.
142.
Id. at vii, 3-8 to 4-7.
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modeling to determine nutrient credit production.143 To ensure
that the conservation practices are in fact matching up to the
computer models, the USDA recommends actual data be collected
periodically through monitoring.144 The West Virginia Potomac
Nutrient Credit Bank and Trading Program (WVNCBTP) tasks
point sources with reporting trades with non-point sources by
submitting discharge monitoring reports, which list all nutrient
credits purchased.145 Point sources, aggregators, or brokers are
responsible for monitoring non-point sources’ conservation
practices to ensure the nutrient discharge reductions are being
achieved.146 The USDA supports point sources or third party
monitoring because agricultural non-point sources may “distrust”
the government, and the non-point sources might be dissuaded
from trading if government intrusion would be necessary for
monitoring.147
The USDA also differs with the EPA in the use of nutrient
pollution averaging over the time period of a contract. It also
emphasizes that trading programs must accept that there will be
variations in the effectiveness of conservation practices, and the
program must account for those variations. When a conservation
practice is applied to a non-point source, the actual nutrient
discharge reductions will vary greatly depending on whether it is
a wet or dry season.148 In contrast to the EPA’s guidance for
trading, the USDA suggests that trading programs allow nonpoint sources to generate a yearly average of the total nutrient
reductions achieved by a conservation practice.149 According to
the USDA’s reasoning, over the long term, these poor water
quality years will be canceled out and the overall water quality
will improve as needed.150 To account for variations, the USDA
143.
Id. at 3-8; see KIBLER, supra note 39, at 22. While computer models will not be
perfectly accurate, the uncertainty can be accounted for and water quality can still be
improved. KLING & SECCHI, supra note 130, at 5-4.
144.
KLING & SECCHI, supra note 130, at 5-5 to -6.
145.
W. VA. WATER RESEARCH INST., W. VA. POTOMAC NUTRIENT CREDIT BANK AND
TRADE PROGRAM: NRCS CONSERVATION INNOVATION GRANT 18, 29 (2010), available at
http://www.nrcs.usda.gov/Internet/FSE_DOCUMENTS/stelprdb1044928.pdf (describing
the progress and success of the West Virginia Potomac Nutrient Credit Bank and Trade
Program, which was funded by a NRCS conservation innovation grant).
146.
Id. at 29. For example, when a BMP produces credits for more than one year,
the program must verify yearly that the BMP is performing properly. Id. at 23.
147.
See id. at 10, 29 (noting farmers’ distrust and declaring that the operation and
maintenance of any nutrient reduction effort must be verified).
148.
See KLING & SECCHI, supra note 130, at 4-2.
149.
Id. at 4-2, 5-2.
150.
Id.; see W. VA. WATER RESEARCH INST., supra note 145, at 38, 45 (stating that
non-point sources generate an average of a conservation practice’s total nutrient
reduction each year).
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suggests the use of an uncertainty ratio to provide a “margin of
safety.”151
These policy differences with the EPA could be ascribed to
the different goals of each agency. In maximizing farmer welfare,
the USDA ignores the possibility of inadequate pollution control
in favoring averaging and modeling, which are cheaper for
agricultural participants (and also arguably easier to make into a
market). The EPA’s main focus, on the other hand, is on actual
pollution reductions at the time and place necessary to bring
about the environmental benefits. The EPA’s position is more
supported by the legal framework of the Clean Water Act (which
recognizes seasonal water pollution variation), but the USDA is
nonetheless an important entity in encouraging successful nonpoint source trading.
The USDA has focused on contractual mechanisms as a way
to address the uncertainties inherent in its preferred approach
and to allow flexibility for farmers. For instance, to account for
variability, a program can adopt a reserve ratio that puts aside
nutrient credits in a reserve pool.152 The reserve pool can then be
drawn upon when a non-point source fails to generate credits due
to variability, including for a natural disaster.153 According to the
USDA, a credit reserve pool can also be useful if a non-point
source voluntarily ends a conservation practice and does not
generate the agreed upon nutrient reductions.154
As with the EPA, the USDA also favors using contractual
requirements to hold non-point sources accountable for failures
to control pollution, and it has also pushed for regulators to be
allowed to directly enforce requirements on non-point sources. As
noted above, an often-cited problem with nutrient trading is that
non-point sources face no obligation and liability under the Clean
Water Act and federal regulations.155 While contracts can be used
to enforce some liability on non-point sources, some programs do
151.
See KLING & SECCHI, supra note 130, at 5-6 to -7 (contending that many trading
programs require a safety margin to account for uncertainty). The USDA supports similar
trade ratios as the EPA, HARBANS LAL, NUTRIENT CREDIT TRADING: A MARKET-BASED
APPROACH FOR IMPROVING WATER QUALITY 1, 4 (2009), available at
ftp://ftp.wcc.nrcs.usda.gov/wntsc/mktBased/nitrogenCreditTrading.pdf, except the USDA
does not explicitly state that equivalency ratios can be used for cross-pollutant trading.
KLING & SECCHI, supra note 130, at 5-6 to -7. In fact, the West Virginia trading program does
not allow cross-pollutant trades. W. VA. WATER RESEARCH INST., supra note 145, at 39.
152.
W. VA. WATER RESEARCH INST., supra note 145, at 50.
153.
Id. at 29.
154.
Id. at 41, 50.
155.
Andreen, supra note 11, at 27. Non-point sources are afraid of future regulation
and sometimes are wary of participating in trading programs because that means
admitting they are part of the problem. See King & Kuch, supra note 6, at 10361.
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not allow point sources’ regulatory liability to be transferred
through contracts.156 The USDA states that it could be beneficial
to allow transfer of regulatory liability because that will lessen
point sources’ fear of the risks of trading.157 The WVNCBTP has
created a true-up period for point sources to correct for failed
non-point source credit generation.158 So long as the point
sources’ failure to meet nutrient reduction was not due to their
own negligence and they replace the credits in the true-up period
they can avoid enforcement.159 The USDA suggests that a true-up
period could also be beneficial to allow non-point sources to
breach a contract when the conservation practice is no longer
economically viable.160 It could be beneficial overall to tailor
trading contracts to allow intentional or unintentional breaches
for the preceding reasons.161
While the EPA believes that baselines are necessary for
nutrient trading,162 the USDA believes baselines are only
beneficial in certain circumstances. For point sources, the
WVNCBTP does not enforce TBEL baselines, and point sources
can actually purchase credits to meet their whole regulatory
nutrient reduction.163 The USDA has shown support for timed
baselines over minimum standard baselines because this will
allow more non-point source participation and will benefit the
trading program overall.164
One issue that the USDA addresses and that the EPA policy
did not account for is leakage, which can greatly hinder
improvements of water quality. Leakage occurs when there are
increases to nutrient discharges that are outside the regulatory
and trading programs’ control.165 The USDA tasks trading
programs with finding a way to address the issue of leakage.166
156.
KLING & SECCHI, supra note 130, at 5-10 to -11.
157.
See id. (indicating that trade contracts can help point sources be sure that the
credits they purchase fulfill their legal obligations). Note that holding point sources liable
for non-point source failures is one of the criticisms of current EPA practices. See Steinzor
et al., supra note 128 (asserting that trading programs and their participants must be
held legally accountable for their trades).
158.
See W. VA. WATER RESEARCH INST., supra note 145, at 20.
159.
Id. at 30.
160.
See KLING & SECCHI, supra note 130, at 4-3.
161.
See id.
162.
See Water Quality Trading Policy: Issuance of Final Policy, supra note 35, at
1610.
163.
W. VA. WATER RESEARCH INST., supra note 145, at 8. The program also allows
offsetting of all nutrient discharge from a new facility that would otherwise be restricted
from being built. See id. at 39.
164.
Ghosh, Ribuado & Shrotle, supra note 89, at 14–15.
165.
See KLING & SECCHI, supra note 130, at 4-4 to -5.
166.
See id.
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While this might seem like an impossible task, leakage is
sometimes the byproduct of trading programs.167 This occurs
when a farmer might retire cropland to generate nutrient credits,
and to replace the lost cropland, that same farmer plants crops
on a new piece of land.168 In this situation, a trading program
might result in better water quality on paper, but the farmer’s
new crops have offset any gains from the buffer zone.169
Fortunately, trading programs can account for this type of
leakage through trade ratios or contractual agreements.
The USDA and the EPA differ quite extensively on their
opinion of “pooling” of federal funding with private resources to
generate credits. “Pooling” federal with private funds would allow
the farmers to use pollution control techniques already paid for
by federal conservation grant money to satisfy requirements of a
tradable offset. The USDA has stated that its “position is very
clear . . . environmental credits from agriculture [are] the
property of the farmer, . . . regardless of the federal cost-share
dollars that were invested.”170 The WVNCBTP allows farmers to
generate credits from the cost-share portion so long as they are
above the baseline.171 In addition, the WVNCBTP allows credit
generation when “farm land is retired and/or converted through”
USDA programs.172 While this USDA-funded program is
supportive of pooling, it does state “[i]t is important . . . that
efforts intended to advance water quality goals not become
credits that simply increase nutrient loadings elsewhere . . . .”173
The USDA does note significant downsides to pooling in
some cases. In general, pooling can allow for cheaper credits and
greater trading activity, but it also “makes the cost of credits
appear cheaper to the user of the credit than it really is.”174
Deceptively low prices could create a market barrier for nonpoint sources that do not receive cost-share payments because
167.
See id.
168.
Id.
169.
Id. Leakage could also occur if cropland is retired and then a suburban
development was placed on the land. See W. VA. WATER RESEARCH INST., supra note 145,
at 23. The USDA is strongly against this kind of leakage because it does not want to
encourage the transformation of cropland into suburban development. See id.
170.
Transcript of Remarks by Agric. Sec’y Mike Johanns to the American Water
Res. Ass’n, Release No. 0011.07, U.S. Dep’t of Agric. (Jan. 23, 2007), http://www.usda.gov/
wps/portal/usda/usdamediafb?contentid=2007/01/0011.xml&printable=true&contentidonl
y=true. In contrast, the EPA has been “officially silent on the issue,” but the EPA
unofficially has a preference for farmers only generating credits equal to their share in
the conservation practices. INDUS. ECON., INC., supra note 69, at 3-32.
171.
W. VA. WATER RESEARCH INST., supra note 145, at 40.
172.
Id. at 41.
173.
Id. at 39.
174.
KLING & SECCHI, supra note 130, at viii.
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they would not be able to afford to sell the credits at such cheap
prices.175 Subsequently, point sources might refuse to buy any
higher priced nutrient credits after the pooling credits run out,
and the trading program could fail. Additionally, when pooling is
allowed for cost-share programs that specifically fund BMPs,
point sources will be essentially using federal and state funds to
comply with regulatory discharge requirements (which was not
the intent of water quality regulations on point sources).176
Despite these potential consequences, the USDA does think that
pooling can be beneficial to a trading program when the costshare program is for the broader goal of sustainability and
conservation.177 Also, allowing pooling can help entice non-point
source participation in trading programs,178 and more non-point
source participation is something trading programs need.179
The final issue the USDA addresses in nutrient trading is
the necessity for trading programs to reduce market entry
barriers and the usually high costs associated with nutrient
trading. To reduce market entry barriers, the USDA has
mentioned baseline determination as a possible hindrance.180 A
market entry barrier can also arise when a single buyer or seller
gains “too much control over the market” price.181 The trading
program must always ensure there is a potential for rival buyers
or sellers to enter the market at a price subject to competitive
economics.182 Finally, market entry barriers can occur if nonpoint sources and point sources do not have the ability to
calculate the costs and benefits of entering into nutrient
trading.183 For this reason, the market price and costs must be
readily available for any potential participants so they can see
the benefits of entering into the market.184
Once a point source or non-point source has entered into a
market, the USDA insists that the program must strive to reduce
the normally high costs of nutrient trading. The use of an
aggregator or exchange is the first step to achieving low
transaction costs.185 According to the USDA, both aggregators
175.
176.
177.
178.
179.
180.
181.
182.
183.
184.
185.
Id. at 4-6.
Id. at viii.
Id. at 4-6.
See id. at 2-5.
Ghosh, Ribuado & Shrotle, supra note 89, at 3.
See id. at 2–3.
See id. at 14; KLING & SECCHI, supra note 130, at 3-3.
See KLING & SECCHI, supra note 130, at 3-3.
Id. at 3-2.
Id.
See id. at 3-3 to -5.
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and exchanges eliminate the search for potential trading
partners and eliminate the requirement of time-consuming
contracts that must be laid out for each bilateral trade.186 While
aggregators do facilitate trading at cheaper fees than brokers,187
the USDA avers that exchanges also offer a multitude of
benefits.188 Exchanges not only provide cheap transaction fees,
but they help to reduce uncertainty of credits and can easily
publish the market price because they are involved in every
transaction.189 However, to use exchanges, a product (including a
pollution reduction) must be standardized, and at this point of
the purchase and use of individual offsets, we do not have that
uniformity. The cost of trading can also be reduced by adopting
policies that reduce non-point source implementation cost and
market price. To achieve a reduction in costs and price, a trading
program should support and encourage cross-state and crossmarket trading.190 To further drive down market price, a trading
program can allow for credit generation through past
conservation practice implementation.191 This practice would
avoid the usual exclusion of environmentally friendly farmers,
who have already implemented conservation practices, from
trading.192
C. EPA and USDA Collaboration in Nutrient Trading
In response to the public asking for more cooperation
between the USDA and the EPA, the two organizations entered
into a joint agreement. In 2006, the EPA Office of Water and the
USDA Natural Resource Conservation Service signed a
partnership agreement to collaboratively promote water quality
trading programs.193 Under this agreement, they define nutrient
186.
See id. at 3-3 to -4 (reasoning that transactions are fluid and easily completed
when pricing information is publicly available).
187.
LAL, supra note 151, at 7–8.
188.
See KLING & SECCHI, supra note 130, at 3-4 (noting that exchanges make
pricing information publicly available and transactions easier to complete while lowering
entry and exit barriers).
189.
Id. Additionally, farmers in the WVNCBTP have stated that they prefer an
exchange because it allows more revenue to flow to farmers rather than paying fees to
brokers or aggregators. W. VA. WATER RESEARCH INST., supra note 145, at 11.
190.
See KLING & SECCHI, supra note 130, at 5-10 (advocating cross-state trading
where a watershed crosses state lines); LAL, supra note 151, at 3 (noting the benefits of
broader trading boundaries).
191.
KLING & SECCHI, supra note 130, at 4-4.
192.
Id.
193.
Partnership Agreement Between U.S. Dep’t Of Agric. Natural Res.
Conservation Serv. and U.S. Envtl. Prot. Agency (2006), available at http://www.epa.gov/
owow/watershed/trading/mou061013.pdf.
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trading as “a flexible and cost-effective approach for achieving
water quality standards and pursuing watershed goals.”194 To
provide support for nutrient trading markets, the two
organizations have jointly funded the Nitrogen Trading Tool
(NTT) and NutrientNet.
The NTT was primarily a USDA project but it was developed
in “close cooperation” with the EPA.195 Both the USDA and EPA
recognized the difficulty farmers faced when determining the
amount of nitrogen reduction that could be available for nutrient
credit sales, and the NTT is supposed to assist farmers in this
area.196 According to the two agencies, the NTT is a user-friendly,
web-based tool that “allows farmers to enter in geographic,
agronomic, and land use information” to determine the potential
nitrogen credits generated by a BMP.197 In 2011, the Electric
Power Research Institute (EPRI) evaluated the NTT and
determined it was a “reliable and accurate load reduction tool”
that still needed to be tailored to “better fit the needs of [nutrient
trading] program framework.”198
Besides the NTT, the EPA and USDA have both sponsored
the development of NutrientNet by the World Resources
Institute.199 NutrientNet is an online system that allows point
sources and non-point sources to buy and sell credits, which
194.
Id.
195.
Christopher M. Gross et al., Nitrogen Trading Tool to Facilitate Water Quality
Credit Trading, 63 J. SOIL & WATER CONSERVATION, Mar.–Apr. 2008 at 44A, 44A.
196.
NRCS/EPA Nitrogen Trading Tool: Partnering with USDA/NRCS to Increase
Farmer Participation in Water Quality Trading, EPA WATER QUALITY TRADING NEWS
(U.S. ENVTL. PROT. AGENCY), Dec. 2007, available at http://water.epa.gov/type/
watersheds/trading/upload/2007_12_18_watershed_trading_newsletter_trading_newslette
r122007.pdf.
197.
Id.
198.
ELEC. POWER RESEARCH INST., USE OF MODELS TO REDUCE UNCERTAINTY AND
IMPROVE ECOLOGICAL EFFECTIVENESS OF WATER QUALITY TRADING PROGRAMS:
EVALUATION OF THE NUTRIENT TRADING TOOL AND THE WATERSHED ANALYSIS RISK
MANAGEMENT FRAMEWORK xi (2011), available at http://kieser-associates.com/
uploaded/ntt_and_warmf_report.pdf. In this document, the Electric Power Research
Institute also evaluated the Watershed Analysis Risk Management Framework, id.,
which is an EPA tool that can be used to “calculate TMDLs for most conventional
pollutants.” Watershed Analysis Risk Management Framework (WARMF), U.S. ENVTL.
PROT. AGENCY, http://www.epa.gov/athens/wwqtsc/html/warmf.html (last visited on Sept.
16, 2014).
199.
KLING & SECCHI, supra note 130, at 5-11 (evidencing that the USDA supports
the pilot project in the Chesapeake Bay watershed); NRCS/EPA Nitrogen Trading Tool:
Partnering with USDA/NRCS to Increase Farmer Participation in Water Quality
Trading, supra note 196; JAKE VANDEVORT, MID-ATLANTIC REGIONAL WATER QUALITY
PROGRAM, NUTRIENT TRADING RESOURCE DIRECTORY 1 (Jan. 2005), available at
http://www.envtn.org/uploads/Trading_resources_directory.pdf (evidencing that the EPA
supports the pilot project in the Chesapeake Bay watershed).
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significantly reduces typical in-person transaction costs.200 Next,
NutrientNet provides a similar service as the NTT by allowing
non-point sources to calculate nutrient credit generation through
implementation of BMPs.201 Finally, NutrientNet provides a way
for trading programs to publish prices and obtain public
participation.202 The NutrientNet system is currently being used
in the Potomac and Kalamazoo Watershed Pilot Project, the
Conestoga Watershed Pennsylvania Reverse Auction Site, the
Kalamazoo Watershed, the Pennsylvania State Trading
Program,203 and the West Virginia Potomac Watershed.204
Despite the extensive interest expressed by both agencies in
nutrient trading, improvement in coordination, particularly on
policy disagreements such as baselines, would seem necessary to
bolster further non-point agricultural offset reductions.
IV. NUTRIENT TRADING IN PRACTICE
Nutrient trading has been embraced by many states in plans
for current and future TMDL water quality targets. But none of
the potential programs are as comprehensive as the states
discharging into the Chesapeake Bay watershed. The
Chesapeake Bay is an estuarine environment that is very
valuable for commercial fishing and tourism and also drains a
very large watershed on the Eastern Seaboard.205 It is the largest
of the great United States’ estuaries.206 Because of its value and
complexity, it was singled out early on for the need to lower
pollution levels and enhance the health of the Bay.207 Starting in
the 1960s, a series of studies and plans began to take shape
around solving the nutrient pollution problems in Chesapeake
Bay.208 Strong provisions were set up in 1987, but they did not
address agriculture, and by the year 2000, they had had limited
200.
About NutrientNet, WORLD RESOURCES INST., http://pa.nutrientnet.org (last
visited on Sept. 16, 2014).
201.
Id.
202.
Id.
203.
In addition to NutrientNet, the Pennsylvania Department of Environmental
Protection had the World Resources Institute develop nutrient reduction spreadsheets
programs in Excel that non-point sources can submit to the Pennsylvania Department of
Environmental Protection for credit generation approval. LAL, supra note 151, at 12.
These spreadsheets are supposed to be implemented into NutrientNet in the future. Id.
204.
Id.
205.
Oliver Houck, The Clean Water Act Returns (Again): Part I, TMDLs and the
Chesapeake Bay, 41 ENVTL. L. REP. 10208, 10213 (2011).
206.
Id.
207.
Id. at 10214.
208.
Id.
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effect.209 In 2009, the Obama Administration proposed a stronger
TMDL as a mechanism for cleanup, and now, the Chesapeake
Bay watershed is the largest water restoration project in
America.210 Because of this, the Chesapeake Bay provides an
excellent window on both the promise and perils of nutrient
trading with non-point sources.
Nutrient trading in the Chesapeake Bay has been and will
be driven by the Chesapeake Bay nutrient reduction strategy,
which is based on the EPA’s TMDL for the Chesapeake Bay
Watershed pursuant to the Clean Water Act.211 The states are
responsible for developing and implementing Watershed
Implementation Plans (WIPs) to meet the specific load allocation
of the TMDL.212 Nutrients are not explicitly classified as a
pollutant under the Clean Water Act so the Chesapeake Bay
states have created state programs to achieve nutrient reduction
goals.213 Nutrient trading is a market-based reduction program
utilized by Virginia, Maryland, Pennsylvania, and West Virginia
to meet the Chesapeake TMDL.214 While all four states consider
nutrient trading to be an optional practice,215 the programs
evolved independently and have policies that differ regarding
rules for eligibility and credit exchange.216
States generally set up nutrient trading programs by first
defining a limited number of discharge rights, followed by
creating well-defined market rules to allocate resources and
purchase discharge rights,217 and the Chesapeake Bay states are
209.
210.
211.
Id.
Id. at 10215.
See KURT STEPHENSON, STEPHEN AULTMAN & LEONARD SHABMAN, AN
EVALUATION OF THE VIRGINIA’S NUTRIENT CREDIT TRADING PROGRAM 2 (2006), available
at http://ageconsearch.umn.edu/bitstream/21071/1/sp06st06.pdf (critiquing the costeffectiveness of the nutrient trading plan Virginia designed to meet the Chesapeake Bay
Program’s requirements).
212.
E.g., Houck, supra note 205, at 10217 (discussing EPA’s letter that initially
described Watershed Implementation Plans).
213.
STEPHENSON, AULTMAN & SHABMAN, supra note 211, at 3.
214.
VAN HOUTVEN ET AL., supra note 18, at 13.
215.
See W. VA. DEP’T OF ENVTL. PROT., WEST VIRGINIA WATER QUALITY NUTRIENT
CREDIT TRADING PROGRAM 3 (2012), available at http://www.dep.wv.gov/news/Documents/
NutrientTradingGuidance/WVDEP_Trading_Guidance_DRAFTDEP0815%2009.pdf;
CHESAPEAKE BAY PROGRAM, MARYLAND’S TRADING AND OFFSET PROGRAMS REVIEW
OBSERVATIONS 4 (2012), available at http://www.chesapeakebay.net/channel_files/
17761/md_final_report.pdf; PA. DEP’T OF ENVTL. PROT., supra note 120, at 6; MARK A.
HALEY, NUTRIENT TRADING IN VA – WHERE WE’VE BEEN & WHERE WE ‘MIGHT BE’ GOING
11 (2011), available at http://www.vwea.org/storage/documents/Events/edcom_2011/
virginia%20nutrient%20credit%20exchange%20assoc%20update%20%20mark%20haley.pdf.
216.
VAN HOUTVEN ET AL., supra note 18, at 13–14.
217.
E.g., STEPHENSON, AULTMAN & SHABMAN, supra note 211, at 4–5.
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no exception. However, the Chesapeake Bay nutrient reduction
strategy is unique because it attempts to link different reduction
strategies in a cooperative effort between several states, the
District of Columbia, and the EPA.218
State programs have to address definitions, baseline
determinations, how credits are generated, and how trades and
purchases can be credited and tracked. Because the programs
have been in the hands of the states for decades, the states have
created their own specific ways of addressing these issues. A full
description of the specific state requirements for the Chesapeake
Bay States involved in the TMDL—Virginia, Maryland,
Pennsylvania, and West Virginia—is set out in the Appendix.
V. PROBLEMS WITH IMPLEMENTATION
A detailed examination of the various state programs in the
Chesapeake reveals many concerns that have already arisen with
the attempts to foster nutrient trading in the states around the
Chesapeake Bay region for purposes of meeting the needed
reductions to restore water quality. First, the states have
inconsistent market rules with no uniform standard defining
acceptable trades. Historically, Virginia only allowed point
source-to-point source trades while Maryland has moved to
embrace potential point source-to-non-point source trades.219
Though there are conceptual similarities, each state in the region
has its own method for determining how baselines are
determined for non-point sources entering into trades, and they
also have different enforcement schemes. Some, such as West
Virginia, have not fully developed the specifics of their
programs.220
While states certainly have the legal authority to determine
their own measures for reaching the TMDLs in their jurisdiction,
it seems likely that consistency in the Bay region would benefit
the Bay through potential interstate trading. Also, consistency
would address issues of competitive advantage that might be
enjoyed by some states over others in terms of control and
assistance for agricultural landowners.
The states may also be inconsistent in enforcement. The
issue of measurement and enforcement has been one of the
ongoing environmentalist worries with nutrient trading. Since
218.
See VAN HOUTVEN ET AL., supra note 18, at 10–11, 13–14 (noting that while
differences exist between the cooperating states’ nutrient-trading programs, the
Chesapeake Bay-wide program specifies load limits for the entire watershed).
219.
See infra Appendix Parts A.3, B.2.
220.
See infra Appendix Part D.1.
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most BMPs on agricultural runoff nationwide are primarily
voluntary, verification and enforcement have particularly been
problematic without robust evidence of effective enforcement on
any large scale. Rob Glicksman notes that any environmental
market needs to maintain enforcement principles to protect the
public interest in market transactions.221 This would include
verifiable enforcement standards.222 Paper reductions do no good
for the Chesapeake Bay; enforcement to ensure actual reductions
is crucial. As stated by Professor Oliver Houck in commenting on
the possibilities from nutrient trading: “Trading certainty for
uncertainty is a risky deal, and these [nutrient] trades raise realworld challenges with measuring, monitoring, corroborating, and
backstopping the success of on-farm practices across the
landscape.”223
This disparity also throws into relief the political issue of
controlling non-point sources generally, such as through BMPs or
other methods. In some of the states, some non-point sources are
already subject to some controls while others are not. If non-point
sources can be controlled, should they be regulated directly by
the states outside of the NPDES program and trading?
Alternatively, should non-point sources be penalized in the states
that do have control on them when other states impose no
controls on non-point sources? These questions highlight a
possible political barrier to full implementation of robust
pollution trading. According to King and Kuch in their excellent
analysis of barriers to trading in 2003, sources might rather sell
into a market than receive benefits for voluntary control, but
then they would have to admit they are pollution sources; if that
occurs, other regulated sources may balk at paying them for
reductions.224
Finally, one must address the issue of scale. The first
trading system began in the 1980s.225 Virginia has allowed point
source-to-point source trading since 2000, and by 2007 thirty-one
states had trading programs.226 But the success of those nutrient
trading programs has been miniscule. According to J.B. Ruhl,
only thirteen trades had occurred at all before 2007, and only one
221.
222.
223.
224.
225.
226.
Glicksman, supra note 16, at 955–56.
Id.
Houck, supra note 205, at 10225.
King & Kuch, supra note 6, at 10361.
See BREETZ ET AL., supra note 27, at 64.
SHANE CHERRY ET AL., U.S. ENVTL. PROT. AGENCY, WETLANDS AND WATER
QUALITY TRADING: REVIEW OF CURRENT SCIENCE AND ECONOMIC PRACTICES WITH
SELECTED CASE STUDIES 6–12 tbl.2-2 (2007), available at http://nepis.epa.gov/Exe/
ZyPDF.cgi/60000LDI.PDF?Dockey=60000LDI.PDF.
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of those was a point source-to-non-point source trade.227
Economists at the USDA pointed out that in 2011 there were
fifteen trading programs that allowed trading between point
sources and agricultural non-point sources, and only four of those
programs have experienced any trades while no system has
experienced more than a few.228
Nevertheless, the 2010 comprehensive TMDL program for
the Chesapeake Bay notes that many of the nutrient reductions
will be made economically possible through point source-to-nonpoint source trading.229 Specifically, in the notice of availability of
the Bay TMDL, the EPA states that the WIPs of the seven bay
jurisdictions should “provide reasonable assurance that the
necessary nitrogen, phosphorous and sediment reductions
identified in the TMDL will be achieved.”230 However, an
examination of the WIPs of these affected states notes how
dependent they are on future reductions based on trades with
agricultural non-point sources.231 Maryland probably has the
most sophisticated WIP and reflects the general approach to the
need of point source-to-non-point source trades. According to the
Maryland WIP:
[A] quantitative analysis of the potential implications of not
offsetting future loads in the following example provided by
the Maryland Department of Planning, shows that
offsetting is needed to accomplish the necessary loading
reductions. The example shows that, per household, the
load from new development on well and septic is almost 5
times higher than new loads from sewered areas.232
The Chesapeake Bay TMDL relies on reductions in
agricultural runoff for at least 40% of its anticipated nutrient
reductions.233 But what if they do not occur? While the
227.
J.B. RUHL, STEVEN E. KRAFT & CHRISTOPHER L. LANT., THE LAW AND POLICY OF
ECOSYSTEM SERVICES 229 (2007).
228.
Marc O. Ribaudo & Jessica Gottlieb, Point-Nonpoint Trading – Can it Work? 47
J. AM. WATER RES. ASS’N 5, 6 (2011).
229.
Notice for the Establishment of the Total Maximum Daily Load for the
Chesapeake Bay, 76 Fed. Reg. 549, 550 (Jan. 5, 2011) (U.S. Envtl. Prot. Agency).
230.
Id. at 49, 50 (Delaware, the District of Columbia, Maryland, New York,
Pennsylvania, Virginia, and West Virginia).
231.
Chesapeake Bay TMDL, How Does it Work? Ensuring Results, U.S. ENVTL.
PROT. AGENCY, http://www.epa.gov/reg3wapd/tmdl/ChesapeakeBay/EnsuringResults.html
(navigate to the “Watershed Implementation Plans” tab followed by the “Phase I WIPs”
tab) (last visited Sept. 16, 2014).
232.
MD. DEP’T OF THE ENV’T, MARYLAND’S PHASE I WATERSHED IMPLEMENTATION
PLAN FOR THE CHESAPEAKE BAY TOTAL MAXIMUM DAILY LOAD ES-9 (2010) (emphasis
added), available at http://www.mde.state.md.us/programs/Water/TMDL/Documents/
www.mde.state.md.us/assets/document/MD_Phase_I_Plan_12_03_2010_Submitted_Final.pdf.
233.
VAN HOUTVEN ET AL., supra note 18, at 8.
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Chesapeake reductions have at least been under some scrutiny,
many states and regions are depending upon non-point source
reductions with even less certainty of success and scrutiny.234 As
Oliver Houck said, “[S]tates . . . [are] relying on rather fanciful
reductions from non-point [source] dischargers (which, because
they have no permits, can be as fanciful as one wishes).”235
What happens if this reliance on non-point source reduction
is unfounded? Is there any plan B? It seems that the failure of
these programs to work would lead to one of two bad results:
either the results from nutrient trading are approved on paper
but never really happen (meaning the Bay cleanup and others
will stall); or the plans have to be redone depending solely on
point source reductions or direct regulation of non-point sources,
which may be very expensive or politically impossible.
If the problem with non-point source reductions in a trading
scheme is related to guaranteeing participants, measurements,
legitimacy, and enforcement, the environmental community has
already dealt with a similar issue with offsets in carbon
trading.236 I believe that the lessons learned from carbon offsets
can provide a guide to legitimate regulatory protocols that will
result in genuine reductions of non-point source loads, which will
lead to real environmental benefits at a lower cost.
VI. CARBON TRADING OFFSETS AND NUTRIENT TRADING WITH
NON-POINT SOURCES
A. Greenhouse Gas Offsets: A Comparable Reduction System
Like the situation of using nutrient reductions in non-point
sources to make up for more expensive reductions in point
sources in the regulated NPDES-permit environment, offsets in a
greenhouse gas reduction system are supposed to be a cheaper
way to reduce greenhouse gases than relying solely on the
regulated system. “Greenhouse gas offsets” are commonly
described as projects or systems that offset greenhouse gas
emissions by either sequestration or destruction of a comparable
amount of greenhouse gas.237 An offset must be taken outside of
or in addition to required reductions, and thus, an offset is
234.
Houck, supra note 205, at 10211.
235.
Id.
236.
See infra Part VI.
237.
Victor B. Flatt, “Offsetting” Crisis?—Climate Change Cap-and-Trade Need Not
Contribute to Another Financial Meltdown, 39 PEPP. L. REV. 619, 634 (2012); see also
Tyler McNish, Carbon Offsets Are a Bridge Too Far in the Tradable Property Rights
Revolution, 36 HARV. ENVTL. L. REV. 387, 400 (2012) (observing the cost disparity between
different emission sources on an international scale).
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usually outside of the regulated system.238 An offset is a potential
boon to a greenhouse gas control system because it is believed
that certain carbon sequestration or greenhouse gas destruction
may be cheaper than alternative emission reductions from
regulated sources.239
Similarly, an “offset” in a nutrient trading system would be a
reduction in nutrient pollution from an unregulated source
equivalent to an amount released by a regulated source.
Generally, nutrient pollution from runoff, particularly
agricultural runoff, is currently unregulated or under-regulated,
and it is similarly thought to have potential for lower cost
reductions than continuing point source reductions.240
B. Carbon Offsets and Nutrient Trading Suffer from the Same
Major Problems
The problematic issues with nutrient reduction offsets are also
comparable to those for greenhouse gas reductions from offsets.
According to Fisher-Vanden and Olmstead and as noted in Part V,
nutrient-pollutant controls on non-point sources do not have much
history with quantification verification.241 In particular, using
controls on agricultural runoff to effectively avoid a specific amount
of nutrient pollution requires measurement, monitoring, and
enforcement.242 Furthermore, to be a true offset the reductions must
be “additional” to what would have happened in the absence of the
controls for offset purposes; the reductions must also be specifically
measureable and not have leakage.243
Similarly, offsets in a greenhouse gas regulatory system
require any reduction to be from a measurable baseline and also
be additional without causing leakage.244 Just as with
agricultural runoff nutrient controls, biological greenhouse gas
sequestration projects face real concerns with measurement and
determining additionality. Biological systems are complex and
not uniform, making standardization in both cases more difficult.
238.
Flatt, supra note 237, at 634; McNish, supra note 237, at 400.
239.
Victor B. Flatt, Taking the Legislative Temperature: Which Federal Climate
Change Legislative Proposal Is “Best”?, 102 NW. U. L. REV. COLLOQUY 123, 142 (2007);
McNish, supra note 237, at 400.
240.
Fisher-Vanden & Olmstead, supra note 6, at 149.
241.
Id. at 165; see supra Part V.
242.
Fisher-Vanden & Olmstead, supra note 6, at 157.
243.
Id. at 150; Sonya Dewan, Note, Emissions Trading: A Cost-Effective Approach to
Reducing Nonpoint Source Pollution, 15 FORDHAM ENVTL. L. REV. 233, 244 (2004).
244.
Flatt, supra note 237, at 637; see Robert J. Carpenter, Implementation of
Biological Sequestration Offsets in a Carbon Reduction Policy: Answers to Key Questions
for a Successful Domestic Offset Program, 31 ENERGY L.J. 157, 166–67 (2010).
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The second big concern with agricultural runoff nutrient
controls is that controlling nutrient loading in any particular
waterbody does not guarantee that this will not cause negative
effects in another ecosystem service or in other waterbodies.
These negative effects can occur either because a “trade”
concentrates more pollution on another impaired waterbody
(creating a “hot spot” of pollution) or because of other biological
effects, such as habitat alteration, that physical land
intervention can cause.245 Moreover, reductions from point
sources and runoff operate differently; they may have different
mixing zones and may be affected differently by precipitation
events.246 As an example, imagine that a publicly owned
treatment facility, discharging into the Potomac River, buys
nutrient reductions from agricultural runoff on the
Rappahannock River. While the “nutrient load” reduction in the
Chesapeake itself might be equivalent over a long time period
(such as a year), the Potomac now has a higher load of nutrients
than it would have otherwise. Also, the Chesapeake reduction
may wax and wane during the year depending on precipitation
events on the Rappahannock compared to the Potomac. While in
theory the EPA and states control trades for TMDL impacts,
actual data from existing programs, such as in North Carolina,
show a wide array of ecosystem function mismatches and other
impacts.247 Such mismatches have historically occurred with
wetlands-destruction offsets, though new scientific information
seems to be improving this process in some places.248
A similar issue in greenhouse gas reductions is the
problem of “co-impacts,” or “co-bads,” which is the existence of
negative side effects, such as loss of habitat or other ecosystem
functions, even if the carbon sequestration was specific and
accurate. One need only imagine a conversion of wetlands to a
same species tree farm for carbon sequestration to see how this
could occur.249
245.
Fisher-Vanden & Olmstead, supra note 6, at 157.
246.
Id. at 157, 159.
247.
Todd BenDor, Joel Sholtes & Martin W. Doyle, Landscape Characteristics of a
Stream and Wetland Mitigation Banking Program, 19 ECOLOGICAL APPLICATIONS 2078,
2078–79 (2009).
248.
Philip Womble & Martin Doyle, The Geography of Trading Ecosystem Services:
A Case Study of Wetland and Stream Compensatory Mitigation Markets, 36 HARV. ENVTL.
L. REV. 229, 259 (2012).
249.
Flatt, supra note 239, at 14; see also S. Gibbard et al., Climate effects of global
land cover change, GEOPHYSICAL RES. LETTERS, Dec. 2005, at 4, available at
http://onlinelibrary.wiley.com/doi/10.1029/2005GL024550/full
(follow
“Get
PDF”
hyperlink) (performing forestation simulations that result in uncertain competition
between heating and cooling effects).
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Thus, the major problems of both measurement and
accuracy of baseline and reductions, as well as other negative
effects of physical alterations, are common problems in both
greenhouse gas offsets and attempts to reduce nutrient pollution
from a non-point source, such as agricultural runoff. What
lessons for non-point source reduction offsets are provided by the
examination of these problems in the greenhouse gas reduction
context? The series of federal legislative proposals on
comprehensive climate change legislation, culminating in the
American Clean Energy and Security (ACES) Bill250 (passed by
the House) and the Kerry-Lieberman Bill251 (proposed in the
Senate), had evolving standards to address many of the
concerns.252
The lessons from these standards have also independently
begun to take hold in the “wetlands mitigation” market, which in
its relationship to specific geography and function bears
resemblance to the nutrient pollution market. The improvements
in the wetlands mitigation market suggest the universality of
these lessons and bolster the case for using these greenhouse gas
trading lessons for nutrient trading pollution.
1. Co-Impacts. With respect to the issue of co-impacts, the
ACES Act and the Kerry-Lieberman Bill proposed that greenhouse
gas sequestration projects should protect habitat and native species
(proposed new CAA § 735(h)).253 The Kerry-Lieberman Bill had a
provision that would have disallowed offsets whose environmental
negatives were too large and also required the implementing agency
to “avoid or minimize . . . adverse effects on human health or the
environment.”254 While the evolving bills were not completely
consistent with the need to recognize that offsets can create other
impacts that should be examined, most recognized this possibility.
With respect to nutrient pollution offsets, we have not yet
seen a consideration of the co-impacts of offsets on a large scale.
250.
American Clean Energy and Security Act of 2009, H.R. 2454, 111th Cong.
(2009).
251.
American Power Act, S. Discussion Draft, 111th Cong. (2010) [hereinafter
Kerry-Lieberman Bill].
252. See RES. FOR THE FUTURE, SUMMARY OF NOTABLE MARKET-BASED CLIMATE
CHANGE BILLS INTRODUCED IN THE 111TH CONGRESS (2010), available at
http://www.rff.org/Documents/Features/111th%20_Legislation_Table_Graph.pdf.
253.
This was in the Kerry-Lieberman proposed new CAA § 735(h). H.R. 2454 § 741;
Kerry-Lieberman Bill, supra note 251, § 732(c).
254.
Clean Energy Jobs and American Power Act, S. 1733, 111th Cong. § 732(c)
(2009); see Victor B. Flatt, Kerry-Lieberman Creates Some Added Certainty on Offsets,
CTR. FOR PROGRESSIVE REFORM BLOG (May 12, 2010), http://www.progressivereform.org/
CPRBlog.cfm?idBlog=8E818F19-A0D1-39EA-7299E012C45D6CBE.
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The EPA correctly assumes that any trade (including point
source-to-point source) must consider the effects on the TMDLs of
affected waterbodies and not allow trades to occur if a violation
would occur, or even if water quality in another waterbody is
lowered at all.255 It would even be possible to allow multiparty
trades to align effluent discharges to avoid impacts on other
TMDLs. In any event, negative impacts from nutrient trading
are a possibility and something that proponents have realized
must be accounted for.256 With respect to other potential
environmental harms (to habitat for instance), a blunt but
blanket rule, similar to that proposed in Kerry-Lieberman, could
be applied: no nutrient pollution offset can be approved if there is
significant harm to other environmental or ecosystem amenities.
However, narrative standards of environmental protection have not
always worked in the similar situation of wetlands mitigation
though there is a record showing improvement can occur.257 This
suggests that narrative standards could be bolstered with numeric
standards to ensure that considerations are real and more uniform.
2. Measurements, Baselines, and Performance Safeguards.258
With respect to the more critical issues of measurements,
baselines, and additionality, greenhouse gas offset protocols have
produced several possible answers for insuring that any
reduction is truly additional and can be measured and insured.
ACES and Kerry-Lieberman (as well as Boxer-Kerry)259 try to
bring some certainty in terms of measurement to offsets by
specifying a list of offset categories upfront that can be
considered for credit.260 While this could reduce some flexibility
in offset options, it has the advantage of limiting credits to those
kinds of offsets that are known to work and have less collateral
side damage. A similar action could be taken with respect to nonpoint source nutrient reduction. Since runoff reduction methods
and measurement are some of the main concerns, a system could
start by requiring very specific BMPs (exact size of buffers and
255.
CHESAPEAKE BAY TOTAL MAXIMUM DAILY LOAD FOR NITROGEN, PHOSPHORUS
supra note 3, § 10, at 10-1.
256.
See id. (offering several factors that should be accounted for so that nutrient
offsets do not result in diminished water quality).
257.
Womble & Doyle, supra note 248, at 259.
258.
Robert Glicksman refers to these as two distinct axes for environmental
markets. See Glicksman, supra note 16, at 958–59 (distinguishing baseline performance
standards and performance standards measuring compensatory efficacy in the context of
wetlands migration trades). I consider these to be pieces of a similar puzzle that can be
considered together.
259.
S. 1733, 111th Cong. § 722(b).
260.
Flatt, supra note 237, at 634–35.
AND SEDIMENT,
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what kind of plantings) for a region with already measured and
proven runoffs. Though BMPs have not been deployed on a large
scale, their mechanisms are well understood, both as to reduction
measurement and certainty.261 Thus, instead of letting someone
come forth with any proposal that must then be uniquely tested,
those who wish to create offsets could be given a list of
possibilities that are known to be effective. While there still may
be a need for monitoring, and there may be some differential as
to location, specifying approved BMPs should reduce uncertainty
in performance.
In fact, it is even possible that categories of offsets might be
more predictable than individually proven offsets. Recently, in
upholding the greenhouse gas offset protocol in California’s
landmark AB32, Judge Goldsmith, of the Superior Court of
California, noted that “project-by-project” offsets, though
theoretically more precise in reduction specification and
measurement, had proven less precise than categorical offsets.262
In particular, the case-by-case approach is more subjective and
opaque because of the different ways of measuring and different
personnel.263 Similarly, large aggregate wetlands mitigation
through banks has proven more effective and thus preferable to
supposedly more tailored individual wetlands mitigation.264
The other way to provide for real measurable reductions is to
insure them. The comprehensive greenhouse gas bills proposed
several possible formulas for doing this. ACES specifically listed
an offset reserve mechanism (essentially “buffer” offsets) and an
insurance mechanism as two possibilities to protect against the
loss of offset integrity.265 The Kerry-Boxer proposal in the Senate
suggested the same options.266 The offset reserve mechanism is
not unknown to the proponents of nutrient pollution offsets. As
261.
See N.C. DIV. OF WATER QUALITY, STORMWATER BEST MANAGEMENT PRACTICES
MANUAL (2007), available at http://portal.ncdenr.org/web/lr/bmp-manual; Memorandum
from Bradley Bennett, Supervisor, Stormwater Unit, & Rich Gannon, Planner, Nonpoint
Source Unit to Local Programs (Sept. 8, 2004), http://portal.ncdenr.org/c/document_library
/get_file?p_l_id=38446&folderId=209713&name=DLFE-15340.pdf; see also Chelsea H.
Congdon et al., Economic Incentives and Nonpoint Source Pollution: A Case Study of
California’s Grasslands Region, 14 HASTINGS W.-N.W. J. ENVTL. L. & POL’Y 215, 227
(2008) (stating that irrigated agricultural sources of nutrient pollution can be controlled
by BMPs, but noting BMPs’ shortcomings).
262.
Citizens Climate Lobby v. California Air Res. Bd., No. CGC-12-519554, 2013 WL
861396, at *7 (Cal. App. Dep’t Super. Ct. Jan. 25, 2013).
263.
Id.
264.
Womble and Doyle, supra note 248, at 249.
265.
American Clean Energy and Security Act of 2009, H.R. 2454, 111th Cong.
§ 734(b)(2) (2009); Flatt, supra note 237, at 640.
266.
Clean Energy Jobs and American Power Act, S. 1733, 111th Cong. § 734(b)(2)
(2009); Flatt, supra note 237, at 640.
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noted by Fisher-Vanden and Olmstead, some of the few existing
water trading systems use a ratio or reserve in order to ensure
that offset reductions have the same pollution loading impact as
the foregone reduction.267 While current nutrient-reduction
reserve ratios are related to the effect on an ultimate waterbody
based on distance, other factors such as seasonal precipitation
and vegetation variance could be taken into consideration to
determine a more accurate ratio.
Offset insurance is something that has been missing from
the debate on nutrient pollution offsets and, when coupled with
independent third party offset developers, could be a very
important key to making a market in nutrient trading offsets
both honest and viable. Based on the history of some carbon
offsets from the voluntary markets, the ACES bill would have
allowed greenhouse gas offset developers to purchase and retire
equivalent credits in the market when the developers’ offset
failed.268 To do this, those that create and are responsible for the
offsets would need to be solvent enough to replace them at a time
of failure. Offset insurance and developer liability could be
combined to form a cushion of additional protection against offset
failure.
3. Market Liquidity. In each of these cases, however, a
fundamental reconceptualization of nutrient pollution offsets
would have to occur. Right now, it appears that the new major
TMDLs relying on point source-to-non-point source trading, such
as the Chesapeake Bay, assume that with enough assistance
from the USDA or the EPA actual farmers will enter into the
market for specific trades with point sources. This assumes both
that there will be bilateral trades, which are “over the counter”
and thus illiquid, and that farmers have the inclination and the
expertise to develop, install, measure, market, and monitor
offsets. The likelihood of this occurring seems extremely low, and
the reliance on these trades threatens the very possibility of a
market and the hoped-for reductions. Agricultural sources have
actively resisted trading.269 The American Farm Bureau filed suit
against the concept itself in 2013.270
Fisher-Vanden and Olmstead note that very few agricultural
sources have entered into the existing markets, and reasons
suggested include trust of the agency, liability (reversal)
267.
Fisher-Vanden & Olmstead, supra note 6, at 159.
268.
Flatt, supra note 237, at 641–42.
269.
Steinzor et al., supra note 128, at 2.
270.
Am. Farm Bureau Fed’n v. U.S. Envtl. Prot. Agency, 984 F. Supp. 2d 289 (M.D.
Pa. 2013).
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penalties, or even the lack of regulatory consistency limiting
demand.271 They speculate that there might be more
participation in a larger waterbody, such as the Chesapeake Bay,
and clearly the EPA and the Chesapeake Bay states are
assuming that will occur, but there is no good reason that it
will.272 The rules of the Chesapeake Bay states generally apply to
credit “generators,” suggesting that the agricultural sources
themselves will do the developing.273 That, however, seems
unlikely. Especially when one considers that an existing nonpoint source nutrient pollutant control project in the Chesapeake
Bay area cannot sell all of its credits even though the cost of the
credits is substantially less than the alternative pollution
controls required.274
In the California greenhouse gas offset market, an analysis
of dairy farmers for whom it would be profitable to capture
methane for greenhouse gas offset credits similarly showed that
less than 10% would do so without further intervention.275 In
such markets, having categories of standards for offsets and
allowing third party developers should take care of such lagging.
Third party verifiers could develop enough expertise from
multiple projects to justify the investment of time to learn the
system. Moreover, by being “in the business” of producing offsets,
they would have the financial wherewithal to pay penalties when
offsets do not perform as expected. This has the added benefit of
creating a private sector incentive to properly construct and
measure such offsets.276 To ensure financial stability, such
players could be required to have financial insurance or bonds
(such as in CERCLA, RCRA, or CWA 404(b) wetlands
mitigation), a requirement that seems unlikely with agricultural
interests.
Last and perhaps most importantly, a combination of third
party offset creators who hold the liability for the offset success,
coupled with various offset categories, would allow for the
creation of a true large-scale liquid market. By creating
categories, offsets could be converted into a fungible quantity
271.
Fisher-Vanden & Olmstead, supra note 6, at 163.
272.
Id.
273.
See infra Appendix Parts A.3, B.3, C.3, D.3 (detailing the trading rules for each
of the Chesapeake Bay TMDL states, including those for credit generation).
274.
Paul Quinlan, Water Pollution: Entrepreneurs Jump Start Market Based
Cleanup Systems, E&E PUBLISHING (Oct. 8, 2012), http://www.eenews.net/public/
Greenwire/2012/10/08/1.
275.
Citizens Climate Lobby v. Cal. Air Res. Bd., No. CGC-12-519554, 2013 WL
861396, at *12–13 (Cal. App. Dep’t Super. Ct. Jan. 25, 2013).
276.
Flatt, supra note 237, at 643.
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that could be traded among multiple market participants. And as
I have previously argued with respect to carbon offsets, allowing
the risk to remain with the developer, instead of the market
participants, overcomes many fears of liability.277 Additionally, it
can encourage robust participation while making environmental
integrity more likely.278
VII. CONCLUSION
As this paper makes clear, nutrient trading could be a costeffective method for reaching water quality standards in
currently impaired waterbodies. However, in the water basins
where it has been utilized, the amount used has been thin, and
there have been questions about its reliability.279 Despite this
limited use, within the past two years major efforts to clean large
impaired waterbodies, including the Chesapeake Bay and the
Ohio River Basin, rely on an extensive use of nutrient trading at
levels that would dwarf what has already occurred. The
Chesapeake’s TMDL calls for a 25% reduction in nutrient
pollution loading by 2025.280 The TMDL depends on trades with
non-point source pollution, a technique essentially untested at
this point, and one where there has been no real regulatory
movement to either insure real reductions or even to assure that
a market will come into existence. Unless something happens, I
believe we are heading for a crisis wherein the expected trades
and reductions will fail to develop, or even if they do occur, may
be subject to concerns about reliability.
I believe that both reliability and market creation could be
accomplished by treating non-point sources of nutrient pollution,
particularly agricultural runoff pollution, as potential “offsets”
that could be created and certified by licensed third parties. If
this is coupled with accepted categories of reductions that have
been physically tested, non-point source nutrient pollution could
be used to offset large reductions effectively.
We must embrace the lessons learned through the
greenhouse gas debates, otherwise lots of runoff and waste
(“crap”) will continue to go untreated into our most important
waterways—instead of providing a market mechanism to clean
up those waterways at lower cost.
277.
278.
279.
280.
Id. at 643–44.
Id. at 642.
Fisher-Vanden & Olmstead, supra note 240, at 163.
CHESAPEAKE BAY TOTAL MAXIMUM DAILY LOAD (TMDL) FACT SHEET: DRIVING
ACTIONS TO CLEAN LOCAL WATERS AND THE CHESAPEAKE BAY, supra note 43, at 1.
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APPENDIX—DETAILS OF STATE PROGRAMS FOR CHESAPEAKE BAY
MARKET MECHANISM
A. Virginia
Virginia’s nutrient trading program is the first program in
the country to be explicitly described through state statutes.281
Nutrient trading in Virginia is rooted in the 2000 Chesapeake
Bay Agreement, the latest in a series of cooperative agreements
between Virginia, Pennsylvania, Maryland, the District of
Columbia, and the EPA to improve water quality conditions in
the Chesapeake Bay.282 This initiative establishes allocations for
nitrogen and phosphorus in the Chesapeake Bay and its tidal
tributaries, and also places caps on the discharge of these
nutrients into the watershed.283 The program primarily affects
municipal wastewater treatment plants in the Potomac, James,
Rappahannock, and York Rivers.284 The goal of the program is to
help Virginia meet its 40% aggregate nutrient reduction goal for
the Chesapeake Bay in a cost effective manner.285
1. Definition and Administrative Rules. Virginia does not
explicitly define nutrient trading in the administrative code, but
the Virginia Department of Environmental Protection generally
refers to nutrient trading as a market-based program for
allowing dischargers to sell or purchase additional discharge
rights.286 The Virginia Code establishes that trading is managed
under a Watershed General Virginia Pollutant Discharge
Elimination System Permit (the general permit).287 This general
permit authorizes discharges of nitrogen and phosphorus in the
Chesapeake Bay.288 In conjunction with these permits, Virginia
established the Chesapeake Bay Watershed Nutrient Credit
Exchange Program, establishing mandatory nutrient goals for
point source loaders within the Chesapeake Bay Watershed.289
This program relies on individual waste load allocations
281.
Miranda R. Yost & Thomas J. Mascia, Environmental Credits: The Building
Blocks of a Restorative Economy, VA. LAW., June–July 2011, at 36, 37; see STEPHENSON,
AULTMAN & SHABMAN, supra note 211, at 2.
282.
STEPHENSON, AULTMAN & SHABMAN, supra note 211, at 3.
283.
VA. CODE ANN. § 62.1-44.19:12 (2006).
284.
STEPHENSON, AULTMAN & SHABMAN, supra note 211, at 2.
285.
Id.
286.
See id. at 1–2.
287.
VA. CODE ANN. § 62.1-44.19:14(A) (Supp. 2013).
288.
Id.
289.
STEPHENSON, AULTMAN & SHABMAN, supra note 211, at 4.
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(WLAs),290 which are annual nutrient allocations tied to
individual facilities.291 Each point source loader of a certain size
is given a WLA, expressed in total annual mass load (in pounds)
of nitrogen and phosphorus.292 Within nine months of receiving a
general permit, the permittee must submit an annual compliance
plan, including implementation schedules and projects needed to
achieve the nutrient reduction, to the Department of Water
Quality.293 Nutrient trading is a method of complying with the
WLA.294 The general permit system does not limit the State
Water Control Board’s (the Board) authority to establish more
stringent water quality rules and credit requirements.295 Also, the
rules specify that a listing of the permittees and their total nitrogen
and phosphorus load allocations must be made publically
available.296
2. Baseline Conditions. Baseline conditions in Virginia are
based largely on the Chesapeake Bay TMDLs. Point source
operations are based on WLAs—described below—and vary by
river basin and program.297 For example, agricultural practices
must achieve the reduction level created by the Virginia
Chesapeake Bay TMDL Watershed Implementation Plan or
other approved TMDLs.298 The baseline may require agricultural
operations to implement a BMP, including, if applicable, a soil
conservation plan, nutrient management plan, cereal cover crop,
exclusionary livestock fencing, and vegetative buffers.299 Virginia
does not have specifically defined threshold practices. Threshold
practices, which are present in other states, can be compared to the
extra requirements established under the Board’s authority.300
3. Generating Credits. Credit generation provisions vary
depending on whether the loader is an existing point source or a
290.
Id.
291.
VA. CODE ANN. § 62.1-44.19:13 (2006).
292.
STEPHENSON, AULTMAN & SHABMAN, supra note 211, at 4.
293.
VA. CODE ANN. § 62.1-44.19:14(C)(3).
294.
See CHESAPEAKE BAY FOUND., FACTS ABOUT NUTRIENT TRADING, available at
http://www.cbf.org/document.doc?id=141.
295.
VA. CODE ANN. § 62.1-44.19:14(B).
296.
Id. § 62.1-44.19:14(D).
297.
EVAN BRANOSKY, CY JONES & MINDY SELMAN, COMPARISON TABLES OF STATE
NUTRIENT TRADING PROGRAMS IN THE CHESAPEAKE BAY WATERSHED 9 (2011), available at
http://pdf.wri.org/factsheets/comparison_tables_of_state_chesapeake_bay_nutrient_tradin
g_programs.pdf.
298.
VA. CODE ANN. § 10.1-603.15:2(B)(2)(a) (2012).
299.
BRANOSKY, JONES & SELMAN, supra note 297, at 9.
300.
See infra Appendix Part C.3.
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new and expanding point source.301 For an existing point source,
the process is simple. A nutrient credit is the difference between
the WLA and the actual annual discharge.302 Assuming the
discharge is less than the WLA, the loader will have created a
credit. These credits can be sold to dischargers who have their
own WLA.303 Also, these credits must be secured for at least ten
years.304
If a point source is new and expanding, then the process is
more complicated. The loader must purchase a WLA from an
existing point source or sponsor long-term nutrient reductions
from a non-point source.305 Despite the fact that the new sources
do not have WLAs, they are required to meet the same
technology nutrient concentration requirements as existing
loaders.306 Due to the fact that new point sources can only
acquire a WLA from an existing source, it is implied that the
state cannot issue a new WLA.307 However, the Department of
Water Quality has the authority to establish any means of
acquiring a WLA.308 A WLA that is acquired from a non-point
source must achieve a two-pound reduction for every one pound
of point source WLA.309
To assist in market reductions, Virginia has established a
Nutrient Offset Fund.310 Under this fund the state may purchase
both point and non-point nutrient offsets to achieve reductions in
the same tributary where they were collected, beyond those
required under federal or state law.311 The Director of the
Department of Environmental Quality has the authority to enter
into long-term contracts to purchase these offsets.312 If a private
regulated source exceeds its WLA, it may purchase credits from
the bank.313 Point source credits are preferred, but if there are no
point source credits available, the loader can purchase non-point
source credits.314 Although these credits can be purchased from
301.
STEPHENSON, AULTMAN & SHABMAN, supra note 211, at 5.
302.
Id.
303.
Id.
304.
BRANOSKY, JONES & SELMAN, supra note 297, at 8.
305.
VA. CODE ANN. § 62.1-44.19:18A (2011); STEPHENSON, AULTMAN & SHABMAN,
supra note 211, at 5.
306.
See STEPHENSON, AULTMAN & SHABMAN, supra note 211, at 5.
307.
Id.
308.
Id. (citing VA. CODE ANN. § 62.1-44.19:15(B)(1)).
309.
VA. CODE ANN. § 62.1-44.19:15(C) (Supp. 2013).
310.
VA. CODE ANN. § 10.1-2128.2 (2012).
311.
Id. § 10.1-2128.2(B).
312.
Id.
313.
STEPHENSON, AULTMAN & SHABMAN, supra note 211, at 5.
314.
Id.
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the Water Quality Improvement Fund, they cannot be part of the
loader’s long-term compliance plan.315
The Virginia Department of Environmental Quality
(VADEQ) is responsible for certifying and verifying all credits316
and ensuring they are in compliance with program
requirements.317 Projects must be certified annually.318
Verification of compliance occurs after the project is
implemented,319 but it can occur at any time after
implementation.320 The loaders are liable for compliance with the
permits, under the authority of both the VADEQ as well as the
contracts with offset generators and permit holders.321
B. Maryland
In Maryland, nutrient management plans are classified
under soil conservation in the agricultural section of the
Maryland Administrative Code.322 Unlike her sister states in the
Chesapeake Watershed, Maryland does not specify all of the
methods for eligibility and credit exchange within the
administrative code but rather grants the Maryland Department
of Agriculture broad authority to create and monitor these
programs.323 The Department of Agriculture has developed three
phases of nutrient trading implementation and is in the process
of implementing the second phase.324
1. Definition and Codified Rules. Nutrient trading in
Maryland is generally defined in two ways. First, trading is a
market-based approach to reducing nitrogen and phosphorus
that allows one source to fulfill its reduction obligations through
purchasing another loader’s nutrient allowance.325 Second,
trading is a form of exchange of nutrient reduction credits that
have a monetary value, from an installer of BMPs on non-point
315.
316.
317.
318.
319.
320.
321.
322.
323.
324
VA. CODE ANN. § 62.1-44.19:14(C)(3) (Supp. 2013).
BRANOSKY, JONES & SELMAN, supra note 297, at 11.
Id. at 12.
Id.
Id. at 11.
Id.
Id. at 13.
MD. CODE ANN., AGRIC. § 8-801 (LexisNexis 2013).
Id. § 8-803.
JOHN RHODERICK, MD. DEP’T OF AGRIC., MARYLAND’S NUTRIENT TRADING
PROGRAM: HOW TRADING WORKS 2 (2011), available at http://www.mde.state.md.us/
programs/Water/TMDL/TMDLImplementation/Documents/Webinars/May/Nutrient_Tradi
ng_and_Ecosystem_Markets.pdf; What is Maryland’s Trading Program?, MARYLAND
NUTRIENT TRADING, http://www.mdnutrienttrading.com/ntwhatis.php (last visited Sept.
16, 2014).
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sources to earn money.326 The Maryland Department of
Agriculture is in charge of verifying, certifying, and registering
agricultural credits involving the implementation of BMPs.327
The Department of Agriculture will establish the following
requirements for nutrient and sediment credits produced on
agricultural land:328 (1) application and eligibility requirements
for certification; (2) standards for quantifying nutrient or
sediment credits resulting from any existing or proposed
agronomic, land use, and structural practice; (3) requirements
governing the duration and maintenance of credits; and (4) the
establishment of a publically accessible credit registry.329 The
Department of Agriculture has the authority to suspend or
revoke credits for violation with any regulations, presuming
notice and opportunity to be heard.330
2. Nutrient Trading Implementation Phases. The Maryland
Department of Agriculture has proceeded to implement the
nutrient policy in three phases, which are defined by the type of
nutrient loaders engaged in the trading. Phase I was issued in
2008 and generally described the purpose, form, and
fundamental principles of nutrient trading in Maryland.331 First,
Phase I listed the requirements and procedures for point-to-point
source nutrient trades between wastewater treatment plants.332
Under these rules, all trades must be consistent with local county
water and sewage plans, the National Pollutant Elimination
System permits, and applicable TMDLs.333 A credit is equal to
one pound of nitrogen or phosphorus reduced per year and is
traded within areas defined by the Department of Agriculture.334
Second, Phase I sets forth the method of credit generation.
Credits can be generated by upgrading a wastewater treatment
plant to Biological Nutrient Removal status or Enhanced
Nutrient Removal status or by retiring an existing wastewater
plant and sending its flow to a Biological Nutrient Removal or
Enhanced Nutrient Removal plant.335 Enhanced Nutrient
325.
VANDEVORT, supra note 199.
326.
MARYLAND NUTRIENT TRADING, http://www.mdnutrienttrading.com (last visited
Sept. 16, 2014).
327.
MD. CODE ANN., AGRIC § 8-901(2).
328.
Id. § 8-902(a).
329.
Id. § 8-902(b).
330.
Id. § 8-903.
331.
What Is Maryland’s Trading Program?, supra note 324.
332.
Id.
333.
Id.
334.
Id.
335.
Id.
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Removal facilities can generate credits by reducing their own
nutrient load.336 In all of these scenarios, nutrient credit
agreements must last for ten years.337
Phase II began development in 2011.338 This phase sets out
the requirements and procedures for agricultural non-point-topoint source trading.339 This phase aims to establish the
guidelines for generating, selling and exchanging agricultural
non-point source credits.340
Nutrient trading in Maryland from non-point sources to
point sources is to be governed by six key principles. First,
generators must show that they have met baseline water quality
requirements, including the minimum level of nutrient
reductions under the TMDL.341 Second, generators must comply
with all local, state, and federal laws without contributing to
additional water problems.342 Third, the BMPs funded by federal
or state cost-share programs cannot generate credits during the
life of the project.343 Fourth, to prevent the destruction of
farmland, credits will not be generated for the purchase and
idling of substantial portions of farms to provide nutrient credits
for use off site.344 Fifth, a trade must result in a net decrease in
nutrient loads.345 Finally, an agricultural practice can only
generate credits once it is operational.346
Phase III has yet to be developed and will address non-pointto-non-point source trading.347
3. Generating Credits. Tradable credits can be generated
by any planned agronomic, land conversion, or structural
practice.348 The Maryland Department of Agriculture is given
broad authority to determine which practices are acceptable.349
336.
Id.
337.
Id.
338.
MD. DEP’T OF THE ENV’T, supra note 232, at ES-3.
339.
What Is Maryland’s Trading Program?, supra note 324.
340.
Id.
341.
MD. DEP’T. OF AGRIC., MARYLAND’S POLICY FOR NUTRIENT CAP MANAGEMENT
AND TRADING IN MARYLAND’S CHESAPEAKE BAY WATERSHED: PHASE II–A GUIDELINES FOR
THE GENERATION OF AGRICULTURAL NONPOINT NUTRIENT CREDITS 6 (Apr. 2008),
http://mdnutrienttrading.org/docs/Phase%20II-A_Crdt%20Generation.pdf.
342.
Id.
343.
Id. at 6–7.
344.
Id. at 7.
345.
Id.
346.
Id.
347.
RHODERICK, supra note 324.
348.
MD. DEP’T. OF AGRIC., supra note 341, at 9.
349.
See id. (describing the powers given to the Department of Agriculture).
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Additionally, the Department can accept any nutrient loader that
is in compliance with all applicable laws, has the necessary
permits, has a current Nutrient Management Plan and an
updated Soil and Water Conservation plan, and meets the
baseline reduction requirements in the specific portion of the
property that is generating credits.350 The baseline requirements
are tied to the watershed’s TMDL, developed by the Department of
Agriculture and the EPA.351 It is important to note that
demonstrating the baseline is incumbent upon the loader.352
According to current plans, nutrient generating activities will be
either Agricultural Credit generating practices or agronomic,
structural, and land conversion practices.353
Agricultural Credit generating practices fall under three
categories.354 The first category is BMPs with approved load
reductions, which includes approved programs with wellestablished nutrient removal efficiencies.355 The second category is
BMPs requiring technical review, which includes BMPs that are
currently used but do not have well-established efficiencies.356 All
other BMPs fall into the third category.357 While the Department of
Agriculture will accept programs from the first category, it reserves
the right to examine the other programs on a case-by-case basis.358
Agricultural credits can only be applied as offsets in the year they
are generated and cannot be banked.359
Agronomic, structural, and land conversion practices can
only generate credits if the practices would not count toward the
already existing baseline requirements.360 Agronomic practices
reduce surface, groundwater, or air emissions.361 Structural
practices include setting up manure sheds, waterways, fences, or
other nutrient reducing structures.362 Land conversion involves
changing agricultural land to less nutrient intensive land use.363
If credits can be generated, then they are calculated
350.
351.
352.
credits).
353.
354.
355.
356.
357.
358.
359.
360.
361.
362.
363.
Id. at 7–8 (discussing factors that determine eligibility).
Id. 6–8.
See id. (noting the loader’s obligations in order to generate additional tradable
See id. at 7–9 (discussing the types of nutrient generating activities).
Id. at 9.
Id.
Id.
Id.
Id.
Id. at 10.
Id. at 11.
Id.
Id.
Id.
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through trading ratios that determine the calculated load
reductions while accounting for uncertainties in non-point
source loading and other BMPs in the watershed. 364
Calculating these ratios involves simulating the biological
processes that affect nutrients when they are placed in the
Chesapeake Bay.365 The Maryland Department of Agriculture
will also apply a retirement ratio, which results in 5% of the
total generated credits to be retired towards net water quality
benefits.366 In that case, the groups such as the Chesapeake
Bay Foundation will buy the credits and not use them for
trading.367 After the credits are calculated, the credits must be
certified.368 Loaders will be able to use the Department of
Agriculture nutrient trading website to certify these credits,369
and the Department of Agriculture will inspect certification
requests for compliance before approval.370
4. Purchasing Credits. Both public and private entities can
buy credits from any agricultural non-point source.371 The
Department of Agriculture will leave individual trading
agreements to be determined by the parties,372 but it will develop
an optional credit registry with a web-based marketplace.373 For
example, while trading can occur on the website, the prices will
be set by the free market.374 However, the Department has the
authority to specify the form of the contracts.375 Required
elements of a trade agreement include identification and contact
information of parties including signature, location of credits,
duration of contract in years, quantity of credits to be exchanged
each year of the contract, method of credit generation, and
certification and registry number.376 In all scenarios, a credit can
only be applied as an offset in the year it is generated, rather
than banked for future years.377
364.
365.
366.
367.
368.
369.
370.
371.
372.
373.
374.
375.
376.
377.
Id. at 11–12.
Id. at 12.
Id.
RHODERICK, supra note 324.
MD. DEP’T. OF AGRIC., supra note 341, at 12.
Id.
Id. at 12–13.
Id. at 6.
Id. at 7.
Id.
Id.
Id. at 8.
Id. at 9; RHODERICK, supra note 324.
MD. DEP’T. OF AGRIC., supra note 341, at 10.
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5. Accountability. Trade accountability is either enforced
under the Clean Water Act NPDES permits, TMDL programs, or
under specific provisions within the trading contracts.378 When a
trade involves new or expanding wastewater treatment plants,
the trade is incorporated into NPDES permits for the source
buying credits.379 If the trades are not within the NPDES system,
the Department of Agriculture leaves it to the parties to
determine the rights and remedies under the contract.380 While
the Maryland Department of the Environment oversees the
management of the NPDES systems, the Maryland Department
of Agriculture is responsible for non-point source trading,
eligibility, certification, verification, and compliance monitoring
and enforcement.381 Trading will be implemented in a way that
provides the public with access to trading policy, credit
generating opportunities, trades affected, and other relevant
information.382
C. Pennsylvania
1. Introduction and Definitions. Nutrient trading in
Pennsylvania is better defined within the Administrative Code
than her sister states. Also, Pennsylvania is more reliant on the
EPA than the other states.
Pennsylvania defines nutrient trading as “a market-based
program that provides incentives for entities to create nutrient
reduction credits by going beyond statutory, regulatory, or
voluntary obligations and goals to remove nutrients from a
watershed. The credits can be traded to help other sources cost
effectively meet their obligations or goals.383 The Pennsylvania
Administrative Code defines a nutrient credit as “a tradable unit
of compliance that corresponds with a unit of reduction of a
pollutant . . . which, when certified, verified and registered, may
be used to comply with NPDES permit effluent limitations.”384
Trading is “[a] transaction that involves the sale or other
exchange, through a contractual agreement, of credits that have
been certified, verified and registered.”385 The stated purpose of
378.
Id. at 9.
379.
Id.
380.
Id.
381.
Id. at 11.
382.
Id.
383.
Michael L. Krancer, Nutrient Credit Trading Program; Actions, 42 PA. BULL.
3341 (June 9, 2012).
384.
25 PA. CODE § 96.8(a) (2011).
385.
Id.
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the nutrient trading in Pennsylvania is to “provide for more
efficient ways for nutrient loaders to meet NPDES effluent
limits.”386 Pennsylvania spells out the specific methods of
nutrient trading in the Administrative Code, so the
Administrative Code is the primary source for this analysis. The
Pennsylvania Department of Environmental Protection (the
Department) administers these methods.
The Administrative Code lays out the use of offsets and
credits to meet water quality requirements in the Chesapeake
Bay.387 While the overall goal of nutrient trading is to meet
TMDLs, the Department only allows credits to come from specific
pollutant reduction activities.388 The Department also operates
under the authority of the Clean Streams Law, which allows the
Department to adopt necessary regulations to control
pollution.389 Credits can only be used for comparable
pollutants.390 Also, credits cannot be used to comply with
technology based effluent limits, unless expressly authorized by
the EPA.391
2. Interaction with the EPA. The basis of nutrient trading
is to comply with federal water quality standards. Credits and
offsets are used to meet limits in pounds in nutrients contained
in NPDES permits.392 These levels are based on compliance with
water quality standards established under 33 U.S.C.A §§ 1251–
1387 in regard to the Chesapeake Bay.393 To use nutrient trading
to satisfy NPDES permit requirements, the allowance must be
made part of the NPDES permit,394 and the credits must be
generated in the Chesapeake Bay.395 The permittee is responsible
for ensuring that the credits are certified, verified, and
approved.396 A loader who wants a pollutant strategy certified to
generate credits must submit a written request including the
water quality classifications and any applicable impairments of
the receiving stream segment nearest the location of the
proposed activity.397 Moreover, nutrient trading in general is
based on meeting TMDLs,398 set by the EPA. Finally, the
386.
Krancer, supra note 383.
387.
25 PA. CODE § 96.8(b)(1).
388.
Id. § 96.8(b)(2).
389.
See id. § 96.8; 40 PA. BULL. 5790 (Oct. 9, 2010) (noting that 35 PA. CONS. STAT.
§§ 691.202, .307 authorize the Pennsylvania Department of Environmental Protection to
establish pollution requirements and that 71 PA. CONS. STAT. § 510-20(b) authorizes the
Board of Water Quality to create rules and regulations for the work of the Pennsylvania
Department of Environmental Protection).
390.
See 25 PA. CODE § 96.8(b)(4) (providing the example that nitrogen offsets can
only be used for nitrogen credits).
391.
Id. § 96.8(b)(6).
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Department may use methods, data sources, and conclusions
written in defined EPA documents.399
3. Eligibility for Nutrient Trading. Proving eligibility for
nutrient trading is the responsibility of the loader seeking to
generate credits.400 Demonstrating eligibility requires that two
benchmarks be met; the loader must reduce its pollutant
discharge below the “baseline” and “threshold” requirements.401
These requirements differ based on the category of pollutant
involved, and whether the loader is a non-point or point source.
The baseline requirements are met by following current
environmental laws and regulations related to the pollutant for
which credits or offsets are generated.402 For non-point sources,
the baseline is the requirements applicable to the specific
location where the credits are generated as of January 1, 2005.403
If the trading specifically relates to an agricultural operation, the
baseline includes compliance with erosion and sedimentation
requirements from Chapter 102 of the Code, the agricultural
requirements under § 91.36 and § 92a.92, as well as Chapter 83,
Subchapter D.404 For point sources, the baseline is established by
the load association with effluent limitation in NPDES permits
or the TMDL requirements.405
On the other hand, the threshold requirements are
standards beyond the baseline, which are established under the
rest of the nutrient trading policy.406 For example, threshold
requirements for an agricultural operation include not having
manure mechanically applied within 100 feet of a stream or lake
and a minimum of thirty-five feet of permanent maintained
vegetation between the field and any stream, lake, or pond.407
Furthermore, the applicant must apply an adjustment of at least
392.
393.
394.
395.
396.
397.
398.
399.
400.
401.
402.
403.
404.
405.
406.
407.
Id. § 96.8(b)(3).
Id.
Id. § 96.8(h)(1).
Id. § 96.8(h)(2).
Id. § 96.8(h)(3).
Id. § 96.8(e)(2)(ii)(D).
Id. § 96.8(i)(3).
Id. § 96.8(c)(4).
Id. § 96.8(d).
Id.
Id. § 96.8(a)(i).
Id. § 96.8(d)(2)(i).
Id.
Id. § 96.8(d)(2)(ii).
Id. § 96.8(a).
Id. § 96.8(d)(3)(i)(A)–(B).
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20% to the overall amount of reduction generated by the
activity.408 The Department has the authority to implement any
threshold requirements.409
The Department also has the authority to rescind eligibility
if the loader no longer meets any of the required criteria. If the
Department decides that the loader no longer meets
requirements, the Department can prohibit the person from
trading, as long as this action occurs prior to the registration of a
credit.410 Furthermore, the Department will determine that a loader
is ineligible if it demonstrates a lack of ability or intention to comply
with a department regulation, a law or regulation that addresses
pollution or a contract for the exchange of credits.411
4. Process
for
Certification,
Verification,
and
Registration. The Department must certify any trading activity
before it can be used.412 Certification lasts for five years as a
baseline but can be different.413 The Department may revoke
certification for failure to comply with the conditions.414 The
party seeking the certification must submit a written
certification request to the Department.415 This request must
demonstrate that the location meets eligibility requirements
and will continue to meet them for the applicable term of
certification.416 The request must contain a detailed
description of how the credits will be generated, a map with
the positions of the activities, water quality classifications and
applicable impairment listings under the Federal Water
Pollution Control Act, information on the sources for funding,
information of risk management for failure, a description of
preservation and conservation easements, and information
about the technical merits of the person who made the
calculations.417 The request must include a verification plan to
prove correct implementation, including methods for credit
verification, either by self-verification or by a third party.418
408.
409.
410.
411.
412.
413.
414.
415.
416.
417.
418.
Id. § 96.8(d)(3)(i)(C).
Id. § 96.8(d)(3)(ii).
Id. § 96.8(d)(6).
Id. § 96.8(d)(4)(i)–(iii).
Id. § 96.8(e)(1).
Id. § 96.8(e)(8).
Id. § 96.8(e)(10).
Id. § 96.8(e)(2).
Id. § 96.8(e)(2)(i)(A).
Id. § 96.8(e)(2)(ii).
Id. § 96.8(e)(5).
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This request must also meet calculation requirements.419 A
calculation must show how the pollutant reduction will be
achieved.420 These calculations must be expressed in pounds per
year and must be based on the EPA methodologies provided
under the rules.421 Furthermore, the calculation sets aside 10% of
the reductions for a credit reserve.422
There are several conditions in which the Department will
not certify a request. First, the Department will not certify the
credits if the annual sum of all credits from non-point sources in
the Pennsylvania portion of the Chesapeake Bay Watershed
exceeds the tradable load.423 The Department calculates tradable
load, which is available on the Department’s website.424 Second,
the Department will not certify a request if it includes a
reduction activity related to a farmland conversion action and the
purchase and idling of a whole farm for the sake of providing
credits.425 However, if a portion of the farmland is converted
through one of the USDA programs, then it may be certified.426
Third, the verification and certification for multiple compliance
periods must be done separately.427 Additionally, the Department
may make certification contingent on other conditions not
specified in the regulations.428
After certification is complete, the credits must be verified
and then registered.429 Verification occurs once the pollutant
reduction activity has been implemented and the baseline and
threshold are satisfied.430 The Department must follow the
verification plan, but can also conduct other activities to ensure
the conditions are met.431 After verification, registration must
occur before the credits are applied.432 Registration requires a
contract to ensure that the credits will meet the program
requirements.433
419.
420.
421.
422.
423.
424.
425.
426.
427.
428.
429.
430.
431.
432.
433.
Id. § 96.8(e)(2)(i)(C).
Id. § 96.8(e)(3)(i).
Id. § 96.8(e)(3)(ii)–(iii).
Id. § 96.8(e)(3)(v).
Id. § 96.8(e)(4)(i).
Id.
Id. § 96.8(e)(4)(iii).
Id.
Id. § 96.8(e)(6)(iii).
Id. § 96.8(e)(6).
Id. § 96.8(f)(1).
Id. § 96.8(f)(1)(ii).
Id. § 96.8(f)(2).
Id. § 96.8(g)(1).
Id. § 96.8(g)(2)(ii).
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D. West Virginia
1. Introduction. West Virginia’s nutrient trading program
originated from the state’s involvement in the Chesapeake Bay
Water Quality Initiative.434 Nutrient trading is specifically
focused on the Potomac River.435 West Virginia is seeking to
reduce its nitrogen load into the watershed by 33%, phosphorus
load by 35%, and sediment load by 6% of 1985 levels.436 West
Virginia developed a strategy that addresses load reductions
from point sources, such as sewage treatment plants, industrial
dischargers, and storm water discharges from sewer systems, as
well as load reductions from non-point sources, such as farms,
forests, and urban storm water runoff.437 The West Virginia
trading strategy is still under development, so many of the
specifics are subject to change.438
2. Definitions and Codified Rules. Similar to Maryland’s
nutrient trading policy, the West Virginia Administrative Code
and the General Statutes merely provide the West Virginia
Department of Environmental Protection (WVDEP) with the
authority and responsibility to establish the nutrient trading
program.439 While the program is still in development, the
WVDEP can create and enforce interim trading programs.440 The
specifics of nutrient trading are established by WVDEP guidance
documents. The WVDEP defines nutrient trading as
“transactions that involve the exchange of quantifiable nutrient
reduction credits, registered with and approved by the
[WVDEP].”441 Further, the WVDEP defines a nutrient credit as
trading units in pounds of reduction per unit of time.442
As with the other states, common principles are evident.
First, trades must involve the same nutrients, meaning that
434.
W. VA. WATER RESEARCH INST., WV POTOMAC NUTRIENT CREDIT BANK AND
TRADE PROGRAM 37 (2010), available at http://www.nrcs.usda.gov/Internet/FSE_
DOCUMENTS/stelprdb1044928.pdf.
435.
See id. (stating the geographic focus of the program).
436.
Id.
437.
Id.
438.
See MINDY SELMAN ET AL., PINCHOT INST. FOR CONSERVATION, NUTRIENT
TRADING IN THE CHESAPEAKE BAY REGION: AN ANALYSIS OF SUPPLY AND DEMAND 5, 7
(2010), available at www.pinchot.org/uploads/download?fileId=658 (discussing the
developing nature of the program).
439.
See W. VA. CODE ANN. § 22-11-30(e) (LexisNexis 2009) (noting the powers of the
WVDEP and its secretary).
440.
Id.
441.
W. VA. DEP’T. OF ENVTL. PROT., supra note 215, at 5.
442.
Id. at 3.
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nitrogen offsets can only be used for nitrogen credits.443 Second,
nutrient credits cannot be used to comply with existing effluent
limits, unless expressly authorized by federal regulations.444
Trading can involve point sources, non-point sources, and third
parties, such as banks, as long as they meet the baseline
requirements.445 Point source baselines include having NPDES
permits if required.446 Non-point sources are not currently
regulated by the WVDEP and do not have current nutrient
allocations that would be used for point source baselines.447 To
achieve the baseline, non-point sources generally must comply
with reductions set forth by the tributary strategy to meet the
state reduction goals.448 This aspect of the program is not well
developed, and there will be further revised baseline
requirements as the program matures.449
Generating credits is different for point sources and nonpoint sources. Point source generation occurs when a loader
discharges below the nutrient allocation stated in its NPDES
permit.450 Non-point source generation occurs when approved
BMPs result in a net reduction of nutrient loads below baseline
requirements.451
Trading must comply with TMDLs to ensure that nutrient
trading will only occur where it will improve and protect water
quality.452 To further guarantee that trading will be beneficial, it
must be consistent with the EPA’s requirements.453
3. Proposing Trades. The parties seeking to utilize the credit
program are responsible for submitting a proposal to the
WVDEP, which is responsible for reviewing the proposal.454 The
proposals must include the following information about the
loader and the project: identification of the loader; the geographic
443.
Id. at 7.
444.
Id.
445.
Id.; BRANOSKY, JONES & SELMAN, supra note 297, at 6.
446.
BRANOSKY, JONES & SELMAN, supra note 297, at 6; W. VA. DEP’T. OF ENVTL.
PROT., supra note 215, at 8.
447.
W. VA. WATER RESEARCH INST., supra note 434, at 8.
448.
See generally BRANOSKY, JONES & SELMAN, supra note 297, at 9 (listing some of
the state nutrient goals as baseline requirements); W. VA. DEP’T. OF ENVTL. PROT., supra
note 215, at 8 (stating that forestry loaders must adhere to general forestry
environmental regulations in West Virginia before they can achieve the baseline).
449.
See BRANOSKY, JONES & SELMAN, supra note 297, at 9–10 (noting the revisions
and changes the program will undergo in the future).
450.
W. VA. WATER RESEARCH INST., supra note 434, at 8.
451.
Id.
452.
W. VA. DEP’T. OF ENVTL. PROT., supra note 215, at 18.
453.
Id.
454.
See id. at 11; BRANOSKY, JONES & SELMAN, supra note 297, at 12.
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location of the loader within a specific portion of the watershed;
current land uses and BMPs employed; information about the
credits, such as a reduction description, nutrient source, credit
calculation model, and project lifespan; whether a funding source
used for the reduction activity will limit sale or income from the
credits; a verification plan; a plan to mitigate risks from the
trading program; a description of any conservation easement on
the land; benefits from the activity; and a credit sale or purchase
agreement with a plan for third party inspection and verification
of nutrient reductions.455
The second step in setting up a nutrient trading program is
a review of the proposal by a panel of experts selected by the
WVDEP.456 The panel will examine the proposal to make sure
that the activities will generate the requested credits and that
the reduction is in line with nutrient goals.457 The WVDEP shall
make “every effort” to respond to the proposal within sixty days
in writing.458 Also, the WVDEP will provide public notice of the
proposals and the review by posting them on the WVDEP website
and the online marketplace.459 Paired with this panel review, the
WVDEP must separately verify that the credit generator meets
the baseline requirements prior to credit approval.460
Agricultural operation baselines will be verified through an onsite visit or a review of the management plan.461 The WVDEP has
the authority to appoint a different organization to verify these
practices.462 While verification must occur prior to the WVDEP
accepting the proposal, the department may conduct further
review of the credits and the effluent reduction at any time.463
4. Oversight and Maintenance. The WVDEP has identified
several methods to ensure the success of the trading program.
First, the WVDEP will mitigate risk by using conservative
assumptions for calculating credits.464 In creating these
assumptions, the WVDEP will gather information from experts
in the field while using the best available science.465 Second, the
455.
W. VA. DEP’T. OF ENVTL. PROT., supra note 215, at 12–14.
456.
Id. at 12.
457.
Id. at 13.
458.
Id. at 12.
459.
See id. at 13 (describing the online marketplace known as NutrientNet).
460.
Id.
461.
Id.
462.
Id.
463.
Id. at 13 (listing examples of verification methods, such as engineering plans or
photographic documentation of the installed BMP).
464.
Id. at 16.
465.
Id.
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WVDEP will use risk reserves to adjust load reductions used for
credit generation.466 Third, the WVDEP retains the right to
conduct audits to verify baselines and reduction activities.467 The
WVDEP will evaluate trading programs at least every five years,
but the WVDEP reserves the right to conduct evaluations more
frequently.468
Similar to the trading programs of the other Chesapeake
Bay states, West Virginia will ensure that program information
will be publically available.469 The credit registry, NutrientNet,
will be publically available.470 The review and approval process
will be made public by the WVDEP.471 Any major changes to the
permits or the permit system will be made public as well.472
466.
467.
468.
469.
470.
471.
472.
Id. at 17.
Id.
Id.
Id.
Id.
Id. at 12–13.
Id. at 12.