RTI International
Economic Study of Nutrient Credit Trading for
the Chesapeake Bay
George Van Houtven
Robert Beach
Ross Loomis
The Economics of Water Quality Improvement in the Chesapeake Bay
Washington, DC
October 31-November 1, 2011
RTI International is a trade name of Research Triangle Institute.
www.rti.org
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
Study funded by partnership of the Chesapeake Bay
Commission and the Linden Trust for Conservation
Key Questions for the Study
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How large are the potential costs savings from including
nutrient trading as part of a strategy for meeting the
Chesapeake Bay TMDL requirements?
How are these potential costs savings affected by
different restrictions on interstate and interbasin trading?
The objective is not to predict future trading levels or to
model the impacts of the state’s existing trading
programs
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Approach

Adapt and apply the economic modeling framework we
developed for EPA/ORD
Estimate how the costs of TMDL compliance could be
reduced under different trading scenarios

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Reference “No-trading” Scenario: Load levels and BMP
implementation as specified in the state’s watershed
implementation plans (WIPs) and the corresponding CBWM
scenario
Trading Scenarios: allow loads and load reductions to be
redistributed across sources to achieve same TMDL goals at a
lower cost
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Allow interbasin and/or interstate trading
Allow PS-PS and/or PS-NPS trading
Allow trading to meet TMDL (short term) and/or maintain TMDL (long
term)
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Modeling Framework
1
Total Baseline (2009)
Nutrient Loads
(lbs/yr)
3
4
5
Total Nutrient Load
Limits (TMDL) (lbs/yr)
2
Total Load Reduction
Targets
(lbs/yr)
Inventory of Sources
& Control Projects
• Project Costs ($/yr)
• Project Load Reductions (lbs/yr)
OPTIMIZATION
Mixed Integer
Linear
Programming
Model in GAMS
Least-Cost Solution
• Selected Projects
• Total Control Costs
6
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Approach


By identifying the lowest cost combination of available
projects, the model simulates the results of an ideally
functioning nutrient trading market.
Additional restrictions can make the model more realistic
and policy relevant, by including
–
–
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Transaction costs (% increment to BMP costs)
Uncertainty ratios
Eligibility limits for participation in nutrient trading

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Credit purchases: limits on eligibility for existing point sources
Credit sales: limits on nonpoint source participation, including
agricultural baseline requirements
Limits on inter-basin trading volumes
Limits on agricultural land retirement and conversion
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Key Data for Source Locations and Loads

Chesapeake Bay Watershed Model (CBWM) Phase
5.3.2
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–
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Watershed network and segmentation— subdivides the Bay
watershed into a linked network of 2,468 “land-river segments.”
Land use/land cover segmentation—subdivides each landriver segment into 30 land use categories, including 17 types of
agricultural land and 11 types of urban land.
Delivered loadings— provides total annual delivered loadings
estimates of TN and TP from each land use category, point
sources and atmospheric deposition by land-river segment.
National Hydrography Dataset (NHD), used to identify
unbuffered riparian areas
NRCS soils data, used to identify highly erodible land
(for land retirement) and hydric soils (for wetland
restoration)
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Control Projects, Load Reductions and Annual Costs (I)
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Point Sources
–
multiple tiers of wastewater treatment at 399 significant
municipal and 76 significant industrial facilities
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Reducing TN to 8, 5, or 3 mg/L
Reducing TP to 1, 0.5, or 0.1 mg/L
Annualized costs and nutrient removal estimates based
on EPA’s ongoing cost analysis of the Chesapeake Bay
TMDL
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Control Projects, Load Reductions, and Annual Costs (II)

BMP nutrient removal
rates/efficiencies
included in the
CBWM
 Annualized costs
(including land,
installation, and O&M)
based on EPA’s
ongoing cost analysis
of the Chesapeake
Bay TMDL
Nonpoint Source Contols
Currently Included
Under Consideration
Agricultural BMPs
Forest & Grass Buffers
Wetland Restoration
Tree Planting
Land Retirement
Cover Crops (Early Drilled Rye)
Enhanced Nutrient Management
Continuous No Till
Livestock Exclusion
Conservation Plans
Decision Agriculture
Conservation Tillage
Off Stream Watering without Fencing
Upland Prescribed Grazing
Upland Precision Intensive Rotational Grazing
Barnyard Runoff Control
Nutrient Management
Manure Transport
Urban Stormwater BMPs
Dry Extended Detention Ponds
Urban Nutrient Management
Wet Ponds and Wetlands
Street Sweeping
Urban Forest Buffers
Dry Detention Ponds and Hydrodynamic Structures
Urban Filtering Practices
Urban Infiltration Practices
Retrofit Stormwater Management
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Eligibility for Participation by Point and Nonpoint Sources

States currently have different eligibility
requirements
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–
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MD requires ENR for PS, which in effect limits credit purchases to
offsets for future growth
VA allows PS-PS trades to meet current annual load limits
PA allows PS-PS and PS-NPS trades to meet current annual load
limits
We will include scenarios that allow PS to meet
current annual load limits via trades with
–
–
Only other PS
PS and NPS
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Baseline Requirements for Agricultural BMPs

States currently have different requirements,
but generally specify a minimum level of BMP
implementation
 We will define the baseline as the level of
BMP implementation specified in the WIPS
for each land-river segment
–
–
Ensures that agricultural land at a minimum meets
its load allocations
Additional ‘beyond WIP” BMPs and their associated
load reductions are eligible to generate credits
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Interbasin and Intersegment Trading Restrictions
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The Bay is comprised of 92 impaired tidal
segments, each with its own TMDL; however,
these load limits were set primarily to meet DO
objectives in the deep channel.
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–
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the 92 TMDLs are more protective than necessary to
protect “local” tidal water quality
some amount of loads can safely be redistributed
(traded) across segments and basins
We will allow trading between segments and
basins, as long as the sum of segment-level
TMDL exceedances is less than 9 million lbs of
nitrogen and 200,000 lbs of phosphorus
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Farmland Preservation Restrictions

States have different restrictions on the
amount of agricultural land that can be “idled”
–
MD and PA do not allow credits for idling whole or
substantial parts of farms
– VA places no restrictions on this type of land
conversion for credit generation

We will limit conversion (buffers, tree planting,
retirement, wetlands) to no more than 25% of
agricultural acres in each land-river segment
(CRP guidelines) and only allow retirement of
highly erodible lands.
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Offsets for Future Growth

To maintain TMDL, new or expanded
sources will be required to purchase offsets
from existing PS and/or NPS
 For long-term scenario (2025) we will
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estimate county-level demand for new municipal
wastewater treatment capacity (based on
projected population growth)
estimate resulting demand for offset credits
assuming new capacity uses highest tier nutrient
removal technology
include as additional required load reductions in
the cost minimization model