EPA 903-B-01-001
CBP/TRS 254/01
Chesapeake Bay Program
Nutrient Trading
Fundamental Principles and
Chesapeake Bay Program
A Watershed Partnership
Prepared by:
The Chesapeake Bay Program
Nutrient Trading Negotiation Team
March 2001
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Chesapeake Bay Program
Nutrient Trading
Fundamental Principles and Guidelines
2001
Chesapeake Bay Program
A Watershed Partnership
410 Severn Avenue, Suite 109
Annapolis, Maryland 21403-2500
1-800-YOUR-BAY
http://www.chesapeakebay.net
Prepared by:
The Chesapeake Bay Program
Nutrient Trading Negotiation Team
Allison Wiedeman, Chesapeake Bay Program
Julie Trask, Chesapeake Research Consortium
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Chesapeake Bay Program
A Watershed Partnership
Chesapeake Bay Program Principals' Staff Committee
ENDORSEMENT OF THE NUTRIENT TRADING
FUNDAMENTAL PRINCIPLES AND GUIDELINES
^ / he Chesapeake Bay Program convened the
i^/ Nutrient Trading Negotiation Team in June 1999
to explore the feasibility of nutrient trading for
point and nonpoint sources in the watershed and, if
appropriate, to develop nutrient trading guidelines.
The outcome of the Team's deliberations is
presented in a document entitled Nutrient Trading
Fundamental Principles and Guidelines. The
document is intended to be used as a guide for those
Bay jurisdictions that choose to establish nutrient
trading programs.
The Negotiation Team was composed of a wide
array of interested stakeholders from across the
Chesapeake Bay watershed—Federal, state and local
governments, as well as municipal, industrial,
agricultural, environmental and public interests were
among those represented. Using a facilitated
consensus-based approach, the Negotiation Team
derived the nutrient trading fundamental principles
and guidelines contained in the document.
Fundamental principles represent those elements of a
nutrient trading program that the Negotiation Team
deemed essential. The guidelines are those elements
of a program that the Negotiation Team deemed
important for the jurisdictions to consider when
developing and implementing a trading program.
The document is based on the Negotiation Team's
comprehensive consideration of numerous other
trading programs and approaches, substantial
research, and corresponding lengthy negotiations.
While the document provides parameters of a
general framework, individual Bay jurisdictions
implementing a trading program will need to
determine additional program elements. The
document reflects changes made by the Negotiation
Team in response to public comment.
The Nutrient Trading Fundamental Principles and Guidelines document is accepted and endorsed by the
Chesapeake Bay Program partners. It is recognized that if trading programs are developed, each jurisdiction
will need to tailor that program in a manner necessary to meet their individual needs and nutrient reduction
goals and efforts. However, the enumerated fundamental principals and guidelines in the document will
serve as a common organizing and policy framework for the jurisdictions.
FOR THE COMMONWEALTH OF VIRGINIA
FOR THE STATE OF MARYLAND
FOR THE COMMONWEALTH OF PENNSYLVANIA
FOR THE DISTRJCT OF COLUMBIA
FOR THE CHESAPEAKE BAY COMMISSION
FOR THE UNITED STATES OF AMERICA
Date: March 26, 2001
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PREAMBLE
This document presents fundamental principles and guidelines for nutrient trading in the
Chesapeake Bay watershed. The Chesapeake Bay Program convened the Nutrient Trading
Negotiation Team (Negotiation Team) in June 1999 for the purpose of exploring the feasibility
of nutrient trading for point and nonpoint sources in the Chesapeake Bay watershed and, if
appropriate, develop nutrient trading guidelines for the Bay jurisdictions to use on a voluntary
basis. The outcomes of the Negotiation Team's deliberations are presented herein. This
document is not a regulation. Rather, it is intended to be used on a voluntary basis as a guide for
those Bay jurisdictions that choose to establish nutrient trading programs.
The Negotiation Team was composed of a wide array of interested stakeholders from across the
Chesapeake Bay watershed—Federal, state, and local governments, as well as municipal,
industrial, agricultural, environmental, and public interests, were among those represented.
Using a facilitated consensus-based approach, the Negotiation Team derived the nutrient trading
fundamental principles and guidelines found in this report. Fundamental principles represent the
elements that the Negotiation Team deemed essential for an equitable, environmentally
protective, yet viable, trading program. The guidelines are what the Negotiation Team deems
important for the jurisdictions to consider when developing and implementing a trading program.
This document is a resource for the user in becoming familiar with, or developing and
implementing, a trading program for nutrients. The document is based on the Negotiation
Team's comprehensive consideration of numerous other trading programs and approaches,
substantial research, and corresponding lengthy negotiations. General guidance is provided in
this document: certain program details will need to be determined by individual Bay
jurisdictions, should they implement a trading program. This document has undergone public
review and revisions were made, according to public comment, where the Negotiation Team
deemed appropriate.
Should the signatory states pursue trading programs, the Negotiation Team recommends that the
definitions, principles, and guidelines contained in this document be reevaluated two to three
years after implementation and actual operation of such programs. A reevaluation should
provide the opportunity for trading programs to adapt as reduction goals change, new water
quality data becomes available, new technologies evolve, policies such as "smart growth" are
implemented, cap strategies are developed, and as tributary strategies are revised. Recognizing
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the importance of land use efforts such as "smart growth" in Bay restoration, the Negotiation
Team agreed,
1) that if it can be established that trading only within a major Bay tributary substantially
constrains "smart growth" or cap strategy or tributary strategy implementation
initiatives, and
2) that trading with an adjoining major Bay tributary would yield significant environmental
benefits,
then the reevaluation may include a close examination of Fundamental Principle #2* to consider
the potential for allowing trades across major Bay tributary boundaries. Any changes to the
definitions, principles, and guidelines must be adopted through negotiation by consensus in a
manner consistent with the adoption of the existing definitions, principles, and guidelines.
See Exhibit 1.2 or Section 3.3 for a definition of Fundamental Principle #2.
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HOW TO USE THIS DOCUMENT
It is important for the reader to understand that, due to the very complex nature of this subject
matter, this document should be read in its entirety to fully comprehend how all of the facets of a
trading program work together and to avoid the meaning of any individual facet from being taken
out of context. For example, a reading of the fundamental principles alone will not provide all of
the information necessary to accomplish trading. Rather, it is necessary to comprehensively
consider the fundamental principles together with the guidelines and supporting options herein to
develop a complete trading program.
This document is not a regulation but a guide for the states to use on a voluntary basis when
developing their own trading programs. Certain words frequently associated with statutes or
regulations (e.g., must, should, may, will, etc.) have been carefully used in this report to reflect a
hierarchy of importance or strength of the feeling by the Negotiation Team. In this report, the
Negotiation Team's use of the words "must" and "will" reflect essential elements of a successful
and defensible nutrient trading program, the word "should" reflects the Negotiation Team's
strong recommendation for inclusion of such elements in a trading program, and the use of the
word "may" reflects optional elements that are worthy of consideration.
Hierarchy of Language Chosen by the Negotiation Team
"Must" reflects what the Negotiation Team concludes are essential
components of a successful and defensible program
"Should" reflects the Negotiation Team's strong recommendation for
inclusion within a trading program
"May" reflects optional elements the Negotiation Team considers
worthy of consideration
in
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The Principles and Guidelines Established in This Document Are Agreed to by
Consensus by The Chesapeake Bay Program Nutrient Trading Negotiation Team
February 2001
Primary Negotiators Stakeholder Group
Robert Koroncai
Allison Wiedeman
Jerry Griswold
Virginia Kearney
John Rhoderick
David Bingaman
Robert Yowell
Stuart Gansell
Mark Bennett
John Kennedy
Roy Hoagland
Stella Koch
U.S. EPA, Region III
Chesapeake Bay Program
Chesapeake Bay Program
State of Maryland
State of Maryland
Commonwealth of Pennsylvania
Commonwealth of Pennsylvania
Commonwealth of Pennsylvania
Commonwealth of Virginia
Commonwealth of Virginia
Regional Environmental Interest
Regional Environmental Interest
.
*~_>'TLxa/vf'
IV
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Patricia Jackson Local Watershed Interest
Helen Murphy
Jean Packard
Cy Jones
Bill Leary
Jud White
George Kelly
Steele Phillips
Don Robinson
Lynne Hoot
Barbara Moore
Larry Gavan
Public Interest
Public Interest
Municipal Point Source Interes'
Municipal Point Source Interest
Industrial Point Source
Industrial Point Source
Rural Nonpoint Source
Rural Nonpoint Source
Rural Nonpoint Source
Storm Water Interest
Storm Water Interest
^ij^^
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EXECUTIVE SUMMARY
The purpose of this Nutrient Trading Fundamental Principles and Guidelines document is to
provide guidance on developing and implementing a nutrient trading program within the
Chesapeake Bay watershed. Growing populations and agricultural industries in the watershed
have put pressure on our ability to maintain and achieve nutrient reduction goals necessary for
the health of the Bay and its living resources. In spite of the many traditional nutrient reduction
measures already in effect, such as end-of-pipe technology and Best Management Practices
(BMPs), nutrient loads will continue to increase unless new and alternative reduction and
maintenance methods and programs are employed. Nutrient trading is viewed as a possible tool
among a realm of techniques and actions that may be used to counteract nutrient increases.
In June 1999, the Chesapeake Bay Program
organized a multi-stakeholder Nutrient
Trading Negotiation Team for the purpose
of exploring the feasibility of nutrient
trading in the Chesapeake Bay watershed
and, if appropriate, prepare guidelines for
voluntary use by states in the development
of their respective nutrient trading
programs. This document presents the
results of these discussions and describes
fundamental principles and guidelines for
nutrient trading as proposed and agreed to
by the Negotiation Team. The Negotiation
Team recognized that, if designed
appropriately, this market-based tool
potentially offers a means to achieve
pollution reduction in cost-effective and
environmentally sound ways. The
potential benefits of trading are listed in
Exhibit 1.1.
Through a professionally facilitated
process, the Negotiation Team came to
consensus on a number of fundamental
principles and general guidelines aimed at
ensuring consistent, compatible, and
Exhibit 1.1 Potential Benefits of Trading
(adapted from U.S. EPA, 1998)
Economic Benefits:
Reduces costs for individual sources contributing to water
quality problems.
Allows dischargers to take advantage of economies of
scale and treatment efficiencies that vary from source to
source.
Reduces overall cost of addressing water quality problems
in the watershed.
Creates market demand for new innovative technologies.
Environmental Benefits:
Achieves equal or greater reduction of pollution for the
same or less cost.
Creates an economic incentive for dischargers to go
beyond minimum pollution reduction and also encourages
pollution prevention and the use of innovative
technologies.
Can reduce cumulative pollution loading, improve water
quality, accommodate growth, and prevent future
environmental degradation.
Can address the broader environmental goals within a
trading area; e.g., ecosystem protection, ecological
restoration, improved wildlife habitat, endangered species
protection, etc.
May encourage pollution reduction to occur sooner and at
increased rates.
Social Benefits:
Encourages dialogue among stakeholders and fosters
concerted and holistic solutions for watersheds with
multiple sources of water quality impairment.
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environmentally beneficial approaches between Chesapeake Bay Program jurisdictions and
adherence to Chesapeake Bay Program goals and established agreements. Fundamental
principles, presented in Exhibit 1.2, represent the highest order of importance and establish the
Exhibit 1.2 Fundamental Principles *
Fundamental Principle #1
Trades must not produce water quality effects locally, downstream, or Baywide that
violate water quality standards or criteria
do not protect designated uses
or
adversely impact living resources and habitat.
Fundamental Principle #2
Trading will be allowed only within each major Bay tributary (i.e., Susquehanna, Potomac, Rappahannock, York, James,
Patuxent, Maryland Western Shore, Virginia Western Shore, Maryland Eastern Shore, Virginia Eastern Shore) among all
signatory states and nonsignatory states if they adopt the appropriate allowance and are consistent with the Chesapeake
Bay Program's nutrient trading guidelines and state tributary strategies.
Fundamental Principle #3
The nutrient trading program must be consistent with Federal, state, and local laws and regulations, be flexible enough to
adapt to future changes in these laws and regulations, and enable participation of all potential sources as determined by
the market place.
Fundamental Principle #4
The nutrient trading program must be consistent with the Chesapeake Bay Program's nutrient reduction goals and state
tributary strategies.
Fundamental Principle #5
Each trade must result in a net reduction in nutrient loadings or contribute to maintenance of a tributary nutrient cap. Net
reduction in loadings or maintenance of a cap shall be calculated based upon the estimated tributary loadings at a point in
time determined by the state.
Fundamental Principle #6
Sources should implement nutrient reduction actions to achieve the 40% reduction goal, as well as the goals adopted for
the tributaries south of the Potomac River prior to pursuing a nutrient trading option.
Fundamental Principle #7
Traders must be in substantial compliance with all local, state, and Federal environmental laws, regulations, and programs.
Fundamental Principle #8
The involvement of a diverse group of stakeholders must be sought in the design and implementation of state trading
programs and related public education initiatives.
' Please see Preamble for information on the application of Fundamental Principles.
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vital foundation for the program. Fundamental principles are deemed by the Negotiation Team
to be essential for an equitable, environmentally protective, yet viable, trading program.
Guidelines, presented in Exhibit 1.3, are organized around six key elements of a trading program:
• Identifying nutrient reduction goals
• Determining eligibility
• Performing trade administration
• Ensuring accountability
Assessing progress
• Involving stakeholders.
These guidelines are what the Negotiation Team deems important for the jurisdictions to
consider when developing and implementing a trading program.
Exhibit 1.3 Guidelines
GUIDELINES FOR IDENTIFYING NUTRIENT REDUCTION GOALS
Trading to Achieve or Maintain the Chesapeake Bay Nutrient Cap
1. Trading should be allowed among "like" source types in order to achieve the 40% nutrient reduction goal. This means
that point sources could trade with point sources, and nonpoint sources could trade with nonpoint sources, but point
sources could not trade with nonpoint sources.
Within several years after the implementation of a trading program, the states may reexamine the success or failure of
trades to date in achieving the goal and, thereafter, determine if cross-source trading to achieve is appropriate.
Once the 40% nutrient reduction goal is met, trades should be allowed within and across source types to maintain
nutrient reduction goals or further reduce nutrient levels.
2. For trading to occur within a major Bay tributary, the nutrient trading program must incorporate (a) specific nutrient
loading allocations established to provide water quality conditions necessary to protect living resources in the tributary
and the Bay; (b) a baseline and a cap for nutrient loads for the tributary; and (c) allowances for point and nonpoint
sources.
GUIDELINES FOR DETERMINING ELIGIBILITY
Guidelines Applicable to All Source Categories
3. Total Nitrogen and/or Total Phosphorus are the forms of nutrients eligible for trading.
4. Eligibility consideration should be given to all potential point and nonpoint sources to the extent allowed under current
local, state, and Federal programs.
5. A source may receive credits for reductions in both nitrogen and phosphorus through the operation of a facility or the
implementation of a BMP that reduces both nutrients.
6. Entities that are not considered sources may purchase credits (e.g., for the purpose of banking credits or retirement).
7. Any source receiving state or Federal funds to achieve nutrient reductions through the development or installation of any
nutrient reduction equipment, technology, or structural BMP cannot buy credits to achieve those reductions. If state or
Federal funds are used to cost share nutrient controls that generate credits, only the portion of those credits not paid for
by the state or Federal cost share are available for trading.
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Exhibit 1.3 Guidelines (Cont'd)
GUIDELINES FOR DETERMINING ELIGIBILITY (CONT'D)
Additional Nonpoint Source Eligibility Guidelines
8. All farmers (sellers) must be following a state certified Nutrient Management Plan to be eligible to participate in trading.
9. All BMPs must meet NRCS standards and be part of a Conservation Plan.
Urban Eligibility Guidelines
10. All nonagricultural nonpoint source storm water systems governed by a state and/or Federal storm water permit(s) are
eligible to generate measurable and certified credits for those reductions that exceed permit requirements. For those
storm water systems not governed by permit, each must have comparable requirements (to permitted systems) prior to
the generation of nutrient reduction credits.
GUIDELINES FOR PERFORMING TRADE ADMINISTRATION
Bavwide Program Oversight
11. The Chesapeake Bay Program should have an opportunity to comment on state programs with respect to fundamental
principles, consistency, interstate trades, and program effectiveness.
State-Level Program Oversight and Management
12. Each state will be responsible for program oversight and the applicable level of day-to-day program management.
These functions should include the following:
• Establishing policy direction
• Certifying credits
• Establishing guidance on eligible trades
• Registering and tracking the generation of credits, including quantities retired for net water quality benefits
• Monitoring compliance
• Enforcing program requirements
• Evaluating program performance.
Establishment of Central State Coordinating Office
13. A central trading coordinating office should be established within each state to track the administration of trades. The
organization may be formed within an existing state government or formed from a conglomerate of state and local
stakeholders.
Trade Ratios
14. Each trading program should address the following ratios:
• Delivery ratios
• Special needs ratios
• Retirement ratios
• Uncertainty ratios.
Trade Facilitation
15. Each trading program should address trade facilitation, including those activities that support the negotiation and
recording of completed trade transactions. Specific activities and roles should be determined by the states.
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Exhibit 1.3 Guidelines (Cont'd)
GUIDELINES FOR ENSURING ACCOUNTABILITY
Guidelines for Assessing Performance
Point Sources
16. Self monitoring and reporting of nutrient reduction should be required for participants in the trading program.
Nonpoint Sources
17. All nonpoint source controls should be inspected to ensure the control is properly sited, the materials and plans satisfy
established quality specifications, and the installation job meets performance standards.
18. All nonpoint source controls should undergo an annual on-site assessment by a qualified inspector to ensure proper
functionality (e.g., look for signs of sedimentation and erosion to identify inefficient BMPs). In addition, the nonpoint
source should allow right of entry by the state or its designated agent, and the states should use scheduled spot check
inspections to supplement scheduled random inspections.
States
19. States will be responsible for performing, collecting, and analyzing ambient water quality monitoring and overall
program assessment.
20. In addition to ambient water quality monitoring, states should include other types of data (e.g., weather patterns, slope,
soil types, effluent monitoring data) to predict the effectiveness of trades, to assess whether trades are meeting and
maintaining water quality standards, and whether traders are meeting applicable limits.
Guidelines for Account Balancing
Point Sources
21. Point sources will monitor and report on a monthly basis. A yearly accounting period should be used to assess the
trade.
22. Point sources should have mechanisms in place to calculate the credits or portions of credits eligible for trading.
Nonpoint Sources
23. Annual account balancing periods should be used for nonpoint sources based upon seasonal monitoring.
24. Nonpoint sources should have mechanisms in place to calculate the credits or portions of credits eligible for trading.
Guidelines for Enforcement and Compliance
General
25. The trading agreement will be enforceable by the state. After considering a variety of options, including general state
permits, state regulations, and contracts, the Negotiation Team strongly recommends that trades should be governed
by a state general permit or regulation issued under the state's water quality laws (versus Clean Water Act) and that the
public will be provided opportunity for input prior to the execution of a trade. If a state elects to utilize a contract as a
vehicle for enforcement, the contract development and enforcement processes must provide the same elements as if
within the state's regulatory or general permit program, including public participation prior to the execution of a trade.
Any NPDES permittee with a nutrient effluent permit limit desiring to trade should have the trade linked to its permit.
Point Sources
26. The state will maintain oversight of facility monitoring and reporting and will perform periodic compliance checks. The
state will have full compliance and enforcement responsibilities, such as those performed under existing Clean Water
Act programs and protocols.
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Exhibit 1.3 Guidelines (Cont'd)
GUIDELINES FOR ASSESSING PROGRESS
Monitoring Trades and Trading Impacts
27. States will perform ambient monitoring and modeling to assess the effect of trading programs in achieving or
maintaining baywide (e.g., 40% reduction goal) and tributary specific nutrient reduction goals. These monitoring and
modeling efforts should build upon existing efforts currently used by states and trading participants. Point sources
involved in nutrient trading must monitor and report total nitrogen and total phosphorous discharges as applicable to the
trade. Nonpoint source monitoring should be conducted to provide sufficient data to demonstrate the effectiveness of
trading actions. If monitoring is not utilized, then nonpoint source pollutant loading reductions will be determined based
upon data and analysis obtained from the Chesapeake Bay Program's Watershed Model. If the modeling approach is
used, trading ratios must be applied to accommodate for uncertainty.
State Tracking Mechanisms
28. States must develop mechanisms to collect and track trading information that is compatible with existing mechanisms
used by the Bay Program for assessing progress toward achieving and maintaining nutrient reduction goals (e.g.,
watershed model, BMP tracking system, environmental indicators, State of the Bay Report). Tributary-specific
information must be collected by the state and aggregated to demonstrate how trading supports the achievement and
maintenance of nutrient reduction goals. Information requirements include the following:
• Total annual load reduction of nitrogen and phosphorous
• Total annual load reduction of nitrogen and phosphorous by type of trade (p-p, p-nps, nps-p, nps-nps)
• Total annual load reduction of nitrogen and phosphorous by discharger type (point source, agricultural, and urban
nonpoint sources)
• Net loading reduction of nitrogen and/or phosphorous generated by trading partners
• Comparison of pre-trading water quality conditions to post-trading water quality conditions
• Total number of trades made
• Total annual number of trades
• Determination of whether cumulative effects of the trading program are contributing to achieving tributary strategy
goals.
Reporting Bavwide Progress
29. The Chesapeake Bay Program must provide a similar Baywide analysis (as outlined under the State Tracking
Mechanisms guideline) based on the trading information it receives from the states.
Evaluating Accountability. Compliance, and Enforcement
30. States must track the actions of trading partners, compliance with trade agreements, and any enforcement action taken.
Information requirements for each tributary watershed and the state include the following:
• Total annual number of trading partners subject to periodic compliance checks
• Total annual number of trading partners deemed to be out of compliance with existing regulatory requirements
• Total annual number of trading partners deemed to be out of compliance with the terms of their trade agreement
• Total annual number of trading partners that corrected noncompliance issues
• Total annual number of trades subject to enforcement penalties.
Establishment of a Central Coordinating Office
31. The central coordinating office, as described under the Guidelines for Performing Trade Administration, will be
responsible for the state's responsibilities contained in these Assessing Progress guidelines.
Additional Information to be Provided by Buyer
32. Buyers of credits must provide available information and reason(s) for trades, including the following:
• Credit price
• Timeframe of trade
• Nutrient reduction (in Ibs)
• Existing cost savings estimates.
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Exhibit 1.3 Guidelines (Cont'd)
GUIDELINES FOR INVOL VING STAKEHOLDERS
33. Each state should create or use existing citizens advisory committees to be part of the nutrient trading program within
each state.
34. Each state may choose to create a demonstration program.
35. States should provide broad public notification of trades as they occur, including notification to local watershed groups.
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TABLE OF CONTENTS
PREAMBLE i
HOW TO USE THIS DOCUMENT iii
EXECUTIVE SUMMARY vi
1.0 Introduction 1
2.0 Background 2
2.1 Motivation for a Trading Program in the Chesapeake Bay Watershed 3
2.2 Closing the Gap with Market-Based Approaches 4
2.3 Federal and Chesapeake Bay Trading Initiatives 5
2.4 Approach To Developing Nutrient Trading Guidelines for the Chesapeake Bay ... 7
3.0 Foundations for Nutrient Trading in the Chesapeake Bay 10
3.1 Key Definitions 10
3.2 Geographic Scope 14
3.3 Fundamental Principles 15
3.4 The Six Elements of the Nutrient Trading Program 16
4.0 Guidelines for Identifying Nutrient Reduction Goals 18
5.0 Guidelines for Determining Eligibility 20
6.0 Guidelines for Performing Trade Administration 23
7.0 Guidelines for Ensuring Accountability 27
8.0 Guidelines for Assessing Progress 30
9.0 Guidelines for Involving Stakeholders 32
10.0 Recommended Next Steps 34
Appendix A. Public Comments 36
Appendix B. Negotiation Team Membership 43
Appendix C. Key Definitions 45
Appendix D. Trading Ratios 48
Appendix E. Trade Tracking Forms 62
Appendix F. Implementation Options for Trade Accountability 65
REFERENCES 69
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LIST OF EXHIBITS
Exhibit 1.1 Potential Benefits of Trading vi
Exhibit 2.1 The Effects of Nutrient Over-Enrichment 2
Exhibit 2.2 Potential Benefits of Trading 5
Exhibit 3.1 Key Definitions 11
Exhibit 3.2 Ten Major River Basins of the Chesapeake Bay Watershed 13
Exhibit 3.3 Nutrient Trading Concept 16
Exhibit 9.1 Nutrient Trading Program Development: Stakeholder Process 33
Exhibit D. 1 Model Segments 58
LIST OF TABLES
Table D.I Nutrient Removal Efficiencies ofNonpointBMPs 49
Table D.2 Uncertainty Ratios Established by Other Programs 49
Table D.3 BMP Nutrient Removal Efficiencies and Ratios in the Tar Pamlico Program ... 52
Table D.4 Rahr Malting Co., Pollutant Equivalency Rates 54
Table D.5 Delivery Factors from the Watershed Model Draft Progress 2000 Scenario 56
Table D.6 Estimated Nutrient Reduction Efficiencies for Main BMP Categories 59
Table D.7 Procedure for Calculating Nutrient Credits from BMPs 60
Table D.8 Nitrogen Loading Factors: Conventional Tillage, Conservation Tillage, and
Hayland; Land Use Acreage and Edge of Stream Loading Factors (LF) in
Ibs/acre 61
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1.0 Introduction
This report presents the outcomes from the Chesapeake Bay Program Nutrient Trading
Negotiation Team's deliberation process on the feasibility of nutrient trading in the Chesapeake
Bay watershed. It is meant to serve as a nonprescriptive guide for Chesapeake Bay watershed
states to use in developing their nutrient trading programs, as they deem appropriate. The report
will also aid potential trading participants in understanding the concept of trading and the
expected process for trading in the Bay.
A draft of these guidelines was made available to the public for review on September 8, 2000.
A series of 16 public meetings were held in a variety of locations across the watershed for the
purpose of educating the public on these guidelines. One hundred and eighteen (118) written
comment letters were received prior to the close of the comment period on October 27, 2000.
The Nutrient Trading Negotiation Team (Negotiation Team) considered these comments and
made changes where appropriate. A summary of these comments, along with a description of the
major commenter issues and the changes made by the Negotiation Team after consideration of
these comments, has been compiled and is entitled "Summary of Public Comments Submitted on
the Chesapeake Bay Program Nutrient Trading Fundamental Principles and Guidelines." See
Appendix A for a synopsis of the public meetings, public comments, and responses to these
comments.
Using a consensus-based process, the Negotiation Team identified key definitions, fundamental
principles, and guidelines for a Chesapeake Bay nutrient trading program. In addition, the
Negotiation Team identified implementation options for specific elements of a trading program.
Recognizing the differences among jurisdictions in the watershed, options are presented to
provide ideas that will help entities identify the best approach for their situation. The options
were developed from research and case studies—they are not based on consensus.
This report begins by providing detailed background information on nutrient reduction activities
in the Chesapeake Bay watershed and explains the reasons for considering nutrient trading as a
tool to assist in nutrient reduction. This report continues by presenting definitions and
fundamental principles agreed upon by the Negotiation Team. A description of the six elements
of a trading program follows in Sections 4.0 through 9.0. These sections contain the guidelines
the Negotiation Team concluded were important factors to consider, should the Bay jurisdictions
pursue nutrient trading. Section 10.0 discusses future steps recommended prior to developing a
large watershed trading program.
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2.0 Background
One of the greatest water quality challenges
facing the Chesapeake Bay is excess
nutrients. This overabundance of
phosphorus and nitrogen in Bay waters is a
form of pollution that harms the Bay's
aquatic life and other living resources (see
Exhibit 2.1).
In response to this growing problem, key
government entities in the Bay region—
Maryland, Pennsylvania, Virginia, District
of Columbia, U.S. Environmental
Protection Agency, and the Chesapeake Bay
Commission—signed the Chesapeake Bay
Agreement in 1983. This agreement
established a cooperative approach to
addressing the Bay's problems and initiated the
scientific community and governments at local,
Chesapeake Bay Program.
Exhibit 2.1 The Effects of
Nutrient Over-Enrichment
Excess nutrients may cause the excessive growth of
microscopic floating plants called algae. When algae
populations explode, or bloom, the water becomes cloudy and
blocks light to submerged aquatic vegetation (SAV). Without
enough light, SAV dies. Because SAV provides food and
shelter for many Bay animals, such as crabs and fish, this
results in wide-spread damage to the Bay.
Algae blooms from excess nutrients also cause another
problem—reduced oxygen levels in the Bay's waters at certain
times of the year. Oxygen is necessary for all Bay life, but each
summer as dying algae from the spring blooms sink, they are
consumed by microscopic animals and bacteria in a process
that uses up oxygen in the water. This algae decay, plus hot
summer weather, often rob the Bay's deep waters of life-giving
oxygen. If oxygen levels fall too low, Bay organisms can die.
voluntary partnership between citizens in the
state, and Federal levels known as the
In 1987, the original agreement was strengthened with the signing of a new Bay Agreement that
set a goal to reduce the controllable nitrogen and phosphorus loads entering the Bay by 40% from
1985 levels by the year 2000. Each of the signatory jurisdictions that signed these agreements
(Maryland, Virginia, Pennsylvania, District of Columbia) proceeded to develop "tributary
strategies," which presented their approach to meeting the reduction goals. After almost two
decades of concentrated effort, the signatories to the Chesapeake Bay Agreement recently
reaffirmed their partnerships and recommitted and strengthened their efforts in the June 2000
signing of Chesapeake 2000. By far the most comprehensive and far-reaching of the three Bay
Program agreements, it reaffirms the commitment to achieve and maintain the 40% nutrient
reduction goal agreed to in 1987, as well as specific tributary strategies goals. In fact, the 2000
Agreement's goal is to delist the Chesapeake Bay from the impaired water bodies list for
nutrients and sediments by 2010. As part of this goal, by 2003, new tributary strategies will be
revised to reflect new load reductions for nitrogen and phosphorous assigned to each major
tributary based on water quality conditions necessary to protect aquatic living resources.
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Studies performed as part of the 1997 Reevaluation of the Nutrient Reduction Goal and in
support of the Chesapeake 2000 initiative show that it is necessary to go beyond reduction
approaches implemented to date and think creatively about additional, new, and alternative
reduction methods. One option the Chesapeake Bay Program is considering, which is the focus
of this document, is nutrient trading. Simply stated, nutrient trading is the transfer of nutrient
reduction credits, specifically nitrogen and phosphorus, between buyers (entities that purchase
nutrient reduction credits) and sellers (entities that offer nutrient credits for sale). After
evaluating the range of nutrient reduction techniques utilized thus far in Chesapeake Bay
restoration efforts, the Chesapeake Bay Program found that although it was getting close to
meeting the 40% Nutrient Reduction Goal, it may fall short of fully achieving the goal, even with
full implementation of current approaches. New techniques, such as nutrient trading, may
provide an additional tool needed to close the gap. In keeping with its program philosophy of
voluntary, collaborative cooperation among the watershed's jurisdictions, the Bay Program's
effort to develop nutrient trading guidelines seeks to maximize state flexibility while ensuring
consistent and compatible approaches that are in keeping with overall Bay Program goals.
The remainder of this chapter discusses the motivation for a trading program in the Chesapeake
Bay watershed, the closing of the gap with market-based approaches, Federal and Chesapeake
Bay trading initiatives, and the approach to developing nutrient trading guidelines for the
Chesapeake Bay.
2.1 Motivation for a Trading Program in the Chesapeake Bay Watershed
Although great progress has been made in reducing point and nonpoint source nutrient pollution
to the Chesapeake Bay, more needs to be accomplished to meet Chesapeake Bay Program
reduction goals. This is especially critical as population pressures continue to mount throughout
the watershed. Between 1970 and 1997, the watershed's population increased by 28% to 15.1
million people (U.S. EPA Chesapeake Bay Program, 1999). This trend is expected to continue
well into the future. New people will exert additional pressures on the Bay's fragile ecosystem.
For example, more and more wastewater will be discharged to already strained wastewater
treatment plants. These population increases, and their ancillary effects on community
infrastructure, land use patterns, and pollution generation, will make it difficult to meet
Chesapeake Bay Program goals or even to hold the line in the future. The Chesapeake Bay
Program and its partners will need every tool at their disposal.
In addition to ongoing Chesapeake Bay Program efforts to reduce nutrient pollution, U.S. EPA is
working with states across the country on the development of the Total Maximum Daily Load
(TMDL) regulations. Unlike the tributary strategies that are part of the voluntary framework of
the Chesapeake Bay Program, TMDLs are part of the Clean Water Act's regulatory framework.
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Section 303(d) of the Clean Water Act addresses waterways that are not "fishable and swimable"
by requiring states to identify those waters and develop TMDLs for them, with oversight by U.S.
EPA. Implementation of TMDLs then requires that point and nonpoint sources reduce pollutants
to achieve the pollutant loadings established by the TMDL through a variety of Federal, state,
tribal, and local authorities, programs, and initiatives. Trading is one option that can occur under
a TMDL framework since a TMDL establishes the loading capacity of a defined watershed area
and thus the allocation for that area.
Each jurisdiction within the Chesapeake Bay watershed is confronting the issue of TMDLs and is
in varying stages of implementing TMDLs for impaired water bodies. In addition, Chesapeake
2000 addressed TMDLs. The new Agreement contains a commitment to remove the Bay from
the list of impaired waters by 2010 with a goal of precluding the need to develop regulatory-
based TMDLs for nitrogen and phosphorus.
2.2 Closing the Gap with Market-Based Approaches
Market-based approaches to environmental management, such as watershed-based trading, have
the potential to enhance the suite of traditional approaches and achieve the needed reductions in
nutrient loadings. The driving force behind market-based approaches differs from traditional
approaches to environmental management. In a market-based approach, participants determine
how best to meet a particular goal. The focus moves from compliance to performance. Market-
based approaches use competition to increase efficiency and cost-effectiveness by letting the
market determine which source can best reduce pollution without prescribing how to achieve the
reduction.
Trading programs are emerging in a variety of locations nationwide as a means to achieve
pollutant reductions in cost-effective and environmentally sound ways. In simple terms, trading
programs provide a mechanism for determining the most cost-effective means of nutrient
reduction via the process of buying and selling pollution reduction credits—in the case of the
Chesapeake Bay, nutrient reduction credits. Through this program, the seller of the credits
provides cost-effective means of removing or preventing additional pollutant discharges and the
buyer of the credits has access to these more affordable means. Central to this kind of system is
that overall pollution discharge is not increased within a particular area—the total pollution
control requirements in an area such as a watershed or subbasin will be met, but the aggregate
cost of compliance across nutrient sources is reduced (Stephenson et al., 1995).
There are several different types of trading programs used throughout the country. Point-to-point
trading programs enable trading between individual point sources (e.g., between wastewater
treatment plants), point-nonpoint nutrient trading systems refer to trading opportunities between
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point source dischargers (e.g., wastewater treatment plants) and nonpoint sources (e.g., a farming
operation), and nonpoint-nonpoint trading may occur between nonpoint sources such as
agricultural operations. The most appropriate type of trading program for an area depends on
factors such as the type of sources within a location (e.g., point sources vs. nonpoint sources),
discharge limitations placed on those sources through mechanisms such as discharge permits, and
whether a limitation or "cap" for a pollution load over a geographic area exists.
Trading programs are a market-based approach to environmental protection, intended to result in
a more equitable, efficient, cost-effective means to address water quality problems. They may
encourage pollution reduction to happen sooner and at increased rates. As such, trading
programs supplement existing regulatory and nonregulatory approaches to control pollutant
discharges. It is a tool used in water resource management for which all watershed pollutant
sources, both point and nonpoint, contribute to reducing pollutant without any one source bearing
an excessive financial burden.
Trading is also considered an innovative
way for community stakeholders (e.g.,
regulated sources, nonregulated sources,
regulatory agencies, and the public) to
develop more "common sense" solutions to
water quality problems in their watersheds.
According to U.S. EPA's Effluent Trading
in Watersheds Policy Statement, trading
potentially offers a number of economic,
environmental, and social benefits (see
Exhibit 2.2).
2.3 Federal and Chesapeake Bay
Trading Initiatives
The Federal government has long
considered trading a potential approach in a
suite of environmental management tools.
U.S. EPA, for example, has studied the idea
of trading programs as cost-effective tools
for achieving water quality objectives for
almost 20 years (Podar, 1996). Trading
gained increased attention when President
Clinton and Vice President Gore publically
Exhibit 2.2 Potential Benefits of Trading
(adapted from U.S. EPA, 1998)
Economic Benefits:
Reduces costs for individual sources contributing to water
quality problems.
Allows dischargers to take advantage of economies of
scale and treatment efficiencies that vary from source to
source.
Reduces overall cost of addressing water quality
problems in the watershed.
Creates market demand for new innovative technologies.
Environmental Benefits:
Achieves equal or greater reduction of pollution for the
same or less cost.
Creates an economic incentive for dischargers to go
beyond minimum pollution reduction and also encourages
pollution prevention and the use of innovative
technologies.
Can reduce cumulative pollution loading, improve water
quality, accommodate growth, and prevent future
environmental degradation.
Can address the broader environmental goals within a
trading area; e.g., ecosystem protection, ecological
restoration, improved wildlife habitat, endangered species
protection, etc.
May encourage pollution reduction to occur sooner and at
increased rates.
Social Benefits:
Encourages dialogue among stakeholders and fosters
concerted and holistic solutions for watersheds with
multiple sources of water quality impairment.
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promoted market-based approaches to environmental management through the Reinventing
Environmental Regulation strategy released in 1995.
As a result of this strategy, U.S. EPA issued a Policy Statement in early 1996 that reaffirms U.S.
EPA's support of watershed-based trading programs, describes the types of trading systems, and
outlines the benefits associated with trading. The 1996 Policy Statement described how U.S.
EPA will promote watershed-based trading:
"EPA will actively support and promote effluent trading within watersheds to achieve
water quality objectives, including water quality standards, to the extent authorized by
the Clean Water Act and implementing regulations. EPA will work cooperatively with
key stakeholders to find sensible, innovative ways to meet water quality standards
quicker and at less overall cost than with traditional approaches alone. EPA will assure
that effluent trades are implemented responsibly so that environmental progress is
enhanced, not hindered" (U.S. EPA, 1996a).
In May 1996, U.S. EPA published the Draft Framework for Watershed-Based Trading intended
for local and national community groups, members of the regulated and nonregulated
community, and governmental organizations. This framework provides background information
on trading; describes the conditions necessary for a successful trade; gives a template of issues
(e.g., regulatory, economic, scientific, institutional, etc.) that facilitates the identification and
evaluation of trading opportunities; and provides worksheets and checklists to evaluate if
potential trades meet threshold conditions (U.S. EPA, 1996b).
The states of Maryland, Virginia, and Pennsylvania also are exploring the possibility of nutrient
trading as an additional tool in their nutrient reduction efforts.
Maryland
In August 1997, the Maryland Department of the Environment (MDE) developed a trading
concept paper entitled "Maryland Department of the Environment Concept Paper for a Nutrient
Trading Policy" in an effort to address the issue of allowing for continued development of
municipal wastewater treatment plants while still meeting the Chesapeake Bay nutrient reduction
goals. At this point, the concept paper remains a draft document.
The Water Environment Research Foundation is also sponsoring a study to design a trading
program for Maryland. This project is being performed in consultation with Maryland
stakeholders including MDE, the Maryland Department of Agriculture, the Maryland Department
of Natural Resources, and the Maryland Association of Municipal Wastewater Agencies.
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Trading scenarios will involve point-to-point or point-to-nonpoint sources. This study is
expected to be completed in the Spring of 2001.
Virginia
The Virginia Water Quality Improvement Act includes a clause that requires investigation of
trading as a means to meet its goals. The Virginia Department of Environmental Quality (DEQ)
is currently in the process of working with stakeholders to develop a point-to-point source
trading program in Virginia. DEQ is working with the Virginia Water Resources Resource
Center to hold stakeholder meetings for this purpose. DEQ has also formed a Water Resources
Committee consisting of stakeholder groups to advise the DEQ Director on matters relating to
Virginia's water resources. One of the topics this group plans to address is trading.
Pennsylvania
U.S. EPA sponsored an effort to simulate trading programs for several Bay basins in
Pennsylvania for which TMDLs have been developed. A workgroup of Pennsylvania
stakeholders was formed to assist in this project, including the Pennsylvania Department of
Environmental Protection (PADEP), the Chesapeake Bay Foundation, the Pennsylvania
Municipal Authority Association, and the Chesapeake Bay Program. The product of this
endeavor, completed in September 1999, was to develop a manual to elaborate on issues
regarding point/nonpoint source trading (U.S. EPA, 1999). Additionally, the state legislature
endorsed a resolution on February 9, 2000, expressing an interest in pursuing trading.
2.4 Approach To Developing Nutrient Trading Guidelines for the Chesapeake
Bay
Working within the framework of the Chesapeake Bay Program, the Trading and Offsets
Workgroup (TOWG) of the Nutrient Subcommittee convened a team of Bay watershed
stakeholders (the Negotiation Team) to further examine the concept of nutrient trading.
The Negotiation Team included representatives from major stakeholder groups throughout the
Chesapeake Bay watershed that were interested in and/or affected by a potential nutrient trading
program. The following interests were represented:
• Virginia, Maryland, Pennsylvania, and the District of Columbia
• Regional environmental interests
• Local watershed interests
• Local government interests
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• Public interests
• Municipal and industrial point source interests
Rural and urban nonpoint source interests
Stormwater interests
• Chesapeake Bay Program
• U.S. Environmental Protection Agency.
Full membership is presented in Appendix B.
The Negotiation Team met intensely for more than a year between June 1999 and August 2000.
The Negotiation Team was charged with examining the concept of nutrient trading, and if
appropriate, developing recommendations for nutrient trading guidelines. Each signatory to the
Chesapeake Bay Agreement has different geographic, social, and economic conditions and,
accordingly, are taking different approaches to reducing nutrients to achieve Chesapeake Bay
Program goals. Therefore, the Negotiation Team's efforts were to provide guidelines, not
prescriptions, to ensure that nutrient trading approaches in the Chesapeake Bay watershed are
consistent and compatible between jurisdictions and fully supportive of Chesapeake Bay
Program goals.
The Negotiation Team used an educational and
consensus-based approach for exploring nutrient
trading and developing guidelines. Significant
time was spent developing an understanding of
nutrient trading concepts, reviewing approaches Process' incl^in9the followin9 df initi°nh°f
consensus: Consensus means that all the
and lessons learned from other areas, and
considering how this information could be applied
in the Chesapeake Bay.
Consensus-Based Approach
The first meeting of the Negotiation Team (June 30,
1999) adopted ground rules for the negotiation
negotiators would agree they could accept the
proposed option or guideline, even if a negotiator
might prefer a different position, and be willing to
make compromises that satisfy the interests of their
constituents to help the team move forward."
Throughout the guidelines development process,
the Negotiation Team worked with trained facilitators to develop consensus on the structure and
content of the Chesapeake Bay nutrient trading guidelines. Consensus-based guidelines were
developed for the following aspects of a trading program:
• Fundamental principles
• Definitions
Identifying nutrient reduction goals
• Evaluating eligibility
• Performing trade administration
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Ensuring accountability
• Assessing progress
• Involving stakeholders.
Negotiation Team members met in small groups to deliberate specific questions associated with
the above topics and to develop recommendations to bring back to the plenary session. Plenary
sessions were used to review small group recommendations and to come to a group consensus on
what to incorporate into the guidelines. This iterative process of small group work and plenary
sessions was supplemented by review and agreement on the draft fundamental principles and
guidelines document. The guidelines presented in this document represent the results of this
cumulative effort.
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3.0 Foundations for Nutrient Trading in the Chesapeake Bay
Several key components provide the foundation for developing effective nutrient trading
guidelines for the Chesapeake Bay. Because the watershed encompasses multiple jurisdictions
and potentially many participants in a trading program, it is necessary to use a common language
and adopt common definitions to support development of consistent and compatible programs.
Although each jurisdiction is unique, some level of consistency and compatibility is necessary to
ensure that Chesapeake Bay Program goals, including the capability to monitor and report
progress, are met.
It is also necessary to have a clear idea of what geographic area a trading program will address.
The geographic area covered by a program—the program scope—is an important consideration
for local water quality. As the distance between trading partners increases, the ability to focus on
local water quality may become more difficult; however, if the geographic area is too restrictive,
the number of potential trading partners and the incentives for trading may decrease to a level
where the program is no longer viable. Concerns about local water quality may be
accommodated through an effective trading framework that carefully addresses participant
eligibility, program monitoring, and accountability.
An effective trading framework must address a range of issues that will drive the program from
inception to completing a trade to monitoring program effectiveness and water quality results.
Each element in the framework provides the opportunity for developing discrete guidelines that
will support a properly operating trading system. The Negotiation Team considers six elements
as providing the framework for the Chesapeake Bay nutrient trading guidelines—identifying
nutrient reduction goals, determining eligibility, performing trade administration, ensuring
accountability, assessing progress, and involving stakeholders.
3.1 Key Definitions
Nutrient trading is an emerging environmental management approach. As such, terminology is
still evolving and often similar terms have different meanings from one program to the next.
Definitions for key trading terms provide the building blocks for a trading framework and
guidelines. Because of this, the Negotiation Team felt it important to use the consensus process
to adopt common definitions. Exhibit 3.1 summarizes the key definitions for a trading
framework. A full set of definitions is presented in Appendix C. The definitions presented in
Exhibit 3.1 have guided the Negotiation Team's discussions and should be incorporated into any
framework developed for trading in the Chesapeake Bay. The following narrative demonstrates
how these definitions apply in a Chesapeake Bay trading framework.
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Exhibit 3.1 Key Definitions
Allowance The allowed nutrient load a source may
discharge.
Baseline
Buyer
Cap
Credits
Nutrient
Trading
Seller
Source
The numeric level of nutrient load at a particular
point in time that serves to establish nutrient
reduction goals and allowances.
An entity that purchases nutrient credits.
The total nutrient load that is allowed to be
discharged into a given water body. The cap is
the baseline minus the amount of load reduction
needed to meet the goal. The cap is equal, or
greater than, the sum of the allowances.
The amount of nutrient load reduced below the
allowance.
The transfer of nutrient reduction credits,
specifically those for nitrogen and phosphorous.
An entity that offers nutrient credits for sale.
A nutrient source whether point, nonpoint, or
third party. The Negotiation Team agreed to use
the term "source" in place of "discharger."
Nutrient trading is the transfer of nutrient
reduction credits, specifically nitrogen and
phosphorous, between buyers (entities that
purchase nutrient credits) and sellers (entities
that offer nutrient credits for sale). Credits
become available when a seller has reduced
its nutrient load below what it is allowed to
discharge to the receiving water body. The
allowable nutrient load a source may
discharge is referred to as an allowance.
For example, if a point source is able to
reduce nitrogen below what it is otherwise
required to do, it may sell that reduction in
the form of credits to another source (possibly
another point source or a nonpoint source)
that cannot meet its requirements (either
because of cost, technology limitation, water
quality requirements, etc.). For a trading
system to work, credits need to be quantified ^^^^^^^^^^^^^~^^^^^^^^^^^^^~
and expressed in a common unit of measurement so that they may be measured, monitored, and
tracked. Typically, flow and concentration are required to quantify an allowance and/or credit,
resulting in total nutrient load (expressed as pounds, tons, kilograms, or some other unit of
measurement—typically pounds) per unit of time (e.g., day, month, year). In the case of
nonpoint sources, the load may have a spatial component as well (e.g., pounds/acre/year).
3.1.1 Trading and Cap Issues
In the Chesapeake Bay watershed, allowances and credits are generated because a limitation, or
cap, was placed on the amount of nutrients that could be discharged in the watershed. As
described in Chapter 2.0 of these Guidelines, the Chesapeake Bay Program established a 40%
Nutrient Reduction Goal from 1985 levels for the controllable loads of nitrogen and phosphorus
entering the Chesapeake Bay by the year 2000. The year 1985 was selected as the baseline—the
numeric level of nutrient load into a given water body at a particular point in time—for
determining the nutrient reduction goal. A baseline is the starting point from which nutrient
reduction goals and allowances are established. The Negotiation Team adopted the 1985
baseline as established by the 1987 Chesapeake Bay Agreement. Subsequent agreements or
actions such as the Chesapeake 2000 Agreement or the adoption of a TMDL regulatory
11
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framework could establish alternative baselines for the Chesapeake Bay Program's nutrient
trading framework. Therefore, the Negotiation Team decided that it is imperative that the
program be flexible to accommodate potentially changing baselines and caps.
The 40% reduction goal provided the basis for which the baywide nutrient cap was determined.
Similarly, it formed the basis for establishing tributary-specific nutrient reduction goals and caps
that are expressed in the Tributary Strategies for each of the 10 major tributary basins in the
Chesapeake Bay watershed (see Exhibit 3.2).
3.1.2 Types of Trades
Nutrient trading can incorporate point or nonpoint sources of nutrients. Point sources are pipes
or other fixed, discrete conveyances that discharge directly into water. Typically, point sources
are regulated under the Clean Water Act. Sewage treatment plants are the main point source of
nutrients to the Chesapeake Bay.
Nonpoint sources of nutrients are more diffuse—either washed off the land, leached into ground
water, or deposited from the air. Agriculture, especially crop fertilization and livestock
production, contributes most of the nonpoint source nutrients to the Chesapeake Bay, although
runoff from urban and suburban areas is a growing problem. Most nonpoint sources are not
regulated, although they may participate in a variety of incentive and other nutrient reduction
programs (e.g., agricultural cost share) or be required to submit and implement nutrient
management plans.
In developing these Guidelines, the Negotiation Team considered point and nonpoint sources of
pollution. Four possible trading opportunities can occur: point-point, point-nonpoint, nonpoint-
point, and nonpoint-nonpoint. In a point-point system, allowances are created and assigned to
discrete point sources and trading may occur between those sources provided the fundamental
principles and guidelines are met. For example, a wastewater treatment plant could trade with
another wastewater treatment plant. Point-point trading is the easiest to quantify because
monitoring programs are more established and the location of discharges is confined to a discrete
conveyance.
Point-nonpoint/nonpoint-point trading expands the opportunities for trading by enabling point
sources and nonpoint sources to participate. Again, each source must have an allowance to
determine the availability of, or need for, credits. In this scenario, a point source will seek to
obtain credits from a nonpoint source. For example, a point source operator may pay a farmer to
implement a BMP that will more cost-effectively reduce the total nutrient discharge (Stephenson
et al., 1995). It is also conceivable that nonpoint to point source trading could occur.
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Exhibit 3.2 Ten Major River Basins of the Chesapeake Bay Watershed
W. Shore MD
30 0 30 60 Mies
E. Shore MD
E. Shore VA
13
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Nonpoint-nonpoint trading refers to trading between nonpoint sources, such as two farmers. If
one farmer wanted to expand production or use different techniques that would increase the
nutrient discharge above his/her allowance, the farmer would seek another nonpoint source,
likely another farmer, who had credits to sell because his/her nutrient load was below the
allowance—possibly due to innovative BMPs. Nonpoint source trading is the most difficult to
quantify and measure because it is difficult to monitor these diffuse sources of nutrients. Often
programs use the efficiency of BMPs (e.g., amount of load reduction per a given BMP) as a
starting point for determining the availability of credits.
3.2 Geographic Scope
An important element of a Chesapeake Bay trading program is the geographic scope, or areal
extent and spatial boundaries, of the program. Geographic scope can encompass many different
options and scales (e.g., between or within various government jurisdictions, such as counties or
states; between or within watersheds of varying sizes). In order to maximize program
participation, a larger geographic scope is useful. On the other hand, the farther the trading
partners are from each other, the more difficult it is to ensure that local water quality goals are
met. The geographic trading boundary must also allow for efficient administration of credit
exchange.
The Negotiation Team adopted the Chesapeake Bay Program's 40% Nutrient Reduction Goal as
the basis for the trading program's cap. Because this trading framework requires the assignment
of consistent and equitable allowances derived from the cap, trading will only be allowed among
sources from signatory states (Maryland, Pennsylvania, Virginia, and the District of Columbia).
Trading opportunities may be expanded to include a non-signatory state if that state adopts an
appropriate allowance set by the Chesapeake Bay Program and adheres to the Chesapeake Bay
Program's nutrient trading guidelines presented in this document.
Trading may occur between states as long as the trade is within the major tributary boundaries,
such as between Maryland and Virginia in the Potomac River basin. According to Fundamental
Principle #2 below, however, trading would not be allowed between different basins in different
states, such as between the Susquehanna and the Potomac Basins.
Using watershed boundaries as a starting point, trading will be allowed within a particular
tributary among all signatory states and nonsignatory states if they meet all fundamental
principles and trading guidelines. Additional scope considerations are described below in
Fundamental Principle #2.
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3.3 Fundamental Principles
Fundamental principles are the key criteria that must be met for a successful and defensible
nutrient trading program. They help to define and clarify key assumptions underlying the
Chesapeake Bay Program's nutrient trading guidelines and provide a critical foundation that can
be applied when determining the appropriateness of a trade. The Negotiation Team felt the
fundamental principles to be the backbone of a trading program and spent a considerable amount
of time negotiating these principles to arrive at a consensus. Note that the first fundamental
principle essentially states that local water quality will not be impacted by trades. This is an
overarching theme that any trading program must incorporate when considering trade location
and nutrient credit exchanges. Implementation of this principle will ensure that pollution "hot
spots" will not result from trades. The fundamental principles for nutrient trading in the
Chesapeake Bay follow:
Fundamental Principle #1
Trades must not produce water quality effects locally, downstream, or Baywide that
• violate water quality standards or criteria
do not protect designated uses
or
• adversely impact living resources and habitat.
Fundamental Principle #2
Trading will be allowed only within each major Bay tributary (i.e., Susquehanna, Potomac,
Rappahannock, York, James, Patuxent, Maryland Western Shore, Virginia Western Shore,
Maryland Eastern Shore, Virginia Eastern Shore) among all signatory states and
nonsignatory states if they adopt the appropriate allowance and are consistent with the
Chesapeake Bay Program's nutrient trading guidelines and state tributary strategies.
Fundamental Principle #3
The nutrient trading program must be consistent with Federal, state, and local laws and
regulations, be flexible enough to adapt to future changes in these laws and regulations, and
enable participation of all potential sources as determined by the market place.
Fundamental Principle #4
The nutrient trading program must be consistent with the Chesapeake Bay Program's nutrient
reduction goals and state tributary strategies.
Fundamental Principle #5
Each trade must result in a net reduction in nutrient loadings or contribute to maintenance
of a tributary nutrient cap. Net reduction in loadings or maintenance of a cap shall be
15
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calculated based upon the estimated tributary loadings at a point in time determined by the
state.
Fundamental Principle #6
Sources should implement nutrient reduction actions to achieve the 40% reduction goal, as
well as the goals adopted for the tributaries south of the Potomac River, prior to pursuing a
nutrient trading option.
Fundamental Principle #7
Traders must be in substantial compliance with all local, state, and Federal environmental
laws, regulations, and programs.
Fundamental Principle #8
The involvement of a diverse group of stakeholders must be sought in the design and
implementation of state trading programs and related public education initiatives.
3.4 The Six Elements of the Nutrient Trading Program
Nutrient trading for the Chesapeake Bay
Program can be envisioned as a six-part
model containing distinct activities,
events, and roles/responsibilities. Exhibit
3.3 illustrates the major elements of the
framework and the relative relationship
among the elements. The arrows in the
diagram indicate that the trading program
is dynamic and iterative. The length of
time to cycle through a trade is yet to be
determined. Sections 4.0 through 9.0
describe in detail the Negotiation Team's
recommended guidelines associated with
each element.
Exhibit 3.3 Nutrient Trading Concept
Identifying Nutrient
Reduction Goals
Identifying Nutrient Reduction Goals—The bay-wide goals established by the
Chesapeake Bay Program for nutrient reduction or individual tributary specific goals. In
the context of a trading program, these goals will correspond to and be congruent with
appropriate allowances associated with tributary strategies.
Determining Eligibility—Activities to determine the number and types of credits that
may be traded. Eligibility identifies the forms of nutrients that may be traded and
16
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provides guidelines on what entities can participate. Potential trading entities may
include point and nonpoint sources that meet certain minimum qualifications (e.g., be in
substantial compliance with local, state, and Federal environmental regulations and
programs).
Performing Trade Administration—Identifies roles and responsibilities within the
trading framework. Specific activities for the Chesapeake Bay Program and states are
defined. Also, this element addresses the need for a central coordinating office and
application of trade ratios.
Ensuring Accountability—Post-trade monitoring and assessment of the effectiveness of
the trade, including but not limited to, enforcement of the terms and conditions of a
trade, provisions for extraordinary agreements, and recording updates to the trade.
Issues of default and/or expiration of credits would be monitored and managed based on
the terms and conditions established prior to the trade. Monitoring of local water
quality conditions also is addressed.
Assessing Progress—Tributary and Baywide assessment of the effectiveness of the
trading program outcomes, especially in terms of the nutrient reduction goals for
individual traders, basins, and subbasins. This also includes the type of trade agreement
and tracking credits bought and sold to make sure overall Chesapeake Bay basin goals
are met. Issues of equity and efficiency would also be analyzed and summarized.
Involving Stakeholders—A set of activities and opportunities for any interested party to
observe the trading program, monitor nonproprietary information about the trading
program operation and accomplishments, and offer comments for improvement.
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4.0 Guidelines for Identifying Nutrient Reduction Goals
Trading to Achieve or Maintain the Chesapeake Bay Nutrient Cap
1. Trading should be allowed among "like" source types in order to achieve the 40% nutrient reduction goal. This
means that point sources could trade with point sources, and nonpoint sources could trade with nonpoint sources,
but point sources could not trade with nonpoint sources.
Within several years after the implementation of a trading program, the states may reexamine the success or failure
of trades to date in achieving the goal and, thereafter, determine if cross-source trading to achieve is appropriate.
Once the 40% nutrient reduction goal is met, trades should be allowed within and across source types to maintain
nutrient reduction goals or further reduce nutrient levels.
2. For trading to occur within a major Bay tributary, the nutrient trading program must incorporate (a) specific nutrient
loading allocations established to provide water quality conditions necessary to protect living resources in the
tributary and the Bay, (b) a baseline and a cap for nutrient loads for the tributary, and (c) allowances for point and
nonpoint sources.
Every trading program must have a goal or cap that drives the trading process. The term "cap"
also is generally used to describe the total load allocation of a pollutant that can be discharged to
a water body. Caps can be Total Maximum Daily Loads (TMDLs) established pursuant to the
Clean Water Act or they can be goals established pursuant to the Chesapeake Bay Program.
Guideline #2 was added to reflect the new Chesapeake 2000 agreement, which states that these
loading allocations will be established to provide water quality conditions necessary to protect
living resources. Guideline #2 also acknowledges that allowances for point and nonpoint sources
will need to be defined in order to successfully operate a trading program.
In the case of a water-based nutrient trading program, quantifying a cap on nutrient loads that
may be released to a particular watershed or other geographic area serves as that goal. From this
cap, specific allowances may be determined. Until new load allocations are set according to the
Chesapeake 2000 agreement, the 40% Nutrient Reduction Goal, established by the Chesapeake
Bay Program in 1987, will serve as the initial cap for a nutrient trading program in the
Chesapeake Bay. Due, however, to improved science and evolving technologies and other
related programs (e.g., Chesapeake 2000 or TMDLs or tighter reduction goals), this goal may
change over time. A trading program must have the flexibility to adapt to changing goals.
The operating premise for many Chesapeake Bay Program activities is achievement of 40%
reduction in nutrient loading from 1985 levels by the year 2000. This 40% reduction goal
establishes an overall cap of nutrients that can be discharged into the Bay and is defined on a
tributary-specific basis through the use of Tributary Strategies. The tributary load allocations
provide a starting point for determining caps and source allowances for a nutrient trading
program. These allowances based on nonregulatory Tributary Strategies will serve as the
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primary operating premise for these nutrient trading guidelines unless superceded by new goals
or regulatory requirements. Trading may be one option, along with other measures identified in
the Tributary Strategies to improve water quality in the Bay and its tributaries, so that these
waters may be removed from the impaired waters list (delisted) prior to the time frame when a
Baywide tidal TMDL would need to be established.
The primary consideration in the implementation of any trading program is whether it will serve
as a reliable tool for achieving nutrient reduction goals; therefore, a trading program must be
designed to maximize the ability to do this. Guideline #1 makes a key distinction between
trading to achieve the cap and trading to maintain the cap. Trading to achieve would allow
similar source types to trade to meet their tributary strategy nutrient reduction load allocations.
Trading to maintain would require that sources first meet their tributary strategy load allocations
prior to participating in trades across source types (e.g., point to nonpoint source trading). Once
met, these sources could then trade to maintain to stay within their tributary strategy load
allocation. The Negotiation Team spent a considerable amount of time determining whether
trades could occur to meet and/or maintain the cap and arrived at a consensus on the guideline
presented above; however, the Negotiation Team also recognized that the jurisdictions are
responsible for determining when the 40% goal has been met.
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5.0 Guidelines for Determining Eligibility
Guidelines Applicable to All Source Categories
3. Total Nitrogen and/or Total Phosphorus are the forms of nutrients eligible for trading.
4. Eligibility consideration should be given to all potential point and nonpoint sources to the extent allowed under
current local, state, and Federal programs.
5. A source may receive credits for reductions in both nitrogen and phosphorus through the operation of a facility or the
implementation of a BMP that reduces both nutrients.
6. Entities that are not considered sources may purchase credits (e.g., for the purpose of banking credits or retirement).
7. Any source receiving state or Federal funds to achieve nutrient reductions through the development or installation of
any nutrient reduction equipment, technology, or structural BMP cannot buy credits to achieve those reductions. If
state or Federal funds are used to cost share nutrient controls that generate credits, only the portion of those credits
not paid for by the state or Federal cost share are available for trading.
Additional Nonpoint Source Eligibility Guidelines
8. All farmers (sellers) must be following a state certified Nutrient Management Plan to be eligible to participate in
trading.
9. All BMPs must meet NRCS standards and be part of a Conservation Plan.
Urban Eligibility Guidelines
10. All nonagricultural nonpoint source storm water systems governed by a state and/or Federal storm water permit(s)
are eligible to generate measurable and certified credits for those reductions that exceed permit requirements. For
those storm water systems not governed by permit, each must have comparable requirements (to permitted
systems) prior to the generation of nutrient reduction credits.
One necessary component to any trading program is the determination of who will be eligible to
trade. Clear eligibility requirements help to delineate the rights and responsibilities of trading
partners and are essential to ensuring that the other guidelines, especially fundamental principles,
are achieved. Eligibility is based in part on the program's overall nutrient reduction goals and its
ability to enforce a particular type of trade and monitor for compliance. Eligibility must be broad
enough to enable an adequate available number of trading partners, while ensuring that
applicable water quality goals are met. Certain details can be included in a trading program to
address issues of equity, trading ratios, minimum qualifications of a trader, past performance of
classes of credits, and similar qualifications.
Eligibility consideration should be given to all potential sources (discrete point sources such as
Publicly Owned Treatment Works [POTWs] and industries, urban diffuse sources, and
agricultural nonpoint sources) to the extent allowed under current local, state, and Federal
programs. Baywide, 25% of the nitrogen loading is attributable to point sources, while 59% is
discharged by nonpoint sources. Given this, the Negotiation Team concluded that it is important
to allow trading among point and nonpoint sources. Point source-point source, nonpoint source-
nonpoint source, nonpoint source-point source, and point source-nonpoint source trades could,
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with appropriate guidelines, be implemented in an effort to capture as much reduction potential
as possible from all sources.
The Negotiation Team made an important distinction in Guideline 7 with regard to trading versus
use of public funds to obtain reductions. It was agreed upon, by consensus, that any source
receiving state or Federal funds to achieve nutrient reductions cannot use those reductions to
generate credits for sale or to buy credits. An exception to this guideline, however, is for Federal
facilities trading among or within other Federal facilities.
All sources are eligible to trade pursuant to various eligibility criteria per source type and class of
trade. When determining eligibility guidelines, the Negotiation Team considered requirements
for buyers and sellers of credits among the following categories of sources:
Point source
• Agricultural nonpoint source
Nonagricultural nonpoint source (e.g., urban diffuse sources).
Point Sources
The point source category for trading includes facilities that are regulated under the National
Pollution Discharge Elimination System (NPDES) permitting program and discharge effluent
from a discrete location (e.g., outfalls such as a pipe). For the most part, these sources include
wastewater treatment plants and regulated industries. Because these sources tend to discharge
nutrients from discrete outfalls, it is easier to monitor the level of nutrients being released, and,
therefore, accounting of nutrient loads (credits) is more easily quantified and accurate.
Agricultural Nonpoint Sources
Agricultural nonpoint sources, on the other hand, are often more diffuse and difficult to measure.
The Negotiation Team reached a consensus on a number of agricultural nonpoint source
eligibility criteria. It was decided that all farmers must have a nutrient management plan in place
that meets state standards to be eligible to participate in trading. Not all practices associated with
this plan are capable of generating credits. Those that were built using government cost-share
funds would not be eligible; instead, reductions in nutrients associated with cost-share funded
practices would be applied toward achieving the state's 40% nutrient reduction goal. The
Negotiation Team also felt that while some inequities may arise, BMPs installed prior to a state
adopting a trading program would not be tradeable. Additional guidelines associated with
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agricultural nonpoint source trading are outlined in 8 and 9 of the guidelines summary box at the
beginning of this section.
Urban Diffuse Sources
Urban diffuse sources includes runoff from built (e.g., existing developments, city streets,
parking lots) and nonbuilt (e.g., yards, parks) environments and areas under construction.
Additionally, urban diffuse sources may encompass combined sewer overflows, also subject to
Federal regulation. Some of this runoff makes its way directly to streams and other water bodies,
and some is collected in storm sewer systems. Many jurisdictions have regulations in place for
runoff collected by storm sewers (referred to as storm water). On a national level, many
municipalities will be regulated under either the Phase I or Phase n NPDES Storm Water
Program.
There are many possibilities for integrating nutrient trading into an urban diffuse source program.
Clearly, it must be integrated with existing regulatory programs. Potential buyers from this
category may be residential or commercial developers; sellers may be localities who are
implementing large holding ponds or upgrading septic tanks.
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6.0 Guidelines for Performing Trade Administration
Baywide Program Oversight
11. The Chesapeake Bay Program should have an opportunity to comment on state programs with respect to
fundamental principles, consistency, interstate trades, and program effectiveness.
State-Level Program Oversight and Management
12. Each state will be responsible for program oversight and the applicable level of day-to-day program management.
These functions should include the following:
Establishing policy direction
Certifying credits
Establishing guidance on eligible trades
Registering and tracking the generation of credits, including quantities retired for net water quality benefits
Monitoring compliance
Enforcing program requirements
Evaluating program performance.
Establishment of Central State Coordinating Office
13. A central trading coordinating office should be established within each state to track the administration of trades. The
organization may be formed within an existing state government or formed from a conglomerate of state and local
stakeholders.
Trade Ratios
14. Each trading program should address the following ratios:
Delivery ratios
Special needs ratios
Retirement ratios
Uncertainty ratios.
Trade Facilitation
15. Each trading program should address trade facilitation, including those activities that support the negotiation and
recording of completed trade transactions. Specific activities and roles should be determined by the states.
Actual implementation of a trading program can be complex, involving many different roles and
responsibilities by a range of entities. It is important to clearly define the administrative roles
necessary to smooth implementation of the program. Trade administration also encompasses
specific components of program operation—the mechanism(s) and agreement vehicles for
implementing trades, duration of trading agreements, establishing credit prices, tracking trades,
and program funding.
Establishment of a nutrient trading program involves the transfer of nutrient credits from one
entity (seller) to another (buyer). In order to ensure that transactions occur smoothly, efficiently,
and in a legally defensible manner, and to foster the long-term viability of a credible trading
program, it is essential that administrative and organizational requirements, including responsible
parties, are clearly defined. When establishing administrative requirements, it is important to
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clearly identify the entities in charge of program oversight and day-to-day program management,
actual trade facilitation, and other aspects of a trading program (e.g., public involvement,
technical support). It is also important to define administrative components, such as the
enforcement mechanism to be used to implement trades and the duration of a trading agreement.
Trade administration options—including roles/responsibilities and program components—to be
considered by states in the development of their nutrient trading programs are provided below.
An overview of trading ratios, including options to be considered by the state, is presented in
Appendix D. These ratios are a key component to administering a trading program.
Administrative Roles for Trade Administration
The Negotiation Team identified four primary and two ancillary functions that must be addressed
in a trading program. These are program oversight, program management, stakeholder
involvement, trade facilitation and tracking, technical support, and public education, respectively.
The four primary functions are described below.
Baywide Program Oversight. While the Negotiation Team felt it important for each state to be
responsible for its own oversight and management, the Team agreed that a Baywide program
oversight body should be established to ensure consistency across state programs. This body
would be composed of representatives from all pertinent stakeholder groups (state agencies,
buyers and sellers, environmental interest groups, etc.). The Team identified the Chesapeake Bay
Program as the best oversight entity.
State-Level Program Oversight and Management includes setting policy direction on eligible
trades and program evaluation. It also includes management activities associated with credit
certification, compliance monitoring, and enforcement. The Negotiation Team reached
consensus on the need to have each state responsible for program oversight and management
within its respective state.
Trade Facilitation and Tracking includes those activities that support the negotiation and
recording of completed trade transactions. In general, this role includes brokering trades by
providing information and participant matching. Specific activities may include the following:
Helping to match buyers with sellers
• Identifying, verifying, and prioritizing trading partners
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• Assisting potential trading partners in understanding the regulatory and legal framework
of the program and providing advice on how participating in the program may or may
not serve their interests
• Helping potential trading partners to negotiate and prepare trade agreements
Registering and tracking the generation and use of credits, including quantities retired
for net water quality benefits
Keeping a Web site of information on current trading prices, available credits, interested
buyers and sellers, and other information to facilitate the union of buyers and sellers.
Appendix E provides examples of forms that could be used for trade tracking.
Program Components of Trade Administration
Several components of program operation also are encapsulated under trade administration.
These components identify the appropriate mechanism(s) for implementing trades, the timing
and duration of a trading agreement, the approach for establishing the price of credits, and
techniques to fund program implementation. Discussions from the Negotiation Team's
deliberations in these areas are defined below.
• Mechanism(s) for Implementing Trades—Negotiated trades will be recorded in an
enforceable document that serves as a contract between buyer and seller. The details of
that document should be left flexible and will be determined by individual states
according to their specific trading policies.
• Duration of Trading Agreement—The duration of a contractual agreement should be
contingent upon the type of trade. Using the framework of the Clean Water Act, the
maximum duration of a trading contract will be 5 years, corresponding to the length of a
NPDES permit. Trade contracts involving nonpoint sources should be appropriately
shorter to reflect their higher risk, unless a longer duration can be justified.
• Establishing Credit Prices—The prices of credits typically are established by the
market's supply and demand curves. Appropriate trade administration design should
allow sufficient demand to be created for credits. The trading program should follow as
simple and flexible a design as possible to reduce transaction costs, while still ensuring
that water quality objectives are protected. Grant programs should be used in such a
way as to incentivize nutrient trading; for example, larger grants could be offered early
in a 10-year program.
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Program Funding—To launch the program would require state support at the outset.
In particular, the state should investigate incentives for participation, such as grant
programs (e.g., larger grant offerings earlier in the program). Eventually, the program
could be funded through participant fees.
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7.0 Guidelines for Ensuring Accountability
Guidelines for Assessing Performance
Point Sources
16. Self monitoring and reporting of nutrient reduction should be required for participants in the trading program.
Nonpoint Sources
17. All nonpoint source controls should be inspected to ensure the control is properly sited, the materials and plans
satisfy established quality specifications, and the installation job meets performance standards.
18. All nonpoint source controls should undergo an annual on-site assessment by a qualified inspector to ensure proper
functionality (e.g., look for signs of sedimentation and erosion to identify inefficient BMPs). In addition, the nonpoint
source should allow right of entry by the state or its designated agent, and the states should use scheduled spot
check inspections to supplement scheduled random inspections.
States
19. States will be responsible for performing, collecting, and analyzing ambient water quality monitoring and overall
program assessment.
20. In addition to ambient water quality monitoring, states should include other types of data (e.g., weather patterns,
slope, soil types, effluent monitoring data) to predict the effectiveness of trades, to assess whether trades are
meeting and maintaining water quality standards, and whether traders are meeting applicable limits.
Guidelines for Account Balancing
Point Sources
21. Point sources will monitor and report on a monthly basis. A yearly accounting period should be used to assess the
trade.
22. Point sources should have mechanisms in place to calculate the credits or portions of credits eligible for trading.
Nonpoint Sources
23. Annual account balancing periods should be used for nonpoint sources based upon seasonal sampling.
24. Nonpoint sources should have mechanisms in place to calculate the credits or portions of credits eligible for trading.
Guidelines for Enforcement and Compliance
General
25. The trading agreement will be enforceable by the state. After considering a variety of options, including general
state permits, state regulations, and contracts, the Negotiation Team strongly recommends that trades should be
governed by a state general permit or regulation issued under the state's water quality laws (versus Clean Water
Act) and that the public will be provided opportunity for input prior to the execution of a trade. If a state elects to
utilize a contract as a vehicle for enforcement, the contract development and enforcement processes must provide
the same elements as if within the state's regulatory or general permit program, including public participation prior to
the execution of a trade. Any NPDES permittee with a nutrient effluent permit limit desiring to trade should have the
trade linked to its permit.
Point Sources
26. The state will maintain oversight of facility monitoring and reporting and will perform periodic compliance checks.
The state will have full compliance and enforcement responsibilities, such as those performed under existing Clean
Water Act programs and protocols.
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Trading programs require methods and mechanisms that ensure all entities comply with their
trading agreements. With established protocols for monitoring, reporting, and enforcement,
participating entities can measure and communicate successes and challenges associated with a
trading program. Several components comprise the accountability element in the nutrient trading
framework:
• "Balancing the Account"—A tracking process that summarizes the amount of nutrients
actually discharged compared to the allowances held.
• Assessing Performance—The synthesis of different types of monitoring (environmental
quality, overall program performance, and facility-specific actions) to determine the
efficacy of the program in meeting its goals.
• Ensuring Compliance and Assigning Responsibility—Inspection and enforcement
programs.
The Negotiation Team addressed each aspect of accountability, arriving at the following
consensus-based guidelines. Three assumptions underpin these accountability guidelines. First,
the threat of regulation exists. Second, other participation incentives, such as grant money, exist.
Third, allowances have been determined and are known by all sources. Additional
implementation options for trade accountability are presented in Appendix F.
Accounting Balancing
The Negotiation Team suggests that a monthly reporting and annual accounting be performed for
point source trades. Recognizing the difficulties in collecting data and the potential for variation
from natural factors such as weather, the Team recommended an annual accounting period for
nonpoint sources—more frequent reporting is not required. Sampling for nonpoint sources,
however, should be performed seasonally when runoff is most likely to occur.
Assessing Performance
Monitoring consists of ambient water quality monitoring, facility discharge monitoring and
facility contractual compliance, proper BMP implementation and maintenance, and overall
program assessment. The states should be the responsible parties for performing ambient water
quality monitoring and overall program review and assessment. State efforts may be
supplemented by referencing other monitoring networks, such as compliance monitoring by
sources and citizen monitoring. Each point source facility is responsible for its own discharge
monitoring and contractual compliance, reporting to the states on a monthly basis. The state will
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maintain oversight of facility monitoring and will perform periodic compliance checks. The state
will have full compliance and enforcement responsibilities as identified in the trading agreement.
Monthly monitoring for point sources is suggested to enable adequate tracking of nutrient
reduction through trading and to provide sufficient time to take corrective action in the event that
trading contracts are not being honored or anticipated results are not being achieved. It is further
recommended that monitoring for nonpoint sources be performed on a seasonal, rather than
annual, basis to better account for storm events and periods of wet weather. Account balancing
for nonpoint sources would be on an annual basis.
Ensuring Compliance and Assigning Responsibility
In order for buyers and sellers to enter into a trading arrangement, some sort of agreement, such
as a contract, must be written and signed by the two parties. This document will be enforceable
by the state.
Under the contract with the buyer, a seller is responsible for providing nutrient reduction credits;
however, the buyer is ultimately responsible for ensuring those credits are delivered so that the
contract requirements can be achieved. In the event of seller default, a buyer can seek legal
recourse against the seller. Additionally, a seller stands to loose its state certification, as well as
may be required to repay the buyer for her/his investment or pay penalties per the terms and
conditions spelled out under the contract.
Ultimately, a buyer is held accountable by the state to meet its allowance, through the purchase of
credits or other reduction mechanisms. States will allow adequate time for a buyer to correct for
noncompliance before enforcement penalties are levied. States also will provide information to
buyers on alternative credit availability.
Additionally, the trading agreement must be enforceable by the state. The Negotiation Team
favors use of a state general permit or regulation issued under the state's water quality laws. A
general permit not only affords enforceability, it allows for public review.
In certain cases in which nutrient specific limits exist in NPDES permits, there must be a linkage
between this permit and a general trading permit. The Negotiation Team believes this is certainly
necessary in the cases in which the NPDES permittee is the buyer and desires to purchase credits
in order to meet its nutrient limits (thereby possibly discharging above its permit requirements).
The Negotiation Team further determined that there is room for discretion, however, when an
NPDES permittee desires to sell credits (or discharge below its permit limit).
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8.0 Guidelines for Assessing Progress
Monitoring Trades and Trading Impacts
27. States will perform ambient monitoring and modeling to assess the effect of trading programs in achieving or
maintaining baywide (e.g., 40% reduction goal) and tributary specific nutrient reduction goals. These monitoring and
modeling efforts should build upon existing efforts currently used by states and trading participants. Point sources
involved in nutrient trading must monitor and report total nitrogen and total phosphorous discharges as applicable to
the trade. Nonpoint source monitoring should be conducted to provide sufficient data to demonstrate the effectiveness
of trading actions. If monitoring is not utilized, then nonpoint source pollutant loading reductions will be determined
based upon data and analysis obtained from the Chesapeake Bay Program's Watershed Model. If the modeling
approach is used, trading ratios must be applied to accommodate for uncertainty.
State Tracking Mechanisms
28. States must develop mechanisms to collect and track trading information that is compatible with existing mechanisms
used by the Bay Program for assessing progress toward achieving and maintaining nutrient reduction goals (e.g.,
watershed model, BMP tracking system, environmental indicators, State of the Bay Report). Tributary specific
information must be collected by the state and aggregated to demonstrate how trading supports the achievement and
maintenance of nutrient reduction goals. Information requirements include the following:
Total annual load reduction of nitrogen and phosphorous
Total annual load reduction of nitrogen and phosphorous by type of trade (p-p, p-nps, nps-p, nps-nps)
Total annual load reduction of nitrogen and phosphorous by discharger type (point source, agricultural, and
urban nonpoint sources)
Net loading reduction of nitrogen and/or phosphorous generated by trading partners
Comparison of pre-trading water quality conditions to post-trading water quality conditions
Total number of trades made
Total annual number of trades
Determination of whether cumulative effects of the trading program are contributing to achieving tributary
strategy goals.
Reporting Bavwide Progress
29. The Chesapeake Bay Program must provide a similar Baywide analysis (as outlined under the State Tracking
Mechanisms guideline) based on the trading information it receives from the states.
Evaluating Accountability. Compliance, and Enforcement
30. States must track the actions of trading partners, compliance with trade agreements, and any enforcement action
taken. Information requirements for each tributary watershed and the state include the following:
Total annual number of trading partners subject to periodic compliance checks
Total annual number of trading partners deemed to be out of compliance with existing regulatory requirements
Total annual number of trading partners deemed to be out of compliance with the terms of their trade agreement
Total annual number of trading partners that corrected noncompliance issues
Total annual number of trades subject to enforcement penalties.
Establishment of a Central Coordinating Office
31. The central coordinating office, as described under the Guidelines for Performing Trade Administration, will be
responsible for the state's responsibilities contained in these Assessing Progress guidelines.
Additional Information to be Provided by Buyer
32. Buyers of credits must provide available information and reason(s) for trades, including the following:
Credit price
Timeframe of trade
Nutrient reduction (in Ibs)
Existing cost savings estimates.
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The goal of a trading program is its driving force, influencing all other elements of the program
and determining the goal for each participating entity. Therefore, it is important to measure
progress toward the overall goal to determine if the trading program is on track. Using the
information collected through the accountability element, those responsible for administering the
trading program and the sources participating in the program should be able to assess the
effectiveness of the program.
Nutrient trading should realize the goals set by the program and lead to improved water quality.
These guidelines recommend that a nutrient trading program establish performance indicators
and assessment criteria. While eligibility and accountability address criteria for individual trades,
this trading element on assessment and indicators seeks to measure the effectiveness of the
overall trading program.
To assist in the process of certifying and tracking trades and obtaining the basic information
needed to assess the progress of the program, it is recommended that certain standard forms be
developed and used when implementing a trading agreement. The forms in Appendix E (Trade
Tracking Forms) are designed after the Lower Boise River effluent trading program. They offer
a concise template for the type of information that should be collected in order to effectively
track, certify, and publicize trades. A Reduction Credit Certificate form should be completed by
the seller as part of the individual trading agreement, and should be sent to a central office that
collects this information. This form specifies the amount of pounds being traded, taking into
consideration all trading ratios, and delineates the length of time that trade is valid. This form
should be certified by a qualified official to ensure the reduction methods are properly
implemented and estimates and/or calculations are correctly performed.
The buyer of a trade should complete a Trade Notification Form. This form would be sent to the
central tracking office, as well as to the state regulatory authority, along with other state reporting
requirements, such as an NPDES permit. The Notification Form identifies the seller and buyer
and the pounds being sold and bought. Both buyer and seller sign this form.
These forms and the tracking results should be available to the public at all times.
It is recommended that costs be documented and reported for all trades. This is invaluable
information for determining the overall effectiveness of a trading program. Thus, it is
recommended that the reduction credit certificate form also include a place to declare the selling
price of the credits being sold. Similarly, for the trade notification form, a place should be
included to request information on the amount of money the buyer will be providing the seller,
and their assessment of their nutrient reduction costs should they not engage in trading.
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9.0 Guidelines for Involving Stakeholders
33. Each state should create or use existing citizens advisory committees to be part of the nutrient trading program within
each state.
34. Each state may choose to create a demonstration program.
35. States should provide broad public notification of trades as they occur, including notification to local watershed
groups.
This element of a trading program establishes two-way lines of communication and provides
mechanisms for the public to participate in the program. To garner support for a trading
program, members of the public need access to information and a mechanism for providing input
and feedback. Early stakeholder involvement, and an effort to maintain involvement throughout
the process, help to increase public confidence that water quality goals are being met in a cost-
effective manner.
Enveloped in each element of the nutrient trading program is the need for stakeholder outreach
and involvement. All interested parties will want to know that their interests are being met in the
nutrient trading strategy and that the program is helping to achieve water quality goals. The
TOWG's success in bringing together the major stakeholders together as a Nutrient Trading
Negotiation Team demonstrates its commitment to stakeholder involvement. Citizen
involvement is a subcomponent of this stakeholder outreach, as it will increase public
understanding and support for final guidelines and future development of trading programs.
Exhibit 9.1 illustrates a suggested series of steps that states may take when developing and
implementing a trading program.
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Exhibit 9.1 Nutrient Trading Program Development: Stakeholder Process
State receives Chesapeake Bay Nutrient
Trading Fundamental Principles and
Guidelines
(Nutrient Trading document)
Statewide stakeholder groups, including
environmental groups, industries, municipal
authorities, farmers, conservation districts,
universities, state and Federal agencies,
etc., are formed to review Nutrient Trading
document and select state-tailored program
(local watershed groups are involved)
Nutrient Trading document is presented in
appropriate meetings across state
(widely publicized)
Comments are received, compiled, and
analyzed by state
Full statewide implementation of nutrient
trading program occurs
Recommended nutrient trading program
proceeds through state regulatory process
or policy/fundamental principles and
guidelines creation process
State sponsors another series of public
meetings statewide to review demonstration
results and propose state program changes
Demonstration results are received,
summarized, and used to make changes to
state program, as needed
Appropriate participants design and
implement nutrient trading demonstration
projects in appropriate watershed
State revises program based on comments
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10.0 Recommended Next Steps
Prior to development of a large watershed trading program, the Bay states may find that
approaching trading in a series of phases will work best. For example, Maryland will have
access to a study being performed to assess the nutrient trading market in this state.
Pennsylvania is considering forming a nonprofit task force to develop state-specific trading
guidelines based on this document, and Virginia is forming a stakeholder workgroup to evaluate
market-based incentives for point sources based on this document. The results of these efforts
will certainly provide valuable information on the viability of trading in the Bay watershed.
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Appendices
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Appendix A. Public Comments
This Appendix covers the following topics:
A. 1: Public Meetings
A.2: Public Comments and Major Issues
A.3: Changes Made in Response to Public Comments
A.4: STAC's Comments and Major Issues
Public review of the Trading Guidelines consisted of 16 public meetings around the Bay
watershed, solicitation and receipt of 118 written public comments, and also a review organized
by the Bay Program's Scientific and Technical Advisory Committee (STAC). The Negotiation
Team made changes in response to these comments where it considered changes appropriate.
Changes not made in response to comments were generally because the Team believed that such
comments related to details more appropriate for consideration by the individual jurisdictions in
the development of their own programs, or because the comments were evenly balanced on both
sides of a particular issue such that the Team's negotiated consensus reflects the best
compromise on that issue. A summary of these comments is provided in a document entitled
Nutrient Trading in the Chesapeake Bay Watershed, Public Comments Summary, January 2001.
A.1 Public Meetings
Sixteen public meetings were held during September and October 2000. The dates and locations
are listed below. Generally attendance ranged from 3-30 attendees at each of the public
meetings. Participants included stakeholders from a variety of disciplines, ranging from public
citizens, environmental advocates, industry, and local governments. Discussions focused on
educating the participants on the concept of trading more than the specifics of an individual
trading program. Proceedings for each meeting have been compiled by each of the jurisdictions
hosting the meetings. These proceedings, compiled into a document entitled Nutrient Trading in
the Chesapeake Bay Watershed: Public Meeting Proceedings, January 2001, can be found on the
Chesapeake Bay Program's Web site at www.Chesapeakebay.net.
Nutrient Trading Public Meeting Details
State
Virginia
Pennsylvania
Maryland
D.C.
Meeting Location
Bridgewater
Manassas
Richmond
Williamsport
Harrisburg
Wilkes-Barre
Laurel
Hagerstown
Eastern Shore
D.C.
Meeting Building
Bridgewater Retirement Center
Manassas Battlefield Holiday Inn
VA Power Office in Innsbrook, VA
DEP North Central Office
DEP Rachel Carson Bldg
DEP NE Office
WSSC Headquarters
Hagerstown Community College
Salisbury State
Martin Luther King Library
Meeting Dates/Times
September 26, 10-1 2pm
September 28, 2-4pm, 7-9pm
October 3, 2-4pm,7-9pm
September 28, 2-4pm, 7-9pm
October 5, 2-4pm, 7-9pm
September 26, 2-4pm, 7-9pm
September 26, 2-4pm,7-9pm
September 27, 7-9pm
September 29, 7-9pm
October 10, 6:30-8:30pm
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A.2 Public Comments and Major Issues
One hundred and eighteen comment letters were received by the jurisdictions and the
Chesapeake Bay Program collectively on the Draft Nutrient Trading Guidelines document. A
summary of all of the comments, entitled Nutrient Trading in the Chesapeake Bay Watershed,
Public Comments Summary can be obtained via the Chesapeake Bay Web site. This summary is
an assimilation of the individual comment summaries prepared by each jurisdiction for the
comments they received. Hard copies of the individual jurisdiction comment summaries are also
available at the Chesapeake Bay Program, as well as hard copies of the actual comment letters.
The major issues presented by the comments are delineated below.
a) Guideline #1: trading to meet or maintain the reduction goals
Many believe that trading should not occur until after achievement of the 40% goal. On the other
hand, many believe that this would unnecessarily restrict the market. Many believe that trading
only between "like sources" will eliminate the most likely partnering of buyers and sellers.
b) Fundamental Principle #3:
Trading should have a defined cap within which to trade. Many felt that this should be
accomplished via TMDLs. Many stated that trading should not occur until TMDLs are
established.
c) Fundamental Principle #4
Many believe that trading should result in a net reduction, and not just remain as is.
d) Fundamental Principle #5: what does strive to do its part to meet the 40% goal
Many are confused about what this means.
e) Fundamental Principle #6
Many believe that trading within the major tributaries is too large an area for trades to ensure
water quality. On the other hand, many felt that this would unduly restrict the market. Also,
many were concerned that it is important to restrict the possibility of producing pollution hot
spots.
f) Guideline 24: Permitting Trades
Many felt that trading should occur within the NPDES permit system, especially where local
water quality is at issue. This is because general permits are not sufficiently transparent and do
not include sufficient opportunities for public participation. Many felt that enforcement and
accountability cannot be guaranteed if not in the NPDES permit system.
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g) The section on ratios needs to be corrected, and/or clarified
h) Monitoring
Water quality in streams or rivers with trades must be closely monitored. The guidance must
require the establishment of a water quality monitoring program, which requires monitoring by
the traders and the state. Many stated that the guidelines do not go into enough detail on this.
i) Trade Mechanism
Many comments were submitted regarding the trade mechanisms that would be in place for
trading. Many wanted more information and felt the Guidance document is lacking here. The
concept of individual trades versus a dynamic trading system was mentioned and several
recommended providing guidance on this. A dynamic trading system, where available trades are
generated and posted in a clearinghouse type fashion, available for sale on the open market was
often mentioned as a preferable approach to limiting trades to individual relationships, which
would bog down a trading program.
A.3 Changes Made in Response to Public Comments
The Nutrient Trading Negotiation met after the public comment period closed on October 27,
2000, to discuss the comments and to reach consensus on any changes resulting from the
comments. The following changes were made to the November 29, 2000, draft document.
a) Additional language to be put into the guidelines:
For trading to occur within a major Bay tributary, the nutrient trading program must incorporate
(a) specific nutrient loading allocations established to provide water quality conditions necessary
to protect living resources in the tributary and the Bay, (b) a baseline and a cap for nutrient loads
for the tributary, and (c) allowances for point and nonpoint sources.
b) Trading To Achieve or Maintain the Chesapeake Bay Nutrient Cap (Guideline #1)
Trading should be allowed among "like" source types in order to achieve the 40% nutrient
reduction goal. This means that point sources could trade with point sources, and nonpoint
sources could trade with nonpoint sources, but point sources could not trade with nonpoint
sources.
Within several years after the implementation of a trading program the states may reexamine the
success or failure of trades to date in achieving the goal and, thereafter, determine if cross source
trading to achieve is appropriate.
Once the 40% nutrient reduction goal is met, trades should be allowed within and across source
types to maintain nutrient reduction goals or further reduce nutrient levels.
Add to text: Allow states to make the determination (40% goal discussion)
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c) Fundamental Principle #4
Change the fundamental principle from "Each trade must achieve no change in nutrient loadings
or a net reduction in nutrient loadings" to "Each trade must result in a net reduction in nutrient
loadings or contribute to maintenance of a tributary nutrient cap. Net reduction in loadings or
maintenance of a cap shall be calculated based upon the estimated tributary loadings at a point in
time determined by the state."
d) Fundamental Principle #5
Change this fundamental principle from "Every source should strive to do its part in reaching the
40% reduction goal prior to considering the nutrient trading option." to: "Sources should
implement nutrient reduction actions to achieve the 40% reduction goal, as well as the goals
adopted for the tributaries south of the Potomac River prior to pursuing a nutrient trading
option."
e) Placement of Fundamental Principle #6
Move Fundamental Principle #6 on geographic scope to Fundamental Principle #2 so that the
reader will see the direct connection between no impacts on local water quality to the geographic
scope of a trading effort.
f) The Ratio Appendix
The Appendix on ratios was corrected to properly describe the use of ratios by other programs in
the country
g) Guidelines for Enforcement and Compliance
24. Add "Any NPDES permittee with a nutrient effluent permit limit desiring to trade should
have the trade linked to its permit."
Add in the text a statement about discretion as to whether an NPDES permittee wishing to SELL
credits must have its NPDES permit linked to a trading agreement.
h) Guideline 22
Annual account balancing periods should be used for nonpoint sources based upon seasonal
monitoring.
i) Guideline 24
Add a statement in the text about how trading between Federal facilities is an exception to
guideline 24 regarding use of public funds to trade.
j) Change the title to " Nutrient Trading Fundamental Principles and Guidelines"
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k) Add appendix about public meetings, comments, and responses.
1) Insert A, for page 14 under section 3.2: Geographic Scope
Trading may occur between states as long as the trade is within the major tributary boundaries,
such as between Maryland and Virginia in the Potomac River basin. According to Fundamental
Principle #6 below, however, trading would not be allowed between different basins in different
states, such as between the Susquehanna and the Potomac River Basins.
m) Insert B, for page 28 under section 7.0: Ensuring Accountability
Remove second paragraph under "Assessing Performance" and replace with the following:
"Monthly monitoring for point sources is suggested to enable adequate tracking of nutrient
reduction through trading and to provide sufficient time to take corrective action in the event that
trading contracts are not being honored or anticipated results are not being achieved. It is further
recommended that monitoring for nonpoint sources be performed on a seasonal, rather than
annual, basis, to better account for storm events and periods of wet weather."
n) Insert D on page 14 under section 3.3 Fundamental Principles, just after the second to
last sentence of the first paragraph:
Note that the first fundamental principle essentially states that local water quality will not be
impacted by trades. This is an overarching theme that any trading program must incorporate
when considering trade location and nutrient credit exchanges. Implementation of this principle
will ensure that pollution "hot spots" will not result from trades.
A.4 Comments Received by STAC
The Chesapeake Bay Program's STAC also provided comments on these trading guidelines. Not
only was the Chair of STAC intricately involved in planning and organizing the Negotiation
Team and their meetings, and providing technical expertise to the Team, but STAC also
reviewed this document in addition to selecting three additional experts on trading in the United
States to review this document and provide comment. The six people that performed this review
follow:
Kurt Stephenson, Virginia Tech
Pat Norris, Michigan State University
Leon Danielson, North Carolina State University
Claire Schary, EPA with the Idaho Trading Program
Dave Batchelor, Michigan Department of Environmental Quality
Mark Tedesco, EPA with the Long Island Sound Program
Below is a summary of their comments. Hard copies of these comments may be obtained from
the Chesapeake Bay Program.
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a) Each reviewer made complimentary comments to begin the review.
It is a comprehensive document that is well written and should be easy for users to understand.
The level of consensus that has been achieved is remarkable. It is a valuable resource to potential
users. Great effort to get stakeholder involvement. Stakeholder involvement increases chances
of program success. State flexibility allows states to select the approach that fits them best.
Highly prescriptive trading programs have not proven to be very successful—these fundamental
principles and guidelines strike a good balance in this regard.
b) Simple extension of command and control
Given the 34 guidelines, the system is a direct extension of the existing command and control
system. Voluntary exchange can not exist. Simple extensions of command and control systems
will not bring about the allowance markets that are the truly innovative solutions for water
quality management.
c) Centralized regulatory agency versus decentralized allowance markets
This document does not provide information, guidelines, or discussion devoted to the
characteristics needed for an allowance market to function. No distinction exists between
centralized regulatory agency versus decentralized allowance markets. The trading framework
embodied in the document provides a workable approach only for a highly managed program.
d) Allowance market development is missing
None of the eight fundamental principles deals with requirements for allowance market
development. Property right conditions necessary for investment in aggressive pollution control
activities are not provided for in this document.
e) Establishment of exchange commodity
The document leaves a lot to be desired on establishing the exchange commodity. A
fundamental fact that is glossed over in the text is that the largest hurdles to overcome in
establishing a market-like alternative is, in fact, establishing the exchange commodity—a limited
number of enforceable discharge allowances. It is not clear from reading the document why a
nitrogen source would want to purchase credits under the voluntary framework. At least one
party to a trade must have a source specific, enforceable allocation. The treatment of trading
credits versus adjusting allocations needs clarification. In many credit-trading programs,
allocations remain the same but compliance is determined based on the discharge adjusted by the
sale or purchase of credits. The definition of an allowance sounds like a TMDL-like definition of
a waste load allocation for a point source, but it is unclear throughout the document whether the
individual nonpoint sources will receive a TMDL-like load allocation.
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f) Requirement severely restrict trading
The guidelines establish a number of requirements that severely restrict trading and the benefits
trading offers. These factors will substantially decrease the number of trades and the economic
and water quality benefits that could be achieved. Greater benefit at lower costs can be achieved
through trading programs that establish a cap and let the market decide where the most cost-
effective reductions can be found. The requirement that the buyer is liable for a seller's actions
will diminish the willingness to trade. From an economic standpoint, it is not clear why point/
nonpoint trades are forbidden until after the 40% reduction is achieved. Because point sources
have made reductions, their marginal cost are lower than less controlled nonpoint sources—large
economic gains could be achieved with point/nonpoint trades. This document begs the question
as to what incentive exists for a source to participate. The guidelines do not allow a source to
trade to meet the limited specified by the allowance. If trading cannot be used to meet initial
allowances, then how can it be used to meet the initial tributary load allocation or cap? If the
public has the opportunity to comment prior to each trade, this would be an onerous and costly
requirement that would most likely kill a trading program. The guidance requires states to certify
credits but does not indicate how this will be done. It is not clear whether Fundamental
Principles #4 and #5 allow sources to achieve a net 40% reduction through trading. These two
principles will affect how targets and baselines are set and determine the performance of the
program. The guidance removes the least cost options of reducing storm-water loading. The
guidance creates "maximum extent practical" control technology requirements. The requirement
for trading "like sources only" may create a barrier to municipal source participation.
Restrictions on cross tributary trading severely restrict benefits from trading. A potentially big
economic and environmental opportunity is being missed by not allowing trading between point
and nonpoint sources at the outset. Explain the term prioritizing trade partners. Any prioritizing
should be left to the private sector. The state should not be an enforcer of private contracts. The
compliance design creates a tremendous administrative burden to the state by calling for a
certification program for screening prospective buyers and sellers and then for certifying credits
prior to trade approval.
g) Restrictions on use of cost-share funds
Restrictions on use of cost-share funds should be decided by the rules of the programs that
provide those funds, not the trading programs. The document does not indicate how trading will
be coordinated with nutrient management plans. Additional direction is needed on how to handle
nonpoint sources, cost share monies, and nutrient management plans.
h) Compliance for nonpoint sources
It is unclear how compliance from nonpoint sources will be determined.
i) Working documents
The guide must be perceived as a "working document" and be revised after experience on actual
cases.
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Appendix B. Negotiation Team Membership
CHESAPEAKE BAY NUTRIENT TRADING NEGOTIATION TEAM INVITEES
Stakeholder Group
Principal Member
Alternate
US EPA, Region I
Robert Koroncai, EPA R3
Chief, WV & VA Branch
Water Protection Division
215-814-5730
koroncai.robert@epa.gov
Patricia Gleason, EPA R3
Chief, DC & MD Branch
Water Protection Division
215-814-5740
gleason.patricia.epa.gov
Chesapeake Bay Program
Allison Wiedeman, EPA
Chesapeake Bay Program Office
410-267-5733
wiedeman.allison@epa.gov
Jerry Griswold, USDA/NRCS
Chesapeake Bay Program Office
410-267-5754
griswold.jerry@epa.gov
District of Columbia
Jim Collier, DC Dept. of Health
Program Manager
202-645-6601 ext 3040
jcollier@mail.environ.state.dc.us
Mike Marcotte, WASA
Chief Engineer
202-645-6309
marcottem@aol.com
State of Maryland
Virginia Kearney, MDE
Water Management Administration
410-631-3574
vkearney@mde.state.md.us
Rich Eskin, MDE
Tech & Reg. Serv. Div.
410-631-3691
reskin@mde.state.md.us
State of Maryland
Royden Powell, MDA
Asst. Secretary, Off.of Res.Consv.
410-841-5867
powellrn@state.md.us
John Rhoderick, MDA
Administrator, Off. of Res. Consv.
Operations
410-841-5865
rhoderjc@mda.state.md.us
Commonwealth of
Pennsylvania
Dave Bingaman, PA Dept. of Agriculture
Bur. of Plant Industry
717-772-5208
dbingaman@agric.state.pa.us
Karl G. Brown, PA State Conservation
Comm.
Exec. Secretary
717-787-8821
kbrown@agric.state.pa.us
Commonwealth of
Pennsylvania
Robert Yowell, PA DEP
Regional Director
North Central Region
570-327-3695
ryowell@state.pa.us
Stuart Gansell, PA DEP
Director Bureau of Watershed
Conservation
717-783-7420
sgansell@state.pa.us
Commonwealth of Virginia
Mark Bennett, VA OCR
804-371-7485
mbennett@dcr.state.va.us
Stu Wilson, VA OCR
804-786-4382
swilson@dcr.state.va.us
Commonwealth of Virginia
Alan Pollock, VA Dept. of Env. Quality
Chesapeake Bay Program Manager
804-698-4002
aepollock@deq.state.va.us
John Kennedy, VA Dept. of Env. Quality
804-698-4312
jmkennedy@deq.state.va.us
10
Chesapeake Bay
Commission
Ann Swanson, CBC Director
410-263-3420
aswanson@ari.net
Tom Beauduy, CBC
717-232-1103
tbeauduy@srbc.net
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Stakeholder Group
Principal Member
Alternate
11 Regional Environmental
Interest
Roy Hoagland, CBF
804-780-1392
rhoagland@savethebay.cbf.org
Stella Koch, Audubon Naturalist Society
703-669-3922
stella@audubonnaturalist.org
12
Local Watershed Interest
John Flood, Severn River Comm.
410-267-9692
Patricia Jackson, James River
Association
804-730-2898
jra@i2020.net
13
Public Interest
Helen Murphy, Garden Club of VA
804-472-3094
htmurphy@sylvaninfo.net
Jeane Packard, Fairfax County
Federation of Citizen Associations
703-978-4782
jeanp22032@aol.com
14
Local Government
Paul Gunther, Queen Anne's County
Extension Director, MD. Coop. Ext.
410-758-0166
pg24@umail.umd.edu
Robert Shaffer, PA State Association of
Township Supervisors
Gannett Fleming Engineers & Planners
717-763-7211
rshaffer@gfnet.com
15 Municipal Point Source
Interest
Cy Jones, MD Assoc. of Municipal
Wastewater Agencies (MAMWA)
301-206-8831
cjonesl @wssc.dst.md.us
Bill Leary, VAMWA
Executive Director
South Central Wastewater Authority
804-861-0111
wjlscwwa@erols.com
16
Industrial Point Source
Jud White, Virginia Power
804-273-2948
judson_white@vapower.com
George Kelly, MD Chamber of Commerce
410-781-0072
gkelly@ebxusa.com
17
Rural Non-Point Source
Steele Phillips, MD Soil Consv. Dist.
410-376-3372
Don Robinson, Lancaster County Consv.
Dist/District Manager
717-299-5361
don-robinson@nacdnet.org
18
Rural Non-Point Source
John Chlada, Perdue Farms
410-860-4232
john.chlada@purdue.com
Lynne Hoot, MD Association of SCO
410-956-5771
lynnehoot@aol.com
19
Storm Water Interest
Barbara Moore, Virginia Municipal
League
Director Land Use & Env. Serv.
804-649-8471
barbmoore@att.net
Larry Gavan, City of Alexandria,
Transportation & Environmental Services
703-519-3400 (x188)
larry.gavan@ci.alexandria.va.us
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Appendix C. Key Definitions
Accounting
Allowance
Banking
Baseline
Best Management
Practices (BMPs)
BNR
Buyer
Cap
Credits
Nutrient Management
Plan
Monitoring Period
Nutrient Trading
Method of recording outcomes of monitoring. The accounting period
can be monthly or yearly or other frequency. Regardless of the period,
success of a trade will be documented, generally in pounds per year or
other unit measurement.
The allowed nutrient load a source may discharge.
Banking is a system where credits are stored for future use or sale
(trade). These banked credits can be used at a future time when the
discharger needs them, can be traded, or can be retired. Banking systems
can be centrally arranged by a banking entity thereby creating a market
place in which credit buyers and sellers can locate one another at a
minimal transaction cost. The bank can be operated by a regulatory
entity, or another public, private, or nonprofit organization.
The numeric level of nutrient load at a particular point in time that
serves to establish nutrient reduction goals and allowances.
BMPs refer to practices implemented by nonpoint sources designed to
reduce discharges to surface water. Practices include runoff or erosion
management systems at agricultural or construction sites and animal
waste storage systems on farms.
BNR refers to Biological Nitrogen Removal, an advanced waste
treatment process that lowers the amount of nitrogen released in a plant's
effluent. Many states in the Chesapeake Bay watershed are promoting
BNR as a technique to help meet tributary strategy goals.
An entity that purchases nutrient credits.
The total nutrient load that is allowed to be discharged into a given
waterbody. The cap is the baseline minus the amount of load reduction
needed to meet the goal. The cap is equal to, or greater than, the sum of
the allowances.
The amount of nutrient load reduced below the allowance.
A comprehensive plan to manage the amount, placement, timing, and
application of animal waste, fertilizer, sludge, or other nutrients.
Frequency of assessing nutrient reduction through performance
inspections.
The transfer of nutrient reduction credits, specifically those for nitrogen
and phosphorous.
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Offset
Retiring Credits
Seller
Soil Conservation and
Water Quality Plan
An open trading system allows regulated sources to modify their permits
to reflect an exchange of pollution control requirements. In an open
system, discharge limitations are imposed on individual sources and
effluent allowances are only created when a source discharges less than
the amount allowed under a permit. Open trading systems are common
in the air emission trading program (adapted from Water Science
Reporter. Effluent Allowance Trading: A New Approach to Watershed
Management. National Institutes for Water Resources, 1996). Open
trading is a system that refers to a situation in which there is no pollutant
load cap on a water body.
A partially closed trading system sets a limitation or "cap" on nutrient
loading for a geographical area and for a specified group of sources. The
system allocates nutrient loading control responsibility to individual
group members in the form of allowances. After allowances are
distributed, sources can trade as long as total nutrient loading within the
system does not exceed the pollution cap (adapted from Water Science
Reporter. "Effluent Allowance Trading: A New Approach to
Watershed Management." National Institutes for Water Resources,
1996). Partially closed systems are where discharge allowances are
assigned to some, but not all, of the sources.
A fully closed trading system amplifies the partially closed trading
concept and applies it to all nutrient load sources in a given watershed
(adapted from Water Science Reporter. "Effluent Allowance Trading:
A New Approach to Watershed Management." National Institutes for
Water Resources, 1996). Fully closed systems are where discharge
allowances are assigned to all of the sources.
The term "offsets" will be used to specifically refer to reductions a new
or expanding (or otherwise unaccounted for) source must accomplish
prior to being allowed to operate in an impaired water body. Offsets will
refer to the means in general of accomplishing pollution reduction,
which could include trading or other efforts, such as technology
reductions, alternative offsite land use conversions, etc.
Credits can be retired, or taken out of, the market. For example, states,
other administrative units, environmental groups, or speculative
investors could purchase credits from a market, thereby reducing the
amount of allowances that could be discharged into a body of water.
An entity that offers nutrient credits for sale.
A comprehensive plan addressing natural resource management on
farmlands directed toward the control of erosion and sediment loss and
management of animal waste or agricultural chemicals to minimize their
movement from agricultural land to surface waters.
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Source
Trading Ratios
Transaction Costs
Water Quality Criteria
Water Quality
Standards
Watershed
A nutrient source whether point, nonpoint, or third party. The
Negotiation Team agreed to use the term source in place of discharger.
The goal of acceptable soil loss will be equal to "T", or tolerable soil
loss. If this is not achievable the farmer, in consultation with the
planner, can determine that site conditions and farming practices warrant
an acceptable rating of "2T."
To account for the uncertainty regarding the effectiveness and
monitoring of nonpoint source controls, trading ratios are applied in the
cases in which nonpoint sources are involved. For example, a trading
ratio of 2:1 means that for every pound increase in pollutant traded by a
point source, there must be a corresponding two-pound trade from a
nonpoint source.
Transaction costs are expenses for trading participants that may be
required in order to establish a trade, including public and private
participants and administrators. Transaction costs often include
administrative, negotiation, legal, and documentation costs.
Water quality criteria indicate levels of water quality expected to render
a body of water suitable for its designated use. Criteria are both numeric
and narrative. Numeric criteria are scientifically derived ambient
concentrations developed by EPA or states for various pollutants of
concern to protect human health and aquatic life. Narrative criteria are
statements that describe the desired water quality goal. Criteria are
based on specific levels of pollutants that would make the water harmful
if used for drinking, swimming, farming, fish production, or industrial
processes.
Water quality standards refer to the law or regulation that designates the
beneficial use or uses of a water body or a segment of a water body and
the water quality criteria that is necessary to protect the use or uses of
that particular water body. Water quality standards also contain an anti-
degradation policy. The water quality standard serves a twofold
purpose: (a) it establishes the water quality goals for a specific water
body and (b) it is the basis for establishing water quality-based treatment
controls and strategies beyond the technology-based levels of treatment
required by sections 301(b) and 306 of the Clean Water Act, as amended
by the Water Quality Act of 1987.
A drainage area or basin in which all land and water areas drain or flow
toward a central collector such as a stream, river, or lake at a lower
elevation.
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Appendix D. Trading Ratios
CONTENTS: Summary of Trading Ratios in Other Programs
Examples of Other Trading Programs
Trading Ratios for the Chesapeake Bay
Example Credit Calculations
Summary of Trading Ratios in Other Programs
Many nutrient trading programs across the country apply several types of trading ratios to
accommodate uncertainty, especially if nonpoint sources are participating, and to ensure
protection of water quality. Typically, various ratios will account for the loss of a pollutant as it
travels over land or in water, accommodate the uncertainty of reduction method (e.g., BMPs)
efficiencies, or ensure a net water quality benefit. The use of ratios is essential in attaining the
equivalency of credits between all permutations of trades (i.e., nonpoint-nonpoint,
nonpoint-point, point-point). Although each program develops and adopts ratios that are best
suited to its needs, the following are the most commonly used trading ratios:
• Delivery Ratios
Uncertainty Ratios
• Water Quality Ratios
Retirement Ratios.
It is important to note that these common ratio names may vary across programs. For example,
one program may use the term "location ratio" instead of "delivery ratio." Although the
terminology varies, the concepts are similar.
Delivery Ratios
Delivery ratios apply discount factors to compensate for a pollutant's travel over land or in water
(or both) and may be applied to point, as well as, nonpoint sources. Delivery ratios generally
account for attenuation (i.e., the rate at which nutrients are reduced through natural processes,
such as hydrolysis, oxidation, and biodegradation, on their way through tributaries to the
mainstem of the water body). The ratio varies depending on the location of the source from the
mainstem. The general idea is that the greater the distance the pollutant has to travel, the greater
the pollutant loss will be. This ratio would work to equalize a trade between a source high in the
tributary and one near the mainstem. This ratio is also often termed a "location ratio."
Uncertainty Ratios
Point source nutrient discharges are relatively constant and easily quantified. By contrast,
nonpoint source nutrient discharges are more uncertain and are readily influenced by storm
events, seasonal variations, and site-specific physical and chemical characteristics. In addition,
the BMPs applied to nonpoint sources generally provide a reduction potential that is an estimate
rather than a measured value. As an example, Table D. 1 shows the percentage of nitrogen and
phosphorus typically removed by a number of nonpoint controls. Note the wide ranges reported,
especially for nitrogen.
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Table D.1 Nutrient Removal Efficiencies of Nonpoint BMPs
BMP
Urban storm water management
Pasture
Animal waste management
- Cattle, swine
- Poultry
Cover crops
Forested buffer
Grassed buffer
% Nitrogen Removed
25-32
20
80
14
34-51
48-65
35-50
% Phosphorous Removed
20-64
14
80
14
10-20
10-20
53
Source: Chesapeake Bay Watershed Model Application and Calculation of Nutrient and Sediment
Loadings. Appendix H. August 1998.
To accommodate for this range of potential efficiencies, most trading programs attempt to
address nonpoint reduction uncertainties by assigning a rate greater than 1:1 (i.e., requiring that
more than one nonpoint credit be traded for one point source credit). As Table D.2 shows, the
most popular rate used is 2 nonpoint credits for 1 point source credit (2:1). The U.S. EPA's
Draft Framework for Watershed-Based Training (U.S. EPA, 1996b) cautions against using ratios
that are too stringent and those that eliminate the economic benefits of trading.
Table D.2 Uncertainty Ratios Established by Other Programs
Program
Tar Pamlico Basin
Lake Dillon
Chatfield Basin
Kalamazoo
Ratio
2 to 3:1
2:1
2:1
2:1
Program
Rahr Malting Co.
Bear Creek
Cherry Creek Basin
Red Cedar River
Ratio
2:1
1:1 (PS/PS)
1.2 to 3:1
2:1
Water Quality Ratios
Water quality ratios may be included to account for the effect a source has on local water quality,
or to relate the relative impact of pollutant reductions in any given watershed segment (e.g.,
tributary) to mainstem water quality goals, such as indicators of dissolved oxygen and living
resources. Water quality ratios would account for situations, including nonattainment areas or
sensitive areas such as wetlands, lakes, or wildlife sanctuaries, that may require additional water
quality considerations. The increase in loads in such areas could have a greater impact than in
less sensitive areas. In such cases, sources could have their reductions discounted by a factor
(e.g., 10%) to achieve greater water quality protection. The water quality ratio and the delivery
ratio are similar in that both involve location, but a delivery ratio addresses attenuation and
considers source location relative to the distance from the water body of concern. A water
quality ratio addresses location relative to special conditions in the receiving water; if needed, it
may exist in addition to delivery ratios.
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Retirement Ratios
A certain percentage of an available credit may be retired (i.e., excluded) from trading in order to
increase the potential for a water quality benefit or to provide a margin of environmental safety
(similar to an uncertainty ratio) for the overall trading program. Some programs require, for
example, that 10% of the available credits for sale be taken off the market before any trades are
negotiated. When evaluating the potential use of retirement ratios, it is important to also
consider issues of cost, equity, and future economic growth. Options for retirement ratios
include the following (McCatty, 1999):
Requiring that a portion (e.g., 10%) of all credits traded by both point and nonpoint
sources is contributed to the state. This is a fairly equitable approach, and, if the
percentage is small, should not impose too onerous a cost on participants.
Requiring that BMP credits expire at the end of the rated life of the installation. This is
a reasonable requirement; however, difficulties may arise in multiple BMPs installed
over an extended period of time and in the case of BMPs functioning efficiently beyond
their rated lifespans.
• Requiring that all credits be retired at the end of 5 years. This is the approach taken in
the Michigan program. It establishes a level playing field for all participants. In
addition, the duration is sufficiently long enough for planning and assessment purposes.
• State agencies, citizen groups, or environmental nonprofits may purchase credits with
the express purpose of immediately retiring them. Such action may be warranted in
locations or periods of worsening water quality. It is, however, a costly option for all
concerned and, by removing credits from the market place, may serve to dampen the
market for trading and restrictive growth.
• Entities that cease to operate may be required to retire all or a portion of their credits.
This policy may be pursued in areas in which growth is being discouraged for
environmental reasons.
• Credits may be retired as part of penalties imposed on entities that continue to violate
their terms of trade for an extended period of time (e.g., over two years).
Examples of Other Trading Programs
The following is a brief discussion of methods used by seven nutrient trading programs to
determine various trading ratios. The programs are Long Island Sound, Lower Boise River, Tar
Pamlico Basin, Michigan State, Cherry Creek Basin, Southern Minnesota Beet Sugar
Cooperative, and Rahr Malting Co.
Long Island Sound
The proposed Long Island Sound trading program developed trading ratios based on the
discharge's effect on the water quality once it reaches the Sound. The ratios attempt to equalize
50
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the impact on dissolved oxygen levels of nitrogen discharged in various areas of the Sound. The
program focuses on point-point trades. The main components are as follows (McCatty, 1999):
• The watershed is divided into 11 management zones. Normalized exchange rates, in
terms of dissolved oxygen improvements in the Sound, were developed for each zone.
• Zones with the greatest influence on dissolved oxygen levels are given an exchange rate
of 1.0. Zones with lower impacts are given values less than 1.0.
Attenuation factors that take into account nitrogen losses in its travel downstream to the
Sound are assigned to several tiers within each management zone. This ensures that
reductions reflect levels of nitrogen delivered to the Sound.
The exchange rate is calculated by multiplying the zone exchange rate and the tier
attenuation factor and is intended to equalize the value of nitrogen removal between the
respective management zones. Zones close to the Sound are assumed to deliver 100%
of their pollutants to the Sound and, therefore, are not adjusted for attenuation.
• The exchange rate within each zone is set at 1:1.
Lower Boise River
The Lower Boise River program also proposes geographically based exchange rates using three
types of water transport ratios: river location ratios, drainage delivery ratios, and site location
factors (Schary, 2000).
River location ratios address the geographic relationship between sources located directly on the
Boise River and the river's mouth at Parma, which is where it joins the Snake River and is the
TMDL's point of concern. The ratios were established using a mass balance model that accounts
for river flow and phosphorous concentrations, factoring in inflow, outflow, and groundwater in
this heavily altered river system. For a given source, the river location ratio is equal to the
amount by which the phosphorous loading at Parma would increase (or decrease) if one pound
more (or less) were discharged at that location.
Drainage delivery ratios account for transmission losses (e.g., uptake by vegetation, infiltration
to groundwater, etc.) in a drain or tributary. They are calculated by subtracting from 100 the
number of miles a source located on a drain or tributary is from the mouth of the drain, then
dividing that number by 100.
Site location factors address the potential for diversion and reuse of water below the point of
discharge to the drain or tributary. Taken together, drainage delivery ratios and site location
factors reflect the portion of the reduction that will be realized at the confluence of the drain or
tributary with the river. When the three factors are applied to an amount of reduction (measured
or calculated in "local pounds") by multiplying the four numbers together, the result is a uniform
unit of measurement termed "Parma Pounds." This creates a common unit for measuring
increases and decreases at different locations and will ensure that their effects on water quality
51
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offset each other. Trades are converted back into local pounds when they are reported on the
Discharge Monitoring Report (DMR). The permit's effluent limit for phosphorous for the point
source is also expressed in pounds.
An uncertainty discount is applied to nonpoint source reductions, but it should be noted that it is
only applied to those reductions that are not measured, and for which an estimating calculation is
made instead. "Calculated credits" are those for which the amount of marketable credits will be
determined by a calculation because direct monitoring of reductions is technically infeasible or
too costly. The uncertainty discount is a multiplier that will reduce the number of transferable
credits generated by a calculated nonpoint source reduction to account for variability in the
effectiveness of the practice. It is applied prior to the conversion of the "local pound" credit
amount into "Parma Pounds," and the amount of the uncertainty discount will be specified along
with the BMP's design, installation, and maintenance specifications in the BMP list being
developed by local, state, and Federal agencies.
Tar Pamlico Basin
The Tar Pamlico Basin Association is composed of point sources that work cooperatively to meet
nutrient caps set by the state. If the Association does not meet its goals, it must purchase offsets
by paying a pre-set price per pound to the state's Agriculture Cost-share Program for nonpoint
sources. In the Tar Pamlico program, point sources that are members of the Association
purchase credits for $29.00 per kilogram of nutrient discharged above the Association's cap.
This fee is paid into an agricultural BMP cost-share fund managed by the North Carolina
Division of Soil and Water Conservation Service. Trading ratios are based on the nutrient
reduction efficiencies of three categories of BMPs: (a) animal waste management, (b) cropland
practices without water control structures, and (c) cropland practices with water control
structures (McCatty, 1999).
Table D.3 summarizes the nutrient reduction efficiencies and trading ratios adopted by the North
Carolina Department of Environmental Management based on the results of monitoring data,
studies, and best professional judgment. In addition to the applicable trade ratio, a discount
factor of 30% is applied to credits to account for in-stream losses to Washington (McCatty,
1999).
Table D.3 BMP Nutrient Removal Efficiencies and Ratios
in the Tar Pamlico Program
BMP
Animal waste management systems
Crop management practices without water control structures
Crop management practices with water control structures
% Nutrient
Removal
50
30
60
NPS/PS
Trading Ratio
2:1
3:1
Not Provided
Michigan State
The statewide program proposed by the Michigan Department of Environmental Quality also
uses trading ratios to address uncertainly and to provide a net water quality benefit, as well as
52
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discount factors to address distance, directionality, toxicity, and equivalence. Credits, called
discharge reduction credits (DRC), are determined by subtracting reduced discharge level (RDL)
from the baseline (B): DRC = (B - RDL). This quantity, minus the water quality contribution,
represents the actual quantity of credits available for trading. Baseline calculations for BMPs
take into account pollutant-specific loading associated with existing land uses and management
practices (McCatty, 1999).
Each point source is required to retire (or in this case, make a one-time contribution of) to the
Department of Environmental Quality 10% of the credits traded to account for uncertainty and to
provide a net water quality benefit. Nonpoint sources contribute 50% (i.e., a nonpoint source/
point source trade ratio of 2:1). To further safeguard water quality, the Michigan draft rules
contain options for site-specific and trade-specific ratios and an additional 10% discounting for
locations upstream of impoundments or other protected areas (McCatty, 1999).
Cherry Creek Basin
Exchange rates in the Cherry Creek program are established on a project-specific basis in the
range of 1.3:1 to 3:1. The Cherry Creek Basin Authority assigns lower ratios to more
established, stable projects, and higher ratios to those with greater technical or institutional
uncertainties. Criteria for assigning exchange rates are based on institutional, variability, and
best professional judgment factors, as follows (McCatty, 1999):
Institutional Factor: This is an assessment of the reliability, stability, accountability,
financial, administrative, and technical ability of the project owner or operator. Authority
projects receive the highest Institutional Factor of 1.00.
Variability Factor: Calculated by dividing overall annual average phosphorus removal by
the 95th percentile of the dataset of monitoring data.
Best ProfessionalJudgment Factor: Accounts for scientific uncertainties and is based on
(a) data limitations and assumptions, (b) level of establishment of the project, (c) project
location, and (d) timing of pollutant reductions. For example, a factor of 1.0 is assigned to
projects close to the Cherry Creek reservoir, which are well established and fully operational
and have several years of comprehensive monitoring data. Others not so well established
and documented receive a discount factor less than 1.0.
The exchange rate (E) for each project is obtained by multiplying Institutional Factor (IF) by
Variability Factor (VF) by Best Professional Judgment Factor (BPJ): E = IF x VF x BPJ.
The Discharge Credits or pounds of phosphorus available for trading = quantified
phosphorus removal x exchange rate.
Southern Minnesota Beet Sugar Cooperative
Southern Minnesota Beet Sugar Cooperative uses an exchange rate of 2.6 for its nonpoint
trading, determined as follows (McCatty, 1999):
53
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+ 1.0 = base 1:1 trading ratio
+ 0.6 = engineering safety factor reflecting potential site-site variations
+ 1.0 = net reduction factor to achieve load reductions that improve water quality.
2.6
Its NPDES permit contains procedures for calculating phosphorus reductions from each of the
approved BMPs using Universal Soil Loss Equations or Revised Universal Soil Loss Equations,
sediment delivery tables, and nutrient enrichment tables. The Natural Resources Conservation
Service and the local Soil and Water Conservation District determine the Revised Universal Soil
Loss Equation coefficients on a site-by-site basis. The list of approved BMPs comprises the
following (McCatty, 1999):
• Soil erosion BMPs
Cattle exclusion
• Rotational grazing with cattle exclusion
Critical area set aside
• Constructed wetland treatment systems
Alternate surface tile inlet
• Cover cropping.
Rahr Malting Co.
The Rahr Malting NPDES permit includes procedures, similar to those of Southern Minnesota
Beet's, for calculating estimates of pollutant reduction for livestock exclusion, soil erosion
BMPs, rotational grazing with livestock exclusion, critical area set-asides, and wetland treatment
systems. An overall safety factor of 2 is built into the estimates, effectively a 2:1 ratio. The
program defines one credit as equivalent to 1 pound of CBOD5 discharged per day. Table D.4
gives equivalency rates for the various pollutants (McCatty, 1999).
Table D.4 Rahr Malting Co., Pollutant Equivalency Rates
Trade Parameter
Phosphorus
CBOD5
Nitrogen
Sediment
Measured Value/Day
1 pound
1 pound
1 pound
1 ton
Metro Reach BMP
CBOD5 Credit
8 units
1 unit
4 units
0.5 units
Upstream BMP
CBOD5 Credit
8 units
Not Provided
1 unit
0.5 units
The phosphorus to CBOD5 exchange rate is 1:8 and CBOD5 to nitrogen is 1:4. This means that
the discharger is allowed to release 8 pounds of CBOD5 for every pound of phosphorus removed
by BMPs and 4 pounds of CBOD5 for every pound of nitrogen removed (net of 50% safety
factor) for the life of the BMP.
The Rahr Malting exchange rate is, therefore, a combination of a 2:1 ratio to account for BMP
uncertainties, and ratios ranging from 1:8 to 1:1 to equate the various pollutants with CBOD5
(McCatty, 1999).
54
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Trading Ratios for the Chesapeake Bay
The Negotiation Team determined that the following ratios should be considered when
developing a trading program in the Chesapeake Bay watershed:
• Delivery Ratios
Uncertainty Ratios
• Special Needs Ratios (Note: the Negotiation Team opted to use the term "special
needs" in place of "water quality"; they are referring to the same ideas.)
• Retirement Ratios.
The Chesapeake Bay Watershed Model is an application of the Hydrologic Simulation Program:
Fortran model to the Chesapeake Bay watershed. It is one part of an integrated system of models
designed to assess the impact of nutrient loads on the Bay system and includes (a) refined land
use coverage, (b) loads for all land uses, (c) point source loads, and (d) load reductions expected
from applied control measures (e.g., BMPs). This model is available to provide information for
ratio determination for the Bay watershed as described below.
Delivery Ratios
Delivery ratios for the Chesapeake Bay, available from the Bay Program's Watershed model,
account for attenuation during nutrient transport and are estimations of the quantity of nutrients
from sources throughout the Bay that reach the Fall Line. Nutrients discharged below the Fall
Line experience minimal delay before entering the Bay; hence, there is little need to discount for
attenuation in these areas. Table D.5 presents example delivery factors for nitrogen and
phosphorus above the Fall Line. These delivery ratios were derived from a draft watershed
model run simulating year 2000 conditions. The factors may change with respect to different
model scenarios, sometimes by as much as 50%. Thus, it is recommended that trading programs
developed in the next few years use the delivery factors developed by the watershed model's
final 2000 Progress Run (available from the Bay Program Office). The delivery factors derived
from the watershed model are determined for each of the approximately 100 model segments that
the Bay watershed is divided into. Exhibit D. 1 is a map of the model segments that can be
correlated with the segment delivery factors in Table D.5.
Preston et al., working on regression modeling of nutrient loading in the Bay watershed, report
that areas of northeastern and southern Pennsylvania, parts of Maryland, and parts of the lower
Eastern Shore have the highest delivered nitrogen loading to the Bay. Areas with high
incremental yields and relatively low delivered yield include the New York part of the watershed
and parts of central Maryland and western Virginia. Highest delivered yields are areas that drain
directly to large streams or are areas of high incremental loading close to the Bay.
Another source of delivery ratios is the U.S. Geological Service's SPARROW model, which has
a finer resolution than the Bay Watershed model. This model divides the Bay watershed into
approximately 1,400 model segments. Delivery ratios were derived for each segment in a similar
way to the Bay watershed model.
55
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Table D.5 Delivery Factors from the Watershed Model
Draft Progress 2000 Scenario
Nutrient Delivery Factors for 2000 Scenario
TN Factor
0
0.026
0.0833
0.1593
0.2163
0.2812
0.3134
0.3511
0.4959
0.5056
0.5148
0.5321
0.5348
0.5438
0.5445
0.5805
0.5843
0.5872
0.6002
0.6283
0.6443
0.6539
0.6708
0.6822
0.7114
0.7168
0.7396
0.7456
0.7568
0.7782
0.7948
0.8036
0.8082
0.8321
0.8483
0.8577
0.8622
0.8959
0.8976
0.9637
0.9766
0.9838
0.9867
1
Seament TP Factor
650
250
265
330
190
270
300
235
10
240
200
20
160
170
750
260
310
230
280
730
50
210
175
770
700
740
30
90
100
60
290
180
720
220
40
760
340
780
70
110
710
120
80
490
0
0.4079
0.4079
0.4079
0.4079
0.4079
0.4079
0.4079
0.4079
0.4079
0.4079
0.4079
0.4079
0.4079
0.4079
0.4079
0.4079
0.4178
0.4178
0.4741
0.4741
0.484
0.484
0.566
0.566
0.566
0.566
0.566
0.566
0.566
0.566
0.566
0.566
0.566
0.6905
0.731
0.731
0.8706
0.9381
0.9381
0.9381
0.9381
0.9438
0.9635
Seament
650
120
720
710
700
140
110
100
80
70
20
60
30
90
40
10
50
240
235
300
310
260
250
730
750
160
220
210
200
190
180
740
170
175
770
340
330
780
265
290
270
280
230
760
56
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Nutrient Delivery Factors for 2000 Scenario
TN Factor
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1.0321
Seament TP Factor
370
380
410
390
400
930
470
850
860
870
880
890
900
830
920
820
940
950
955
960
965
970
980
910
580
430
440
450
480
990
500
510
540
840
560
420
590
600
610
620
630
800
810
550
140
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
Seament
490
370
410
380
390
400
930
840
850
860
870
880
890
900
470
920
810
940
950
955
960
965
970
980
910
560
430
440
450
480
990
500
510
830
550
820
580
590
600
610
620
630
800
420
540
57
-------
Exhibit D.1 Model Segments
30 0 30 60 Miles
58
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Uncertainty Ratios
Determinations of uncertainty are based primarily on the reliability and efficiency of nonpoint
nutrient reduction controls. (Camacho [1992] defines efficiency as 1 - post BMP/pre-BMP x
100.) The Bay model uses 21 BMP designations for its assessments. For this discussion of
uncertainty ratios, the designations are consolidated into 5 categories, and nutrient reductions are
averaged within categories (see Table D.6).
The ranges given indicate the variations in nutrient reduction efficiencies and are an indicator of
BMP reliability. Here the assumption is made that the larger the range, the greater the variability
and need for discounting to compensate for the associated uncertainty. While it appears that
uncertainty ratios in the range of 1.5 - 3 would be generally applicable in the Bay watershed, it
may be necessary to conduct more thorough analyses prior to adopting actual uncertainty ratios.
Table D.6 Estimated Nutrient Reduction Efficiencies for Main BMP Categories
BMP Categories
Animal waste management system (cattle, swine)
Urban storm water
Resource protection
Non-structural cropland
Nutrient management plans (cover crops)
% N Removed
80
25-33
25-75
4-20
34-51
% P Removed
80
20-64
25-75
8-40
10-20
Source: Summarized from Chesapeake Bay Watershed Model Application and Calculation of Nutrient and
Sediment Loadings. Appendix H. Table 2.2. August 1998.
Special Needs Ratios
The Negotiation Team also determined that a ratio should be considered to account for areas in
which special factors (e.g., sensitive waters or areas needing living resources protection) are
involved. This special needs ratio is essentially a water quality ratio in that it would account for
local water quality situations that may require additional protection for a variety of reasons.
Retirement Ratios
Credits may be retired (i.e., removed from trading) to provide net water quality benefits. For
example, a portion (say 10%) of all credits traded by both point and nonpoint sources may be
required to be contributed to the state. There are issues of cost, equity, and future economic
growth to be considered, however, when doing so. Some related retirement scenarios follow:
• Requiring that all credits be retired at the end of 5 years. This is the approach taken in
the Michigan program. It establishes a level playing field for all participants. In
addition, the duration is sufficiently long for planning and assessment purposes.
State agencies, citizen groups, or environmental nonprofits may purchase credits with
the express purpose of immediately retiring them.
• Entities that cease to operate may be required to retire all or a portion of their credits.
This policy may be pursued in areas in which growth is being discouraged for
environmental reasons.
59
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Example Credit Calculations
The best source of data quantifying nonpoint loads is again the Bay watershed model. Camacho
(1992) gives edge-of-stream loading factors for conventional tillage, conservation tillage,
hayland, pasture, animal waste, forest, and urban areas for 63 watershed segments. The
following example illustrates the use of loading factor, nutrient reduction efficiency, uncertainty
ratio, and transport factor to quantify available BMP credits.
Example: (Note: this example assumes that the farmer meets all eligibility requirements before
trading.) A farmer located in the Lower Potomac has 500 acres of conservation tillage and
wishes to trade nitrogen. How many credits would the farmer have available for sale? For the
answer, follow the steps outlined in Table D.7.
Need to know
Watershed segment
Loading factor
Nutrient reduction efficiency
Uncertainty ratio
Transport factor
Answer
220
13.5 Ibs. N/acre/year
21.3%
3:1
0.8315
Table D.7 Procedure for Calculating Nutrient Credits from BMPs
Stepl
Step 2
StepS
Step 4
StepS
Step 6
Step?
StepS
Determine watershed segment.
Check nitrogen loading factor for conservation in this segment (Table D.8).
Calculate total nitrogen load from 500 acres (500 x 13.5).
Check nutrient reduction efficiency for conservation tillage.
Calculate nutrient removed by conservation tillage (6,750 Ibs x 21 .3%).
Reduce by 3:1 uncertainty ratio for conservation tillage (1,438/3).
Look up transport factor for nitrogen from segment 220 (Table D.5).
Reduce by transport factor for segment 220 (476 x .831 5).
Segment 220
13.5 Ibs. N/acre/yr
6,750 Ibs N
21.3%
1,438 Ibs N/year
476 Ibs N/year
0.8315
398 credits (Ibs N/year)
available for sale.*
*Note that additional discounting to reflect water quality impacts and benefits also may be applied.
Note that a location in neighboring segment 200, which has a loading factor of 22.2 Ibs/acre/year
and a transport factor of 0.5746, would have a similar amount of nitrogen credits (406 Ibs) from
500 acres of conservation tillage.
The information in Table D.7 is for one BMP example. In reality, multiple BMPs are often
implemented over an extended period of time as part of an integrated resource management
system. Such a scenario makes it difficult to separate load reductions associated with each BMP.
For trading purposes, it should be sufficient to group these BMPs together, calculate the nutrient
reductions for each type, and sum reductions for the entire group. Monitoring over an extended
period would serve to validate these estimates.
60
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Table D.8 Nitrogen Loading Factors:
Conventional Tillage, Conservation Tillage, and Hayland;
Land Use Acreage and Edge of Stream Loading Factors (LF) in Ibs/acre
Segment
10
20
30
40
50
60
70
80
90
100
110
120
140
160
170
175
180
190
200
210
220
230
235
240
250
260
265
270
280
290
300
310
330
340
Conventional Tillage
Acres
100,723
160,951
78,620
126,240
37,257
66,122
62,800
144,248
24,395
91,758
173,581
104,846
27,034
17,350
7,080
13,174
84,971
21,425
22,470
38,588
8,121
25,054
7,131
4,081
9,007
17,381
335
8,075
25,308
11,562
33,120
8,054
2,225
4,956
LF
20.1
19.0
18.8
21.6
33.2
31.1
25.9
24.9
23.4
21.4
31.7
23.4
20.2
24.6
23.4
245.0
23.1
33.9
28.3
23.2
17.6
15.2
20.5
17.3
25.8
22.0
22.3
31.9
23.0
23.3
24.2
23.0
17.4
18.5
Conservation Tillage
Acres
10,869
10,943
14,797
54,651
9,509
43,988
44,435
133,753
29,316
62,717
200,603
85,976
37,578
11,180
2,998
11,118
168,939
49,723
32,018
127,498
69,422
37,390
5,094
18,703
5,830
28,427
738
37,671
29,341
14,252
37,019
2,600
10,233
8,806
LF
16.7
16.7
18.0
17.7
32.7
29.1
24.3
21.2
20.0
18.1
24.0
19.4
15.8
17.2
18.7
18.5
19.3
28.2
22.2
18.9
13.5
11.0
16.0
13.3
20.5
16.7
17.9
24.2
17.8
17.4
18.4
18.2
14.5
14.5
Hayland
Acres
226,565
401,085
240,216
63,556
54,900
134,578
62,979
149,693
71,198
148,417
152,836
70,578
20,404
57,926
37,911
41,362
199,500
116,083
88,901
97,542
71,578
121,214
8,852
2,816
14,837
28,076
10,845
162,192
147,753
21,120
52,912
217
4,845
5,352
LF
10.8
11.0
12.1
11.0
17.7
17.1
15.3
7.9
8.8
7.6
11.2
7.7
7.5
6.1
11.1
10.1
5.3
8.5
7.3
6.0
5.4
10.3
9.4
7.4
10.1
9.3
8.9
11.6
10.4
8.4
8.4
7.7
5.2
4.8
Source: Excerpted from Camacho, R. 1992. Financial
Reduction Technologies in the Chesapeake Bay Basin.
Cost Effectiveness of Point and Nonpoint Source Nutrient
ICPRB Report92-4. December 1992. TableA-1.
61
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Appendix E. Trade Tracking Forms
Chesapeake Bay Program Nutrient Trading Program
62
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Trade Notification Form
TO BE COMPLETED BY THE BUYER
Name of Buyer
Type of Facility or Operation
Permit # (if applicable)
Name of Authorized Representative of Buyer
Phone Number
TO BE COMPLETED BY THE SELLER
Name of Seller
Type of Facility or Operation
Permit # (if applicable)
Name of Authorized Representative of Seller
Phone Number
TO BE COMPLETED BY EITHER PARTY
Parameter Being Traded
Amount of Nitrogen or Phosphorus Traded
(specify units)
Sellers Reduction Credit Certificate #
Dates the Trade Will Be in Effect
Purchasing Price of the Trade (include all
units)
Costs of Nutrient Removal (in the same units
as the purchase price) if a Trade Were Not
Conducted
I certify that the above information is accurate and truthful to the best of my knowledge and is in accord with the
state's trading program.
Signature of Authorized Representative of Buyer:
Signature of Authorized Representative of Seller:
63
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Reduction Credit Certificate Form
CERTIFICATE NUMBER:
Name of Seller Facility or Operation:
Address:
Phone #:
Location of Source Being Traded (water body and lat/long):
Parameter Being Traded (Nitrogen or Phosphorus):
Type of Source Being Traded:
Nutrient Reduction Being Applied:
Monitoring Method and Frequency:
Amount Available for Trading (Credits Generated) (specify units):
Selling Price of a Credit (specify units):
Show below the calculations used to determine the Credits Generated (identify all ratios applied):
Contact Name:
I certify that the information provided above is accurate and truthful to the best of my knowledge.
Signature of Authorized Representative of Seller:
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Appendix F. Implementation Options for Trade Accountability
This appendix presents implementation options related to administrative roles and program components for trade
administration. The Negotiation Team presents these options for consideration by states in the development of their
trading programs.
Stakeholder Involvement Options
Responsible Entity
Option Description
Examples
Multi-Disciplinary Steering
Committee or Authority
This entity would be a multidisciplinary authority
comprising key stakeholders, such as state
agencies, environmental interest groups, trading
participants (buyers and sellers), and the public. It
would be responsible for providing overall program
guidance to the state; ensuring a representation of
a diversity of views from program managers,
program participants, and affected parties; and
creating opportunities for public consultation.
Although this is most similar to the structure and
role assignment identified by the Negotiation Team,
no examples have been identified at this time. Most
existing programs assign a steering committee or
authority more administrative and program
management responsibility.
State Agency
This would be a state entity currently responsible
for Chesapeake Bay Program Activities.
Michigan's Surface Water Quality Division of
Michigan's Department of Environmental Quality is
responsible for both program management and
program guidance, but collaborates with
representatives from agriculture, municipal,
industrial, environmental, private sector, and
regulatory agencies for program guidance and
stakeholder involvement.
Multi-Jurisdictional
Management Authority
This type of authority would be composed of
representatives from each of the local jurisdictions,
as well as from regional, state, and Federal
organizations involved in watershed protection.
Because of its governmental nature, its role is
expanded to include other administrative/program
management responsibilities, such as the approval
of project proposals, and monitoring.
The Cherry Creek Basin Authority is composed of
two cities, four counties, and seven special districts,
as well as seven ex-officio members of regional,
state, and Federal organizations involved in
watershed protection. It is responsible for creating
the opportunity for public comments and
consultations and providing liaisons with state
agencies, in addition to other program management
responsibilities.
Combination Government/
Participant Steering
Committee
This entity would comprise both governmental
representatives and program participants.
The Chatfield Basin Watershed Authority
(Colorado) is composed of representatives from 10
point sources and 5 regional, state, and Federal
organizations. This authority allocates wasteload
among its members, reviews applications, monitors
trades, and provides technical support.
Association of Program
Participants
This method uses a narrower definition of
stakeholder involvement to include only the source
participants in a trading program.
North Carolina's Tar Pamlico Association is a
nonprofit organization composed of 14 point
sources responsible for allocating allowances
among its members and ensuring its group load cap
is met. This approach may not be appropriate for a
program that allows both point source and nonpoint
source trades with numerous diverse trading
participants.
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Trade Facilitation Options
Responsible Entity
Option Description
Examples
State
In most existing trading programs, trade facilitation
is considered a state responsibility.
Michigan Department of Environmental Quality will
create a trading registry that will be updated daily
and readily accessible through the Internet. Useful
for trading programs in which there is the potential
for a significant number of participants.
Trading Partners
Any two or more sources that have entered into a
trading agreement.
Trading partners of the Minnesota's Sugar Beet Co-
op and Rahr Malting Co. trading programs take an
active role in locating nonpoint source partners and
negotiating the terms of trades. This hands-on
approach is well suited for trading programs in
which the likely number of participants is relatively
few.
Independent Trade Brokers
Private sector companies, or other independent
organizations, with the requisite financial, legal,
technical, and negotiation skills act as inter-
mediaries between a wiling buyer and willing seller
to define the credit price and trades terms that are
mutually acceptable to both parties and in
accordance with all government regulations. A
brokerage system could be set up as a periodic
auction or an ongoing commodity exchange.
In addition to offering a registry of credits, the
environmental brokerage service of Cantor
Fitzgerald offers trading seminars, technology
evaluations, market price indexes, and
assessments for the air emissions trading program.
The use of independent brokers avoids potential
conflicts of interest that may arise when a
regulatory agency is in charge of both trade
facilitation and program oversight.
Electronic Commerce
Brokerage Services
A subset of independent trade brokers are
e-commerce services, whereby potential traders
could conduct trades and access information on
up-to-date credit prices, the market, technical
assistance, etc. directly from an online brokerage
service/clearinghouse. This option provides the
potential for reduced transaction costs.
Cantor Fitzgerald (see above).
GreenOnline.com™ uses the Internet to conduct
environmental commerce on a global scale. It is an
electronic marketplace for news, information,
products, communications, materials, and services
pertaining to environmental commerce.
Technical Assistance Options
Responsible Entity
Option Description
Examples
State
Program managers and staff from state
government can provide information on available
technologies for credit generation and procedures
for obtaining credits. This option also could
include an extension branch of a state university.
The North Carolina Department of Environmental
Management as part of its program oversight role
for the Tar Pamlico Program provides technical
support by tracking nutrient tradeoffs relative to
allocations and imposing individual point source
nutrient limitations where localized water quality
problems exist.
Steering Committee or
Authority
(See description under Stakeholder Involvement
options.)
A technical review committee of the Cherry Creek
Basin Authority prepares and assesses technical
proposals.
The Chatfield Watershed Authority provides
technical support to trades.
Independent Trade Brokers
Trade brokers can provide assistance in preparing
contractual agreements and providing advice on
legal and regulatory issues. They could also be a
repository for the latest information on available
technologies for credit generation.
Cantor Fitzgerald offers trading seminars and
technology evaluations for the air emissions trading
program.
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Options for Program Components of Trade Administration
Program components for trade administration identify the appropriate mechanism(s)
for implementing trades, the timing and duration of a trading agreement, the approach for
establishing the price of credits, and program incentives/funding. The Negotiation Team agreed
upon the general terms for implementing trades, the duration of a trading agreement, the
establishment of credit prices, and program funding. The details of each of these program areas
will need to be defined by each state at the time of program development. General options and
examples of how other trading programs around the country have addressed these elements are
provided below. (Note: Additional research is needed to complete examples.)
Duration of Trading Agreement Options
Option
Description
Five Years
The Negotiation Team felt the duration of a contractual agreement should be contingent
on the type of trade. The Team also felt that the maximum duration of a trading contract
should be 5 years, corresponding to the length of an NPDES permit according to the
Clean Water Act. Trade contract involving nonpoint sources should be appropriately
shorter to reflect their higher risk, unless a longer duration can be justified.
Uniform Duration
There is the option of having a uniform trade duration for all trades. This duration could
be based upon the NPDES cycle. One advantage of this approach is that it allows for the
integration of trade monitoring functions with other NPDES control requirements resulting
in administrative savings. The principle disadvantage of this approach is that it imposes a
regulatory cycle designed for point sources on nonpoint sources. This may disqualify the
use of short-term nonpoint source BMPs from being used within the market.
Shorter Durations
In general shorter duration periods allow for the market to be more responsive to changes
in both the cost of control technology and changes in land use. Shorter durations also
allow regulators flexibility in addressing potential issues, such as emerging hot spots or
problems of default. Regulators could wait until after the trade has expired before taking
action. This would avoid the potentially costly process of renegotiating trades, and would
help to foster confidence among trading program participants.
Longer Durations
On the other hand, longer trade duration periods contribute to market stability. They are
more advantageous for long term financial planning of both buyers and sellers, and the
transaction costs from trading are reduced as the frequency of having to trade is reduced.
Variable Durations Based on the
Period Credits Are Needed
Assigning trading agreement durations to correspond to the length of time an individual
buyer needs credit reductions could result in a more efficient allocation of credits and
dynamic trading markets. There would be less likelihood of credit banking; however,
administrative costs would likely increase and short durations may be difficult to monitor.
Buyers who underestimate demand may experience difficulties securing credits on short
notice, resulting in episodes of noncompliance and adverse water quality impacts.
Contingent on Type of Source
Control
The duration of the trade can be contingent upon the type of source control being used to
generate the credits. For example, in the Tar Pamlico program, structural BMPs are
eligible to generate credits for 10 years, or longer as provided for in BMP contracts, while
nonstructural BMPs have a credit life of 3 years.
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Credit Pricing Options
Option
Description
Direct Negotiations
Many programs currently rely upon direct negotiations between buyers and sellers.
Direct negotiations for each trade typically result in a per credit price that is unique to that
trade. As mentioned earlier, direct negotiations can be cumbersome and inefficient for
larger markets, and a credit auction may be more appropriate.
Auctions
There are numerous types of auctions that could be used. Uniform price auctions may
be an appealing approach because they are viewed by many participants as being more
equitable. In this type of auction, buyers and sellers submit bids and offers for credits,
the auction is called, and a single credit price is then determined, which is used for all
transactions.
Permitting Authority
State sets price of credits in reserve pool to sell to sellers in default. While the market
would determine the initial credit price for credits exchanged between buyer and seller,
the state may wish to set a higher price for credits in a reserve pool that will be sold to a
seller who would otherwise default on his/her trade agreement with a buyer unless
he/she purchases credits from the reserve pool. The additional funds generated through
the sale of these reserve credits could be invested in BMP installments in potential "hot
spot" areas. The Cherry Creek and Tar Pamlico programs offer examples of this special
case of price setting.
Program Incentive Options
Option
Program Simplicity
Grants
Description
The Negotiation Team agreed that trade administration design should be simple (while
protective) so that sufficient demand be created for credits and transaction costs
minimized.
The Negotiation Team recommends that grant programs be used in such as way as to
incentivize nutrient trading; for example, larger grants could be offered early in a 10-year
program.
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