Water Quality Trading Case Study



Rahr Malting Company Permit

Minnesota

Overview

Rahr Malting Company produces and
distributes malt that is mainly used for beer
brewing or making whiskey. The malting
process steeps grains such as barley, sorghum,
or wheat and creates a wastewater that is high
in carbonaceous biochemical oxygen demand
(CBOD)1. One of Rahr's malt production plants
is in Shakopee, Minnesota. Wastewater from
this plant was originally treated at a regional
wastewater treatment plant (WWTP). When
Rahr wanted to expand production at the
plant, they determined they could reduce
costs if they constructed their own WWTP with
a discharge to the Minnesota River. However,
the total maximum daily load (TMDL) for
CBOD for the Minnesota River did not include reserve capacity for new discharges. Rahr proposed a
solution to the Minnesota Pollution Control Agency (MPCA) to include special conditions in their
National Pollutant Discharge Elimination System (NPDES) permit that allowed for multiparameter
nonpoint source trading offsets for phosphorus, nitrogen, CBOD, and sediment to address the
dissolved oxygen impact of the new discharge from the proposed WWTP.

In 1997, Rahr was issued a permit for the discharge from the new WWTP (MN0031917). The permit
established both mass-based and concentration-based average and maximum monthly effluent limits,
as well as permit conditions that required trading with nonpoint sources to provide equivalent
reductions to fully offset the CBOD load from the new discharge.

Type of Trading

Point Sou rce-N on point Source
Pollutant(s) Traded
Carbonaceous biochemical oxygen demand
Basis for Trading

Fully allocated wasteload with no reserve capacity in
TMDL for new discharges

Participants

NPDES permitted industry (malting plant), upstream
nonpoint source discharges

1 CBOD measures dissolved oxygen depletion from only carbonaceous sources. Biochemical oxygen demand sampling results
are based on dissolved oxygen depletion from both carbonaceous and nitrogenous sources in a wastewater sample.

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The permit required Rahr to provide 150 pounds per day (ibs/day) of CBOD equivalent credits.2
Within the first five years of implementing the trading effort, Rahr obtained 212.8 ibs/day worth of
credits (MPCA, 2019), which is more nonpoint source reductions than were required in the permit.

Market Driver

A TMDL with no reserve capacity for new discharges.

Trading Mechanisms

Trading is authorized and implemented through the NPDES permit for discharges from the Rahr
WWTP.

1997 NPDES Permit

The initial permit to Rahr established phosphorus and CBOD concentration- and mass-based effluent
limits. In addition, the permit required 150 nonpoint source load reduction units to be accumulated
through nonpoint source offsets during the five-year permit term. The nonpoint source load reduction
units could be generated through reductions in CBOD (1 lb = 1 unit), phosphorus (1 lb = 8 units),
nitrogen (1 lb = 4 units), or sediment (1 ton = 0.5 units). The permit specified an interim schedule
beginning in year two for these units to be acquired (i.e., 30 units per year every year except the final
year, when the final 60 additional units were required).

The initial permit required that Rahr establish a $250,000 trust fund to pay for nonpoint source
projects that would reduce CBOD loadings by at least 150 lbs/day. The initial permit required that the
trust fund be administered by a board of citizens concerned with water quality conservation, including
people from grassroots organizations, state offices, and Rahr representatives, to oversee the final
selection of BMP sites. The MPCA gave final approval for each nonpoint source project and
determined the amount of CBOD credits generated. Rahr ultimately spent $300,000 during the first
permit term to achieve this goal (Fang and Easter, 2003).

The credits were granted in a schedule to give Rahr greater flexibility in meeting the permit
requirements: 45 percent were granted when the contractual agreements were reached, 45 percent
when the nonpoint source controls were implemented, and 10 percent when vegetation
establishment criteria were reached.

2019 Permit

Rahr's 2019 permit provides concentration- and mass-based effluent limits for CBOD and phosphorus
in addition to a requirement to offset 150 lbs/day of CBOD. The permit requires the company to
maintain the existing nonpoint source controls.

Trading requirements are described in three separate attachments to the 2019 permit. Attachment 3
(entitled Rahr Malting Permit Trading Language) authorizes trading of nitrogen, phosphorus, and
CBOD, as well as sediment to generate CBOD credits, using the same nonpoint source load reduction
unit conversion rates as described above. Rahr may not trade to meet its phosphorus effluent
limitations.

2 Based on dissolved oxygen stressor impacts from CBOD, ammonia-nitrogen, total phosphorus, and sediment reductions.
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The Point-Nonpoint Source Trading Summary (Attachment 2 of the 2019 permit) explains the premise
for Rahr's point-nonpoint source trading process, the concepts involved in developing the trading
program, and how the trading agreement and administration of the trades occurs.

Replacement credits, if proposed and approved, will be granted in a schedule. Based on a history of
successful implementation of the nonpoint source trading requirements, the permit no longer
requires Rahr to maintain a trust fund.

Credit Generation

Trade-eligible nonpoint source BMPs are:

•	Soil erosion BMPs;

•	Livestock exclusion;

•	Rotational grazing with livestock exclusion;

•	Critical area set aside;

•	Wetland treatment systems;

•	Alternative surface tile inlets;

•	Cover cropping; and

•	BMPs installed to reduce CBOD (this category covers BMPs that directly reduce CBOD, in contrast
with the categories listed above that also reduce nutrients and sediment).

Attachment 1 of the permit details how pollutant reductions are calculated for the different types of
approved BMPs. Attachment 2 details the various calculations necessary to determine Pollutant
Equivalency Credits for the pollutants reduced by these BMPs. These credits are calculated to show
how many pounds per day of phosphorus, CBOD, and total Kjeldahl nitrogen reduction, as well as
how many tons per day of sediment reduction, are necessary to equate to a specified number of
CBOD units in each of three areas of the Minnesota River: the reach of the river covered by the TMDL
(the TMDL zone), the portion of the river upstream of this zone to river mile 107 (the BOD zone) and
then the portion of the river upstream of river mile 107.

The calculations for determining Pollutant Equivalency Credits account for safety and delivery (i.e.,
channel assimilation and field loss) to minimize associated risks specific to each pollutant.

•	The relationship between phosphorus and BOD varies depending on the nutrient needs of the
biological life forms, flows, turbidity impacts on photosynthetic activity, and the bioavailability
of phosphorus. For phosphorus, the Pollutant Equivalency Credits calculation assumes an
upstream reduction of 1 pound of phosphorus results in a reduction of 8 pounds of CBOD.3

•	Nitrogen is less persistent in the river because of loss to the atmosphere, and it exerts its
demand on oxygen more rapidly than phosphorus. So, a reduction of 4 pounds of CBOD is
assumed for every pound of nitrogen removed in the TMDL zone, and a reduction of 1 pound
is assumed in the BOD zone. Calculation of load reductions from livestock management BMPs
includes a 50 percent field loss factor to account for atmospheric nitrogen losses prior to
transport into the water column.

3 MPCA estimated the pollutant equivalency factors based on a review of literature documenting the association of nutrients
with chlorophyll concentrations in rivers and the relationship between chlorophyll and BOD.

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• Controlling sediment loss reduces oxygen demand associated with turbidity. The permit
presumes that a reduction of one ton of sediment is necessary for 0.5 pounds of CBOD within
both the TMDL and BOD zones.

For CBOD, presumed reductions within the BOD zone are based on the river mile distance from the
TMDL zone, as described in the 2019 Permit, Table 2 of Attachment 2. The further away the credit is
generated from the TMDL zone, the less CBOD persists. Discharges of CBOD directly into the TMDL
zone experience no assimilation reduction. BOD zone assimilation rates are also provided. Minimal
credit—1 percent of the pounds removed—is given for pollutant reductions that occurs upstream of
the BOD zone beyond mile 107 (MPCA, 2019).

Pollutant Trading Ratios

In addition to accounting for delivery and assimilation as described above, the permit applies a trade
ratio of 1.2:1 for all point source-point source trades and 2.6:1 for point source-nonpoint source
trades (e.g., if a point source needs 10 pounds of reduction, it would have to purchase 26 pounds of
nonpoint source generated credits). The nonpoint source trade ratio includes three different
components: a base of 1:1 to offset the discharge, +0.6 to account for uncertainty and variations
among sites, and +1 to provide additional water quality improvements (i.e., retirement) (MPCA, 2019).

Monitoring and Assessment

The estimated reductions from BMPs are determined by calculations described in Attachment 3 of the
permit. Some data were collected on initial phosphorus concentrations in the soil and used in the
reduction calculations. Prior to MPCA's approval of a BMP, Rahr is responsible for submitting to MPCA
technical and engineering reports detailing the design and installation of the BMP as confirmed by an
independent auditor, including structural specifications, operation plans, and detailed photographs
after BMP completion. The permit requires Rahr to submit an annual CBOD Nonpoint Source Load
Reduction Monitoring Report accounting for nonpoint source credits. MPCA monitors the status of
BMPs with annual site inspections. For the initial trades, MPCA did not verify pollutant reduction with
systematic monitoring (MPCA, 2019). Rahr does not conduct water quality monitoring at the BMP
credit generation sites.

Summary of Trading Activity

Rahr implemented trades at four sites using nonpoint source BMPs to generate credits to offset CBOD
loadings from the WWTP. The BMP sites had to be upstream of the Rahr plant in the Minnesota River
basin and flow from the BMPs could not flow through large water impoundments before reaching the
lower Minnesota River.

Two of the BMP sites, located at the junction of the Cottonwood and Minnesota rivers, restored
riparian vegetation to offset 28.9 and 71.8 lbs/day of CBOD, respectively. Rahr bought the land for
these sites from the landowner, the city of New Ulm. The contracts included landowner obligations.
One site was then sold back to the city for a dollar. The other site was donated to an environmental
organization, which has since sold the property to a private individual (Henningsgaard, 2022). The
sales were contingent on the property becoming wildlife areas and the resulting easement
aqreements include provisions and restrictions needed for preservation and upkeep of the properties
(MPCA, 2019).

The other two BMP sites were bank stabilization projects located on the Rush River and Eight Mile
Creek. Prior to project implementation, the landowners for the sites had concerns about the effects of

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bank erosion on their land and buildings and were eager to participate in the trading arrangement
with Rahr to reduce bank erosion (Kiang, 2006a; Sparks and Wallace, 2006). For the Eight Mile Creek
site, Rahr installed bluff/channel stabilization BMPs on the landowner's property in return for the
landowner excluding livestock from the Creek and maintaining the BMPs. These BMPs offset 13.4
lbs/day of CBOD. At the Rush River site, a bench terrace was constructed, and rock J-hooks were
installed to deflect the channel away from the river bluff to limit erosion of the 60-foot-high bluff face.
The BMPs at the Rush River site offset 98.7 lbs/day of CBOD. Together, the projects provide an offset
of 212.8 lbs/day of CBOD, which exceeds the permit requirement to offset 150 lbs/day of CBOD.

The most recent 2019 permit does not require additional credit generation from other projects, only
"replacement trades"—new BMPs that reduce loading in order to take other BMPs out of service—for
existing reductions (MPCA, 2019).

Benefits

A 2003 study by Fang and Easter, suggested it is likely that Rahr achieved cost savings through
trading. The researchers estimated that the capital and operation costs for a WWTP with comparable
design flow to treat to 1 milligram per liter (mg/L) of phosphorus4 range between $4 and $18 per
pound of phosphorus reduced, based on a 20-year investment life and an 8 percent annual interest
rate. The cost of phosphorus removal through Rahr's nonpoint source projects was approximately
$1.56 per pound (including engineering, construction, materials, design, transaction costs, and
maintenance costs) when annualized in the same way.

Ancillary environmental benefits were realized by implementing nonpoint source BMPs. Two bank
stabilization projects that improved land stability provided benefits to landowners experiencing
property loss. One of those projects also provide deeper pools in the river for fish habitat. Two other
projects created wildlife areas to prevent erosion of crop land flood plain areas (Henningsgaard,

2022).

The trading program raised watershed awareness, provided an example of community cooperation,
and supported a local company's economic growth (Klang, 2006b).

Challenges

Deciding how to determine the relationship between upstream nonpoint source phosphorus loadings
and CBOD discharges from Rahr's WWTP was a significant challenge. MPCA conducting studies
relating phosphorus to chlorophyll-a and relating chlorophyll-a to CBOD to determine that an
upstream reduction of 1 pound of phosphorus results in a reduction of 8 pounds of CBOD.

Local environmentalists initially objected to the trading program, but Rahr gained their support by
cooperatively working with and accepting input from environmental organizations.

The initial permit required approximately 25-50 percent of a full-time MPCA staff person for permit
trade calculation development. Now, MPCA spends only a few days a year managing the program
(Henningsgaard, 2022).

4 Because costs cannot be estimated for getting to zero phosphorus discharge, which would have been required of Rahr if they
had discharged without trading, Rahr's costs were compared to that of WWTPs with comparable design flow that have to
reduce to one mg/L of phosphorus.

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Resources

Breetz, H., K. Fisher-Vanden, L. Garzon, H. Jacobs, K. Kroetz, and R. Terry. 2004. Water Quality Trading
and Offset Initiatives in the U.S.: A Comprehensive Survey. Dartmouth Coiiege, Hanover, New
Hampshire.

Fang, F., and K.W. Easter. 2003. Pollution Trading of Offset New Pollutant Loadings—A Case Study in
the Minnesota River Basin. In: Proceedings of the American Agricultural Economics Association Annual
Meeting. Montreal, Canada.

Henningsgaard, Bruce. 2002. Personal communication. March 30.

Klang, James. 2006a. Personal communication. May 5.

Klang, James. 2006b. Personal communication. September 1.

MPCA. 2019. NPDES and SDS (State Disposal System) Permit MN0031917.

Riggs, D.W., and C.A. Hartwell. 2000. Environmental Flexibility in Action: A Minnesota Case Study.
Reason Public Policy Institute, Policy Study #265. https://reason.org/policy-study/environmental-
flexibilitv-in-a/

Sparks, C., and S. Wallace. 2006. Pollutant Trading to Improve Riparian Habitats. Stormwater Magazine.
January/February.

U.S. Environmental Protection Agency. 1992. TMDL Case Study: Lower Minnesota River.
https://nepis.epa.oov/Exe/ZyPDF.coi/20004PPA.PDF?Dockey=20004PPA.PDF

Permitting Authority Contact:

Bruce Henningsgaard, P.E.

Minnesota Pollution Control Agency
(651) 757-2427

bruce.henninasaaard ©state, mn.us

£EPA Water Quality Trading Case Study — Rahr Malting Company Permit

EPA-833-F-22-013	February 2024


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