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By Michelle Perez, Sara Walker, and Cy Jones.
This report was produced by WRI staff for a U.S. Environmental Protection Agency Targeted Watershed Grant.
To help reduce Gulf of Mexico hypoxia, the World Resources Institute (WRI) recently completed a project to evaluate the economic and environmental feasibility of voluntary, interstate nutrient trading in the MRB.
Approach:
WRI used a case study approach with two wastewater utilities serving as hypothetical credit buyers and six agricultural watersheds serving as hypothetical credit sellers within a hypothetical nutrient trading framework. For the project’s water quality goal, WRI chose to use the 2007 USEPA Science Advisory Board’s recommendation of a 45% reduction in the delivered nitrogen (N) and phosphorus (P) loads to the Gulf. A simplifying assumption was made that both nutrient sources in the project, the wastewater and the agricultural sectors, would receive this same overall cleanup goal. The assumption for the wastewater utilities as credit buyers was that they would have to achieve this 45% reduction in loads and could do so either through upgrading their plants or through trading. The assumption for agricultural credit sellers was that before they can sell credits, sellers must first achieve their individualized portion of the project’s goal, deemed a “trading eligibility standard” (TES).
Methods:
WRI partnered with Symbiont, an engineering firm, to conduct the wastewater utility nutrient reduction cost analysis. Two wastewater utilities, the Metropolitan Water Reclamation District of Greater Chicago (MWRDGC) and Sanitation District No. 1 (SD1) of northern Kentucky, provided data from their 20-year Master Planning documents. WRI partnered with the modeling team at the U.S. Department of Agriculture (USDA) Natural Resources Conservation Service (NRCS) Conservation Effects Assessment Project (CEAP) to estimate the potential nutrient credit supply and associated costs in six “Delta area” watersheds in Arkansas and Mississippi. WRI also partnered with HydroQual, a water quality firm, to conduct in-stream numeric nutrient criteria and delivery factor analyses.
There is a significant cost differential between nutrient reduction measures from the wastewater utilities and from the agricultural sources. As a result, voluntary nutrient trading in the MRB appears to be an economically feasible approach to help reduce the costs of meeting water quality goals in the Gulf of Mexico.
Even without trading, on some project acres, conservation practices that manage nutrients and soil erosion can be profitable to agricultural producers.
The study found that when both N and P credit prices are offered in a trading market, more acres participate to generate credits, larger quantities of both N and P credits are generated, and higher profits materialize than when only one credit price is offered. If only one credit price is offered, an N price stimulates more credit generation than a P price. And the larger the credit price, the larger the quantity of credits generated. Regarding TES policy, having both N and P TES requirements yields more credits than just one TES requirement. Finally, as would be expected with the additionality policy, a larger quantity of credits is generated if additionality is not enforced than if it is.
The study did not find any current water quality conditions, state policies, or utility-specific permitting issues that would restrict nutrient trading for either of the project’s utilities. However, there are new instream P standards being discussed in Illinois that may constrain the geographic scope of P nutrient trading for the MWRDGC in the future.
The study modeled the effect of future local instream numeric nutrient criteria on trading and found that, depending on the criteria, instream standards could prevent nutrient trading from occurring with downstream suppliers. Nevertheless, nutrient trading might still remain a viable option for helping to attain local numeric nutrient criteria in the most cost-effective way possible if there is sufficient agricultural credit supply upstream and within the applicable watershed.
After reviewing the study’s findings, the project utilities found N trading to be a potential alternative to investing in more expensive onsite technologies—should a Gulf-related N reduction goal materialize—and they did not foresee local N water quality policies as forthcoming. MWRDGC was less interested in P trading due to commitments they have made to reduce P onsite and the likelihood that a local instream numeric P criterion might materialize. SD1 was open to investigating the favorability of P trading at some of their plants for a Gulf P goal as they did not foresee a local P goal being developed for the fast-moving Ohio River. Both utilities stated that if water quality policies materialized which prompted them to investigate trading as a compliance option, they would have to conduct an updated economic analysis to determine if trading made economic sense for them; vet plans to trade with their ratepayers, review boards, and regulatory agencies; and take into account the opinions of other area stakeholders such as watershed and environmental groups.
After reviewing the study’s findings, most of the agricultural stakeholders in the project watersheds were interested in trading as a potential additional revenue source for farm producers. The study’s estimated profits were believed to be attractive to at least some producers. Ultimately, a producer’s decision to engage in trading would depend on how commodity prices compare to credit prices, confidence in the buyers and the stability of the trading market, how risky or onerous contract obligations appeared, and how trading activities may affect potential future contract obligations.
While trading on a large interstate scale in the MRB will likely not come to pass unless there is a strong policy driver, states and stakeholders could be taking steps toward enabling trading if and when it occurs. Should USEPA, state regulatory agencies, and stakeholders conclude that nutrient trading is a cost-effective approach to help achieve water quality goals in the MRB, WRI offers three recommendations for moving forward.
Identify local watersheds where trading may be feasible due to local water quality concerns.
Federal and state agencies, environmental groups, the agricultural community, wastewater community, and other stakeholders should collaborate in defining key trading program elements.
All relevant stakeholders should collaborate to identify and develop the necessary data and tools for quantifying nutrient reduction.
CONTACT: Michelle Perez, Senior Associate, WRI, mperez@wri.org, 202-729-7908
