Introduction to Nutrient Trading: Concepts and Design

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Introduction to Nutrient TradingConcepts and
Design
Kurt Stephenson
Leonard Shabman
March 26, 2003
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Anatomy of an Market Exchange
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Market-like Nutrient Trading
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Types of Nutrient Trading
The term nutrient trading, however, is used to
describe a wide range of systems of exchange.

• Trading programs can be distinguished by
• Who has primary responsibility to make decisions
  concerning how and where to discharge.
• Whether trades occur within or outside a mass
  load cap

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Types of Nutrient Trading Programs
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Regulator-directed Trading
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The Premise of Market-like Trading
Cap pollution loads to achieve over the long-run
water quality goals.

• Decentralized market decision-making facilitates
  long-term private investment in pollution
  prevention by,
• Incentivizing nutrient control
  implementation,
• Placing pollution control decisions with those
  in the best position to discover creative
  pollutant management and control strategies.
• Based on polluter pays principle.

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Terminology
Point and Nonpoint Sources

• Not necessarily a distinguishing physical
  property, but a regulatory distinction.
• The regulatory distinction might be based on
• Legal definitions (CWA)
• Political decisions
• Monitoring and Measurement
• Cost
• Technical capacity

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Nutrient Trading Outside a Cap
Capped Sources
Source A
Source B
Point Source
NonpointSource
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Challenges to Trading with Unregulated Sources
Leakage and the problem of incomplete nutrient
accounting. Potential for nutrient discharges to
increase. Equivalency issues ensuring
equivalent WQ impacts from different type of
sources. Fairness Issues if nutrient discharges
can be measured, monitored, and enforced
sufficient for a trade, why are these sources
unregulated?
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Credit Trade
Similar conditions as cap-and-trade, with the
following exception
Capped Sources
Source A
Source B
PointSources
NonpointSources
GovernmentEstablishes criteria for accounting,
measurement, and monitors/enforces new nonpoint
source control requirements.
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Offsets
Nonpoint Source
Compensation
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Nutrient Offsets
Nutrient offsets are not implemented as a means
to lower overall nutrient control costs.
Offsets generate funds for nonpoint source
controls. Nutrient offsets are aimed at lowering
lowering overall nutrient discharges
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Distinguishing Features of Nutrient Trading
Options
Regulator directed
Market -like
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Designing Market-like Alternatives
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Market-like Water Quality Management Program
Establish Water Quality Goals
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Principles of Market-like Trading
Cap Define aggregate levels of discharge
Decentralize Decision-making - Promote discharger
discretion over how to control N and where to
discharge
Performance Oriented Measure/require results
(nutrient discharges, water quality impact), not
means (practices or technology)
Monitor and Enforce Dedicate regulatory
resources to measuring and policing performance
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Cap-and-Trade Illustrations of different program
designs from North Carolina and Connecticut
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Tar Pamlico
CT Long Island Sound
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Incorporating Nonpoint Sources into Trading
ProgramsProgram Options based on Market design
Principles
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Incorporating Nonpoint Sources into Trading
Programs
Capping Nonpoint sources Assigning Caps to
Nonpoint Sources Bringing Nonpoint Sources Into a
Cap Nonpoint Sources Credit Sales Performance-bas
ed Bidding Programs
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Capping Nonpoint Sources
North Carolina has placed caps on nonpoint
sources in the Neuse Basin.
Local governmental units (towns and counties)
assigned load cap for urban nonpoint sources
(based on 30 reduction 1995 loads).
Ag operators (individually or as part of a
county-wide plan) assigned load cap (based on 30
reduction 1995 loads)
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Capping Nonpoint Sources
The size and scope of cap might be increased by
voluntarily allowing dischargers to bring
nonpoint sources under a cap
For example, a local municipality might include
stormwater discharges under a POTW cap or remove
residents from septic systems. Regulators expand
the cap and number of sources under cap if
measurement and monitoring conditions are
met. This option would provide financial
incentives to 1) improve nonpoint source
measurement/monitoring and 2) bring more sources
under mass load cap.
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Acquiring Nonpoint Sources Reduction Credits
Outside a Cap
NonpointSources
Govt Establishes Measurement Criteria, 3rd
party verification, and enforcement Nonpoint
sources assume legal and financial obligation to
limit discharges after sell of credits
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Market-like principles can provide incentives to
lower nonpoint control costs and improve
measurement and certainty of nonpoint sources
controls.
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Illustration Nonpoint Credit Bidding Program
Governmentpurchases nonpoint source nutrient
credits
Government Collects Funds (PS payments,
cost-share, etc)
Credits can be resold to capped sources or
applied against nonpoint source nutrient
reduction targets
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U.S. Bureau of Reclamation Colorado River
Salinity Control Program
U.S. Bureau of Reclamation issues requests
proposals to reduce salinity in Colorado River
basin. Private and public parties are eligible to
compete.

• Bureau selects and funds proposals based on
• price of per ton salinity reduction
• and weighted by uncertainties in achieving
  reduction.

• Proposals reduce uncertainty of salinity
  reductions by
• Posting performance bonds
• Providing additional means to measure and
  monitor discharges (above minimum requirements)

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Themes and Conclusions

• Market-like trading are ultimately designed to
  achieve and maintain water quality goals over
  time (hard caps pollution prevention
  incentives). Trading is not simply about saving
  money.
• This objective is achieved by
• Polluters decide how to control and where to
  discharge, not regulators.
• Regulators focus attention on accountability for
  nutrient control performance (measurement,
  monitoring, and enforcement).

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Questions?
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Allowance Trading in the Tar-Pamlico Watershed
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Water Quality Goals and Nutrient Cap

• Tar-Pamlico system declared nutrient s sensitive
  waters by North Carolina DEM
• Point sources assigned nutrient cap equivalent to
  a (30 percent reduction from 1990 levels
  discharges). Nonpoint sources face 30 percent
  reduction goal

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Assignment of Nutrient Control Responsibility

• 13 dischargers (primarily POTWs) formed the
  Tar-Pamlico Association.
• North Carolina assigns aggregate discharge cap to
  the Association (405,000 kg of nutrients can be
  discharged annually)
• Discharge allowances to meet the cap assigned
  through contractual arrangement (no NPDES permit)
  with NCDEM.

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Discharger Discretion

• Members of the Association are responsible for
  selecting the type and timing of nutrient control
  strategies/technologies.
• Compliance 1) Association pays excess discharge
  fee if aggregate discharges exceed cap, 2)
  Individual plants face monitoring requirements 3)
  Individual dischargers issued NPDES permits if
  opt out of program or fail to comply.

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Discharger Discretion Trading

• Association assigns allowances to individual
  members and members exchange allowances based on
  individual circumstances and the internal rules
  of the Association.
• No NCDEM approval required to transfer allowances
  within association

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Long Island Sound Connecticuts Nitrogen
cap-and-direct program
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Assignment of N Cap
11 management zones in NY and CT (6 in CT)
Each zone has different D.O. impacts in LIS
Each zone assigned a 58.5 N reduction goal from
1990 baseline
POTWs discharges will be capped 70 below 1990
levels.
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Legal Mechanism to Assign N Control Responsibility
General Permit CT holds one general permit and
assigns N control responsibility annually to each
POTW under the permit. Watershed permit provides
regulators protection from anti-backsliding
language.
Issuance of Annual Discharge Limits - Annual
discharge limits will be reduced annually at the
discretion of CT DEP.
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Limited Discharger Discretion
Cost-share - CT DEP determines which POTW gets
cost share and what types of upgrades each plant
will undertake.
Cost share limits POTW operational flexibility by
linking state aid to regulator identified,
on-site capital projects instead of effluent
control performance.
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Limited Discharger Discretion Trading
N credits Difference between discharge
performance and nutrient WLA under general
permit. CT DEP reduces N limits to all plants
uniformly (regardless which plants receive cost
share) CTDEP collects all credits below annual
limit and resells at a fixed price to those above
WLA (subject to attenuation ratios) CT DEP
determines price based on CT estimates of
costs CTDEP determines buyers and sellers through
cost-share