After decades of effort, the voluntary, collaborative approach to restoring the health and vitality of the Chesapeake Bay— the largest estuary in the United States—has not worked and, in fact, is failing. A diverse group of 57 senior scientists and policymakers have joined forces to save the Bay. This is our plan.

Nutrient Trading: Our Concerns

(Posted by Bill Dennison)

Nutrient trading is the buying and selling of nutrient reduction credits that have a monetary value for the reduction of either nitrogen or phosphorus loading to the waterways. The concept of nutrient trading is to unleash free market forces for nutrient reduction strategies, similar to the approach used with carbon trading to address global warming.

Nutrient trading is a relatively new concept in ecosystem restoration that has been initiated for the Chesapeake Bay. Using the new Google analysis tool (‘ngrams’), nutrient trading only appears in the literature around 1990, but has increased rapidly, with a doubling of citations roughly every three years. There is excitement about nutrient trading as a new approach, and this excitement is evident in the various policy statements explaining nutrient trading. Along with this excitement, there is considerable skepticism also evident, and the issue is often emotive.

The Senior Bay Scientists and Policymakers group has reviewed the status of nutrient trading as applied to Chesapeake Bay restoration. We found that there are a variety of different definitions for nutrient trading being used by the U.S. Environmental Protection Agency and state agencies, and that there is a lack of data and case studies to support or refute assertions about nutrient trading. The fact that nutrient trading is complicated, emotive and data poor makes this approach one that deserves close scrutiny and scientific rigor. Within the Senior Bay Scientists and Policymakers group, our nutrient trading report is a carefully crafted consensus between fairly intense and polarized viewpoints and it took quite a bit of effort to strike this balance.

The nutrient trading report by the Senior Bay Scientists and Policymakers answers the question “Is nutrient trading a good thing for Chesapeake Bay?” with a qualified “Yes it could be, but there are major concerns,”  listing ten caveats and recommendations for implementing nutrient trading.  A strong case is made for exercising caution in developing a nutrient trading program, recognizing that a nutrient trading system on this scale is unprecedented.

The ten caveats and recommendations for nutrient trading articulated in the report are the following:

  1. Nutrient trading is a relatively new and untested technique for pollutant reductions in waterbodies that makes assumptions regarding short- and long-term effects.
  2. All efforts should be made to improve and then preserve local water quality.
  3. Independent, rigorous, and transparent verification is essential.
  4. A policy of net improvement credit is needed to account for uncertainties in non-point sources reductions and runoff variability.
  5. Nutrient trading should not be used to maintain discharges at technology levels below industry standards.
  6. Nutrient trading may create environmental justice issues by moving problems to disadvantaged areas.
  7. Trading could benefit large organizations and corporations without protecting the interests of local waterways and grassroots entities.
  8. The total impacts of nutrient trades need to be measured and adequate compensation provided.
  9. Credited practices and the models used to calculate the amounts of credits awarded need to be standardized.
  10. Growth allocations should be based on demonstrated pollution reductions in other sectors, not on speculative, proposed reductions in those sectors.

It is evident from these ten caveats/recommendations that there are many ways to do nutrient trading badly, and fewer ways to get it right. We feel that there is only one shot at getting it right and developing market integrity is key. The scientifically rigorous verification by independent entities will be essential for the ongoing integrity of a nutrient trading program.

We have produced this nutrient trading report to encourage an active, robust discussion about the issue. We welcome your comments and viewpoints and would very much like to hear what you have to say about nutrient trading.

5 Responses to Nutrient Trading: Our Concerns

  1. Of course nutrient trading can be done correctly as ecosystem trading has been very successful in some areas of the Country and we know from these models how to do it right.

    Even better idea…take the millions of dollars that we spend on this issue and let people propose projects that will reduce the most N and P per dollar and then award the money yearly to those projects. The fund could consist of just the money we spend now or add in a flush tax or add in a fertilizer tax.

    Or we could just keep doing what we have been doing for decades, how well has that worked?

  2. There are substantial issues that need to be addressed in trying to develop water quality trading markets to serve the goals of the Chesapeake Bay restoration. But, by and large, the “caveats” listed in this article miss them. Before identifying what I believe are issues that need to be addressed in creating these markets, let me explain why I think the points raised in the article miss the mark.

    1. Nutrient trading is a relatively new and untested technique for pollutant reductions in waterbodies that makes assumptions regarding short- and long-term effects.
    This same argument can be made about the Chesapeake Bay TMDL. EPA has never attempted to develop a TMDL for as large an environmental impairment as the Chesapeake Bay. Never has a TMDL been based on such elaborate modeling as this. The argument was used to suggest that, since this is so, perhaps there should not be a TMDL for the Chesapeake Bay. Fortunately, that argument did not get legs. It is surprising to me that the Bay Action group would make such a conservative (i.e., one that favors the status quo) argument.
    2. All efforts should be made to improve and then preserve local water quality.
    Efforts to preserve water quality that cost more should not be used until we have exhausted efforts that cost less. There are many ridiculous things that might be done to improve water quality. This caveat says that we should do them. I am not sure why.
    3. Independent, rigorous, and transparent verification is essential.
    Verification is needed for water quality trading. But so is it needed for the many other practices that are implemented in pursuit of restoration goals. The National Academy’s review of the Chesapeake Bay Program identified implementation tracking as a serious problem. Does this caveat imply that we should be more careful in verifying trading credits than we are in accounting for the things that are already being undertaken?
    4. A policy of net improvement credit is needed to account for uncertainties in non-point sources reductions and runoff variability.
    This caveat seems to misunderstand how the Chesapeake Bay Model and the TMDL that it is based on works. When a nutrient pollution reduction practice is implemented, the model credits that practice with a specific amount of reduction, based on the best available science. Does this caveat mean that just because the practice was implemented under a trading program, it should not be counted as effective as if it were implemented under some other payment system? Why?
    5. Nutrient trading should not be used to maintain discharges at technology levels below industry standards.
    This caveat seems to be saying that if you could buy 1,000 units of nutrient pollution reduction with the $1 million that an upgrade would cost and which would only generate 200 units of pollution reduction, we should not allow the discharger to buy the larger amount of reduction instead of buying the upgrade. This does not seem consistent with the restoration goal.
    6. Nutrient trading may create environmental justice issues by moving problems to disadvantaged areas.
    All of the nutrient trading programs in the drainage prohibit the selling of credits out of a drainage that feeds an impaired waterway. Given this, if pollution short of the impairment requirement is shifted from one waterway to another, it is not clear what “environmental justice” issues are at stake.
    7. Trading could benefit large organizations and corporations without protecting the interests of local waterways and grassroots entities.
    If we truly focus on the issue of restoring the Bay, what does it matter whether profits are protected for corporations? Is the Chesapeake Bay Foundation a “large organization”? This seems to be an argument for superfluous constraints on what is already a very challenging undertaking.
    8. The total impacts of nutrient trades need to be measured and adequate compensation provided.
    I do not understand what is meant by this caveat. If a trade does not create or contribute to an impairment and if it lays the foundation for achieving greater nutrient pollution reduction, then it seems a good thing to have it happen. If either of those things is not true, then it should not happen.
    9. Credited practices and the models used to calculate the amounts of credits awarded need to be standardized.
    All of the trading programs being developed in the drainage use the same modeled expectations that are used in the WIPs. The lack of standardization exists in trading ratios.
    10. Growth allocations should be based on demonstrated pollution reductions in other sectors, not on speculative, proposed reductions in those sectors.
    This caveat comes close to identifying a substantial issue facing the Bay TMDL. Maintaining the Chesapeake Bay nutrient pollution cap in the face of population growth will require that those sources that can reduce pollution at the lowest cost do so. In this process, additional loads that are here for the long term (i.e., new development) may end up being traded against short term reductions. Some way needs to be found to ensure that the short term reductions remain in place over the longer term so that the cap is maintained. It is not so much about whether the reductions happened in year one or year two as it is that, over all the years reductions are sufficient to keep loads under the cap.
    The most fundamental issue facing the creation of sustainable markets for pollution reduction is that they are being established by people who have spent their entire careers working for government agencies that either regulate or accommodate particular segments of the private sector. To the best of my knowledge, none of the principals in this process have undertaken serious study of economics. This seems to me tantamount to putting responsibility for the biological research in the hands of people trained in sociology. It does not seem the best way forward.
    In addition to that practical matter, the development of markets for water quality trading will – if they do their job – provide incentives for people to reduce more pollution (at some given budget). Part of how it will do this is by paying reducers on the basis of how many pounds of pollution they reduce. When you do this, you may inadvertently provide an incentive for people to pollute more so that they are paid for reducing more. That would be bad. So, it is important to ensure that this does not happen.
    A third problem is the one that caveat #10 almost addressed. Matching long term increases with short term reductions. This is a potential problem that will require careful study.
    I congratulate the Bay Action group for taking on the issue of water quality trading. It is a potentially useful tool for achieving the goals of the Chesapeake Bay restoration that at some point in the future may make a difference. However, as noted by the group there is much that could be got wrong in this process. We should apply all available intellectual rigor to ensuring that it is not got wrong.

    Robert Wieland
    Main Street Economics

  3. Great review Robert. A few additional thoughts from someone involved from the private sector in water quality trading and mitigation remedies for over 15 years.
    1. The government does not have the resources, money or people to fund and implement BMP’s or enough restoration to have a meaningful impact on Bay water quality within the time frame it needs to occur.
    2. More importantly, our concerns have historically been last on the list when it comes to funding at any level when compared to national security,health, crime,education and the economy so even in a good economy we have to be realistic about point #1 above.
    3. Only when there is an environmental calamity do we get serious (for a while) about doing something. Otherwise there is little political will to encourage legislation to provide on a timely basis for improved water quality much less, implement rules governing legislation and enforce them. There are lots of rules on the books not enforced. Why? Either its hands off for the big cats or we lack funding to hire or allocate staff at the enforcement level.
    4. Without adequate rules and enforcement you have no demand. Wanting it as we all do does not create demand. Without demand you have no market. Without a market there be a complete absence of private capital and little progress. Everyone professes progress so they can justify the next donation and or grant. Again, not enough to make meaningful progress in eliminating the flow of nitrogen, phosphorus and sediment into Bay waters.
    5. Wetland mitigation banking under the Clean Water Act has been around for 20 years and involves a credit process that has been scrutinized closely at the State and Federal level. The techical, transactional and legal provisions governing that credit trading process are well established. It offers a road map that addresses each of the ten concerns raised by the Senior Bay Scientists as well as compliments your analysis above. It also provides for permanency with regard to the BMP’s or restoration initiatives undertaken thus helping eliminate the prospect that some water quality initiatives are short term. Success criteria and financial assurances are the foundation of the program.

    I applaud the effort of the Senior Bay Scientists but also encourage them to engage those in our industry who have learned from past trails and tribulations and think we have found some methodologies to advance the nutrient trading market. It has been undertaken successfully in other water quality restoration initiatives on a National scale and in some States. Why reinvent the wheel?