Minnesota Pollution Control Agency Water Quality Trading Rule Development

Why Trading? The Minnesota Pollution Control Agency has developed some experience with water quality trading which has led us to believe that it can be a very useful water quality management tool Rahr Malting Company – 1997 Southern Minnesota Sugar Beet Cooperative – 2000 Minnesota River Basin Phosphorus General Permit – 2005 Water quality trading can provide management options to achieve greater efficiencies and environmental benefits than those available based on conventional regulatory requirements

Why Trading? Impaired Waters The Draft 2008 Impaired Waters list contains 1,469 impairments including: 500 lakes 25 listed for multiple pollutants 336 rivers & streams 603 “reaches” listed for one or more pollutants

Why Trading? The legal angle In 2004 the MPCA was sued over the issuance of a discharge permit to a new wastewater treatment facility planned for the cities of Annandale and Maple Lake At issue was whether the MPCA’s issuance of a permit to a new source of pollutants to in the watershed of an impaired water, and prior to the completion of a TMDL, violated federal law MPCA argued that a recent phosphorus reduction of 53,500 lbs/year achieved by the city of Litchfield more than offset the proposed 2,200 lbs/year load from the Annandale/Maple Lake project No formal “trade” agreement was negotiated between the Litchfield and Annandale/Maple Lake facilities

Court of Appeals Decision In August of 2005 the Minnesota Court of Appeals ruled that the MPCA had improperly issued the permit because the proposed discharge would contribute to the nutrient impairment in Lake Pepin and reversed the permit issuance The Cities (Annandale & Maple Lake) and MPCA appealed the decision to the Minnesota Supreme Court which agreed to review the case

And Then We Waited… Turns out the Supreme Court is a rather busy place and turn around time doesn’t appear to be their primary concern MPCA didn’t issue any discharge permits for new and expanding facilities in the Lake Pepin watershed from August of 2005 to …. We had a lot of time consider how the Annandale case changed the legal landscape given the numbers of new impairments we expect to see in the future MPCA decided that trading should be part of the mix for successful water quality management

Supreme Court Decision In May of 2007 the Supreme Court ruled that the MPCA’s approach in issuing the Annandale/Maple Lake permit had been reasonable and reinstated the permit By this time we had 69 proposals for new or expanded facilities waiting for MPCA discharge permits Although the court ruled that the MPCA’s offset based approach had been reasonable, we are now moving towards a trading based approach for new and expanded facilities in impaired watersheds

Water Quality Trading Goals Improve water quality Manage growth and development in impaired and unimpaired watersheds Flexible and cost effective water quality management Encourage ecosystem improvements based on the “ancillary benefits” derived from the implementation of ecological services Design a water quality trading system that provides a consistent framework for buyers and sellers

EPA Water Quality Trading Policy (2003) Trading Objectives EPA supports implementation of water quality trading by states, interstate agencies and tribes where trading: A. Achieves early reductions and progress towards water quality standards pending development of TMDLs for impaired waters. B. Reduces the cost of implementing TMDLs through greater efficiency and flexible approaches. C. Establishes economic incentives for voluntary pollutant reductions from point and nonpoint sources within a watershed. D. Reduces the cost of compliance with water quality based requirements.

US EPA Office of Water Water Quality Trading Policy (2003) Trading Objectives (cont.) E. Offsets new or increased discharges resulting from growth in order to maintain levels of water quality that support all designated uses. F. Achieves greater environmental benefits than those under existing regulatory programs. EPA supports the creation of water quality trading credits in ways that achieve ancillary environmental benefits beyond the required reductions in specific pollutant loads, such as the creation and restoration of wetlands, floodplains and wildlife and/or waterfowl habitat. G. Secures long-term improvements in water quality through the purchase and retirement of credits by any entity. H. Combines ecological services to achieve multiple environmental and economic benefits, such as wetland restoration or the implementation of management practices that improve water quality and habitat.

Water Quality Trading Rule Development MPCA is developing a Water Quality Trading rule with the assistance of an advisory committee The advisory committee process is intended to obtain guidance from the numerous interested sectors Our objective is to complete a draft rule by June 2008

ADVISORY COMMITTEE MEETINGS External Membership: 70 people on email notification list Representing 52 different organizations MPCA Membership: 19 agency staff on notification list Representing various areas of expertise ADVISORY COMMITTEE MEETINGS Meeting Date Feb 27 Apr17 Jul 17 Sep13 Nov6 Number of Participants 33 47 34 32

Progress So Far Developing a set of common goals and values Water quality protection and restoration is the top priority Accountability, additionality and equivalence Market driven and results oriented system Capture multiple ecological benefits Establish incentives for management that benefits water quality Efficient, equitable and sustainable Flexible to adapt to changing knowledge and technology Have evaluated various existing programs and regulations Have developed a draft outline and started to analyze its components

Minnesota River Basin General Phosphorus Permit Watershed permit applies all point sources in the Minnesota River basin Pollutants of concern: biochemical oxygen demand (BOD) phosphorus Authorizes point source/point source trades 41 point sources are currently authorized to trade

Minnesota River Basin General Phosphorus Permit - Map

Minnesota River Basin Permit Drivers Lower Minnesota River Watershed Low Dissolved Oxygen TMDL Low flow dissolved oxygen depletion between Shakopee and the Twin Cities Upstream sources of phosphorus contribute to excess algal growth Algal decay causes in stream dissolved oxygen deficiency in the lower 22 miles of the Minnesota River TMDL established waste load allocations for phosphorus sources upstream of Jordan Individual waste load allocations for the 39 largest continuous dischargers Collective wasteload allocations for everyone else Virtually no reserve capacity No phosphorus load allocated for new and expanding facilities

Minnesota River Basin Trading Permit How Does it Work? The basin permit is part of the TMDL’s implementation plan Establishes phosphorus reductions and authorizes trading between the 39 largest point sources upstream of Jordan Intended to achieve a cumulative phosphorus reduction of 35% in 5 years Trading baselines Existing facilities based on effluent loads from the 1999 & 2000 summer seasons New facilities have no allocation so their trading baseline is zero Credits Facilities operating below their permit baselines can generate credits for sale The permit establishes the Jordan Trading Unit as the medium of exchange (credit) based on each facility’s location in the watershed Trade Ratios 1.1 to 1 for existing facilities 1.2 to 1 for new facilities

Minnesota River Basin Permit Trading Activity Effluent limits for existing facilities take effect an May 1, 2008 Preliminary review shows that 13 of the 39 facilities are not expected to meet effluent limits for the 2008 season Expect to see new trade agreements early next year Two new facilities are operating in the basin Granite Falls Energy is trading with the Mankato WWTP Poet Biorefining is trading with the Lake Crystal WWTP Two additional trade agreements have been executed in the basin but the companies are not yet in operation

Potential Environmental Benefits of Point/Non-Point Trading Programs Point Source Upgrade Non-Point Source BMPs Pollutant of Concern Yes Other pollutants Maybe Habitat creation No Canopy establishment Stream bank stabilization Velocity attenuation Wetland creation Floodplain management Assimilative capacity

Example of a Watershed Based Water Quality Trading Program Great Miami River Watershed Water Quality Credit Trading Program Run by the Miami Conservancy District, Dayton, Ohio Excess nutrients and turbidity impairments in three sub-watersheds TMDL completed for the Stillwater River watershed

Ohio’s Great Miami River Watershed 1.5 million residents Dayton is largest city Agriculture is dominant land use Non-point source activities are considered major contributors to water quality impairments Water Quality Credit Trading Program established in 2005 Total Phosphorus and Total Nitrogen trading between POTWs and agricultural producers

Great Miami Economic Projections 2004 economic analysis trading opportunities in the watershed 20 year economic projection of the costs to meet water quality goals: WWTP upgrades = $422.5 million Total trading costs = $46.5 million Agricultural BMPs = $37.8 million Data and transaction costs = $8.7 million Projected cost savings of $376 million

Great Miami Trading Program Results Miami Conservancy District 2006 Annual Report Participating wastewater treatment facilities 5 BMP project proposals received 71 Cost estimate range (combined TP & TN) $0.34 to $12.78/lb Projects funded 15 Executed agreements with county SWCDs Project terms 5 to 12 years Payments to farmers $86,743.84 Payments to SWCDs $6,240.25 Estimated nutrient reductions >36 tons Types of BMPs funded: No-till, pasture seeding/prescribed grazing, cover crops, hay land; conservation crop rotation, filter strips

South Nation River Watershed Total Phosphorus Management Program Established by South Nation Conservation in 1993 Agricultural BMP implementation to offset point source regulatory requirements Over 500 projects valued at $7.3 million

Total Phosphorus Management Eligible Practices Eligible Projects Grant Rate Grant Maximum Manure Storages Up to 50% Up to $5,000 Constructed Wetlands for Wastewater Treatment/Disposal Milkhouse Wastewater Treatment/Disposal Up to $2,500 Clean Water Diversion/Barnyard Runoff Control Livestock Access Restriction to Waterway: labour contracted out labour by applicant   Up to 75% Up to 100% Buffer Strips Stream Bank Erosion Control Educational Initiatives Fertilizer, Chemical and Fuel Storage/Handling Up to $1,000 Septic System Upgrade/Replacement Nutrient Management Plans Up to $500 Plugging Abandoned Wells Up to $1000