1. Water Quality Credit Trading 101
Improving Conservation & Agricultural Economics with Water Quality Credit Trading
Prepared by:
Mark S. Kieser, Senior Scientist
and James Klang, P.E., Senior Project Engineer

2. Learning Objectives To provide answers to the following questions:
How Does It Work?
What is the Value?
How does it pay?
(LP) Overview of the presentation: start with general information on watershed management and water quality regulations,
Followed by detailed information on water quality trading (development, program procedure and current considerations)

3. Water Quality Credit Trading
Uses a Watershed Approach
Wastewater treatment plants achieve a minimum level of performance before being allowed to trade
Allows flexibility and cost savings
Provides greater WQ protection than conventional wastewater treatment alone

4. Watershed Approach Most effective & comprehensive water quality method
Builds a broad-based community understanding
Community-developed goals
Applies many tools to solve water quality concerns
Nutrients and sediments are two significant concerns affecting water bodies:
Loading from many sources (cumulative WQ impacts)
Persistent in the environment: transported throughout the watershed with little or no chemical/physical losses
Diminished aesthetics, recreation and fisheries
EPA Draft Watershed Handbook
(LP) The watershed approach is actively promoted by EPA as the best approach to address water quality issues. Watershed management is characterized by the involvement of stakeholders around a common goal: the improvement of water quality within their watershed
EPA lists nutrients as the number 1 pollutant in lakes and reservoirs, and sediments as the second most important pollutant in rivers and streams (2000 National Water Quality Inventory)

5. Watershed Approach Agricultural Management Practices Benefits with
Trading
Treatment Plant Upgrades
Agricultural Management Practices
Pollutant of concern reduced
Yes
Other pollutants reduced
Maybe
Habitat improved No
Canopy enhanced
Streambanks stabilized
Flow velocity decreased
Wetlands created
Floodplains preserved
Assimilative capacity increased
(JAK) The ancillary benefits provided by sediment and temperature reductions affect many other parameters vital to water quality. The most important is Dissolved Oxygen, it is driven in large part by the temperature of the water. In addition, sediment brings many organic carbon particles with it and further reduces the dissolved oxygen as the bacteria consume the carbon.
(JAK) the application of watershed management brings treatment benefits at the location of the BMPs as well as at the point of WWTP discharge or reach impairment.
(JAK) the holistic nature of this list of benefits demonstrates the true goal of the Clean Water Act (chemical, physical and biological integrity) being fulfilled

6. Water Quality Trading How does it work?
Case Example:
Municipal wastewater treatment plant
Minimum treatment levels:
25 mg/l Carbonaceous Biochemical Oxygen (CBOD) Demand
30 mg/l Total Suspended Solids (TSS)
1 mg/l Total Phosphorus (TP) (proposed for all new or upgrading plants)

7. Wastewater Minimum Requirements
Must Treat
Tradable

8. Minimum Wastewater Requirements (existing discharges)
Must Treat
Tradable

9. Minimum Wastewater Treatment Requirements
Must Treat
Tradable = 0

10. Water Quality Credit Trading is:
One of the tools used in the watershed management approach to achieve water quality goals efficiently
 Not available for every watershed. The type of impairment, pollutants of concern and presence of potential buyers and sellers all must fit for WQT
(JAK) WQT is a voluntary program that a point source can select or if they would rather treat it on site with their own facility then they have that option
Point sources are NPDES permits (pipe discharges, “points” on a map)
From EPA 2004 Water Quality Trading Assessment Handbook

11. Potentially Tradable Pollutants
Pollutants that:
come from both point and nonpoint sources
tend to be transported through stream network without assimilation
have a water-quality based effluent limit
For agriculture, most commonly traded pollutants: Phosphorus, Sediment, Nitrogen
In some watersheds, physical variables are also being traded: flows, temperature
Assimilation= natural processes that remove pollutants from the stream
(JAK) Technology Based Effluent Limits can not be traded away
Point sources are NPDES permits (pipe discharges, “points” on a map)
Nonpoint sources are storm related run-off, diffuse or spread out through the landscape
Assimilation is the chemical, physical and biological stream or lake processes that treat or absorb pollution
Pollutants that: are lethally toxic accumulate in organisms, such as fish (mercury , PCBs, pesticides) Are typically not traded

12. What is a “Credit”? The Trading Currency
Surplus Pollutant Reductions = “Credits”
(Unit of mass over a period of time;
for example Pounds/year or Tons/year)
Real: Actual non-point source reduction is made to generate a credit that can be traded
Surplus: Load reduction is greater than required by permit and/or TMDL allocation goals
Quantifiable:
Load reduction can be measured or calculated by a standard method/equation
Watershed-based: Credits can only be produced and traded within the same, pre-defined watershed
Net improvement (trading ratio):
Trading ratio must be greater than 1:1 (accounts for
uncertainty, provides net water quality benefit)

13. How do you generate credits?
Farmer achieves baseline performance prior to generating a credit
Must meet TMDL allocation goals first
Watersheds without TMDL goals:
Policy formation for minimum baseline
Rule may require minimum baseline
History may set minimum baseline
Local program authority should set the baseline
(JAK) WQT is a voluntary program that a point source can select or if they would rather treat it on site with their own facility then they have that option
Point sources are NPDES permits (pipe discharges, “points” on a map)

14. What is the credit value?
Market-driven
Price can reflect actual cost to generate credit
“Credits” exchanged with a Trading Ratio (e.g., Buyer purchases 20 pounds of TP to offset 10 pounds of permitted discharge)
Demand driven (TMDL or other obligation)
What the buyer (WWTP) is willing to pay

15. WWTP Treatment Costs Wastewater Treatment Size (Million Gallons/ Day)
Type of
Treatment
Typically
Applied
Treatment Costs
($/lb P)
Blue Lake 55
Continuous
$0.20
Mankato 10
$2.00
Industrial
1.5
$14-$18
Mid Size Rural
0.2
$5-$18
Small Rural
0.05
Ponds
$60
(JAK) Different states have different requirements on factors that reduce the pounds of TP credited. For example in Minnesota, the delivery ratios that are applied to the sheet erosion field estimates are significantly lower than those used in the Michigan WQT rules. (for MN the delivery ratios are 5% to 20% for sheet erosion as compared to above %50 percent in Michigan).
(JAK) This slide can also point out the differences in BMPs applied (In MN only floodplain protection, spring cover crops, livestock exclusion and streambank stabilization have been applied. In the MN permits nutrient management and high residue tillage have not been allowed but now may be considered. However their application will be based on economics and creating a surplus above a baseline.
Examples from Minnesota Pollution Control Agency and WWTP Representatives

16. Emerging Market Information
Trading Program
Location
Buyer Treatment Costs
($/lb TP)
Ag Credit Price Range
Average Credit Price
Michigan
292
3 – 652 --
Ohio
23.37
1 – 12
1.50 PA
30 - 3,000
6 – 113
9.27
Ontario
775
156
Minnesota
0.2-60
3-24
(JAK) Different states have different requirements on factors that reduce the pounds of TP credited. For example in Minnesota, the delivery ratios that are applied to the sheet erosion field estimates are significantly lower than those used in the Michigan WQT rules. (for MN the delivery ratios are 5% to 20% for sheet erosion as compared to above %50 percent in Michigan).
(JAK) This slide can also point out the differences in BMPs applied (In MN only floodplain protection, spring cover crops, livestock exclusion and streambank stabilization have been applied. In the MN permits nutrient management and high residue tillage have not been allowed but now may be considered. However their application will be based on economics and creating a surplus above a baseline.

17. What are the contractual terms?
Farmer signs a legally binding contract with WWTP
Description of BMP
Life of contract
Payment schedule
BMP Operation & Maintenance requirements
Contract is NOT a permit
Civil contract
(JAK) Stacking of market based incentive programs can pay for the BMPs implementation costs and in a better market a profit would be made.
(JAK) Efforts that link WQT and risk guarantee programs like the BMP Challenge can take the economic risk away.

18. Trading Program Participation (assuming baselines are met)
Step 1 – Farmer selects an approved trading BMP(s) from their conservation plan or a crop consultant and estimates pollutant load reduction using standard calculation method such as RUSLE2 (a NRCS soil erosion model).
Step 2 - Farmer installs new BMP(s) and calculates credits using approved crediting methods.
Step 3 – Farmer connects with a credit buyer via an aggregator, broker or individual contact, and signs private contract to provide credits.
Step 4 – Buyer applies “Trading Ratio” to his reduction needs to determine volume of credits needed from farmer.
Step 5 – Buyer or seller registers credits with the state regulatory agency (MPCA, or third party).

19. MN Point Source-Nonpoint Source Trading
Dissolved Oxygen Impaired Reach
SMBSC Facility
Rahr Malting Facility

20. MN Point Source/Non-point Source Trading (Example 1)
Rahr Malting Company
Goal: Malt producer wanted to expand by operating its own wastewater treatment plant.
Issues: - Minnesota River waste load allocation for CBOD fully allocated to other dischargers. - Previously high sanitary sewer fees forced Rahr towards other options
Solution: Point source/non-point source permit trade. Trades with agriculture offset Rahr’s CBOD loading by reducing several parameters causing WQ problems in river upstream of facility.
(JAK) The dissolved oxygen standard of 5 mg/l is affected by temperature, Carboneous Biochemical Oxygen Demand, eutrophication, nitrogenous oxygen demand and internal sediment oxygen demand which is also an organic material decaying on the stream bed. So multiple factors can be used to offset the discharge from Rahr.
(JAK) The Rahr facility discharged just up stream of the 1985 Waste Load Allocation which did not allow for other dischargers to enter this water.
(JAK) The permit is currently up for re-issuance and the conditions and requirements may change.

21. Rahr Malting: 8 Mile Creek
Rahr installed four erosion control sites:
8 Mile Creek – Channel stabilization, livestock exclusion

22. Rahr Malting: Rush River Site
Results: - Discharge of up to 150 lbs CBOD/day lbs of CBOD reductions/ year from erosion control sites
Bank/Bluff stabilization site near Henderson, MN, reducing accelerated collapse of bluff into Rush River. The 500 foot long 60 foot high bluff was eroding in some years as much as 20 feet a year, a significant acceleration of erosion due in part to increased flows from landuse activities, and in part to variable climate conditions. This design keeps the river away from the toe of the bluff while allowing for the needed natural channel processes like access to the floodplain.

23. MN Point Source/Non-point Source Trading (Example 2)
Southern MN Beet Sugar Co-op
Goal: Cooperative wanted to expand but faced air & water quality compliance issues
Issues: - Expanded wastewater discharge difficult to obtain because of Minnesota River D.O. problems - Prohibitive costs for expanding spray irrigation treatment process
Solution: Point Source/Non-point Source trade:
Allows continuous discharge of treated wastewater
Requires 2.6 times TP offset reductions from upstream NPS
(JAK) this permit allowed the factor to discharge far upstream from the impaired reach for dissolved oxygen, the same reach the Rahr Malting company discharged above. The distance away from the reach is sufficient for the Carboneous Biochemical oxygen demand and nitrogenous oxygen demand to be assimilated upstream. Therefore only the phosphorus related eutrophication of the river was required to be offset.
(JAK) The facility used to operate only lagoons and spray irrigation facilities without a permit to discharge to the basin. The high strength of the waste would turn the ponds anaerobic and create H2S gas which would violate the air quality permit conditions.
(JAK) More land for lagoons and spray irrigation was cost prohibitive, and considered risky given the current air quality violations.
(JAK)

24. Spring Cover Crops 58,832 acres planted in 2005
Conventional field preparations for sugar beets traditionally have left low percentages of residue, by planting a spring cover crop of rye or oats at the time of planting, residue is regenerated providing a BMP for the critical spring to pre crop canopy period for of water erosion, wind erosion (not credited) and crop protection against wind damage (also not credited but often profitable). The water erosion reductions are calculated using the NRCS recommendations for RUSLE2 model inputs and a standard sediment attached phosphorus load equation.
58,832 acres planted in 2005

25. West Fork Beaver Creek
Results: - Trading requirements exceeded - West Fork Beaver Creek: channel stabilization, livestock exclusion - Spring cover crop contracts with shareholders over 50,000 acres.

26. Common Questions
Can conservation practices I’ve implemented in the past be used to generate credits?
Will Depend on MPCA Rules and Guidance.
What is the life of my credits?
Annually renewable/saleable for the life of the practice.
If I sell credits, will I eventually be regulated?
No. But credits are used by someone who is regulated.
What happens if I default on implementing my practices?
You may have liability within your private contract and MN rules.
Who could buy my credits?
Any regulated facility within your watershed.
How much is my credit worth?
Determined by market demand.
This slide will be updated as more information on MN trading rules become available.