1. RTI International RTI International is a trade name of Research Triangle Institute. www.rti.org Economic Study of Nutrient Credit Trading for the Chesapeake Bay George Van Houtven Robert Beach Ross Loomis The Economics of Water Quality Improvement in the Chesapeake Bay Washington, DC October 31-November 1, 2011

2. RTI International Key Questions for the Study Study funded by partnership of the Chesapeake Bay Commission and the Linden Trust for Conservation How large are the potential costs savings from including nutrient trading as part of a strategy for meeting the Chesapeake Bay TMDL requirements? How are these potential costs savings affected by different restrictions on interstate and interbasin trading? The objective is not to predict future trading levels or to model the impacts of the states existing trading programs

3. RTI International Approach Adapt and apply the economic modeling framework we developed for EPA/ORD Estimate how the costs of TMDL compliance could be reduced under different trading scenarios – Reference No-trading Scenario: Load levels and BMP implementation as specified in the states watershed implementation plans (WIPs) and the corresponding CBWM scenario – Trading Scenarios: allow loads and load reductions to be redistributed across sources to achieve same TMDL goals at a lower cost Allow interbasin and/or interstate trading Allow PS-PS and/or PS-NPS trading Allow trading to meet TMDL (short term) and/or maintain TMDL (long term)

4. RTI International Modeling Framework

5. RTI International Approach By identifying the lowest cost combination of available projects, the model simulates the results of an ideally functioning nutrient trading market. Additional restrictions can make the model more realistic and policy relevant, by including – Transaction costs (% increment to BMP costs) – Uncertainty ratios – Eligibility limits for participation in nutrient trading Credit purchases: limits on eligibility for existing point sources Credit sales: limits on nonpoint source participation, including agricultural baseline requirements – Limits on inter-basin trading volumes – Limits on agricultural land retirement and conversion

6. RTI International Key Data for Source Locations and Loads Chesapeake Bay Watershed Model (CBWM) Phase 5.3.2 – Watershed network and segmentation subdivides the Bay watershed into a linked network of 2,468 land-river segments. – Land use/land cover segmentationsubdivides each land- river segment into 30 land use categories, including 17 types of agricultural land and 11 types of urban land. – Delivered loadings provides total annual delivered loadings estimates of TN and TP from each land use category, point sources and atmospheric deposition by land-river segment. National Hydrography Dataset (NHD), used to identify unbuffered riparian areas NRCS soils data, used to identify highly erodible land (for land retirement) and hydric soils (for wetland restoration)

7. RTI International Control Projects, Load Reductions and Annual Costs (I) Point Sources – multiple tiers of wastewater treatment at 399 significant municipal and 76 significant industrial facilities Reducing TN to 8, 5, or 3 mg/L Reducing TP to 1, 0.5, or 0.1 mg/L – Annualized costs and nutrient removal estimates based on EPAs ongoing cost analysis of the Chesapeake Bay TMDL

8. RTI International Control Projects, Load Reductions, and Annual Costs (II) BMP nutrient removal rates/efficiencies included in the CBWM Annualized costs (including land, installation, and O&M) based on EPAs ongoing cost analysis of the Chesapeake Bay TMDL

9. RTI International Eligibility for Participation by Point and Nonpoint Sources States currently have different eligibility requirements – MD requires ENR for PS, which in effect limits credit purchases to offsets for future growth – VA allows PS-PS trades to meet current annual load limits – PA allows PS-PS and PS-NPS trades to meet current annual load limits We will include scenarios that allow PS to meet current annual load limits via trades with – Only other PS – PS and NPS

10. RTI International Baseline Requirements for Agricultural BMPs States currently have different requirements, but generally specify a minimum level of BMP implementation We will define the baseline as the level of BMP implementation specified in the WIPS for each land-river segment – Ensures that agricultural land at a minimum meets its load allocations – Additional beyond WIP BMPs and their associated load reductions are eligible to generate credits

11. RTI International Interbasin and Intersegment Trading Restrictions The Bay is comprised of 92 impaired tidal segments, each with its own TMDL; however, these load limits were set primarily to meet DO objectives in the deep channel. – the 92 TMDLs are more protective than necessary to protect local tidal water quality – some amount of loads can safely be redistributed (traded) across segments and basins We will allow trading between segments and basins, as long as the sum of segment-level TMDL exceedances is less than 9 million lbs of nitrogen and 200,000 lbs of phosphorus

12. RTI International Farmland Preservation Restrictions States have different restrictions on the amount of agricultural land that can be idled – MD and PA do not allow credits for idling whole or substantial parts of farms – VA places no restrictions on this type of land conversion for credit generation We will limit conversion (buffers, tree planting, retirement, wetlands) to no more than 25% of agricultural acres in each land-river segment (CRP guidelines) and only allow retirement of highly erodible lands.

13. RTI International Offsets for Future Growth To maintain TMDL, new or expanded sources will be required to purchase offsets from existing PS and/or NPS For long-term scenario (2025) we will – estimate county-level demand for new municipal wastewater treatment capacity (based on projected population growth) – estimate resulting demand for offset credits assuming new capacity uses highest tier nutrient removal technology – include as additional required load reductions in the cost minimization model