1. Minnesota Pollution Control Agency Water Quality Trading Rule Development

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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.

10. 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.

11. 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

12. ADVISORY COMMITTEE MEETINGS
External Membership:
70 people on 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

13. 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

14. 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

15. Minnesota River Basin General Phosphorus Permit - Map

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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