national forum on synergies betweenwater quality trading ...wetland mitigation banking; and explore...

E N V I R O N M E N T A L L A W I N S T I T U T E

Sponsored by:

U.S. Environmental Protection Agency

Forum Report

National Forum on Synergies Between Water Quality Trading and WetlandMitigation Banking

National Forum on Synergies Between Water Quality Trading andWetland Mitigation Banking

Sponsored by:

U.S. Environmental Protection Agency

Prepared by the

Environmental Law Institute

December 2005

Forum Report

July 11 – 12, 2005

Carnegie Endowment for International Peace

Washington, DC

Acknowledgements

The National Forum on Synergies Between Water Quality Trading and Wetland Mitigation

Banking was funded by the U.S. Environmental Protection Agency. Environmental Law

Institute staff on the project included Jessica Wilkinson, Maria Placht, Roxanne Thomas,

and intern Alison Rau. ELI would like to gratefully acknowledge Eric Raffini, Lynda Hall, Kathy

Hurld, Palmer Hough, Morgan Robertson and Michael Mikota for their leadership and guidance

in designing the forum.

ii Environmental Law Institute

About ELI Publications—

ELI publishes Research Reports and briefs that present the analysis and conclusions of thepolicy studies ELI undertakes to improve environmental law and policy. In addition, ELIpublishes several journals and reporters—including the Environmental Law Reporter, theEnvironmental Forum, and the National Wetlands Newsletter—and books, which contributeto education of the profession and disseminate diverse points of view and opinion tostimulate a robust and creative exchange of ideas. Those publications, which express opinionsof the authors and not necessarily those of the Institute, its Board of Directors, or fundingorganizations, exemplify ELI’s commitment to dialogue with all sectors. ELI welcomessuggestions for article and book topics and encourages the submission of draft manuscriptsand book proposals.

National Forum on Synergies Between Water Quality Trading and Wetland Mitigation Banking

Copyright © 2005 Environmental Law Institute®, Washington, D.C. All rights reserved. ISBN No. 1-58576-099-4, ELI Project No. 0508-01.

An electronic retrievable copy (PDF file) of this report may be obtained for no cost from theEnvironmental Law Institute website www.eli.org, click on “ELI Store,” then “ResearchReports,” then “Wetlands” to locate the file. [Note: ELI Terms of Use will apply and areavailable on site.]

(Environmental Law Institute®, The Environmental Forum®, and ELR® – TheEnvironmental Law Reporter® are registered trademarks of the Environmental LawInstitute.)

Cover Photos:

Wildlands Mitigation Bank, Placer County, California. Courtesy of Craig Denisoff

Planting trees for a buffer with Trees Forever, Illinois Buffer Partnership, part of a three-tiered approach of trees, shrubs, and native grasses.Courtesy of Alley Ringhausen

Stormwater retention basin: a pool of water formed by a dam, designed to detain waterduring a storm, thereby reducing flash flooding and controlling erosion.Courtesy of Alley Ringhausen

Table of Contents

National Forum on Synergies Between Water Quality Trading and Wetland Mitigation Banking iii

Forum Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . .iv

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Summary of Presentations and Facilitated Discussions . . . . . . . . . . . . . . . . . . . . . . . . . .3

The History and Status of Wetland Mitigation Banking and Water Quality Trading . . . . . . . . . . . .4

Palmer HoughU.S. Environmental Protection Agency, Wetlands Division Lynda HallU.S. Environmental Protection Agency, Assessment & Watershed Protection Division

The Challenges of Point/Nonpoint Source Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Dennis KingUniversity of Maryland

The Use of Water Quality Trading and Wetland Restoration to Address Hypoxia in the Gulf of Mexico . . . . . . . . . . . . . . . . . . . . . . . .19

G. Tracy Mehan, III Cadmus GroupPaul Faeth World Resources Institute

Lessons Learned from Point-Nonpoint Source Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

Dennis O’Grady South Nation ConservationAlley RinghausenGreat Rivers Land Trust

Legal and Financial Liability – Issues in Mitigation Banking and Water Quality Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

A Wetland Mitigation Banking PerspectiveGeorge I. PlattWetlandsbank, Inc.A Water Quality Trading PerspectiveCyrus JonesWashington Suburban Sanitary Commission

The Banking Experience: Environmental Performance Standards & Credit Release . . . . . .33

Craig Denisoff Wildlands, Inc.

Bank Review and Certification Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

A Third Party Auditor PerspectiveHank Habicht Global Environment & Technology FoundationA Wetland Mitigation Banking PerspectiveDavid UrbanLand and Water Resources, Inc.

Multiple Credit Types for a Single Project Site . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46

Andrew McElwaine Pennsylvania Environmental Council

Stimulating Creation of a Point/Nonpoint Source Trading System on a Watershed Scale . . .53

Donald Hey The Wetlands Initiative

Wrap-up & Summary . . . . . . . . . . . . . . . . . . . . . . . . . .57Diane Regas Director Office of Wetlands, Oceans & Watersheds, U.S. Environmental Protection Agency

Appendix A: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59Agenda for National Forum on Synergies Between Water Quality Trading and Wetland Mitigation Banking

Appendix B: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61Participant Contact Information

Forum Participants

Leslie AldermanEarthMark Companies

Tara AlldenEnvironmental Banc & Exchange

Sonja Biorn-HansenOregon Department ofEnvironmental Quality

Sean BlacklockeCDM

Howard BleichfeldVan Ness Feldman

Allan BrockenbroughVirginia Department ofEnvironmental Quality

Anne CoanNorth Carolina Farm BureauFederation

Carol CollierDelaware River Basin Commission

Jeff CorbinChesapeake Bay Foundation

Craig DenisoffWildlands, Inc.

Keith DollarGulf States Paper Corp.

Katharine DowellU.S. Environmental ProtectionAgency

Donna DowningU.S. Environmental ProtectionAgency

Albert EttingerEnvironmental Law and PolicyCenter

Paul FaethWorld Resources Institute

Curt FehnU.S. Environmental ProtectionAgency, Region 4

Mary Therese GookinGookin Technical Target MarketingServices

Benjamin GrumblesU.S. Environmental ProtectionAgency

Hank HabichtGlobal Environment & TechnologyFoundation

Dusty HallMiami Conservancy District

Lynda HallU.S. Environmental ProtectionAgency

Matt HeberlingU.S. Environmental ProtectionAgency

Donald HeyThe Wetlands Initiative

Palmer HoughU.S. Environmental ProtectionAgency

Kathy HurldU.S. Environmental ProtectionAgency

Cyrus JonesWashington Suburban SanitaryCommission

Daryll JoynerFlorida Department ofEnvironmental Protection

John KadyszewskiWinrock International

Dick KempkaDucks Unlimited

Virginia KiblerU.S. Environmental ProtectionAgency

Mark KieserEnvironmental Trading Network

Dennis KingUniversity of Maryland

Suzanne KlimekNorth Carolina EcosystemEnhancement Program

Barry KorbU.S. Environmental ProtectionAgency

Dick LanyonMetropolitan Water ReclamationDistrict of Greater Chicago

Carl LuceroU.S. Department of Agriculture

Andrew McElwainePennsylvania EnvironmentalCouncil

Tracy MehanThe Cadmus Group, Inc.

Michael MikotaU.S. Environmental ProtectionAgency

Brian NoyesColonial Soil and WaterConservation District

Dennis O'GradySouth Nation Conservation

Amy ParkerU.S. Environmental ProtectionAgency

George PlattWetlandsbank Inc.

John PowersU.S. Environmental ProtectionAgency

Eric RaffiniU.S. Environmental ProtectionAgency

Diane RegasU.S. Environmental ProtectionAgency

Alley RinghausenGreat Rivers Land Trust

Morgan RobertsonU.S. Environmental ProtectionAgency

Cynthia RobinsonRobinsong Ecological Resources, Inc.

Claire ScharyOffice for EnvironmentalManagement & Information

Joseph Schubauer-BeriganU.S. Environmental ProtectionAgency

Andrew SeligmanU.S. Environmental ProtectionAgency, Region 3

Jeremy SokulskyEcosystem Marketplace

Mark SudolU.S. Army Corps of Engineers

Gerald TalbertNational Association ofConservation Districts

iv Environmental Law Institute

David UrbanLand and Water Resources, Inc.

Tom WallU.S. Environmental ProtectionAgency

Stuart WilsonVirginia Department ofConservation and Restoration

Robert WolcottU.S. Environmental ProtectionAgency

ELI Staff

Maria PlachtEnvironmental Law Institute

Roxanne ThomasEnvironmental Law Institute

Jessica WilkinsonEnvironmental Law Institute

National Forum on Synergies Between Water Quality Trading and Wetland Mitigation Banking 1

EXECUTIVE SUMMARY

The National Forum on SynergiesBetween Water Quality Tradingand Wetland Mitigation Banking

was held July 11-12, 2005, inWashington, DC.The forum wassponsored by the U.S. EnvironmentalProtection Agency.

The 2-day meeting was designed toachieve the following objectives:n Advance point/nonpoint source

trading on a watershed scale byidentifying ‘lessons learned’ fromwetland mitigation banking; and

n Explore the potential role wetlandscan play in providing water qualitycredits as part of a watershed scaletrading program.

The primary goal of the meeting was toprovide a forum to discuss how market-based approaches, such as waterquality trading and wetland mitigationbanking, can help achieve water qualitygoals at lower cost.The forum was notmeant to yield consensus-baseddirectives for the agencies. However,several themes that were revisitedrepeatedly by the forum participantswarrant mention.n Several participants viewed water

quality trading as a critical tool forachieving better environmentalresults at lower cost, particularly ingeographic areas where nonpointsource pollution dominates waterquality problems.

National Forum on SynergiesBetween Water Quality Trading andWetland Mitigation Banking

n Although wetland mitigationbanking did not prove to be aperfect model to guide thedevelopment of water qualitytrading programs, the role of a thirdparty as a credit broker or certifierdid have significant resonance.Participants felt that third partiesmay play an important role in waterquality trading, including ensuringlegitimacy (e.g. third partycertification, monitoring,modeling), managing risk anduncertainty/liability, and certifyingand valuing credits.

n Many participants stressed the needto define credits based on soundscientific and economic modelingthat can reduce uncertainty.

n Several participants stated thatwater quality trading programsmust provide at least the samedegree of certainty andtransparency as the §402 permitsystem to allow for public oversightof the programs.

n Many participants stressed theimportance of developingmonitoring programs that allow foroversight.

This report is designed as arepresentative record of the issuesdiscussed at the water quality tradingforum. It can serve as a resource forthose interested in understanding theconnections between wetlandmitigation banking and water qualitytrading, how these approaches differ inimportant ways, and how a third-partybanking approach could be used toaddress some of the challenges toimplementing point/nonpoint sourcetrading on a watershed scale.

Audio recordings from the forum, aswell as PowerPoint presentations, othersupporting materials, and links to manyof the policy and technical documentsdiscussed in this report are availablethrough the Environmental LawInstitute’s website at: http://www2.eli.org/research/wqt_main.

2 Environmental Law Institute

INTRODUCTION

The National Forum on SynergiesBetween Water Quality Tradingand Wetland Mitigation Banking

was held July 11-12, 2005, inWashington, DC.The forum wassponsored by the U.S. EnvironmentalProtection Agency (EPA).The forumprovided an opportunity for a diversegroup of experts from the water qualitytrading and wetland mitigationbanking professions to discussinnovative ways to promotewatershed-based strategies to achieveclean water goals through market-based approaches. Stakeholdersincluded representatives from federaland state government, non-profitorganizations, academia, and theprivate sector.

The 2-day meeting was designed toachieve the following objectives:n Advance point/nonpoint source

trading on a watershed scale byidentifying ‘lessons learned’ fromwetland mitigation banking; and

n Explore the potential role wetlandscan play in providing water qualitycredits as part of a watershed scaletrading program.

The forum was designed to capture avariety of opinions on advancing waterquality trading. It was not designed togenerate consensus or developconsensus-based recommendations.

Background

Over the last several decades,significant progress has been made incleaning up our nation’s waters.Today,nearly two-thirds of our lakes andrivers are safe for swimming, ascompared to just 36 percent in 1970.The Clean Water Act has successfullyreduced pollution from industrial,municipal, and other point sources. Butthe job of achieving clean water in theUnited States is only about half done.Approximately 40 percent of the rivers,45 percent of the streams, and 50percent of the lakes that have beenassessed still do not support theirdesignated uses. Innovative market-based approaches such as water qualitytrading and wetland mitigationbanking can help address nonpointsource pollution and achieve waterquality goals at lower cost.

This year marks the 10th anniversarysince the release of the federalguidance that institutionalized thepractice of wetland mitigation banking.Developments in the banking arenaover this time period can help informthe future of water quality trading inthe United States, especially as we seekto expand trading to include morepoint/nonpoint source trading on awatershed scale.This forum wasdesigned to determine if the lessonslearned from wetland mitigationbanking, another market-basedapproach to achieving Clean Water Actgoals, can help inform futuredevelopments in water quality trading.

The following is a summary of thepresentations and discussions that tookplace during the forum.The meetingfacilitators have summarized thecomments of participants basedprimarily on audio recordings andnotes taken during the discussions.Points made by participants aresummarized and attributed whereappropriate. ELI apologizes in advancefor any misrepresentation of thespeakers’ meaning or intent.

SUMMARY OF PRESENTATIONSAND FACILITATED DISCUSSIONS

Day One began with opening remarks fromBenjamin Grumbles, Assistant Administratorfor Water, U.S. Environmental Protection

Agency. This presentation was followed by adiscussion of the history and status of wetlandmitigation banking and water quality trading byPalmer Hough and Lynda Hall, both from the U.S.Environmental Protection Agency.

Dennis King, from University of Maryland’s Center forEnvironmental Science, provided an overview of thechallenges of point/nonpoint source trading. Hispresentation was followed by questions and afacilitated discussion, during which the participantswere challenged to identify the existing andperceived challenges to the establishment ofpoint/nonpoint source trading and to identify whichof these challenges the wetland mitigation bankingmodel could help address.

A lunch presentation, titled, “The Use of WaterQuality Trading and Wetland Restoration to AddressHypoxia in the Gulf of Mexico,” was provided by G.Tracy Mehan, III, Cadmus Group, and Paul Faeth,World Resources Institute. Following lunch,participants heard two case studies on lessonslearned from point/nonpoint source trading. Thesewere provided by Dennis O'Grady, South NationConservation, and Alley Ringhausen, Great RiversLand Trust.

The final session of the day included twopresentations, one from the wetland mitigationperspective and one from the water quality tradingperspective, offered respectively by George I. Platt,Wetlandsbank, Inc., and Cyrus Jones, WashingtonSuburban Sanitary Commission. Their discussionsfocused on the legal and financial liability issuesassociated with mitigation banking and water qualitytrading. Their presentations were followed byquestions and a facilitated discussion that sought toidentify options for addressing or transferring liabilityin the water quality trading arena to stimulatemarket demand, as well as the potential strengthsand limitations to these approaches.

Day Two began with a presentation on the wetlandmitigation banking experience by Craig Denisoff,Wildlands, Inc., titled, “Environmental PerformanceStandards and Credit Release.” His presentation was

followed by questions and a facilitated discussion thatfocused on identifying the types of environmentalperformance standards that are needed for waterquality trading to ensure improvements in waterquality. The discussion also addressed the potentialstrengths and limitations to using theseenvironmental performance standards.

The next session focused on bank review andcertification requirements. Two presentations wereoffered. The first presentation, by Hank Habicht,Global Environment & Technology Foundation, wasfrom the perspective of a third party auditor. Thesecond presentation, by David Urban, Land and WaterResources, Inc., was from the wetland mitigationbanking perspective. A facilitated discussion followedquestions from the audience and focused onidentifying the mechanisms that could be used tocertify credits and transactions in water qualitytrading, the strengths and limitations of thesemechanisms, and the roles that can be played bythird parties in the process.

Andrew McElwaine, from the PennsylvaniaEnvironmental Council, spoke on the topic ofmultiple credit types for a single project site. Hispresentation was followed by questions and afacilitated discussion that sought to elicitparticipants’ viewpoints on the environmental, legal,and financial strengths and limitations of establishingwater quality trading projects that can sell multiplecredit types.

Donald Hey, of the Wetlands Initiative, provided anoverview on stimulating the creation of apoint/nonpoint source trading system on a watershedscale. His presentation was followed by questions anda facilitated discussion designed to identifyparticipants’ thoughts on what assurances or otherincentives are needed to help stimulate theestablishment of a point/nonpoint water qualitytrading system on a watershed scale.

The forum concluded with a wrap-up and closingstatements by Diane Regas, Director of the Office ofWetlands, Oceans & Watersheds, U.S. EnvironmentalProtection Agency.

Details of each presentation and facilitateddiscussion are summarized below.



SUMMARY 0F PRESENTATIONS AND FACILITATED DISCUSSIONS

PART I: THE HISTORY AND STATUS OF MITIGATION BANKINGPalmer Hough, U.S. Environmental Protection Agency, Wetlands Division

Hough explained that the primary driver formitigation banking is rooted in the requirements of§404 of the Clean Water Act (CWA). The primary goalof the CWA is to restore and protect the chemical,physical, and biological integrity of the nation’swaters. To help achieve that goal, §404 of the actrequires a permit from the U.S. Army Corps ofEngineers (USACE or Corps) in order to dischargedredged or fill material into waters of the U.S. As partof the permit program, impacts must be avoided andminimized to the maximum extent practicable. Forremaining ‘unavoidable’ impacts, the Corps mayrequire compensatory mitigation to offset or replacelost aquatic resource functions and area.

The §404 program results in an average ofapproximately 80,000 Corps permit actions per year.

Permit data provided by the Corps for the 8 years(1996 through 2003) demonstrates that since 1999,there has been about twice as much mitigationrequired as compared to permitted impacts. This datademonstrates a significant and constant demand forcompensatory mitigation of 40,000 to 60,000 acresannually.

Compensatory mitigation, or actions taken to replaceaquatic resources lost to authorized and unavoidableimpacts, can be accomplished through one of fourmethods: creation, restoration, enhancement, andsometimes preservation. There are three mechanismsthat provide compensatory mitigation. Under the first,known as permittee-responsible or project specificmitigation, the permittee performs the mitigation orhires a contractor to do the mitigation. Underpermittee-responsible mitigation, the responsibility

and liability for the completion and success of thiswork remains with the permittee. The other twooptions for a permittee to meet their mitigationrequirements are through mitigation banking and in-lieu fee mitigation, both of which are termed “third-party mitigation.” Third-party mitigation ischaracterized by the permittee paying a third party tocomplete the mitigation work. The third party can beeither a mitigation bank or an in-lieu fee sponsor, butin either case, the third party accepts theresponsibility and liability for completing the workand ensuring its success. Permittee-responsiblemitigation can be either on the same site as theimpacts or at another site, often termed “off-sitemitigation.” Third-party mitigation is generallyconducted off-site.

The majority of compensatory mitigation undertakenis permittee-responsible. Banking currentlyrepresents about 10-15 percent of compensatorymitigation, however, it represents a growingpercentage in many places. For example, from 1994 to2002, the percent of permits requiring mitigation thatrelied upon a mitigation bank in the Corps’ ChicagoDistrict increased from 1 to 14 percent.

A wetland mitigation bank is a wetland area that hasbeen restored, created, enhanced, or, in certaincircumstances, preserved and then set aside tocompensate for conversions of wetlands for permittedactivities. A wetland bank may be created when agovernment agency, a corporation, a nonprofitorganization, or other entity undertakes suchactivities under a formal agreement with a regulatoryagency.

In 1995, a federal interagency group releasedguidance on wetland mitigation banking.1 Thebanking guidance defined a bank as having fourcomponents: 1) The bank site – the physical acreagerestored to wetland condition using the science ofrestoration ecology; 2) The bank instrument – thelegal agreement between the bank owners and(usually Corps) regulators establishing liability and

The History and Status of Wetland Mitigation Banking and Water Quality Trading

1 Federal Guidance for the Establishment, Use and Operation of Mitigation Banks. Federal Register 60, no. 228 (Nov. 28, 1995): 58,605-14.


of IWR’s study, ELI published a report analyzing the46 extant banks as of 1991. The study found thatthere was still only one commercial bank, butproposals were in the works to develop an additional15 commercial banks.

At the same time, the federal agencies releasedInterim Federal Guidance on Mitigation Banking,which was then replaced in 1995 with the currentFederal Guidance on Mitigation Banking. In 2001the National Research Council released its study,“Compensating for Wetland Losses Under the CleanWater Act,” which noted mitigation banking as anoption for mitigation conducted under the CWA.Then, in 2002, ELI published its second study Banksand Fees: The Status of Off-site Wetland Mitigationin the United States, which included a review of 219extant banks, 135 of which were commercial. Thisrepresented a 376 percent increase in the number ofbanks over 10 years, nearly all of which occurredfollowing the release of the 1995 banking guidance.

Finally, in 2003, the National Defense AppropriationAct of 2004 was signed into law. The legislationdirected the Secretary of the Army to promulgateregulations on compensatory mitigation by the end of2005. The regulations must articulate equivalentstandards for all three types of mitigation (in-lieu fee,permittee-responsible, and mitigation banking), withthe aim of “leveling the playing field” between them.

The first commercial bank, Tenneco LaTerre, wasestablished in Louisiana as a pilot project to “advanceconsolidated mitigation.” The project was initiated byFWS and Tenneco Oil Co. The memorandum ofunderstanding (MOU) was signed on December 20,1983, without the Corps or EPA as signatories. Thepurpose of the bank was to provide single-use creditsfor the oil company, but the MOU also included aprovision allowing credit sales. The first third-partycredit sale occurred in 1986. However, this bankdiffered from true entrepreneurial banks, which didnot spring up for another decade. “Modern”

the terms of bank credit approval; 3) A MitigationBank Review Team (MBRT) – the interagency teamthat assists with the review, approval, and oversightof the bank; and 4) A service area – the geographicarea in which the bank can operate and compensatefor permitted impacts.

A mitigation bank differs from permittee-responsiblemitigation and in-lieu fee (ILF) mitigation because itis the only mechanism that has all of the above fourcomponents. ILF programs do not have a bank site,and permittee-responsible mitigation does not have abank instrument or interagency team review.

A bank’s service area has direct relevance to thediscussion of water quality trading. The 1995 bankingguidance defines the service area of a mitigationbank as “the area wherein a bank can reasonably beexpected to provide appropriate compensation forimpacts to wetlands and/or other aquatic resources.”2

The guidance provides some direction on establishingservice areas. In general, service areas should bedesignated in the banking instrument and be basedon consideration of hydrologic and biotic criteria. Thefederal guidance does allow banks to compensate forimpacts beyond their service areas on a case-by-casebasis. The guidance recommends the use ofwatershed boundaries, specifically U.S. GeologicService Hydrologic Unit Codes, ecoregionalboundaries, or other classification systems developedat the state or regional level. However, the guidancedoes not preclude the use of political boundaries,such as counties, which are administrativelyconvenient but not necessarily drawn with hydrologicor biotic factors in mind.

The wetland mitigation banking industry hasdeveloped gradually over a 20-year period. In 1983,the U.S. Fish and Wildlife Service (FWS) releasedInterim Guidance on Mitigation Banking. FWSreleased a survey of 16 extant banks in 1988. At thetime, there was only one commercial bank inexistence. Between 1992 and 1995, the Corp’sInstitute for Water Resources (IWR) conductedanother survey of wetland mitigation banks called theNational Wetland Mitigation Banking Study. As part

2 See id.



still being permitted. This tract of land yielded 391credits of freshwater and saltwater marsh. The banksponsors used an assessment tool called WetlandAssessment Technique for Environmental Review(WATER) to determine the number of credits theyhave available for sale. WATER is the same tool that isused at the impact site to determine the number ofcredits that the permittee must purchase from thebank to offset their impacts. WATER examines anumber of different factors such as water quality,vegetation, wildlife utilization, soils, hydrology, andsalinity, when applicable. Freshwater credits sell forabout $45,000 and saltwater credits sell for $75,000.

The Everglades Mitigation Bank has different serviceareas depending on the type of impact. For linearimpacts (roads, pipelines or other linear facilitiesthat pass through a wetland but impact only aportion) the service area is the boundaries of theSouth Florida Management Water District. For non-linear impacts, such as residential and commercialdevelopment where a substantial wetland fill isanticipated, the service area is Dade and BrowardCounties and portions of southern Palm BeachCounty.

ELI’s 2002 study found that Florida, Georgia, andIllinois were the only states that had more than 20banks each. In addition to the 219 approved banks,ELI documented another 95 banks that were underreview with approval pending. ELI estimated thatthere were 139,000 acres in 219 approved banksproviding a combination of wetland restoration,creation, enhancement, and/or preservation. The 95banks under review at that time included anadditional 8,000 acres. ELI also listed 40 approvedumbrella banks with approximately 26,848 acres ofmitigation wetlands approved at 308 individual sites.Because of regional differences in the categorizationof banks, an accurate count is difficult to perform,but there are currently over 1,000 individual banksites. An effort is currently underway to update thisinventory.4

entrepreneurial banks were developed in Georgia,Florida, and Illinois in the early 1990s. They differfrom Tenneco and other earlier banks by being moreor less freestanding entrepreneurial entities, enablingthe industry to form as a coherent interest groupcapable of concerted action and lobbying. The firstbank permit was approved in 1992 in Millhaven,Georgia, and in 1994 the first instrument wasapproved in Otter Creek, Illinois. Also in 1994, thefirst credit sale for a mitigation bank took place inPembroke Pines, Florida.

Mitigation banks are typically similarly organized. Abank’s value is defined in terms of mitigation credits.An MBRT approves the total potential credits that areavailable for sale using various assessmenttechniques and/or best professional judgment. Thosecredits are then released over time as the banksponsor demonstrates to the Corps and the MBRTthat they are meeting the bank’s ecologicalperformance standards and are completing certainadministrative requirements as specified in thebank’s instrument.

There are various ways to define credits. ELI’s 2002study, Banks and Fees,3 reported that 2 percent ofbanks use best professional judgment to definecredits, 13 percent use functional equivalency, 62percent rely upon acreage, and 23 percent use acombination of the above. In addition to thesemethods, 90 percent of all banks factor in an uplandevaluation of credits.

Hough described a Florida mitigation bank toillustrate how banks commonly operate. The FloridaEverglades Mitigation Bank is a 13,500-acre site inSouth Florida. It is operated by Florida Power andLight and is being developed in two phases. The firstphase consists of 4,200 acres. The second phase is


3 Environmental Law Institute. Banks and Fees: The Status of Off-site Wetland Mitigation in the United States. Washington, DC: Environmental Law Institute, 2002.

4 Environmental Law Institute. A Status Report on Third Party Compensatory Mitigation in the United States. Washington, DC: Environmental Law Institute, forthcoming.


At the time of ELI’s study, most banks were privatecommercial and used watersheds to define theirservice areas. Of the banks studied, 65 percent usedenhancement as their mitigation method, followed byrestoration at 62 percent, creation at 45 percent, andpreservation at 44 percent. Monitoring lengths variedbetween banks. The majority of banks – 59 percent –monitored for at least five years, while 16 percentmonitored for 6-10 years and 6 percent monitored for11-50 years.

There are various benefits and challenges tomitigation banking. Mitigation banking has a numberof advantages over traditional permittee-responsiblemitigation because of the ability of mitigationbanking programs to:n Reduce uncertainty over whether the mitigation

will be successful in offsetting project impacts;n Greatly expand entrepreneurial opportunities for

third-party mitigation credit providers;n Bring together extensive financial resources,

planning, and scientific expertise not alwaysavailable to many permittee-responsible mitigationproposals;

n Reduce permit processing times and provide morecost-effective compensatory mitigationopportunities; and

n Increase the efficiency of limited agency resourcesin the review and compliance monitoring ofmitigation projects because of consolidation.

In its 2001 study, the National Research Council(NRC) also noted that banks are more likely thantraditional compensatory mitigation to achievedesired long-term outcomes and be protected inperpetuity by organizations committed to resourceconservation.5

5 National Research Council. Compensating for Wetland Losses Under the Clean Water Act. Washington, DC: National Academy Press, 2001.


The challenges to banking, according to variousobservers, include the concern that siting a bank isoften driven by economic factors, rather thanecological factors. On a regional scale, banks tend tobe sited near urban areas where there is a high levelof demand. On a local scale, even within service areasor watersheds, banks are usually located in areaswhere the cost of production is lowest, which may notnecessarily meet the ecological priorities of thewatershed. Another challenge is the uneven playingfield between the three different kinds of mitigation:in-lieu fee, permittee-responsible, and banking. Thereare also regional regulatory idiosyncrasies to consider,such as attitudes, policies, resources, and turnover.The courts are also constantly reshaping thelandscape of the §404 program, which addsuncertainty to the issue of jurisdiction. Finally, therecontinues to be scientific uncertainty regarding thespatial movement of aquatic resource functions. It isdifficult to commodify ecosystem services and movethem from one part of the watershed to another.



PART II: THE HISTORY AND STATUS OF WATER QUALITY TRADINGLynda Hall, U.S. Environmental Protection Agency,Assessment & Watershed Protection Division

Hall began by describing water quality trading as acreative way to help meet the goals of the CleanWater Act. Water quality trading is defined as a broadrange of practices that provide pollutant reductionsin a different location, often achieved by a differentparty than the source required to achieve suchcontrol. It occurs where the credit supplier has lowercontrol costs than the permittee and where otherthreshold conditions are in place.

In water quality trading, the buyers of the credits(the regulated dischargers) will almost always befacilities that hold National Pollutant DischargeElimination System (NPDES) permits. The facilitywill purchase credits if it needs to meet a morestringent permit limit or needs to expand itsoperations and is met with high pollutant controlcosts. The seller of credits can be a point source(NPDES facility, such as a wastewater treatmentplant) or nonpoint source that, although notregulated by the Clean Water act, contributesloadings of the same pollutant. The seller cangenerally achieve reductions at a lower cost and thencan sell its surplus pollutant reduction “credits.”

Trading markets are expected to revolve mainlyaround the control of nutrients. Thus, agriculturallands will likely play a key role in trading nitrogenand phosphorus reductions. Experience has shownthat nutrients are especially amenable to trading fora number of reasons. Nutrients are generated bymany different sources in a watershed and thesesources often have different pollutant control coststhat provide the threshold conditions for a trade.Furthermore, excess nutrients tend to exert theirnegative effects on a water body over time andsometimes over reasonably large areas. That providesan amount of spatial flexibility in the control of thepollutant that is helpful for trading because thelocation of the pollutant control can be achieved indifferent parts of the watershed.

There can be various catalysts or “drivers” fornutrient trading in Clean Water Act programs. TheAct requires states to adopt water quality standardsfor all of its waters. These standards must define thedesignated uses for waters (e.g., recreation, watersupply, aquatic life, agriculture) and the appropriateamount of pollutants that can be assimilated whilestill meeting the designated uses.6 Furthermore, theCWA requires states to place the waters that fail tomeet water quality standards on the CWA §303(d)list. There are thousands of water bodies on the§303(d) list, and the list is expected to grow as statescontinue to assess their waters. Once a water body isregistered on the list, it becomes a candidate fordevelopment of a Total Maximum Daily Load(TMDL).7 A TMDL is the maximum loading that awater body can assimilate and still meet the waterquality standards set by the state. TMDLimplementation can provide an impetus for tradingbecause the TMDL assigns each NPDES point sourcethat discharges into the listed water body with awaste load allocation. Wasteload allocations will oftenbe more stringent than current permit limits,triggering the need for greater pollutant controls.TMDLs also assign a load allocation to nonpointsources. As numeric nutrient water quality standardsare developed in more states and as nutrient TMDLsare implemented, there will be a potential for tradingin many locations around the country.

There are three different water quality tradingmodels that will be discussed during the forum. Thefirst is trading between two or more point sources(point source to point source), which occurs betweenNPDES facilities to meet a watershed goal that isoften implemented through a multi-source permit.8The facilities could trade among themselves orthrough an association or a state-managed exchange.Another type of trading is point/nonpoint sourcetrading, where an NPDES facility (the point source)buys pollutant reduction credits from a nonpointsource, such as a landowner, to meet their water

6 For more on water quality standards, see: http://www.epa.gov/OST/standards.

7 For more on TMDLs, see: http://www.epa.gov/owow/tmdl.8 For more on watershed-based NPDES permitting, see: http://

cfpub.epa.gov/npdes/wqbasedpermitting/wspermitting.cfm.

The History and Status of Wetland Mitigation Banking and Water Quality Trading


quality-based effluent limit (WQBEL). Finally, adesired state for trading, which has yet to beimplemented, is point/nonpoint source trading on awatershed scale, with multiple buyers and sellersinvolved in trades to achieve the water quality goalfor the entire watershed. Desirable aspects ofwatershed scale point/nonpoint source tradinginclude the ability to co-locate BMPs for greaterwater quality and ancillary benefits (e.g., contiguoustracts of habitat) and to achieve greater efficienciesand cost savings in meeting water quality goals.

Water quality trading has been around for about aslong as wetland mitigation banking. Since the 1980s,the field has ebbed and flowed, as demonstrated bythe evolution of state policies, laws, studies, pilotprojects, facility offsets, and a few watershed-scaleprograms. This activity has been on the rise in thepast two to three years. For example, several stateshave adopted trading policies or laws. Actual waterquality trading transactions, as reflected in permits,have occurred in about 15 locations involving dozensof NPDES permittees. About a dozen other programsdealing with phosphorus, nitrogen, and otherpollutants are being considered or are underway.9Many of these are on a watershed scale, supported bythe U.S. Department of Agriculture’s NaturalResource Conservation Service (NRCS) ConservationInnovation Grants or EPA’s Targeted Watershedgrants.

For point/nonpoint source watershed-scale trading tooccur, several factors must generally be in place.These include a TMDL or consensus-based cap ontotal pollutant loadings, a solid understanding ofpollutant sources and loadings in the watershed,multiple point sources facing more stringent NPDESpermit limits, and significant differences in pollutantcontrol costs between point sources or point/nonpointsources. Total load reductions must be achievable bysome facilities “over-controlling” pollutants andothers “under-controlling” and purchasing credits tomake up the difference. In some circumstances this

9 For a comprehensive summary of current trading efforts, see: Breetz, Fisher-Vanden, Garzon, Jacobs, Kroetz, Terry. “Water Quality Trading and Offset Initiatives in the U.S.: A Comprehensive Survey.” Prepared for the U.S. EPA, Washington, DC, Aug. 5, 2004.


will not work because loadings are such that everyfacility would have to produce substantial pollutantreductions to meet water quality standards and few“surplus” reductions would be available as credits.The success of a trade also depends on the pollutanttype. Trading is easier for pollutants that exert effectsover longer periods of time and on a larger scale,which is one reason nutrient trading holds the mostpotential. Finally, regulators and stakeholders need tobe willing to embrace this non-traditional approach.If and when the above conditions are met, tradingwater quality credits on a watershed scale is morelikely to be successful.

A water quality credit is defined as the mass ofsurplus pollutant reduction over a certain timeperiod, e.g., the pounds per day of total phosphorusreduction generated over one year. Time periods canvary. NPDES facilities may use credits to meet waterquality-based effluent limits but not technology-basedlimits developed for their industrial category. Pointsources can generate credits if their pollutantdischarge is reduced below their required WQBEL. Atthe same time, nonpoint sources can generate creditsif their pollutant load is reduced beyond a specifiedbaseline consistent with water quality standards. It isimportant to note that all trades must protect localwater quality. Depending on circumstances and thepollutant, the need to protect local conditions couldlimit the number of credits purchased by a givenfacility.

A water quality trading boundary must be within awatershed but can vary widely within that watershed.The boundary can be determined by the ability torelate the impact of pollutant reductions across anarea. Once it is no longer possible to determine if areduction of pollution in one location improves waterquality in another location, the boundary of thetrading area has been exceeded and such a tradecannot take place. Models are used to determine thepollutant fate, how it travels, and the impact ofwatershed features. Watershed groups often developadditional factors to consider in setting tradingparameters. In general, trades that occur in closerproximity are simpler and more cost-effective, butlarger markets make trading more viable, resulting inpotentially greater benefits to water quality.



There are a variety of benefits to watershed scalepoint/nonpoint source trading. The first is realizingsubstantial cost savings while meeting a watershedgoal. For example, it is estimated that relying uponpoint/nonpoint source trading could save $1 billionfor facilities striving to meet water quality standardsin the Chesapeake Bay, and $370 million for pointsources in the Miami River basin in Ohio. Cost savingsfor credit buyers and revenue for credit supplierscould mean the difference between attaining fullimplementation of water quality standards andfinding it prohibitively costly to do so. Point/nonpointsource trading also results in environmental benefitsin addition to improved water quality, such asriparian stabilization through reduced erosion, co-control of pollutants such as sediments andpathogens, improved habitat with flood retention, andpossibly more wetlands restoration. A watershed-scale approach allows for greater ability tostrategically locate controls for enhanced watershedbenefit.

State water pollution control agencies maintain theoverall responsibility for implementing watershedtrading programs under EPA oversight. Tradingactivity can be monitored through the point sourcetransactions that are reflected in the NPDES permit.There are several different models for managingtrades: a state-managed exchange where the state isthe broker, such as in Connecticut; a NPDESCompliance Association where the Association is thebroker, such as the Neuse River in North Carolina; ora third-party broker, such as the South NationConservation program in Ontario. Other trademanagers can be non-profits, private enterprises,conservation organizations, or conservation districts.

There are still various challenges to overcome forpoint/nonpoint source trading, especially whenexpanding to watershed-scale programs. The practiceof wetland mitigation banking has faced a number ofsimilar challenges. Hopefully this forum will providean opportunity for the water quality tradingcommunity to hear how wetland mitigation bankingwas able to address these impediments and moveforward.

Some challenges faced by point/nonpoint sourcetrading programs include reliably assessing nonpointsource loadings, estimating performance of bestmanagement practices, accounting for variability anduncertainty, and accounting for and verifying credits.The issue of CWA liability is also considered animpediment by some NPDES permit holders.Currently, if purchased credits fail to materialize, theNPDES permittee remains liable for any associatedpermit violations. In third-party wetlands mitigation,the banker or credit supplier carries thisresponsibility. Finally, another challenge is efficientlymanaging multiple transactions in watershed-scalemarkets with numerous buyers and sellers.

By addressing challenges similar to some of thoseabove, credit brokers or bankers have facilitated andmade possible the process of wetland mitigationbanking. Brokers may be able to play a similar role infacilitating point/nonpoint source trading. Forexample, credit brokers could assist with connectingnumerous credit buyers and sellers, such aswastewater treatment plants and landowners.

Brokers could be especially useful because, unlike inwetland mitigation banking, there are unlikely to belarge “single user” banks for nonpoint source creditswhere a buyer provides his own credits. In wetlandmitigation banking, state departments oftransportation have played a dominant role ingenerating demand for credits. With nutrient trading,demand is likely to be generated by an aggregation oflarge municipalities. Landowners may shy away frominteraction with municipal government entities, ormay be uninterested or unable to assess credits thatcould be generated on their land. Brokers couldaggregate credits from multiple nonpoint sourcelocations for large buyers, verify credit performance,and discount credits for location, performance and/oruncertainty. These brokers could also select sites andlocate suites of best management practices. In case ofBMP failure, a broker could also possibly provideescrow or backup credits to ensure that pollutantswere still reduced and the buyer’s permit limits met.


Questions & Answers

Denisoff raised the issue of transferring liability. Heasked if the NPDES holder is unable to transferliability because of a stated agency policy or becauseof a legal requirement. Hall replied that this isbelieved to be a legal requirement of the CWA.

Faeth referenced a graph in Hough’s presentationthat showed wetlands avoided, permitted, andmitigated over a 10-year period.10 The graph showsthat a large number of wetlands have been mitigatedduring this timeframe. He asked if there have beenany studies conducted on the net ecological effects ofthe conversion of natural wetlands to mitigationwetlands across the nation. Hough responded that heis not aware of a nationwide study, only studies thatexamine wetland mitigation on a small scale. TheFWS does conduct regular trend analyses of wetlandlosses, but there have not been any nationwidestudies of the ecological effects associated with theseconversion rates.11

Joyner noted that Hall’s presentation focused onwater quality trading for nutrients. In Florida, Joynerhas been supportive of establishing responsevariables, rather than causal variables. He asked ifdaily maximum limits for nutrients in NPDES permitswould constrain opportunities for trading. He feelsthat if there is a nutrient concentration that cannotbe exceeded within a short time period, thecumulative effects of nutrients are not consideredand there is little room for trading. Hall said thetrading programs underway are designed to meetconcentration-based limits in the water column andthat the required permit reductions and trades arearticulated in terms of mass. The permittee has aschedule to reduce loadings over a specified period oftime with the goal of achieving the in-column target.

Joyner responded that in Florida’s TMDLs, the targetis generally a downstream target. He is concernedthat even though there would not be an impact in thestream they are trying to trade in, daily nutrientlimits would impede trading. Hall agreed that

10 See slide 5 at: http://www2.eli.org/pdf/wqtforum/presentations/Hough.Hall.pdf.

11 For more information about FWS’s National Wetlands Inventory trend studies, see: http://wetlands.fws.gov.

12 See slides 17 and 29 at: http://www2.eli.org/pdf/wqtforum/presentations/Hough.Hall.pdf.


stringent daily maximum permit limits for nutrientswould constrain trading.

Platt observed that Hough’s maps of water qualitytrading and wetland mitigation activity show almostno geographic overlap.12 He noted that creatingsynergies between the two fields may require focusingon two almost entirely different areas of the country.Platt asked Hall to clarify her point about tradesbecoming simpler and more cost-effective when pointand nonpoint sources are closer to one another. Heasked if credits are generated based on proximitywithin the watershed. Hall responded with anexample. In a large watershed, if one pound ofnitrogen is released in the upper reaches of thewatershed, it will attenuate as it travels the distancedownstream to the area targeted for pollutantreduction, until perhaps only half of the originalpound of nitrogen remains. Similarly, if a pound ofnitrogen is reduced at that upstream point, only halfa pound of nitrogen reduction will reach thedownstream location. As a result, the buyer in thelower parts of the watershed must purchase twice asmany credits from an upstream seller to achieve onefull pound of nitrogen reduction in the target waterbody. Trading programs must discount credits to takeinto account this attenuation and diversion. Buyingcredits as close as possible to the target water bodywill mean a smaller discount, although the creditsmay be more expensive. Platt responded that thismight undermine the incentive for people to createbanks. Hall replied that the adjustment of credits toaccount for location is unavoidable. However, thereare many other factors that affect credit cost that thebroker does have control over.

Robinson asked why Hall assumes that the nonpointsource can provide nutrient reductions at a costsavings relative to the point source. She asked if theformulas that show a cost savings allocate for a profitdriver for the farmer or the stream mitigation bankerwho would be negotiating with the farmer. This is achallenge in stream mitigation banking. In theagricultural settings, farmers demand high prices fortheir water. Hall responded that she did not think thecost savings studies included that profit driver.



Dennis King, University of Maryland

Introductory CommentsKing began by offering some general comments abouttrading that, although obvious to some, are importantto keep in mind. Environmental trading markets arenot natural, but rather are entirely manufactured byregulation. All aspects of these markets, every nuanceof supply and demand, are determined by regulatorydecisions. These markets are a supplement toregulation, not an alternative to regulation. One ofthe reasons that water quality trading has not takenoff is that the costs associated with noncomplianceare not high.

The unit of exchange in water quality trading is a low-cost permit. Quality control must be imposed fromoutside, since both sides have clear incentives tocollude against the regulator in order to minimizecosts. The buyer is interested in securing a permit atthe lowest cost possible and the mitigation provider isinterested in minimizing cost. The less stringent thescoring criteria are, the more money that can bemade. As regulators increase quality controls, theycan limit trading. On the other hand, insufficienttrade scoring criteria can reduce the environmentalbenefits of the program.

The repercussions of unbalanced quality control wereevident in the early days of wetland trading. Strictscoring criteria were imposed, but regulators wereflexible in enforcement because they did not want tohinder the development of trading. This early historyof bad trades has undermined support for wetlandtrading to this day. Finally, trading markets areinherently risky. If the risks are not assigned to thebuyers or sellers, by default they fall on the public.

The central difference between wetland andpoint/nonpoint source trading is that wetland tradinginvolves trading assets that produce streams ofservices over time, including nutrient trapping.Point/nonpoint source trading involves exchanging aknown discharge for the services of a farmer in aneffort to reduce pollutant discharges.

Recent ResearchTo understand certain challenges water qualitytrading faces, it is first relevant to look at the broadmarket context in which this trading occurs. NobelPrize winning economic research conducted byJonathan Nash in 2003 found that asymmetricinformation problems in markets result in gamingbehavior that causes excessive firm/product branding,less competition, and winner-take-all markets. Inenvironmental markets, this means that buyers andsellers both have incentives to exploit and perpetuatequality uncertainty and to collude against traderegulators and the public interest.

The 2004 Nobel Prize winning economic research byEdward Prescott and Finn Kydland found that timeinconsistency problems with the way markets areregulated result in widespread gaming behavior thatcauses regulatory programs to fail. In environmentalmarkets, willingness-to-pay for credits is not based onmarginal treatment costs, but on the expected cost ofnot complying after adjusting for political/legalmaneuvering.

A 2003 paper on nutrient trading published by Kingand Peter Kuch13 was initially designed to determinehow people are “scoring” nutrient credit trades.However, they discovered that there were not anynonpoint source trades to score. The study thenattempted to determine why there were no waterquality trades taking place. As part of the study, theyreviewed 37 on-the-ground water quality tradingsystems. There was very little trading occurring andno point/nonpoint trades. The study evaluated supplyconditions, demand conditions, and institutionalconditions.

The paper concluded that while institutionalproblems are significant, such as how buyers andsellers find one another and how scores are traded,they can and are being overcome. The authorspointed out that supply and demand problems such asconnecting willing buyers and willing sellers are farmore significant. These barriers are outside thecontrol of the regional watershed organizations that

13 King, Dennis M. and Peter J. Kuch. “Will Nutrient Credit TradingEver Work? An Assessment of Supply and Demand Problems and Institutional Obstacles.” Environmental Law Reporter 33 (May 2003): 10352-68.

The Challenges of Point/Nonpoint Source Trading


are striving to make trading work. The authors alsotentatively concluded that centralized tradingsystems (e.g., government-run offset and biddingprograms) have much more near-term potential thandecentralized (market-style) credit trading programs.Centralized trading systems, such as the NorthCarolina and Connecticut programs, were deemed tohave more potential largely because they have fewercredibility problems.

King’s 2005 water quality trading study,14 which reliesupon the raw data being produced by Dartmouth,15

planned to examine trading to determine whichpractices were succeeding. King found that althoughthere is a tremendous amount of interest, support,and start-up funding for water quality trading, andabout 70 water quality trading efforts in place, thereis still almost no trading taking place. The studyfound far more examples of “regulator-approved offsettrades,” where there are one or more buyers or sellersand some creative permitting.

The study again concluded that there are serioussupply and demand problems and identified severalreasons for these problems. The study claims thatregulatory programs too often dictate treatmentmethods and levels. In addition, many subsidyprograms require treatment methods and levels. Kingstated his opinion that discharge restrictions are notbinding and not well enforced. He feels that TMDLscan help address these issues, but that it will requireregulators to become more savvy about market-basedsolutions. He added that the 2005 study alsoconcluded that centralized trading systems have morepotential than market-style credit trading.

Types of TradingThere are two basic styles of trading: market-stylecredit trading (decentralized trading systems) andregulator-approved trading/government-run offset andbidding programs (centralized trading systems).Market-style credit trading, the style most often

14 King, Dennis M. “Crunch Time for Water Quality Trading.” Choices 20, no. 1 (1st Quarter 2005): 71-75. http://www.choicesmagazine.org/2005-1/2005-1.pdf.

15 Breetz, Fisher-Vanden, Garzon, Jacobs, Kroetz, Terry. “Water Quality Trading and Offset Initiatives in the U.S.: A Comprehensive Survey.” Prepared for the U.S. EPA, Washington, DC, Aug. 5, 2004.


pursued, has several different distinguishing features.These include standard units of exchange (e.g.,credits), many buyers and sellers (e.g., competition),and formal rules of exchange (e.g., liability assigned).The alternative style, regulator-approved offsettrading, seems to be successful for point sourcetrades. This style of trading is characterized by ad hoctrade “scoring” criteria. The trade may include simplebi-lateral or tri-lateral contracts and a single sourceof offsets. The single source of credits can be agovernment that subsidizes providers of offsets.

Remaining Challenges and Questions One of the issues affecting the supply side of waterquality trading is how credits are generated, or howthe “baseline” is defined. Trading programs usuallyprohibit farmers from selling credits for undertakingland use/land management changes that are legallyrequired (e.g., by state regulation) or for which thefarmer has already been paid (e.g., green payments).Setting the baseline for credits in this way reducesthe ability of farmers in most watersheds to supplylow-cost water quality credits. However, if the farmeris allowed to sell credits for activities that arecovered by a green payment, the taxpayer gainsnothing. This conundrum is exacerbated by the factthat foreign trade policy is shifting farm subsidyprograms away from production payments to greenpayments. Although farmers may be paid throughgreen payments to undertake best managementpractices (BMP), the real intention of these programsis to provide subsidies to agriculture. The future ofgreen payment programs will have a large impact onthe future of water quality trading markets.

Market-based environmental trading programs areoften touted as alternatives to market regulation. Butthe markets are only successful to the degree thatthere are binding caps and allowances that are welldefined. In addition, these markets are never self-regulating. The trades are always three-way, with theregulator overseeing the trades. Another challenge isthat although water quality trading offers ancillaryenvironmental benefits (e.g., forest buffers andwetland restoration projects provide habitat), they donot have a great enough environmental impact.



The level of precision and risk allowed in theseprograms will have a large impact on the success ofthese markets. Water quality trading does not allowfor monitoring of every BMP. Some of the risk needsto be removed from the trades without increasingtransaction costs to the extent that it stifles theprograms. There are a lot of equity issues involved inhow credits are assigned. If fewer credits areassigned for reductions that take place in the upperreaches of the watershed, fewer trades may occur.Although these adjustments may be important forachieving water quality benefits at the base of thewatershed, those who live in the upper reaches willlose out on the benefits that would have accruedcloser to their homes.

Regulators seem compelled to stimulate water qualitytrading markets by having point sources purchasecredits from nonpoint sources. But many pointsources feel that their abatement costs are highbecause they are already achieving significantpollution reductions, while abatement costs may below for agricultural landowners because they do verylittle to reduce nonpoint source pollution. A tradingsystem that is based on urban dwellers “bribing”farmers may become a major problem.

General questions about trading remain. Theseinclude questions about whether caps should be fullor partial and whether trading can occur within oroutside the cap or both. In addition, there arequestions relating to how allowances are allocatedwithin the cap and who decides how and where tomodify discharges or find offsets.

Specific questions about trading need to be resolved.The first relates to how the units of exchange aredefined. The units of exchange establish equivalencyof water quality gains and losses. Second, the rules ofexchange must be outlined so that questions aboutwho can trade and who is liable are resolved. Finally,the incentives for exchange must be more fullydeveloped. This includes equity of initial endowmentsof “rights,” and fear on the part of credit producers(e.g., farmers) that water quality trading may lead tothe loss of green payments and expose them to futureregulations.

A Case StudyKing used an example of scoring trades from a projecthe has been working on with the Patuxent River,which feeds into the Chesapeake Bay. There are fourdifferent criteria for assigning scores to water qualitytrades: 1) Site ranking (e.g., soil, slope, hydrology); 2)BMP efficiency (percent nitrogen reduction peracre); 3) Landscape ranking (proximity to othernatural features); 4) River segment ranking(dilution/attenuation); and 5) Seasonal adjustment(hydrology/ecology). The project considers threeBMPs on three different sites: planting a forestedbuffer, restoring a wetland, and removing manure.Not all of these practices would be scored the same,even though they would all remove nutrients. Inaddition, planting a forested buffer and restoring awetland would have ancillary environmental benefits.The case study includes the use of GeographicInformation Systems (GIS) models and thedevelopment of site indicators for the farms.

The University of Maryland’s Center forEnvironmental Science has developed the NutrientEnforcement Economics Decision Support (NEEDS)Model. This model is a county-level decision supporttool designed to help focus, manage, and assess thelikely success of initiatives to reduce nutrientdischarges into the Chesapeake Bay. The model hasthree components: 1) County discharge capacitymeasures; 2) County discharge control measures; and3) Geographic dilution/attenuation factors. NEEDSlooks at the levels of effort for compliance, whichthey believe will drive whether or not actors willparticipate in the market. Most of the countynonpoint sources they interviewed were unwilling topay for a credit because there was no enforcement fornonpoint source controls. There was also typically nomonitoring of impervious areas and the maximumfine for violating an impervious area is only $500,which the developers just build into the cost of doingbusiness.

Generating CreditsThe nonpoint credits can be generated through threetypes of activities: 1) Those that reduce nutrientdischarges (reduce fertilizer use, build/use manuresheds); 2) Those that prevent nutrients from reaching


the water body (plant wetlands or grass or forestriparian buffers); and 3) Those that remove nutrientsfrom the water body (restore oyster beds or growoysters on off-the-bottom racks).

RecommendationsKing concluded with five suggestions for developingsuccessful water quality trading:

n Follow the new EPA guidance;n Discourage “command and control” regulatory

programs;n Encourage binding discharge restrictions;n Establish meaningful monitoring and enforcement

of restrictions and stiff penalties for violations,and;

n Get smart about countervailing public policies andabout the “gaming” strategies that point/nonpointsources will use to limit regulation and avoidpenalties.

There has been significant discussion surroundingafter-the-fact monitoring and verification. But before-the-fact monitoring, termed “investment indicators”by economists, is more important. A credible groupneeds to review the basis for these trades, the scoringcriteria for a bank, and the particular mitigationproposal beforehand so that the parties involved trustit. Most observers think that the federal agencies donot have the manpower, budget, technical skills, orpolitical support to provide this function.

Quality control will likely need to come from outsidethe federal government. King suggested establishingan environmental Securities and ExchangeCommission (SEC). The SEC is an agency establishedto protect investors and maintain the integrity of thesecurities markets. It does not analyze whetherstocks perform, but rather, whether or not theprospectus was accurate. An environmental SECwould manage trading risks through insurance, suchas weather insurance for wetlands. Another optionwould be a collateral bank where the environmentalservices are produced beforehand. The regulator thenrents this acre of wetland that is fully functioninguntil it is clear that the other one will succeed. Inthis scenario the credits are being leased to the bank,eliminating the risk from the trade completely.


Questions & Answers

Jones mentioned that where gaming is a concern,public sector agencies are different than profit drivenorganizations. He asked if there is any empiricalevidence that public agencies can and do act in thesame way as private agencies where money is thebottom line. King responded that he believes thatpublic agencies do employ gaming strategies, but thatthey are not profit driven.

Collier asked King for additional information on hiscomments related to gaming strategies. King statedthat economic research has demonstrated thatbusinesses assume that the people who make thelaws now are not going to be the ones enforcing them.Therefore, regulators can expect the regulatedcommunity to engage in political and legal strategiesfor delaying, postponing, and minimizing penalties.Economists refer to the phenomenon as “rationalexpectations theory.”

Coan stated that she evaluates the success of tradingprograms in more general terms. She felt that Kingwas too stringent when he concluded that no tradeswere taking place. She asked King if he would definea trading program as unsuccessful because there havenot been any “actual trades.” King responded thatsome researchers feel there have been no tradesbecause the caps are set too high. He stated thatwhen the regulated community is in opposition to theimposition of a new regulation, they game the systemby insisting that compliance costs will be excessivelyhigh (e.g., $28/pound for nutrient reduction).



Facilitated Discussion

The goals of the facilitated discussion were to: 1) Identify the existing and perceived challenges tothe establishment of point/nonpoint source trading;and 2) Identify which challenges the wetlandmitigation banking model could help address.

Participants’ comments for goal one are listed below.

Existing and perceived challenges to theestablishment of point/nonpoint source tradingon a watershed scale:

1. Lack of nutrient standards (Lanyon)

2. Lack of a demand driver (Denisoff)

3. Lack of easily defined credits, for example uncertainty in quantifying credits and in the duration of the credits generated (Denisoff, Jones, Joyner)

4. Lack of incentives for institutional/non-market pricing (Denisoff)

5. Liability issues

a. Lack of severance of liability (Denisoff)

b. Adequate information on liability and the consequences of failure (Jones)

6. Lack of critical mass of trades – need for regional implementation for water quality trading (Denisoff)

7. Lack of clarity over the temporal aspects of mitigation, e.g., whether or not pollution reduction must be fully achieved prior to the sale of credits (Platt)

8. In-lieu-fee programs competing with a water quality trading program would undermine the participation of third parties in water quality trading (Platt)

9. Performance standards and method of monitoring (Urban)

10. The public review process (e.g., lengthy, consensus-based public process vs. individual regulator authorized to make permit decisions) (Urban)

11. Baseline issues

a. Baselines for nonpoint sources need to be better defined (Corbin, Schary)

b. Lack of clarity on whether or not green payments are eligible for credits (O’Grady)

12. Cross-jurisdictional issues

a. Political barriers to working on a watershed scale (Collier)

b. Regional regulatory idiosyncrasies (Collier, Kieser)

13. Lack of focus on innovative technology to address nonpoint source pollution (Noyes)

14. Public perceptions of trading programs (O’Grady)

a. Environmental and economic benefits need to be more clearly articulated (O’Grady)

b. Politicians need to be informed (O’Grady)

c. Concern on behalf of the agriculture industry about being regulated as point sources (D. Hall, Raffini)

d. Perception that water quality trading is a new implementation strategy, although the implementation issue already exist under TMDLs (Schary)

15. Need for more local decision-making power (O’Grady)

16. Need to measure and define success on a programmatic basis (Coan)

17. Ability to enforce nonpoint sources (Ettinger)

18. Enforceability/lack of state capacity for developing and administering programs

19. Length of time to develop trading programs (L. Hall)

20. Higher transaction costs associated with early trades (L. Hall)

21. Public agencies’ ability to compete with nonpoint source to provide less expensive credits (Joyner)

22. Possible interference with the operation of pilot products by the development of state and local rule-making (D. Hall)

23. Rules prohibiting bundling of credits (Platt)


24. Incongruity of point source and nonpoint source nutrients and the lack of adequately developed science underpinnings for establishing trading programs nationwide (Parker)

25. Equity issues – urban/rural, upstream/ downstream (King)

26. Lack of state capacity for developing and administering water quality trading programs (Mehan)

27. The expectation that trading programs will become more pervasive may create a disincentive to nonpoint sources to address pollution now (Lucero)

28. Gaming strategies (King)

29. Patience (Hey)

Participants’ comments addressing goal two of thesession, to identify which challenges the wetlandmitigation banking model could help address or thata third party could solve, are summarized below:

Robinson believes that removing liability from thepermit holder (#5), which could be specified in theNPDES permit or in a separate contract, wouldincrease people’s willingness to participate. Also, inregards to whether or not mitigation needs to takeplace in advance (#7), pre-credits as the initialincentive would help water quality trading take place.Federal guidance and a mechanism analogous to theMitigation Banking Instrument (MBI) could addressthe challenges of performance standards and methodof monitoring (#9) and enforceability (#18). Finally, athird party can help the agricultural community feelless like they are being regulated as a point source(#20).

Platt commented that 15 of the 29 challenges couldbe addressed by creating a mitigation bank regulatoryregime through banking model guidance. These 15(#s 1, 2, 5a, 5b, 6, 7, 8, 9, 10, 13, 18, 19, 21, 22, 23) aremaybe not the most important, but they lendthemselves to regulation rather than innovativetechnology. Perhaps rule-making by state and localprograms (#22) cannot be addressed with politics atthe state level if the state itself does not have aregulatory framework or state regime. Therefore,federal guidance needs to encourage states to set uptheir own programs.


Joyner thinks the key issue is that mitigation banksget a permit. Water quality trading needs to expandthe regulatory authority to the seller of the credit likethe mitigation banking industry has done. Sellingcredits needs to be regulated to help address liabilityand uncertainty issues (#5), e.g. regulating ecologicalvalue of credits.

King stated that mitigation banks are suppliers ofcredits. A banker who supplies aggregate credits isnot helpful to water quality trading. The third partyconsolidators are more effective and accurate atvalidating trades, scaling back risk, and the law oflarge numbers. There are two ways to validate thesetrades. One is to model and measure endlessly, theother is to consolidate them and use the law of largenumbers. Hey disagreed, stating that it is necessaryfor suppliers of credits to monitor and measure thecredits. If a farm is too small to do so then theyshould not be in the business.

Denisoff believes that King and Hey are both correct.Bankers do play a broker role and can take theprivate sector incentives and efficiencies to themarket. At the same time, a brokerage can helpconsolidate trades. An effective program takes theprivate sector efficiencies and marries them with theoversight and resources of government programs, likethe North Carolina Ecosystem EnhancementProgram. This program allowed for advancedfinancing and mitigation, where private sectorefficiencies were brought together with third partiesto broker the agreements under a “triangletransaction” (buyer, seller, and broker/oversightagent). The broker can be a public or private entity.

Robertson pointed out that banking was initiallydesigned to solve the problem of defining thecommodity that was being sold, i.e., thechemical/biological integrity of the nation’s water.The degree to which water quality trading can learnfrom mitigation banking may be limited by whetheror not the commodity in water quality trading can bemodeled from a distance. Mitigation banking providedan answer to the question of spatial consolidation;however, this is not the question in water qualitytrading. In terms of patience (#29), we cannot solveall problems at once.



Schubauer-Berigan stated that the differencebetween mitigation banking and water quality tradingis that in water quality trading, context is important,while in mitigation banking, habitat is important.Trades depend on what will be released in responseto certain restrictions versus where the trade willoccur. This relates to how to prevent a series oflandowners from becoming the losers in a largetrading game. They need to find recourse forproblems occurring in their section of the watershedas opposed to someone else who is gaining benefitsfrom the treatment. Finally, there is a misnomerabout “small farms.” Most farms are large. Largefarms should be required to monitor like businessesand other industries. Farm size should not always bedetermined by acreage.

Coan responded that the average size of a farm in herstate is 140 acres. This points to the fact that therecannot be a “one size fits all” approach to developingregulatory schemes. What will work in her state willnot work on the big farms. Joyner commented that afarm in Florida (regardless of size and profitability)will not generate credits by just implementing BMPs.It must go above and beyond the baseline.

Lanyon said that publicly owned treatment works(POTW) trading will only work if a broker is involved.This separate entity could find appropriate parties ortechnology for nutrient removal. POTWs can transfertheir liability to this third party. It is crucial thatPOTWs not be in a position where they can be sued.It is easiest to deal with one entity/broker.

Urban felt that if each individual nonpoint source hasto put together an instrument and negotiateagreements the model will not work. Regasemphasized that one central challenge is the lack of ademand driver, be it a lack of enforceable TMDLstandards or a lack of numeric water qualitystandards. Platt said that the mitigation bankingmodel could help address this issue with a “build itand they will come” approach.

Robinson commented that people should use theterm mitigation banking not wetland mitigationbanking. There are other bodies of water to consider,e.g. streams, linear aquatic bodies, etc.

Ettinger pointed out that the environmentalcommunity’s preference would be to have nodestruction of wetlands and no discharge ofpollutants into waterways. However, since the Corpsdoes grant §404 permits and EPA does issue §402discharge permits, the environmental communityseeks to minimize the environmental impacts thatstem from these programs. Under the §404 program,mitigation options include permittee-responsiblemitigation and the market-based approach ofpurchasing credits from a wetland mitigation bank.Since permittee responsible mitigation is essentiallyunenforceable, and the environmental communitycannot bring a lawsuit to enforce that permit,wetland mitigation banking may be a good option.Under the §402 program, however, permittees arerequired to meet effluent limitations and the §402permit can be enforced in federal court. In order forthe environmental community to support a market-based approach to water quality trading, and forwater quality trading to succeed, water qualitysuppliers will need to demonstrate that they areachieving the pollution reductions and they must belegally liable for doing so.

McElwaine stressed that the key to a third partysuccess in trading will be whether or not it reducestransaction costs, such as risk mitigation, for allparties. Water quality trading is not a “one size fitsall” strategy. Each watershed is different, withdifferent criteria and different assumptions. It isabsolutely imperative to keep transaction costs down.


G. Tracy Mehan, III, Cadmus Group Paul Faeth, World Resources Institute

Hypoxia in the Gulf of Mexico is prevalent along theentire coast of Louisiana. There have been a numberof studies demonstrating that hypoxia is increasingevery year as a result of discharges from point andnonpoint sources in the Mississippi River basin.

World Resources Institute (WRI) and the USDAEconomic Research Service developed a model todetermine what would be required to stabilize andreduce hypoxia and reduce nitrogen and phosphorusby 30 percent. The model also ascertained how atrading program could be developed in theMississippi River basin to reach the 30 percentreduction goal. The model assumed that pointsources, including significant agricultural pointsources, would have an obligation to curb discharges.The model depicts where significant reductions aremost likely to occur and shows a great deal of tradingactivity in those regions with the greatestconcentration of point sources. These areas coincidewith areas of high agricultural productivity, where theuse of fertilizers and animal waste treatmentfacilities is also high.

In addition to nutrients and sediments, the modelalso has the capacity to examine greenhouse gasemissions. The most significant greenhouse gascontributed by agriculture is nitrous oxide, followedby methane, and then carbon. Nitrous oxide is asignificantly more powerful greenhouse gas thancarbon dioxide. It is produced when agricultural useof nitrogen leads to the input of nitrogen into thewater system, which is then largely released into theatmosphere as nitrous oxide. Thus, a nitrogen tradingprogram aimed at water quality would also result innotable green house gas reductions because therewould be less nitrogen in the environment. A mappresented depicted the location of the highestpercentage of greenhouse gas reductions.16

16 See slide 4 at: http://www2.eli.org/pdf/wqtforum/ presentations/Faeth.Mehan.pdf.

17 See slide 5 at: http://www2.eli.org/pdf/wqtforum/presentations/Faeth.Mehan.pdf.



20 See: http://www.nutrientnet.org.


The Use of Water Quality Trading and Wetland Restoration to AddressHypoxia in the Gulf of Mexico

Faeth highlighted the findings of various studies thathave sought to determine the cost of reducingnitrogen inputs into the water system throughwetland protection.17 Some of these reductions wouldbe cost effective. If producers were able to bundleproduction practices, they could actually makemoney. At the lower end, credits generated fromwetlands can be competitive, but not necessarily atthe high end. These studies do include theopportunity costs of agricultural production.

The model also found an important correlationbetween the location of wetlands in the MississippiRiver basin18 and the location of the highest nitrogendelivery ratios.19 Historically the wetlands of theMississippi River basin have been located in thelower parts of the basin in areas where there is highnitrogen delivery along the main stem. Wetlands builtin these areas would attenuate the most nitrogen andwould stimulate very competitive reductions.

In order to encourage the development of nutrienttrading programs, WRI developed a website calledNutrientNet,20 where farmers can access a photo oftheir property. By selecting different fields in thephoto, farmers can retrieve information on severalfactors, such as slope, distance to the nearest stream,and soil type, among others. The farmer can thenenter information into the site on how much fertilizerthey use and their cropping practices to estimatetheir nutrient contributions. The website cancalculate the baseline, which is ultimately decided bythe regulatory agency regulatory decision. In placeslike the Chesapeake Bay, there is a baseline thefarmers must achieve first, and then any creditsgenerated above that baseline can be traded.

After the website calculates the baseline, it providesoptions for either reducing discharges or sellingcredits. However, the farmer has no obligation toreduce discharges. The website also outlinessubsidies, BMP options, and provides the form for



EPA’s Office of Science and Technology and Office ofWater are moving toward focusing on water qualitystandards as a priority, if the courts will allow them tomove away from an almost exclusive focus ontechnology-based effluent guidelines. The TMDLprogram is improving through trial and error.Eventually this will result in tighter NPDES limits.However, this necessary evolution may take a longtime.

Mehan suggested that the Chicago Climate Exchangecould set up a market and begin to trade greenhousegas (GHG) credits. American Electric Power isspending a fortune reforesting the entire Mississippidelta to generate GHG credits. They might get morebang for their buck if they were dealing with astronger GHG, such as nitrous oxide. This type ofmarket could operate on a national scale. It fits theconcept of a centralized system and would benefitany water body impaired by nitrogen.

Say's Law dictates that supply creates demand.Mehan suggested that an institution could managenonpoint sources in a given watershed or TMDLsegment. If the nonpoint sources were reducedbeyond a baseline level dictated by a regulatoryagency, credits could be generated and madeavailable, creating a demand upon which pointsources could capitalize. Such an arrangement wouldrequire active intervention by a third partyinstitution, such as a not-for-profit institution thathas close affinity to the agriculture community. Thefunction of such an institution would be to preservethe anonymity of the producers involved, providecredibility to the system, and provide comfort foragriculture producers and regulators. The third partycould begin to implement BMPs and generate creditsin a watershed. Brokers, bankers, and aggregatorscould be involved at this stage to help create thesupply that would then create the demand.

selling credits. The website incorporates opportunitycosts then calculates the price for reducing eachpound of nitrogen. In 2006, Faeth anticipatesconducting a test with Andrew McElwaine of thePennsylvania Environmental Council to use cash tobuy credits from farmers through a grant from theU.S. Department of Agriculture.

Mehan continued the presentation, emphasizing thatthe Mississippi River basin is considered the largestnutrient challenge in the entire country given the sizeof its drainage and number of rivers. For some timenow, trading has been considered a possible solution,but how to start such a program is still unclear. Hestated that trading must be a part of the solution tothe problems in the Gulf of Mexico.

There are three essential components to establishinga water quality trading program: water qualitystandards, TMDLs, and NPDES permits. Thestandards must be in place to correctly assess theTMDL. The TMDL is essentially a pollution budget,which is defined through a waste load allocation in apoint source NPDES permit. Having all three of thesecomponents in place would be the ultimate driver forpoint sources.

Setting water quality standards related to nutrientshas been very problematic. An administrative lawpetition filed with EPA a few years ago by a publicinterest group in St. Louis highlighted the lack ofstandards in the Mississippi River and the problemswith these standards when applied to nutrients. Inthe Gulf of Mexico, they have reached a politicalagreement with an arbitrary reduction goal, but thereare no legal ramifications with respect to what will bereflected in NPDES permits.


Questions & Answers

Schubauer-Berigan commented that he is concernedabout the suggested link between nutrient tradingand GHG trading. One of the problems associatedwith trading is that very rarely is denitrificationcompletely nitrous oxide-free. The larger the nitrogensource, the more nitrous oxide. Nitrogenmanagement, when managed in terms of redox, isdifferent than if you were to manage phosphorous.Nitrification also is known to produce a lot of nitrousoxide. Schubauer-Berigan stated that we should bemindful of where nitrogen is controlled and whatprocess is used. He was skeptical about theassumptions in their model that water quality tradingwould genuinely contribute to greenhouse gasemission reductions. Faeth stated that the modelfocused on avoiding the introduction of nitrogen inthe water in the first place. However, he agreed thatthe process of how wetlands treat nitrogen is not wellunderstood.

Schary asked if the Chicago Climate Exchange wasgenuinely getting involved in water quality trading,funding notwithstanding. Mehan said that theywanted to continue discussing it, but were not reallysure how to proceed. Their interest would largelyrevolve around the value of reducing GHGs. Theirinvolvement would probably require some funding. Hesuggested that EPA might be able to support such aneffort.

Denisoff asked Mehan what he thinks would be aneffective demand driver for encouraging water qualitytrading. For example, would stronger teeth or moreincentives in NPDES permits be sufficient, or would acombination be necessary? Mehan responded thatthere are many possible combinations. Once thetraditional regulatory components of the waterprogram properly deal with nutrients, more driverswill be created. There are places right now wheretrading makes sense, such as Saginaw Bay, Michigan,where there are tremendous cost differentials incontrolling phosphorous between point and nonpointsources. Some of the barriers include the focus ofregulators on the NPDES program, as well astraditional corporate culture. There are capacity,technical, and policy issues that need to be resolved.


Faeth added that the 2007 Farm Bill is an opportunityto address these issues. There has been muchdiscussion about the barriers of the farm programssetting the baseline too high. However, farm programscould be structured to allow environmental servicesto be purchased from farmers. If the environmentalservices provided by farmers were defined in terms ofcredits, farmers might become more comfortable withthe idea of selling services. The farm programs are anopportunity for conditioning permits and generatingclean water.


decides if a stream meets the Policy 2 criteria, hadallowed phosphorus discharges if there was ahardship to meet standards (e.g., high costs).

The Deputy Ministers established a no net increase ofphosphorus cap on a watershed scale. The Ministry ofthe Environment stated that this cap could be met byany new or expanded plants having zero discharge orby purchasing phosphorus credits to offset theirloads.

A critical component of this program is that themethod of capping is decided by the discharger, notthe province. In Ontario, dischargers must prepareenvironmental assessments (EAs) prior to expansionor new construction. The EAs are required to outlinewhich option they will use to control phosphorus. Forexample, they can build a new tertiary treatmentplant, which costs about $15 million, or they canimplement a Total Phosphorus Management (TPM)strategy or another system, such as treatmentwetlands. Under the TMP approach, it costs anaverage of $370 to remove a kilogram of phosphorous.This program only applies to new plants. Wastewaterdischarge must still meet provincial treatmentstandards for all other parameters.

Phosphorus credits are generated through typicalBMPs: septic, manure storage, milkhouse washwater,barnyard runoff control, livestock access, and bufferstrips. The program’s formulas for how manyphosphorous credits could be applied to the differentBMPs came from a number of studies. There wassome uncertainty about how new technologies andmanagement methods would affect these formulas,many of which relied upon 5-15 year old research. In2002, SNC conducted a review of 80 primary researchpapers in an effort to develop new formulas. Theresults were peer reviewed. New literature isreviewed to ensure that they have the most up to dateformulas.

The TPM program is a closed system. Credits arepurchased only by SNC and can only be sold tospecific dischargers that are expanding. There wereconcerns about whether or not a market exists in thecontext of a closed system. Dischargers must buyfrom someone, but what happens if there is nophosphorus to sell?


CASE STUDY: PHOSPHORUS TRADING AND WATER QUALITY – THE TOTAL PHOSPHORUSMANAGEMENT PROGRAM Dennis O'Grady, South Nation Conservation

The South Nation River watershed is located in theeastern part of Ontario, encompassing 4,000 squarekilometers. The river is 180 kilometers long butrelatively flat. The watershed consists of 15municipalities and has a population of 90,000 people.Sixty percent of the land is in agriculture. River flowsin the spring are around 198 cubic meters per secondand in the summer the rivers essentially dry up.

There are 36 watershed agencies, or “ConservationAuthorities,” in Ontario. The Conservation Authoritieswere established through legislation in 1946. It isinteresting to note that the Conservation Authoritiesare all located in the southern part of the provincewhere there are people. They have no resourceproblems in the northern part where humanpopulations are low.

The South Nation Conservation Authority (SNC)became involved in a phosphorous trading programbecause phosphorus levels throughout the watershedwere, on average, five times greater than theprovincial water quality objectives (.3 mg/l). Ninetypercent of the phosphorus comes from nonpointsources.21 The watershed has 18 wastewater lagoons,most of which discharge once every spring. Theproblem reached a climax in the mid-1990s when anumber of plants sought to expand their operations,which would have led to additional phosphorusdischarges.

The trading program is based on Provincial WaterQuality Guidelines established by the OntarioMinistry of the Environment. Policy 2 of theguidelines states that when water quality does notmeet provincial standards, no further degradation ofwater quality is allowed.22 The province, which

Lessons Learned from Point-Nonpoint Source Trading

21 South Nation River Conservation Authority. Waste Water Assimilation Study of the South Nation River Watershed.Toronto: Ontario Ministry of the Environment, 1993.

22 Ontario Ministry of the Environment and Energy. “Water Management Policies, Guidelines, Provincial Water Quality Objectives of the Ministry of Environment and Energy.” July 1994. http://www.ene.gov.on.ca/envision/gp/3303e.pdf.


Previous experience with BMPs helped the programdemonstrate that a market already existed. Since1993, SNC had been administering a Clean WaterProgram, which completed 420 BMP projects worthover $5.4 million. Applying the new formulas to thework they had done in the past, they were able tocalculate how much phosphorus was controlled byeach of the BMPs. These data allowed them tocalculate the amount of phosphorus that can beremoved through application of BMPs (more than9,166 kg annually). This gave the province anadequate amount of comfort regarding phosphorustargets and allowed the program to proceed morequickly.

Funding can be used to direct the program. Forexample, SNC provides farmers with a 50 percentgrant to install manure storage, but they cap thegrant at $10,000. Manure storage costs approximately$25,000 to $30,000. They are able to satisfy thedemand using this cap. But if they offered $15,000 to$20,000, they would probably increase demand forparticipation in the program.

This program was not easy to establish even thoughthere was an existing program in place. Theagricultural community was concerned that the offsetratio for phosphorus reduction was too low (2:1), aswell as the funding level per kilogram of phosphorus($150/kg). SNC was partially to blame, as the totalcosts were not considered (phosphorus reduction wasbeing subsidized through other funding sources).Other concerns related to the fact that liability wasnot well defined. It was unclear if the landownerswho accepted funding or the municipality/industrywould bear the responsibility if phosphorusreductions were not achieved. There were also equityconcerns related to the agricultural communitybearing responsibility for pollution caused by urbandwellers. Finally, there was a general wariness by thefarm community of urban people and politicians.

SNC established a working group to review theconcerns of the agricultural community and to bringan end to two years of struggling. The group hadrepresentatives from farm organizations, farmers,SNC, and government. The process led to a signedagreement that outlined the different parties’ rolesand responsibilities. They settled on a 4:1 offset ratio,


instead of the initial 2:1 (kilograms of phosphorousremoved from nonpoint source for every kilogramdischarged from a point source). The trading ratioagreed upon is not based on science, but rather onnegotiation with the farmers. The negotiationsestablished a higher cost per kilogram of phosphorus,designed an evaluation and monitoring strategy, andcreated a system for open reporting to municipalitiesand agriculture.

Two factors contributed to the success of theprogram. First was establishment of the Clean WaterCommittee, which has total control over the program.This committee ensured credibility by equallyrepresenting all the stakeholders: business, industry,environment, farm, and political interests. Thecommittee is fully responsible for grant structure,funding approvals, committee structure andmembership, promotion and evaluation, research andmonitoring, and fund raising. It is chaired by a localfarmer and reports to SNC’s Board of Directors.

Second is the leading role played by farmers indelivering the program. The Clean Water Committeepays local farmers to conduct all site visits and thefarmers are recognized as leaders in the community.The farmers make recommendations to theCommittee on which projects to accept. This is also avery cost effective approach. In 2004, SNC spent$6,626 for 85 project site visits. If SNC had used full-time staff for these visits, the cost would have beenaround $100,000. They have been relying upon thisapproach for five years and have seen no negativeside. This method has served to increase thecredibility of and participation in the program.

The agreement signed by the stakeholders providesfor monitoring, evaluation, and reporting. Themonitoring component consists of sampling 13stations for surface water quality on a monthly basis(April – November). Phosphorus trends are trackedover time by comparing this data to baseline,historical information, which has been collected formore than 40 year at some stations. However, it is stillnot possible to measure immediate results. Otherindicators of water quality improvement must bemeasured.


O’Grady concluded by summarizing the TPM program.Under the program, SNC negotiates a phosphorousmanagement agreement with the discharger. Thisagreement becomes part of the operating proceduresfor that wastewater treatment plant. The dischargerpays SNC based on the number of kilograms the plantis discharging. SNC passes the money along to theClean Water Quality Committee. The Committeeallocates the funds to eligible projects. Oncelandowners complete the approved projects, SNCverifies that the projects have been complete bysending a farmer field representative to conduct asite inspection and report back to the committee. Theinspection is documented through invoices andphotos of the completed project. The fieldrepresentatives randomly inspect 10 percent of thecompleted projects. SNC then calculates the totalphosphorus reduction from these completed projectsand allocates credits to the dischargers.

SNC provides annual reports to the dischargers onthe amount of money contributed and phosphoruscredits allocated. The Annual Clean Water ProgramReport is circulated to all watershed stakeholders.

This program was fortunate to have a watershedagency already in place, as well as an establishedClean Water Program with a track record of providinggrants for BMPs. Without these elements, wide-scaleadoption of a trading program would have taken fouror five years. O’Grady stressed the importance inhaving patience in similar developing programs. Ittakes a long time for people to break downcommunication and institutional barriers. Waterquality trading programs would benefit fromadditional public relations exposure so that thevarious parties can begin to understand the benefitstrading offers to government (lower grants forinfrastructure), taxpayers, industry, businesses (lowertaxes), agriculture (support), and the environment(controls other contaminants, in addition tophosphorus).


SNC and TPM partners recently completed a programevaluation, the second component required by theagreement. The partners originally committed toevaluations in the fifth and tenth years of theprogram. The evaluation included a stakeholdersurvey, data analysis for water quality,accomplishments, challenges, and recommendationsfor program improvements. The evaluation found thatfarmers’ opinions of the Ministry of Environment hadimproved because of this program.

Reporting is the third important component of theagreement signed by the Clean Water Committee.SNC provides annual reports to participating pointsource dischargers. Phosphorus credits are allocatedbased on targets for each discharger. SNC uses theaggregate of all BMPs, applies the formulas, andwrites a report back to municipalities outlining theprojects they completed and the amount ofphosphorus that is being allocated back to them.Time required to achieve phosphorus reductiontargets varies from one to five years. Themunicipalities are required to see that they arecontrolling the phosphorus.

When SNC provides the list of projects that make upthe “bank” of phosphorus credits, individual projectsand landowners are not specifically identified. Allreporting is confidential and presented by township.This format was adopted to address stakeholderconcerns regarding landowner liability forperformance of phosphorus reducing projects.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Improved soil quality

Improved herd health

Saved money

Improved my opinion of the MOE

Reduced health risks to my family

Increased my respect for the environment

Improved my opinion of SNC

Increased property value

Improvements Noticed (Unprompted)


CASE STUDY: GREAT RIVERS LAND TRUSTAlley Ringhausen, Great Rivers Land Trust

Great Rivers Land Trust (GRLT) is a non-profitorganization dedicated to preserving open space andcritical wildlife habitat in the St. Louis metropolitanregion. GRLT’s mission is to promote the preservationand improvement of natural resources principally in,but not limited to, the watershed of the MississippiRiver for the benefit of the general public. Theseresources include land and water resources, the plantand animal life thereon, and the area’s unique scenic,natural, and historic sites.

GRLT works with educational institutes, nonprofitorganizations, private citizens, corporations, locallandowners, and government entities at the local,state, and federal level. GRLT has a 13-member Boardof Directors, a 57-member Advisory Board, and 485individual donors.

GRLT manages a unique area on the Illinois side ofthe Mississippi River where a four-lane highway runsalong the river. The area includes bluffs, prairies, andforests. As a land trust, GRLT is primarily involvedwith acquiring land or purchasing conservation,riparian, or scenic easements. This area is under a lotof development pressure and GRLT strives to keep itas natural as possible. In the past, GRLT hasconducted wetland enhancements and reforestationprojects, formed a buffer partnership with TreesForever, and protected land for community parks andriverfronts. One such project is the Piasa CreekWatershed Project

The Piasa Creek Watershed drains over 78,000 acresin Madison, Jersey, and Macoupin counties. The lowerreaches of the stream were channelized years ago andare comprised of second-growth bottomlanddeciduous forests. The upper reaches drain theresidential landscapes of Godfrey and the agriculturallands of Jersey and Macoupin counties. Thewatershed’s point of discharge into the Mississippi isat the Great River Road, about five miles north ofAlton.


Lessons Learned from Point-Nonpoint Source Trading

In the early 1990s GRLT started working with theAmerican Farmland Trust, the first nationwidemembership organization dedicated to protectingAmerica’s farmland. Together they began an effort toconduct pilot projects to develop watershed plans forthis area. As part of the effort they brought together agroup of stakeholders, including businessmen,politicians, farmers, and landowners to talk about themajor problems of the watershed, possible solutions,and what resources might be available to implementthese solutions. Based on the information gathered atthese meetings, they developed the Piasa CreekWatershed Plan. It received a few grants, but mostlysat on the shelf; the watershed strategy was not trulybeing implemented.

Then in 1993, heavy rains flooded a local watercompany. The company, the Illinois American WaterCompany, wanted to relocate their water purificationplant to the top of a nearby hill. Unlike the originalplant, the new plant was not allowed to dischargeriver sediments taken through intake pipes back intothe Mississippi River. Instead, they were required tobuild sediment lagoons and transfer the sediment tooffsite landfills. As an alternative, Illinois AmericanWater Company discovered the Piasa CreekWatershed Plan and offered to fund implementationof the plan if Illinois EPA would allow the originalpermit conditions to stand for sediment discharge.Implementation of the watershed plan would allowthe plant to reduce the amount of sediment cominginto the river from Piasa Creek, which was just abovethe plant’s intake pipes. Illinois EPA approved theirproposal.

The GRLT and the Illinois American Water Companysigned an agreement to begin implementation of thePiasa Creek Watershed Project (PCWP). The $4.1million, ten-year project will attempt to reducesedimentation in the Piasa Creek Watershed byapproximately 6,600 tons per year by the end of thecontractual agreement. The groups agreed upon a 2:1ratio, or double what the water company is estimatedto discharge over the ten-year period. Achieving thesediment reduction rates will involve a variety of soilconservation practices such as the construction of siltbasins and dry damns, streambank stabilization, andvarious other practices.



The project first sought to gather baseline data. Theyhired a fluvial geomorphologist to conduct aninventory and assessment of the Piasa CreekWatershed. The study identified where the erosionwas, where sediment was entering the waterways, andthe types of land uses creating the most erosion. Thebiggest source of sediments was agriculturalcroplands. The assessment provided information oneach sub-watershed and specified which areas shouldbe the highest priorities, as well as different tools toaddress the erosion issues in each area.

Various sediment control tools were identified asoptions for the project, including water and sedimentcontrol basins, grassed waterways, filter strips,streambank stabilization plantings, storm detentionbasins, terraces, and grade control structures.

The assessment identified several types of erosiontaking place in the watershed: sheet erosion, rillerosion, gully erosion, and streambank erosion. Thegeomorphic assessment concluded that gully erosionwas the watershed’s biggest problem and that itneeded to be addressed by the agriculturalcommunity. GRLT hired a local farmer to encourageother farmers to participate in the Piasa CreekWatershed Project. GRLT formed a partnership withSoil and Water Conservation Districts that werealready working in the area. They helped buildvarious sediment control tools for the differentprojects. These tools are designed to be as natural aspossible and are measured using USDA standards.Stream bank stabilization projects are determined byphysical measurements in the field.

The program has generated so much interest in theagricultural community that GRLT developed aweighted system to evaluate which projects result inthe greatest sediment reduction for the investment.GRLT has also implemented an educationalcomponent to the Piasa Creek Watershed Projectgeared toward children and landowners.

GRLT uses GIS to track each project and to identifypriority areas for future projects. USGS topographicmaps and aerial photos are often used as base maps,and thematic data is layered over them. Thematicdata indicates which areas of the watershed are inmost need of protection. The program prioritizes itswork in areas with the most erosion. The data usedfor PCWP are quaternary geology landcover, bedrockgeology, wetlands, prior converted wetlands, and soilclassification. Once a project is completed, all theinformation used in the project is included in a GISmap organized by sub-watersheds. By clicking on aspecific property, the user can access project reportsfor each site, including total acres benefited and totaltons of sediment removed. One of the benefits is thatthe project is funded with private monies, rather thana government grant. To date, GRLT has more thandoubled the funds received from the water companyby matching it with other grants.

Another important component of PCWP is itsflexibility. GRLT established an agreement with theTrails West Council of the Boy Scouts of America in2002. In the 1980s, the 40-acre lake at Camp WarrenLevis had become filled with silt due to constructionin the area. The levy of the lake was breeched in 1989in an attempt to dry the lakebed and sell the soil,however, no funds were available to complete therestoration process. GRLT offered to restore the lakeif the Boy Scouts would provide GRLT with aconservation easement on the 253-acre camp. Theeffort is funded in part by PCWP. GRLT is restoringapproximately half of the original lake and theremainder will become an enhanced wetland. Phase Iexcavation work on the 15-acre lake is nearlycomplete. Phase II designs are complete and willaddress the restoration of the levy and spillway.

GRLT has also put together a wish list of theirresearch priorities related to the watershed project,which were limited by lack of funding and staff. Theyshared the list with universities in the area inattempt to generate interest from graduate studentsor professors.


Ringhausen concluded by stating that the mostimportant factor in the success of the project hasbeen the cooperation and buy-in of local landowners.While GRLT has more interest than they canaccommodate, this allows them to pick and choosethe highest quality projects that result in the largestamount of sediment reduced for the money theyspend. The water company is satisfied because theycan continue to discharge their sediment, keepinglocal water bill costs down, and lower water billskeeps local residents happy. Landowners support theproject because they receive funding for conservationprojects they could not normally afford, cleaning upthe stream corridor, improving habitat for flora andfauna, and ultimately resulting in a cleanerMississippi River.


Questions & Answers

Sokulsky asked Ringhausen about the level of FarmBill program activity in the watershed and how GRLTcompetes with those programs. Ringhausenresponded that GRLT works with these programs,such as USDA’s Conservation Reserve Program, toprovide farmers with more of the full costs associatedwith implementing projects. PCWP does not providefarmers with 100 percent of the costs because theyfeel that farmers must have some ownership for theprojects. The likelihood of the farmers maintainingthe projects is higher if the farmers have contributed.Sokulsky asked if they had any remedies if the farmerdoes not maintain the project. Ringhausen respondedthat this has not yet been an issue.

Wilson asked O’Grady if the formula they use toallocate phosphorus was a baseline or a target.O’Grady stated that they do not allocate credits, butrather, they allocate kilograms of phosphorus. Forexample, the number of cows kept out of the river istranslated to an amount of phosphorus that isremoved by the use of this BMP.

Joyner asked O’Grady to clarify how his project usesoffset ratios. Farmers usually view higher ratios asless desirable. O’Grady responded that the 2:1 ratiowas decided upon in an arbitrary manner. The 4:1ratio provides more money for BMPs, because forevery kilogram that is discharged into the river, themunicipality must pay to remove four kilograms. Thisprovides SNC with four times as much money toprovide to the agricultural community for BMPs.

Schary asked O’Grady how SNC verifies the results ofthe projects that they are implementing, and whetherthere is any follow-up to ensure that the inspectorsare conducting appropriate appraisals. O’Gradyresponded that no money is paid out until SNCreceives a verification that the project has beencompleted. The program relies on using “farmer fieldrepresentatives” as inspectors. These individuals arefrom the local area and know the farmers who aredoing the projects. Although there is potential forgaming, it would be very difficult because FarmerField Representatives are from the same communityand have frequent interaction with all the farmers.


SNC randomly audits only 10 percent of the projects.They have decided it is not cost effective to design amonitoring system to identify the 5-10 percent ofparticipants who may be gaming the system. Instead,they manage for the 95 percent of participants whoparticipate in an honest manner. Ringhausen addedthat a severe rainstorm caused a blowout of severalprojects in his area a few years ago. Because thecommunity is so close, GRLT knew about the failuresalmost instantly.

Urban asked O’Grady if the permits have a time limitand, if so, how the permits get renewed. He asked ifold projects carry over when permits are renewed orif new projects must be conducted. O’Gradyresponded that the Certificate of Approval is inexistence unless there is a change. The timeline forthe completion of the phosphorus managementprojects and the amount of kilograms removed arebased on SNC’s estimates of how long it will take toremove the phosphorous. The determinations arecase-specific and based on negotiations. Agreementsrange from one to five years.

Biorn-Hansen commented that case study projectsseem to have been successful in identifying goodprojects that have met their goals. She asked howadditional pollution control could be accomplished ifthey had more funding. She also asked how much ofthe overall pollution problem they have been able toaddress with current levels of funding. Ringhausenresponded that they could complete additionalprojects with more funding.

King asked O’Grady what incentive farmers have forparticipating in the program, since they do notreceive 100 percent of the costs for completing theprojects. He added that an additional possibledisincentive is that participation in the program is atime commitment to farmers. Ringhausen respondedthat regardless of how high the ratio is set,participation in the GRLT program is more desirablethan participation in the Farm Bill programs. O’Gradyadded that many farmers view themselves as stewardsof the land and have a strong conservation ethic.


These farmers are not opposed to doing conservationwork on their land because they believe that theyshould address the pollution for which they areresponsible. Much of the time, however, they cannotafford to do the conservation work. As a result, SNC’sprogram helps them tremendously. In addition,farmers may be participating in these programs as aresult of concerns about the regulatory consequencesof failing to address pollution problems. They wouldrather voluntarily put in a few dollars of their ownthan have the government force them to implementBMPs.

Dowell asked Ringhausen if he has looked into therole of farmland preservation in terms of sedimentreduction – for example preserving farmland fromresidential development. Ringhausen replied thatthey have considered it, but have not yet becomeinvolved, as it does not quite fit in with what they aredoing. So far, the farmers have been simply sellingtheir land to the developers for a lot of money.


A WETLAND MITIGATION BANKING PERSPECTIVEGeorge I. Platt, Florida Wetlandsbank, Inc.

Platt outlined the legal and financial mechanismsthat help make mitigation banking successful.

The first mitigation bank sponsored by FloridaWetlandsbank was in Florida in the early 1990s, priorto issuance of federal guidance or state legislation onbanking. The bank operated under a permit that gavethem a starting point but left them to work out thedetails. The permit, for example, did not dictate theprice of credits.

It has now been ten years since the federal agenciesissued the mitigation banking guidance. It is a creditto government regulators and ingenuity of privatesector that banking has come as far as it has. Thereare nearly 400 mitigation banks permitted across thecountry, and over 35 in the state of Florida alone. Thebanking industry in Florida has thrived for severalreasons: there are many wetlands in the state, rapiddevelopment is occuring, the state passed wetlandslegislation that mirrors the federal wetlands laws,and wetlands are regulated at the local level.

Wetlandsbank supports the no net loss goal becausethe more wetlands mitigation that is required, thegreater the demand for credits. The 1995 bankingguidance, as well as other federal policies that directmitigation, have many parallels to water qualitytrading. All of these provisions have been importantin encouraging mitigation banks. Similar provisionscould support the development of water qualitytrading, as well as encourage farmers and largelandowners who are near listed waterbodies to takeaction by working through bankers, brokers, orcooperatives.

The banking guidance establishes the specific rightsand obligations related to proposed mitigation banks.It requires a detailed description of the restoration,enhancement, or creation of the bank site, timingissues, success criteria, the type and number ofcredits, and the credit release schedule. The releaseschedule is directly linked to meeting specificmilestones. The federal mitigation bankinginstrument, and often a sister permit at the state

Legal and Financial Liability –Issues in Mitigation Banking andWater Quality Trading


level, establish legal duties that the banker mustmeet in order to commence and continue sellingcredits. The mitigation bank service areas aregenerally watershed-based, but banks may also sellcredits for linear impacts, such as pipelines andrailroads.

The issue of the transfer of liability is absolutely keyto the success of the mitigation banking market. Inthe early days of banking there was skepticism aboutthe practice. Although developers did not fullyunderstand banks, they did not want the five-yearobligation for monitoring a mitigation site on theirown. Some developers realized that they could buycredits and transfer that legal liability. Thischaracteristic is an essential component of whatmakes mitigation banking successful. This sametransfer of liability must be developed for waterquality trading, perhaps through the NPDES permit.

Under the mitigation banking instrument, the bankeris responsible for the creation of a trust fund thatsupports long-term management. This is unlikely tooccur in water quality trading. It is more likely thatthis continuing obligation would be handled througha trust fund or some financial assurance. The long-term management responsibilities in banking arevirtually in perpetuity. Each time a banker sells acredit, they are required to post money in a trustfund, which generates income for perpetualmaintenance. The banking guidance states that “it isextremely important that an enforceable mechanismbe adopted establishing the responsibility of the banksponsor to develop and operate the property.”

Financial assurances are often enforced by state orlocal agencies designated in the mitigation bankinginstrument. The process of working with the MBRT tosecure a banking instrument is collaborative and cantake two years. It is an arduous process and requiresthe banker to invest quite a bit of money up front.Paying for land up front is unpopular because thecost of land in many states is astronomical. Oneoption is to find a joint venture partner that alreadyowns the land.


Establishing a bank requires several types of financialassurances. The banking guidance requires thebanker to secure sufficient funds, or other financialassurances, to cover the contingency actions in theevent of a bank default or failure. The greater the riskof failure, the higher the financial assurancesrequired. Financial assurances may be in the form ofperformance bonds, irrevocable trusts, escrowaccounts, casualty insurance, letters of credit, and inthe case of government operated banks in Florida,legislatively dedicated funds. States typically regulatein much greater detail the type of financial assuresthat are required. In Florida, bank sponsors can berequired to post bonds that are 110 percent of thecost of the construction and implementation. Thosebonds are reduced and phased out as certainmilestones are met. The long-term trust funds are notused until after the five-year monitoring period. Onthe other hand, if banks are constructed in advanceof the sale of credits, financial assurances forconstruction need not be posted. This requirementwould be different in the water quality tradingcontext.

The banking instrument includes a credit releaseschedule. For example, the bank sponsor may beallowed to release credits for sale after securing aconservation easement, prior to completing any majorrestoration work. Other milestones for credit releasemay be the eradication of exotic species, re-establishment of hydrology, planting, meeting certainsuccess criteria, and completing the five-yearmaintenance and monitoring period. As successcriteria are met, the amount of financial assurancesmay be reduced accordingly.


In the mitigation banking context, the MitigationBanking Review Team process has “boxed the risk” offailure by requiring financial assurances as a backup.The same will hold true for water quality trading,where risk needs to be “boxed.”

The amount of planning that takes place before abanking instrument is secured is key to the success ofbanking. Collaborative consensus building takes along time, but once an instrument is submitted, theprocess runs fairly smoothly. Although painful, if theprocess did not exist, it would be much more chaotic.


A WATER QUALITY TRADING PERSPECTIVECyrus Jones, Washington Suburban SanitaryCommission

Wastewater treatment plants (WWTPs) have verymixed attitudes toward the Clean Water Act andNPDES permits. On the plus side, the CWA and itsregulatory structure establish clear goals and rulesfor plants and regulators. In general these rules arepractical and achievable. The biggest benefit to theregime is the ability of WWTPs to use the dischargepermit as a shield. If a plant discloses all dischargesin a permit application and operates in fullcompliance with the approved permit, it cannot beaccused of excess or inappropriate discharges. Thisrelates to water quality trading as well. If tradingregulations and legislation are carefully structured,then permits will serve as a shield against tradingliability issues.

There are several characteristics of the CWA thatwastewater treatment plants dislike. First, strictliability is placed upon wastewater treatment plants.Second, there are multiple levels of consequence forviolations. Penalties can range from a statementrequesting improvements to prevent recurrences of aproblem, to a considerable amount of federal controlover how the plant is operated, to the possibility ofsevere civil and criminal sanctions. Such strict, overlyprescriptive state or federal controls result in badpublic relations. Finally, it is expensive to complywith the CWA.

The realities of NPDES permits and trading are suchthat legal liability is not transferable. Trading may beestablished by incorporating trades into NPDESpermits. The elements that may be required in thepermit and/or fact sheet include a description of howthe trade is designed and how it is consistent withwater quality standards. The permit must also specifyhow it is consistent between trade design, units andaveraging periods.

There are several optional approaches forincorporating trades into the NPDES permit regime.Trading may be stipulated in a general or watershedpermit, the permit can reference the state’s adoptedtrading program, or trading rules may beincorporated into the permit.


Legal and Financial Liability –Issues in Mitigation Banking andWater Quality Trading

Sound trading programs can minimize legal liabilities.If designed appropriately, such programs can alleviatepoint source concerns and create more demand fortrading. In the process of establishing a sound tradingprogram, all of the issues of legal liability by allparties (EPA, state, dischargers, nonpoint sourceinterests) can also be addressed. Trading may alsoserve to minimize legal liabilities through soundplanning on the part of the WWTP, careful assessmentof risk of default by the credit supplier, and thedevelopment of a carefully constructed contract withthe credit supplier (e.g., biosolids contract). Liabilitymay also be minimized through a “reconciliation andtruing up” period at the end of the averaging period,existence of an emergency or backup source ofcredits, and finally, regulatory recognition andcertification of the credits


The goal of the facilitated discussion was to identifyoptions for addressing or transferring liability in thewater quality trading arena to stimulate marketdemand, and to discuss the potential strengths andlimitations to these approaches.

Although there are limited opportunities fortransferring liability in the water quality tradingcontext, the contract with the seller could be used totransfer some liability. For example, a sludge contractwith a seller addresses liability by enabling one partyto sue the other if they do not meet their contractobligations. Participants stressed that any schemeneeds to be enforceable by EPA and private citizens.The current NPDES process allows for significanttransparency in monitoring and reporting. Any waterquality trading program that transfers pollutioncontrol responsibility to another entity must includethe same level of transparency.

Another participant proposed that state agenciescould be responsible for monitoring and enforcement.These agencies can verify the monitoring process andresults. The permit itself should identify who isresponsible for monitoring.


A participant suggested that a third-party could verifyand certify credits to avoid criminal liability. Thiswould be a good solution since states do not currentlyverify compliance by checking that the informationcontained in discharge monitoring records isaccurate.

It was recommended that sellers could be required inthe permit to post bonds or other financialassurances if they plan to sell credits. If the monitor(e.g., the state) determines that the project is failing,then the beneficiary agency named under the bondwould have the right to call the bond and wouldcontract to have the work performed.

Another participant suggested that a third party canplay the role of broker by establishing an insurancepool. Some of the credits generated would accrue tothe pool. For example, the Miami ConservancyDistrict is currently acting as a third party in theirwatershed. In this case, the permit holder retains fullliability, contracts with all permit holders, andestablishes an extra credit insurance pool using thecredits created through the trading ratios applied toeach trade. The sum of credits generated at a highercost accrue to the insurance pool and are protected.

A participant commented that water quality trading,like mitigation banking, should allow for the advancesale of credits. The credit provider must complete thework before selling credits to a buyer becausenutrient reduction needs to be concurrent with creditgeneration. One participant emphasized that theviability of mitigation banking is in part due to thefact that banks are developed in phases.

There should be flexibility in the financial assurancesto allow for adaptive management and the dynamicvariability/fluctuations related to water quality.

One participant stressed that the choice of mitigationratios can impede the development of a water qualitytrading market. Risks should not be dealt withthrough ratios because they tend to reduce the valueof trades.


There was some discussion about the timing of creditgeneration, certification, and trades and how thesefactors are dependent on the pollutant at issue. Theissue of selling credits in advance of generatingcredits is preferable in the wetland mitigationbanking context. In the water quality context, itsacceptance will differ based on the pollutants beingaddressed. If the trading scheme is expanded beyondnutrients, there will be a timing problem (e.g., algalblooms, ammonia needs to be taken out at the sameplace/time) and banking/brokering for water qualitycredits will not work. It would be very difficult to timepresales to predict flows. Another participant statedthat it is important to think adaptively with waterquality and consider seasonal and parameterchanges. Installation can be done in advance as longas reduction is continuous.


Craig Denisoff, Wildlands, Inc.

Denisoff offered participants a general definition ofwetland mitigation banks: large areas of restored orpreserved wetlands set aside to compensate forimpacts to wetlands. Mitigation banks are formallyapproved by regulatory agencies to provide mitigationcredits. Banks are designed to create, restore, and/orenhance wetland habitat. Bank sponsors areauthorized to sell credits according to a credit releaseschedule, which is formally reviewed and approved,and contains financial incentives to meet milestones.

Denisoff stated that mitigation banking offers severalecological advantages over mitigation conducted bypermittees, including mitigation in advance of theimpact, large preserve size, biological improvements,financial benefits, and mitigation conducted inreference to performance standards. In addition,mitigation sites are protected in perpetuity and bankshelp meet the nation’s goal of no-net loss of wetlands.One of the key benefits of mitigation banks is theirability to verify performance and quantify success.

The mitigation banking instrument is the documentthat outlines the physical and legal characteristics ofthe establishment, operation, and maintenance of thebank, as well as the legal, financial, and biologicalassurances that must be met. Legal assurances maybe in the form of deed restrictions (recorded),conservation easements (recorded), legal title orproperty rights, a Declaration of Trust, or a trust andbank document. Financial assurances may be in theform of construction bonding, interim managementsecurity, contingency security, or a landmanagement/endowment account.

Denisoff provided some examples of typical biologicalperformance standards, which may cover vegetation,hydrology, and non-native vegetation. For example, abank may be required to have 95 percent native cover,tidal inundation twice a day and seasonal ponding,and less than 5 percent non-native vegetation. Banksmay be required to monitor vegetation and hydrologyat specific intervals, such as in years 1, 2, 3, 5, 10, and 20.


The Banking Experience:Environmental PerformanceStandards & Credit Release

Performance standards should be based on a numberof different criteria. Because wetlands are habitat-based systems, performance standards are oftenbased on reference sites. A reference site is generallya naturally occurring wetland that demonstratessimilar variation in functions as the wetland typebeing replaced. Vegetations standards are based oncomposition, cover, survivorship, and wetland types.Wildlife standards examine the type and number ofspecies as well as their life stages. Hydrologystandards consider inundation, duration, and floodregime. Soils standards take into accountgeomorphology and accretion/erosion. Both hydrologyand soil standards would be important for waterquality trading.

Another consideration is natural dynamicequilibrium. Changes in the environment need to bedocumented to allow for adaptation. Adaptivemanagement for dynamic ecosystems is oftendiscussed, but rarely implemented because regulatorsprefer to operate within static systems they can bemeasured on a regular basis.

To determine if performance standards are being met,mitigation banks often rely upon third parties,consultants, or the bank sponsors themselves toconduct monitoring. Monitoring reports are sent tothe regulatory agencies. No fewer than three agenciesreview the reports. If the agencies feel thatperformance standards are not being met, the banksponsor is required to take remedial action, such asreplanting, reseeding, adjusting grades, orestablishing supplemental irrigation.

Once predetermined performance standards are met,the bank can release mitigation credits. A credit is anagreed upon unit of measurement that represents onegood or a number of goods. Once a credit is defined, itcan still be changed in the future, if appropriate.


In order to determine the increase in wetlandfunction and value that results from the restoration, abaseline must be established for a variety ofparameters, such as ecological values, floodattenuation, and water quality. A wetland delineationmust first be conducted to determine the totalwetland acreage. Then the bank sponsor develops arestoration plan, which estimates the value that willbe added to the existing wetlands. This added value iswhat eventually will be sold. Wetland restorationprojects will generally get full credit for the wetlandacreage restored. Wetland enhancement generallyprovides 50 percent of the proposed credit values.Another approach to assigning credits is to considerthe array of environmental goods that are beingprovided. In this case, flora and endangered speciesmay be measured in addition to wetlands todetermine the value of a credit.

Once the credits are established, a credit releaseschedule is developed. In California, 20 percent of abank’s credits can be released once the bank sponsorsigns the conservation easement agreement. Anadditional 30 percent of the credits are released afterthe mitigation bank is built. Once hydrologystandards are met, another 30 percent of the creditsare released. The final 20 percent of credits arereleased when all vegetation requirements are met,which often includes meeting a series of interimmilestones. It usually takes three years to meet thefirst three milestones and an additional year to meetthe final vegetation milestone.

Bankers believe there are both pros and cons to theestablished credit release method. The benefitsinclude a guaranteed, high quality product, productassurances, interim milestones, public acceptancebecause of the credit release process, and economicincentives. The drawbacks include reduced sales ratebecause all of the product cannot be sold upfront, thebanker must invest a lot of money and wait years tosee a return, less certainty because there is noabsolute guarantee that a bank will succeed, greaterliability, and a competitive disadvantage to otherforms of mitigation. It is necessary to make sure thereis a level playing field between banks and other formsof mitigation.

Any attempt to use the banking experience to informwater quality trading will require the development ofwater quality performance standards and cleardefinitions of credits. It is necessary to have aquantifiable good, whether it is nitrogen,phosphorous, sediment, or some combination thatcan be grouped under a Water Quality Unit. Theremust also be a generally accepted unit ofmeasurement that establishes how many pounds orunits of water quality benefit one acre of buffer strip,or one acre of managed marsh, or 100 linear feet ofstream, equals. Once this per unit standard isestablished, the release of water quality credits canbe based on the percent completion of this unit.Finally, it is necessary to monitor the water qualityinflow and outflow on a site-specific and watershedbasis.

Finally, the market recapture mechanism needs to beslightly different than that in mitigation banking. Inmitigation banking, banks sell a plot of land one timeand then manage it forever. In addition, credits aresold only once. Water quality trading will need asystem that works on an annual basis, or based on thelength of the permit (three to five years). Paymentwill need to occur on an annual basis or be based onwater units or flow, allowing for adaptivemanagement based on flow and other variables. While water quality trading will necessitate thedevelopment of a different economic model, thewetland mitigation banking model can provide somevaluable lessons.


Questions & Answers

Mehan asked Denisoff whether the metrics hesuggested for water quality trading are limited tobrokers who happen to be mitigation bankers orwhether the metrics could be generalized to brokersin the water quality arena. Denisoff responded thathe feels the metrics can be generalized. Bankers canplay an important role in acquiring large land parcelsand getting projects off the ground. However, becausewater quality trading projects could encompass tensof thousands of acres, it may be necessary to involve athird party broker.

Coan asked Denisoff how difficult it was to negotiatethe definition of a credit. Denisoff responded that itwas a very lengthy process to develop a methodologyfor defining credits for vernal pools. But once thecredit definition was accepted, it was very easy towork with.

Schubauer-Berigan asked how regulators define thenumber of credits that must be purchased to offsetpermitted impacts. Denisoff explained that, as abanker, he supplies habitat credits, which arereleased when performance standards are met. Thedemand is created by permitted impacts. Bankers arenot involved in the demand side of the equation. Theregulator overseeing the permitted impactsdetermines how the wetland will be replaced.Schubauer-Berigan also asked why, in Denisoff’sexample, these projects that were designed to offsetwetland impacts have been allowed to sell creditsover and above the wetland replacement values.Denisoff responded that the regulators wanted totake into account several variables. In the exampleprovided, the same model was applied to both thesupply and demand side.

Kieser asked Denisoff how typical it is to includewater quality credits in the overall credit assessmentof his banks. Since nutrients in a trading system arefairly cheap, he asked Denisoff if it would be morebeneficial to include water quality credits along withwetland credits in a bank, or if it would be morebeneficial to separate those credits. Denisoffresponded that wetland banks do not usually monitoror manage for water quality. They do not ask to bepaid for the same thing twice. Bankers could make



changes to wetland mitigation sites to get addedvalue for water quality and do the monitoringrequired to determine if success criteria are met. TheNational Mitigation Banking Association has alwayssupported the ability to bundle credits. A bank couldinclude water quality credits if they can demonstratethere is value added. This would require a slightlydifferent system because with wetlands credits aresold once. Water quality trading would require moreadaptive management and stricter monitoring. Therewould be value added for including water qualitycredits in a bank, but it will cost more to generatethese credits.

Jones asked whether or not wetland science is wellenough developed to accurately quantify and verifycredits, particularly the uptake of nutrients. Denisoffreplied that there have been a lot of studies. It is“generally” accepted that mitigation banks canreplace lost functions, and both the NationalAcademy of Sciences and the Society of WetlandsScientists have come out in support of mitigationbanking as a method for achieving no-net-loss.However, there is still some skepticism. It is easier toquantify credits with native wetlands than withtreatment wetlands. Some types of treatmentwetlands should not be defined as natural wetlands,but rather considered managed marshes. Houghadded that EPA has catalogues of wetland assessmenttools. Some of the assessment tools are specific towetland type and others are specific to regions. EPAhas reached a certain comfort level with rapidassessment tools that have been developed for thepurposes of mitigation conducted under CWA §404.These tools can be used to estimate potential benefits(credits) at a bank site, as well as losses (debits) atimpact sites. It would be difficult to layer waterquality credits on top of a mitigation bank created togenerate credits under the §404 program. This wouldprobably overtax the assessment tools developed for§404.


Alderman commented that the chart Denisoffpresented23 depicting proposed credit values varieswidely from region to region and state to state. Thereis an excruciating process, especially in Florida, todetermine the increase in wetland benefits. The sameassessment methodology must be used at the impactsite and at the mitigation bank site so credit can becompared in the same manner.

Biorn-Hansen asked how bankers avoid thetemptation to only construct the wetland types theyknow will receive the most credit, such as vernalpools. Denisoff responded that the regulatoryagencies that approve the design of banks have asignificant say in the wetland types that arerepresented.

Hurld addressed Denisoff’s suggestion that waterquality credits could be purchased through an annualpayment/fee based on water units/flow.24 She asked ifthis system would create a disincentive foraggregators to make long-term investments if there isno guarantee that there will be a market five or sixyears. Denisoff responded that the issue would benecessary to consider when designing any program.Credit definition would depend on the type of project,e.g. a five-month buffer or a several-year marsh. Thesolution may be a mechanism that locks in thecontract and allows for variable factors. Adaptivemanagement must be a component that is built intothe water quality trading model. There are moredynamic variables in the water quality tradingcontext than in wetland mitigation banking.


The facilitated discussion sought the participants’input on the types of environmental performancestandards that are needed for water quality trading toensure improvements in water quality, as well as thepotential strengths and limitations to using theseenvironmental performance standards.

The discussion started with a clarification of howperformance standards are defined. Performancestandards are the measures used to determinewhether or not a mitigation project is meeting itsdesigned goals. Schary stated that how performancestandards will be used depends on the design of thewater quality trading program. In Boise, Idaho, forexample, credits were tied to meeting performancestandards. The risk was managed by making creditsgood for one month only. The NPDES permit holderwas required to demonstrate that the BMP is still inplace and installed to the defined specifications.

Klimek stated that performance standards for waterquality trading must be tied to baseline watershedneeds, which will depend on specific characteristicsof the watershed. Demand in water quality tradingwill be generated by the degree and characteristics ofwater quality impairment. The baseline will need tobe well understood to establish performancestandards. This information must be shared withthird party brokers so they know where projectopportunities exist.

Hey stated that performance standards and designcriteria are separate issues. Design criteria willdetermine performance. In water quality trading,performance standards are water quality based. Theycan be divided into concentration and load, and thendivided into temporal distribution(seasonally/monthly/daily) and longevity ofperformance.

23 See slide 23 at: http://www2.eli.org/pdf/wqtforum/presentations/Denisoff.pdf.

24 See slide 35 at: http://www2.eli.org/pdf/wqtforum/presentations/Denisoff.pdf.


Urban stated that the performance standards used inbanking are designed to produce a functionalwetland. In the water quality context, the goal is toreduce a specific pollutant in a defined timeframe.Each practice will have its unique standards ofperformance and will be tied to an estimatedpollution reduction.

Regas stated that with point/nonpoint source trading,the specificity and certainty of the performancestandards that apply to the nonpoint source will needto be comparable to those that apply to the pointsource. Urban replied that in the banking contextthese risk issues are addressed though the definitionof credits, credit ratios, and credit allowances.

Jones cautioned that NPDES permit limits areestablished to meet very specific water quality goalsfor specific pollutants. When point sources seek tobuy credits, those credits will need to be expressed inexactly the same terms as those in the permit, e.g.,pounds of a certain pollutant per year or per month.Point sources want to buy credits simply to offsetpermit requirements. They are not interested inmeeting larger watershed goals. Parker respondedthat although she agreed with Jones’s statement as itapplies in most markets, in some areas there is agrowing desire to manage all systems based onbiological and ecological integrity. Water qualitystandards will be based on these attributes. Forexample, in EPA Region 9 states are developingnutrient criteria in a watershed context. Theirnutrient standards incorporate ecologicalcomponents, such as biological integrity and specificvegetation and aquatic life attributes. If theseprograms are monitoring and managing a system in awatershed context, then point and nonpoint sourcesare trying to meet the in-water body standard.Pollution reduction allocations will be based not oneach source, but rather on the total watershed needs.Many of the permits in these areas include ecologicalattributes in their limits. Hey replied that maybesources could hedge risk by buying more credits ifthey were still below the cost of meeting the permit.Jones said that WWTPs would not buy more creditsthan they had to unless it would lessen risk.



Noyes expressed concern that it may be difficult togenerate demand based on lost function. Ettingerstated that in order to retain the certainty andmonitoring transparence that is built into the NPDESprogram, trading programs need to providemonitoring data on a regular basis. Without thisoversight, the assumption will be that people will tryto game the system. Ideally there would be amonitoring system that allows the public to see thereductions. The second best option is to monitorregardless of whether BMPs are being implemented.However, the BMPs would need to have proven resultsand a report will need to be submitted in order toallow the public to take action if a BMP is notworking. Finally, the wetland mitigation bankingmodel is based on more qualitative measures thanwater quality trading, which is based on a poundreduction designed to meet a specific permit limit orTMDL.

Joyner agreed with Ettinger, and responded toRegas’s comments regarding the desire to maintainthe level of certainty from buyer to seller. In theregulatory arena, there are two different models. Thefirst is the NPDES wastewater program that relies oneffluent monitoring. The second is the stormwaterregulatory program that relies upon BMPs. Joynerstated that many of the concerns raised about BMPsare currently being addressed through the NPDESstormwater program. Effluent from these BMPs is notmonitored, nor can it be monitored. If BMPs are to beused in water quality trading, with little or nomonitoring, design criteria must be outlined toreassure the environmental community. Models couldthen be developed to demonstrate the amount ofpollution reduction and the number of credits thatcan be generated with the installation of specificBMPs.


Regas agreed with Joyner and suggested that waterquality trading must be able to offer the same level ofmonitoring, risk, and certainty as the standard pointsource regulatory program. There is a level ofcertainty about the amount of pollution in theeffluent coming from WWTPs that is currentlyreflected in discharge monitoring records.Stormwater monitoring offers a different level ofcertainty. She suggested that the participants shouldconsider how to achieve comparable levels ofcertainty and risk between the buyer and seller in thewater quality trading context. Developing a “one sizefits all” approach to managing risk in the brokeringarena will be difficult.

Ringhausen, building on the comments of Joyner andRegas, stated that when dealing with nonpointsources on a watershed scale, there are manyvariables that can affect performance. It may benecessary to rely upon generally accepted andreliable engineering standards to estimateperformance. Monitoring each nonpoint source wouldbe virtually impossible.

Collier asked what incentive the private sector wouldhave to install multiple buffer strips or conductstream bank restoration projects across a largewatershed. The BMPs would require monitoring atregular intervals to ensure they are still functional(e.g., a path cutting through a buffer strip cancompromise its effectiveness), which may beconsidered too onerous for the private sector.

Korb first pointed out that participants had not yetaddressed the need for nonpoint source effluentreductions to be contemporaneous with the requiredpoint source reductions. This would affect the abilityto phase in credits as projects are completed. Second,he stated that water quality trading is most likely todevelop in areas where pollution reductions cannotbe achieved through point source reductions. Tryingto meet water quality goals through nonpoint sourcereductions will involve a much lower confidenceboundary. Therefore, point/nonpoint source tradingperformance standards will have to factor in some ofthis uncertainty through other means, such as tradingratios, average timelines for achieving reductions,and relying on research estimates for BMP pollutionreductions instead of monitoring. Otherwise, waterquality trading programs would be imposingrequirements that cannot be met. In areas where it ismore difficult to achieve water quality improvementsthrough traditional means, regulators may be morewilling to accept risk.

Schary stated that water quality trading does notraise new issues for TMDL implementation; it onlyserves to magnify them. In the Lower Boise example,there are not many point sources available to workwith to meet pollution reduction goals. TMDLs willneed to be met through nonpoint source reductions.In trying to meet TMDL goals, there is the same levelof uncertainty surrounding BMPs with or withouttrading. Trading is supposed to create more certaintythat the load allocation will actually be achieved. Inthe Lower Boise program, point sources are asked tobuy credits that are based on a suite of approvedBMPs. They are required to ensure that the BMPs areinstalled and maintained adequately. This leads tomore certainty than when TMDLs are addressedthrough cost-share programs where there is littleconfidence that farmers will go beyond installingBMPs to maintain them.




Robertson emphasized that high standards areessential for the creation of a successful water qualitytrading program. Wetland mitigation banking alwayshad very high standards for those entering themarket, and it was these high standards thatmaintained credibility and allowed mitigationbanking to succeed in most regions. The absence ofhigh standards for banking in other regions causedthose markets to fail. He questioned why there is anassumption that site-by-site monitoring would be sodifficult or expensive in water quality trading. Fromthe legal standpoint, he agreed with Ettinger’s pointthat having clear liability so failure can be remediedwill be decisive.

Schubauer-Berigan reminded everyone to think aboutthe potential gains that can be made throughmanagement practices, rather than through theinstallation of BMPs. New technologies can be used toverify that specific management practices areapplied.

Corbin stated a concern that the science is only asgood as the science today and this will evolve overtime. In the Chesapeake Bay, a TMDL dictates thatspecific standards need to be met by 2010. If thesestandards are not met through a trading program, itis unclear what the consequences would be. Corbinsupported Ettinger’s comment that it may not be inthe best interest of an environmental advocacyorganization to support a trading program if doing someans a reduced ability to monitor and enforce.

One participant suggested that flora can be used as aperformance standard. Such a measure could be usedto demonstrate overall program success, unlikeindividual BMPs. For example, an Index of BioticIntegrity (IBI) or Invertebrate Community Index(ICI) could be used as performance standards.

Another participant added that nonpoint monitoringis unappealing for sellers and buyers because of thehigh costs. Attempts to measure nonpoint sources toa high enough degree of accuracy will essentially leadthem to be as regulated as point sources. It will benecessary to develop appropriate models andestablish accepted BMP levels. Monitoring monthlydischarge levels is not possible so there will always beuncertainty. Ratios can be used to guard againstuncertainty.

A participant stated that watersheds are too complexto measure accurately. It is of concern that the legalcommunity will not accept non-numericmeasurements, which will lead to litigation overmodels and formulas. The science for measuringambient water quality and BMPs needs to improve. Aparticipant responded that there are alternative waysto audit and ensure quality besides simply measuringevery nonpoint source. TMDLs themselves are basedon models that are logical to use.


A THIRD PARTY AUDITOR PERSPECTIVE Hank Habicht, Global Environment & TechnologyFoundation

Habicht focused on the role that third parties canplay in certification to accelerate banking and tradingapproaches in the water sector. He suggested thatthird parties can help advance innovative andmarket-based approaches to bring water qualitytrading to the next level.

The Global Environment & Technology Foundation(GETF) is a not-for-profit organization that wasestablished in 1988. Its mission is to mainstreamsustainable development with information networks,tools, and technologies. GETF serves as a bridgebetween the energy and environmental sectors at thefederal, state, and business level, focusing onpartnerships in the fields of energy, climate, water,and environmental security. GETF leverages thesepartnerships and resources to deploy cleanertechnology and forms environmental managementsystems that reduce doubt and create the conditionsthat allow ideas to flourish.

GETF recognizes the compelling need to try newapproaches. The Chesapeake Bay experience, forexample, demonstrates that limited funding can leadto new and innovative solutions. Farming is part ofour culture and economy and must be a part of thesolution. Communities and regulators at the state andfederal level are critical components as well.Together, these players contribute dynamism andovercome many challenges. There are credibilityissues with high stakes and credible third parties canhelp break up the inevitable logjams.

Habicht offered several examples of the role playedby third party auditors. An EnvironmentalManagement System (EMS) is a set of processes andpractices that an organization can adopt to reduce itsenvironmental impacts and increase its operatingefficiency.25 Third parties have become involved inregistering EMSs under ISO 14001, the international

26 National Academy of Public Administration. “Third-Party Auditing of Environmental Management Systems: U.S. Registration Practices for ISO 14001.” May 2001. http://www.dep. state.pa.us/dep/deputate/pollprev/Iso14001/NAPA.pdf

27 See id.28 See: http://www.astm.com.29 See: “Standard Guide for Process of Sustainable Brownfields

Redevelopment,” at: http://www.astm.com.25 U.S. Environmental Protection Agency. “Environmental

Management Systems.” U.S. Environmental Protection Agency.http://www.epa.gov/ems/.

Bank Review and CertificationRequirements


standard for EMSs. Third parties also provideverification that organizations conform to the ISO14001 standard.26 However, a 2001 report27 foundthat, while there are economic benefits to third partycertification, the system still needs a lot of work.Although certification has value, there remaincredibility issues in the EMS field.

In the sulfur dioxide and carbon dioxide tradingmarkets, verification is extremely complex.Continuous Emissions Monitoring (CEM) data can beused to monitor direct emissions. Because CEM datacan be used to monitor stationary sources, such assulfur dioxide, third parties may play less of a role inthese markets. However, carbon dioxide emissionsoffer far more challenges, since most carbon dioxideemissions are from non-stationary sources. WRI iscurrently trying to develop a role for third parties inverifying carbon dioxide emissions.

In the brownfields context, American Society forTesting and Materials (ASTM), a non-profitorganization that provides “a forum for thedevelopment and publication of voluntary consensusstandards for materials, products, systems, andservices,”28 has developed a standard guide forsustainable brownfields redevelopment.29 The guidewas developed to provide protocols for how to developbrownfields through a process that actively engagesproperty owners, developers, government agencies,and the community.

Another example of a third party role, the BiosolidsPartnership, was formed in 1997 as a not-for-profitalliance with the National Association of Clean WaterAgencies, Water Environment Federation, and EPA.The organization works to “advance environmentally

30 See: http://www.biosolids.org.



sound and accepted biosolids managementpractices.”30 This was a pioneering effort by thefederal government to promote third partycertification.

Industry standard programs that have third partycertification include Responsible Care, the chemicalindustry’s performance initiative, as well asecoadventure certification programs, air purifiers,and livestock BMPs developed by the AmericanNational Standards Institute (ANSI).

There is a real role for third parties in certifyingwater quality trading programs. Certification isworthwhile when it will help advance public benefitsand statutory goals, when it can provide an economicvalue (e.g., compensated transfer of responsibility),and when certification is based on agreed-upon,reasonably objective evaluation criteria. Third partycertification programs must also be provided withstandards or accreditation and must be sanctioned bythe regulators overseeing the programs. Stakeholdersmust believe that the process yields positive netvalue.

The bottom line is that the stakes are too high todelay the implementation of third party certificationin water quality trading. There is an immediate needto talk to the communities of interest and theexperts, including the insurance and finance sectors.Third party certification should then be implementedin a pilot program and evaluated and improved basedon feedback from the pilot.


A WETLAND MITIGATION BANKING PERSPECTIVE David Urban, Land and Water Resources, Inc.

Urban stated that wetland mitigation banking canoffer helpful experience on how to achieve the overallgoal of advancing point/nonpoint source trading on awatershed scale. First, however, it is necessary tounderstand the role played by the Mitigation BankingReview Team in certifying credits and transactions,the role of the Wetland Mitigation BankingInstrument (MBI) in certifying mitigation banks, andhow the MBRT process has affected the wetlandmitigation banking market.

The MBRT is an interagency group of federal, state,tribal and/or local regulatory and resource agencyrepresentatives that are signatories to bankinginstruments and oversee the establishment, use, andoperation of mitigation banks. The MBRT helpsdevelop the MBI, which is the document thatestablishes bank goals and objectives, outlinesfinancial assurances, contingency plans,responsibilities, compensation ratios, and provisionsfor long term management of the bank. The MBI alsospells out the agreed-upon performance standards, bywhich the bank will be measured.

Chart 1: Comparison of Wetland Banking and Water Quality Trading

Bank Review and CertificationRequirements


The MBRT process ensures that the bank will bedesigned to meet its stated goals. However, mitigationbankers complain bitterly about this process. Thethree main grievances are that there are notimelines, it is extremely difficult to obtainconsensus, and the regulatory agencies are oftenunwilling to commit to anything because of thecomplexity of technical issues and financialassurances. However, once the parties haveparticipated in this process several times, future bankreviews and approvals go more smoothly.

Another problem the MBRT must overcome issatisfying a variety of regulatory requirements,including those in Clean Water Act §404, Rivers andHarbors Act §10, USDA Food Security Act,Endangered Species Act, National EnvironmentalPolicy Act, and others. There are often additionalstate regulations that must also be considered. Thisadds another hurdle to receiving an approved MBI. InChicago, for example, federal agencies do not includestate agencies in banking agreements, so themitigation banks must secure two MBIs, one with thestate and one with the federal agencies.

Urban presented a chart comparing some of thedifferences between wetland mitigation banking andwater quality trading (see Chart 1).

Mitigation bankers provide a product that meetsregulatory requirements. The MBRT certifies that thebanker has created this product acceptably. In waterquality trading, third parties could provide a similarproduct.

The purpose of a wetland mitigation bank is to makethe regulatory process easier for the permittee andthe permit reviewer. In water quality trading,dischargers are required to secure an NPDES permitfrom one primary regulatory agency. Securing an MBIrequires bankers to negotiate with numerousregulatory agencies. The permittee can receive thepermit faster because each agency does not need toreview as much.It is harder to transfer liability inwater quality trading because of the continuousactivity. Also, there is no real need for a “waterquality review team” because only one agency isinvolved.

Wetland Banking Water Quality Trading

Action Requiring Permit One time activity Ongoing operation

Coordination and Jurisdiction

Agreement among multipleagencies having jurisdiction

One lead agency

Goals Consolidation of mitigationareas

Dispersion of mitigation areas

Permit Duration In “perpetuity” Defined period (e.g. five years)

Liability for PermitRequirements

Transferable to provider Non- transferable

Credits Acres/ linear feet/ functional lift Pounds of pollutants reduced




This session’s facilitated discussion focused onsoliciting participants’ thoughts on what mechanismscould be used to certify credits and transactions inwater quality trading. Participants were also asked toidentify the strengths and limitations of theseapproaches, as well as the roles that can be played bythird parties in the process.

One participant stated that the production of waterquality credits must be monitored in order to verifyreductions. A third party could be responsible forverification, but the NPDES permit holder mustreview the results. A third party could verify credits,much like the Food and Drug Administration stampsa side of beef. It would save a lot of grief for smallerentities. In wetland mitigation banking, banks aremonitored for an average of five years. It wassuggested that the potential water quality tradingmarket is huge and the funding is available toproduce the necessary data.

Another participant suggested that a third partycredit certification agency, rather than a broker,could certify credits, such as crop advisors in theagricultural realm. Water quality trading should findmore established parties like these to help with theprocess. Relying upon already established groups willincrease the public’s confidence in the program.

A participant suggested that the permit holder shoulddetermine who takes the lead in conductingmonitoring. Third parties will enter the market if it isin their best financial interest. Another participantwondered if there are actually two separate roles forthird parties – that of auditor and that of broker.

One participant stated that in a market-drivenscenario, the NPDES program can create buyers butnot sellers. The participant questioned what sellerwould want to participate in the market if there areextensive monitoring requirements. Sellers will onlyenter the market if the price is right.

Another participant commented that conservationagencies could be involved in verification of trading,rather than water quality agencies. A participantnoted that monitoring for performance could beimpractical on a site-specific basis. Monitoring mightbe better addressed through annual performance and

tracking, modeling BMP efficiencies, and factoring inrisk through credit allowances. Permittees could payfor further research efforts instead of actualmonitoring.

A participant stated that monitoring and directmeasurements could be used as an incentive forsellers to receive additional credits. Anotherparticipant added that monitoring all the BMPs in awater quality trading program is cost-inefficient. Thelaw of large numbers needs to be addressedspecifically in the watershed program design. Forexample, a discharger could get more value forreduction if they self-monitor. Buyers would pay morefor credits with more certainty. This appliesespecially to riverine areas.

A participant suggested that the government’s roleshould be to regulate the market for the purpose ofprotecting public health and safety. There should beregulatory consequences for the seller if they sell acounterfeit product. A contract between the thirdparty and the seller is necessary to transfer liability

Schary explained that in the Lower Boise program,permittees said they did not want to rely on thirdparty certification of credits. The permitteespreferred to take direct responsibility for verification.For their own satisfaction, the permittees could hirea third party to verify the reductions. The programfollows the Massachusetts Environmental ResultsProgram. EPA Region 10 and Idaho Department ofEnvironmental Quality have agreed to look at astatistical number of examples. In the beginning ofthe project they will probably monitor 100 percent ofthe BMPs to verify that the nonpoint sourcereductions are actually meeting their statedobjectives. However, the regulatory agencies are likelyto stop auditing every single trade once they haveconfidence that the program is running smoothly. Theagencies will likely work through the local Soil andWater Conservation Districts to verify BMPreductions. Because the districts are already out inthe field inspecting for their own cost-share projects,they can easily provide the regulatory agencies withvaluable information in the interim to help them


prioritize their auditing. Finally, EPA employs anotherthird party, a stakeholder cooperative, to recordtrades and make sure forms are filled out properly.

Regas supported earlier comments by Mehan andHabitch that government can inadvertently be abottleneck. The capacity of government is extremelylimited. The staff of state water quality andagricultural agencies has shrunk dramatically in thepast several years. The issue of capacity deservesparticular attention; government may be a limitingfactor for the development of water quality tradingmarkets if the programs are structured in such a waythat government agencies are designated as creditcertifiers. For this reason, it is important to considerthe role that third parties can play in certification, aswell as the potential conflicts of interest that mightarise. In addition, Regas noted the issue of transfer ofliability may have been mixed with the question ofwhether or not a certifier or broker can take on anyliability as well. She cautioned that these are twoseparate issues and she expressed confidence thatlegal mechanisms could be established to transferliability to third party brokers. Broad statements thatliability cannot be transferred to third parties mayconstrain creativity.

Ettinger remarked that addressing water qualitythrough the development of trading programs is azero-sum game for the environment. Althoughnonpoint sources may be a large part of the program,adopting water quality trading programs involvesrelinquishing controls on point sources. The debate isover how to allow point sources to remove nitrogenand phosphorus at a lower cost by giving them analternative. The dischargers are not going tovoluntarily strive to reach any reductions beyondwhat is required of them. Relying upon water qualitytrading programs to address this nutrient removalinvolves asking state agencies to divert scarce fundsaway from managing the environment to managingtrading programs that make it cheaper for pointsources to treat nutrients. Most states do not haveenough resources to manage the environment in


addition to managing trading schemes that reducepoint source costs. Environmentalists will fight thisunless states identify additional sources of fundingfor managing these programs.

Ettinger also pointed out that the forum has beenfocusing on two different pollution reduction models.He noted that Hey’s program is essentially designedto eliminate pollution through the installation oflarge treatment wetlands. This type of program ismanageable, could be self-certified, and the input andoutput of pollution could be easily monitored. Theother model involves individual farmers installingBMPs. Monitoring the output of effluent in theseprograms is not realistic. For the environmentalcommunity to be comfortable with the BMPapproach, the programs will need to demonstratewith certainty how much pollution specific BMPs canremove. The monitoring challenge under the BMPscenario will require verification that BMPs areinstalled. POTWs will not be capable of monitoringand overseeing numerous deals brokered withfarmers to install BMPs. Third party certification willbe necessary to ensure that BMPs are installed andmaintained. If third parties provide positiveverification for BMPs that are not installed, criminalprosecution for falsifying information would be anoption. Legislation could be developed for third partycivil or criminal liability. With third parties playingthe role of certification and verification, the onlygovernment role would be receiving and reviewingreports and carrying out enforcement. It is unrealisticto expect state agencies to invest any additionalresources above and beyond that which they currentlycommit to NPDES enforcement.

Kieser agreed with many of Ettinger’s points. Headded that some states, such as Michigan, are alreadyaddressing some of the concerns he raised. The statehas established an electronic board of trade. Ifsomeone wants to generate a trade, they are requiredto post it. Buyers, sellers, and notices of intent totrade must also posted and the state has a period toreview the proposed trades. Michigan’s legislativerules include penalties for credit generators that donot honor their obligations. In addition, NRCScertified planners must be used to design and verifyagricultural BMPs.



Raffini agreed with Urban that the majority of theliability is between the buyer and the seller. He addedthat third party credit certification can help ease anytrepidation point sources may have in purchasingcredits from nonpoint sources and may help get waterquality trading programs off the ground.

Joyner added that point sources in Florida havestated that the existence of a contract between abuyer and a seller is insufficient for addressing theirconcerns over liability from civil and criminalpenalties. The point sources want to see all of theliability transferred to the seller. Joyner alsoresponded to Ettinger’s concern about the allocationof scarce state resources. He stated that he had notheard anyone at the forum discuss the allocation ofstate resources to address TMDLs, which is atremendous issue. Water quality trading may, in fact,save state resources and address water quality in amanner that is the most cost effective.

Lucero stressed that the current science behindBMPs is very solid. The value of BMPs has beendetermined through modeling. The reductionpotential of BMPs is calculated in order to quantifycredits. The modeling approach can be an incentiveto bring sellers to the table. However, it must beunderstood that annual performance will be theminimum amount of time over which BMPperformance can be measured. He agreed withEttinger that the role of a third party should be toensure BMPs are installed. However, he does notagree that trading is a zero-sum game. Trading is alearning or teaching tool, such as cost-shareprograms. The landowners who receive money toinstall BMPs will learn the practice and recognize theeconomic and environmental benefits, theirneighbors will see the benefits, and the practices willeventually become an accepted part of theirbusinesses.

Coan said that in the Tar-Pamlico trading program,the point source covers the administrativeresponsibilities and state resources are not used.Nonetheless, the point source still saves money. Thepoint source agreement can require that the entitypay a third party, such as local soil and waterconservation districts, to collect data and verifyBMPs. The point source also pays a set amount tomaintain the program, regardless of whether or nottrades are taking place. As a result, if a trade takesplace, a new program does not need to be created tohandle it.

Hall stated that most of the water quality tradingprograms to date and the EPA trading policycontemplate that trading will not be a zero-sumgame. Trading will provide an incentive for nonpointsource pollution sources to contribute to the waterquality goal before they start selling credits. There inan expectation that nonpoint sources must reach abaseline before credits are generated.

Noyes stressed that there needs to be a standard ofeligibility for sellers entering the market.Furthermore, market dynamics will lead the markettoward BMPs that are more resilient, efficient, andcertain.


NUTRIENT TRADING PILOT, MULTICREDIT TRADING,& REVERSE AUCTION PROJECTS: CONESTOGA RIVERWATERSHED, PENNSYLVANIAAndrew McElwaine, Pennsylvania EnvironmentalCouncil

McElwaine began by outlining the currentenvironmental setting. Under the Clean Water Actthere is an assumption that point source permittingwill lead to improved water quality. The assumptionholds that technological improvements will result in adecrease in nutrients from publicly owned treatmentworks. However, a third of American waters currentlydo not meet the standards specified by CWA. Mostpollution comes from nonpoint sources and nutrientsare one of the top causes of water qualityimpairment. Nonpoint sources can be farms, urbandevelopments, or septic systems. In Pennsylvania, 88percent of their polluting nutrients come fromnonpoint sources.

Under the current conventional effluent managementregime, the regulator sets discharge limits for pointsources. Point sources then install technology in theform of end-of-pipe measures. This approach involveshigh compliance costs and offers little flexibility.

Nutrient trading programs, on the other hand,provide point sources with two options. They canadapt their facility to eliminate nutrient discharges,or they can pay for the reductions elsewhere. Underthe latter option, the buyer pays another entity tomeet or exceed its effluent limit and the sellerexceeds its environmental obligations by selling its“credits.” This approach can be described as the re-allocation of effluent loads (nutrients) among sourcesto meet water quality goals. The bottom line iscleaner water at a cheaper price.

Nutrient trading is a market driven approach toenvironmental management that can increase theavailable options for reducing pollutant loadings. Italso takes advantage of the fact that some pollutionsources find it easier (and less expensive) to reduce

Multiple Credit Types for a Single Project Site


than others. Nutrient trading offers several economicadvantages. It offers increased flexibility byincreasing compliance options and generates marketdemand for new, innovative technologies. In addition,it reduces compliance costs. A recent WRI studyfound that, relying on best available technology, a 24percent reduction in phosphorous can be achieved ata cost of $26 per pound, while a 50 percent reductioncan be achieved through trading at a cost of $10 perpound. Nutrient trading also offers numerousenvironmental benefits. It encourages point andnonpoint sources to reduce discharges to createcredits that can be sold, banked for future use, orretired. Trading programs can be designed to targetreductions in priority areas. Finally, they offerpotential for broader environmental benefits throughecological restoration.

The University of Pennsylvania identified 49 tradingprograms in 2004. However, only 16 of these wereconsidered “active” and even then there have notbeen many trades. In Pennsylvania there are a fewwater quality trading policies that have promotedactive trading. These include the Chesapeake BayProgram Nutrient Trading Fundamental Principles &Guidelines (March 2001); EPA Office of Water’s WaterQuality Trading Policy (January 2003); PennsylvaniaDepartment of Environmental Protection’s (PA DEP)Water Quality Trading Policy Discussion Paper (April2003); PA DEP’s Nutrient Trading ProgramAssumptions (Spring 2004); and Pennsylvania’sChesapeake Bay Tributary Strategy (December 2004).

McElwaine highlighted the Conestoga Pilot Project,which was among the first such programs to applytrading as an incentive to assist farmers,communities, and industry to meet and exceed stateand federal water quality goals. This wasaccomplished by establishing a voluntary pollutioncredit trading program on the Conestoga Riverwatershed in Pennsylvania. The goals of pilot projectare to facilitate development of the state nutrienttrading policy; serve as a model for a full-scale,statewide nutrient trading program and similarprograms nationwide; reduce nutrient loadings fromboth nonpoint and point sources; lower compliancecosts; avoid the need for additional regulation; andimprove water quality.



The Conestoga River watershed was an ideal site for apilot trading project. It is within the Chesapeake Baywatershed and the Bay Agreement includes voluntarynitrogen targets. The watershed also has a diversemix of point and nonpoint sources, as well aspotential for significant community involvement. Thepoint sources in the watershed already havephosphorous limits. Finally, the Conestoga is aseverely nutrient-impaired river.

The Conestoga Project sponsors and partners are verydiverse. They include multiple state agencies,environmental organizations, consulting firms, localgovernments, federal agencies, and academic andresearch institutes. A steering committee and varioussubcommittees were established to facilitate policydevelopment. There were, however, several key policychallenges. The first related to establishing athreshold for eligibility. The program needed todetermine when reductions would be deemed credits.The nonpoint source scenario in the watershed is verycomplex. Under the Pennsylvania Tributary Strategy,95 percent of farms within the Chesapeake Bay needBMPs to reach nutrient goals. The second challengerelated to establishing an uncertainty discount. If anonpoint source commits to reducing one pound ofnutrients, should they be credited with one pound ofreduction or should an uncertainty factor be applied?If so, should the ratio be 2:1, 4:1, or should it varybased on the BMP installed?

The Pennsylvania Tributary Strategy, developed by PADEP in December 2004, presented a framework forreducing the nitrogen and phosphorous pollution thatruns off the land into the Potomac and SusquehannaRivers. The initiative is the state's official plan tomeet the Chesapeake 2000 Agreement goals fornutrient and sediment reduction in the ChesapeakeBay watershed. The watershed permit is for theSusquehanna, Potomac, and various subwatersheds,and involves 13 watershed teams and a TributaryStrategy Steering Committee. The Conestoga islocated on the eastern side of the lowerSusquehanna.

The tributary strategy establishes a cap on pointsources. There are 142 significant dischargers in thetributary. A watershed permit was issued that

established a cap and trade program for theSusquehanna, Potomac, and subwatersheds. Thestrategy found Pennsylvania nonpoint sourcescontribute 89 percent of the nitrogen and 82 percentof the phosphorous that reaches the Chesapeake Bay.Agricultural BMPs could account for 75 percent of thenitrogen reductions called for at 7.2 percent of thetotal cost. The strategy’s point/nonpoint sourcetrading policy is still under development, but isexpected to generate additional nutrient reductionsat reduced costs.

There are a variety of other challenges. First,reconciling upstream hotspots with downstreamhotspots presented an issue. Although theenforcement of point sources is laid out in the permit,it is still unclear how nonpoint source discharges willbe enforced. The strategy must also determine abaseline for agriculture. Finally, point sources can bemonitored through self-monitoring and reporting, butthe project has yet to determine how nonpointsources will be monitored.

McElwaine provided an example of a voluntary tradethat involved Pfizer, which sought to curb sedimentloss and restore the Santo Domingo Creek in Lititz,Pennsylvania. A private contract was establishedbetween the company and landowners surroundingthe stream to transfer pollutant reductions from theBorough of Lititz to Pfizer. Credits were held and“retired” by Pfizer. The 1,300 square foot restorationproject cost $80,000. Monitoring showed that in fourmonths the stream lost 28 tons of sediment. Modelingwas used to determine reductions. The estimatedcredits generated were 387 pounds of nitrogen peryear, 74 pounds of phosphorus per year, and 66 tons ofsediment per year.


Multi-credit markets recognize the full range ofecological values in the watershed (water, wetlands,habitats, riparian forests, etc.), support trading thesame range of environmental credits usingwatersheds as the basis for trades, and providemultiple incentives for restoration and improvementof ecosystem functions. The building blocks ofenvironmental markets are environmental goals andmarket transactions connected by crediblemeasurements. Credible measurements must beconsistent, transparent, and verifiable. Traditionalmarket infrastructure consists of legal, financial,economic/accounting, anti-trust legislation, andpublic scrutiny components.

Pennsylvania has created innovative policies toaccomplish their environmental goals. The aim ofthese policies is to reduce the release of nutrients(nitrogen and phosphorus) in the Chesapeake Bay,encourage a greenhouse gas emissions reductioninitiative, and stimulate the renewable energymarket. They have established a multi-pollutionaccounting framework which consists of reverseauctions, calculation tools, monitoring reporting andverification protocols, and a multi-pollutant registry.

Multi-credit markets consider the full range ofecological values by creating a value tent. A valuetent directs people towards the highest credit byidentifying the areas where one could receive themost benefits from their project. It is built byoverlaying GIS layers of watershed values. Each layeris scored by how “creditable” the location is withinthe layer. The layers are added together to obtain thefinal value or tent score. Examples of layers arephosphorous loading, nitrogen loading, wetlandrestoration potential, carbon sequestration scores,aquatic habitat, vertebrate habitat, and terrestrialhabitat.

McElwaine offered a hypothetical, but reality-basedexample of a multi-credit trade. First, a possiblecredit portfolio would be created for the site. Thecredits could include wetland restoration, habitat,carbon, nitrogen loading, and phosphorus loading.

31 See: www.nutrientnet.org


Bundling these values in a multi-credit marketincreases the incentives to act. Next, assume that alandowner wants to improve their property byinstalling BMPs, but needs financial incentives. Theseller applies his nitrogen credits towards hisnutrient management plan. One buyer helps theseller establish an easement on part of his landadjacent to some of their other conservation projects.This buyer buys the habitat credits from the sellerand retires them. Another buyer needs offset creditsfor wetland mitigation and purchases the wetlandcredits from the seller. The county, a third buyer,purchases the phosphorus credits and banks themtoward a potential future TMDL, helping toimplement the statewide program locally. PA DEPmaintains the statewide registry, helps bring theplayers together, and focuses on policy developmentand trade enforcement.

In this example stakeholder input helped create thevalue-tent to direct potential traders to areas withthe highest credit potential. The credit potential inthe value-tent is based solely on environmentalbenefits.

The next step is to create a mock trading platform.Several questions arise within the context of theConestoga. These include how potential sellers(farmers) find buyers to fund BMP projects, and howbuyers judge which projects are the most costeffective for reducing nutrients, e.g., creating credit.NutrientNet, an online tool31 developed andimplemented by the World Resources Institute, canhost a “reverse auction” trading platform. Thisreverse auction platform for BMPs helps buyers andsellers find each other.

The Conestoga River Reverse Auction was createdwith support from the USDA NRCS’s EnvironmentalQuality Incentives Program (EQIP). The grantsupported the development, customization, testing,and evaluation of an online tool for conservationdistricts and farmers. The online tool will be used toestimate and register nutrient reductions for specificBMPs. It provides a mechanism to direct EQIP andother conservation funding to the most cost-effectivenutrient reduction projects.



The goal of the Reverse Auction is to conduct twoauctions, one in the summer of 2005 and one in thewinter of 2006. It will award money to farmers withsuccessful bids to install BMPs. PennsylvaniaEnvironmental Council (PEC) will act as the buyer.PEC received a $980,000 grant from NRCS to fund thepurchase and retirement of nutrient reductioncredits. Credits will be tracked to help Pennsylvaniaunderstand how it can comply with the TributaryStrategy. PEC is interested in securing the maximumquantity of nutrient reductions from a limited budget.Farmers will compete for this budget.

The process of the Reverse Auction begins when thefarmer identifies the BMP and its location. Eligiblefarms are those that qualify for EQIP. Eligible BMPsinclude cover crops, buffer strips, manure storage,streambank fencing, terraces, waterways, andbarnyard runoff control. NutrientNet provides thesefarmers with information such as BMP cost estimates,and quantifies nutrient reductions. The farmer thensubmits a final bid for the project and NutrientNetranks the bids according to nutrient reduction. The winning bids will go to those farmers who canproduce the maximum reductions at the lowest cost.

PEC still has some unanswered questions. They areunsure how the phosphorus reductions will betracked in light of the Chesapeake Bay TributaryStrategy Goals. It is also not fully understood who willbe responsible for reporting total nutrient reductionsto PA DEP. Furthermore, although NutrientNetprovides data on BMP installation, it is unclear howmaintenance costs will be handled. It is also unclearhow the BMPs will be monitored and howenforcement could be carried out against farmers.Despite these uncertainties, PEC hopes that thisnutrient pilot project will serve as a model. Theprogression of this nutrient trading program willprovide an important tool to help Pennsylvania meetits goals for reducing nutrient and sediment loads inthe Conestoga watershed and the Chesapeake Bay.

Questions & Answers

Robertson asked McElwaine how they chose the sixfunctions under the value tent and how they ensurethe functions are fully segregated and not dependenton each other. McElwaine replied that the entitymanaging the registry and banking functions wouldensure that the practices are installed and that thatthere is not multiple selling of different values. Headded that this system is not in place yet.

Ettinger asked if NutrientNet has already determinedthe nutrient removal rates for the BMPs and, if so,whether or not these numbers could be appliedelsewhere. McElwaine replied that the BMPcalculations have been developed, but that they canonly be applied in the Chesapeake Bay.

Kempka asked who paid for the GIS work andanalysis and whether or not these costs were factoredinto the cost of any of the credits that resulted fromthe work. McElwaine responded that these costs werenot factored into the price of the credits. The analysiswas supported by EPA, private foundations, andothers.

Corbin asked McElwaine to explain how the farmerbidding process works. McElwaine responded that arequest to install BMPs is issued throughout thecounty. Farmers can log which BMPs they areproposing into NutrientNet and see how much it willcost. WRI generates the environmental benefits of theBMP and PEC compares pounds of phosphorus andnitrogen removed versus dollars spent. Those BMPsthat get the greatest environmental bang for theirbuck are the ones that PEC will purchase. It does,however, count against the farmers’ total EQIPallocation. The program will make several milliondollars worth of BMPs available. Maryland waterquality standards are about to be adopted and otherorganizations will be looking for BMPs. PEC will havea bank full of BMPs on NutrientNet ready to sell.

Raffini stated he was happy to hear that the programwill be retiring the credits. He added that he wouldnot be comfortable with the program if the NRCSfunding could be used to implement BMPs in theabsence of the program. He asked how the programachieves nutrient reductions beyond what could beaccomplished with traditional NRCS funding.McElwaine responded that this program results in


additional reductions because it targets the EQIPdollars to achieve the most environmentally effectivepractices in the areas that need them most.

Dowell addressed Ettinger’s question by explainingthat EPA and NRCS are working on a nationaldatabase of BMP efficiencies based on existingresearch.

Sokulsky asked if a broker manages the ReverseAuction or if they will issue a Request for Proposal(RFP). McElwaine responded that Lancaster CountyConservation District and NRCS issued the RFP toproducers and the bids are currently loaded ontoNutrientNet. This first round is small because it is nottied to the growing season. The next RFP will beissued in February 2006. Lancaster CountyConservation District and NRCS technicians wereextensively trained on using WRI’s product.

Jones noted that the program’s baseline for trading,the existence of a nutrient management plan andsediment control plan on the farm, seems to be alower threshold than the program’s goal of installingBMPs on 90 percent of the farms in the basin. Hequestioned whether or not this is a meaningfulbaseline for trading. McElwaine responded thatproviding information on the management activitiesalready installed allows the point sources to evaluatethe current baseline and determine what they mightbuy, or if there is anything to trade at all.

Kieser asked what incentives exist for the farmers tomaintain the BMPs once their EQIP contracts expire.McElwaine responded that the hope is that there willbe additional buyers, particularly if a statewide waterquality trading program evolves. The buyers willhopefully provide financial assistance for BMPupkeep.

Lucero asked if property is available for other credittypes once a specific credit type is purchased.McElwaine responded that the goal is to maximizeincome to the landowner through several,simultaneous trades that come out of an ecosystemrestoration project. In some cases there will be onebuyer for two benefits, or two types of credits that areavailable on one property. In other cases, there maybe multiple buyers for each credit type. The challenge

32 See slide 44 at: http://www2.eli.org/pdf/wqtforum/presentations/McElwaine.pdf.


is to ensure that there is no double counting. Theyhope to prevent landowners from seeking bothterrestrial and aquatic habitat credits for onerestoration action. However, McElwaine did not see aconflict with a landowner who installs a forestedbuffer receiving both nutrient and carbon dioxidecredits for the same project.

Hough, referring to a chart in McElwaine’spresentation,32 asked if there is spatial overlapbetween the nitrogen credits and the wetlandrestoration acreage. In other words, is some of thenitrogen removal happening in the wetland?McElwaine said that presumably some of the nitrogenremoval is occurring in the wetland, but he does notfeel this is double counting because while one buyermay need wetland credits, another may need nutrientreduction credits. Hough replied that §404 requirescompensation for lost functions and acreage.Impacted wetlands provide multiple services,including floodwater storage, water qualityenhancement, streamflow attenuation, as well aswildlife habitat. When the Corps issues a permit toimpact a wetland, a bundle of functions are lost andthe permittee is required to compensate for theentire bundle of wetland services. If nitrogenreduction is part of that bundle, there will need to bea complex accounting scheme to avoid doublecounting. Doing so will put a large burden on the§404 program.

Urban noted that stacking and bundling creditsrecognizes that any parcel of land has multiplevalues. Bankers would like to split out these valueswithout double counting. The §404 program, althoughit references functions and values, does notspecifically separate them.

Denisoff asked McElwaine if the price paid to sellersis based on EQIP prices or market-based prices.McElwaine responded that producers were concernedabout being paid less than the EQIP posted price. Theprogram does have the authority to pay what themarket will bear, rather than the EQIP price.

33 Federal Guidance for the Establishment, Use and Operation of Mitigation Banks. Federal Register 60, no. 228. (Nov. 28, 1995): 58611.




The goal of the facilitated discussion that followed wasto identify the environmental, legal, and financialstrengths and limitations of establishing water qualitytrading projects that can sell multiple credit types.

The session began with an extensive discussion aboutthe difference between stackable and multiple credittypes. It was generally agreed that stackable credits aregenerated when one restoration project, such as awetland mitigation project or a riparian buffer, receivesmultiple types of credits, such as habitat credits andnutrient reduction credits. Stackable credits are thosethat overlap spatially. Multiple credits are generatedwhen several different restoration projects areconducted on one parcel of land and each separateproject receives credits for distinct purposes. Thecredits in this instance do not have any spatial overlap.

Urban acknowledged that the §404 program bundlesfunctions and values, but added that Hey’s program, forexample, measures the amount of nutrients enteringand leaving a treatment wetland. The projects are notbeing constructed for §404 purposes, but each of theparameters measured is regulated. In this instance,water quality credits could be stacked, although thecredits cannot be stacked along with §404 because it isalready inherently bundled with the nutrient reductionfunction.

Sokulsky stated that water quality trading may be moreanalogous with renewable energy credits than withwetland mitigation banking. In the renewable energymarket, renewable energy credits may be bundled, suchas in the §404 program with wetlands credits. Thedifferent components (CO2, SOX, NOX) may also besold separately. He suggested that those working ondeveloping water quality trading policy would benefitfrom learning more about renewable energy tradingprograms.

Bleichfeld addressed the stackable issue. He statedthat it was his understanding that the 1995 federalguidance on mitigation banking allows creditsgenerated as part of wetland restoration projectsconducted under §404 to receive conservation credits,endangered species habitat credits, and pollutantreduction credits under §402. (NOTE: The 1995 FederalBanking Guidance prohibits the use of the same creditto compensate for impacts associated with more than

one activity (e.g., “double dipping”). The guidancestates, “Credits from mitigation banks may also be usedto compensate for environmental impacts authorizedunder other programs [e.g., state or local wetlandregulatory programs, NPDES program, Corps civil worksprojects, Superfund removal and remedial actions]. In no case may the same credits be used to compensatefor more than one activity; however, the same creditsmay be used to compensate for an activity whichrequires authorization under more than one program.” 33)

Denisoff responded that the National MitigationBanking Association feels very strongly that bankersshould be able to sell stackable credits. If a banker canshow value added, they should be able to get credit forthe value. Denisoff added that the multiple creditmodel, where several different types of credits areavailable on the same parcel of land without spatialoverlap, is currently used in California and WashingtonState. He added that flood retention and air qualitycredits can be sold from a wetland mitigation sitewhere there is spatial overlap.

Klimek agreed with Bleichfeld. In North Carolina underthe §404 and §401 programs, they have beenconsidering separating out the mega-functions that areprovided in stream and wetland mitigation projects,such as hydrology, water quality, and habitat. Theprogram may provide replacement credits for all ofthese functions in the same physical location. Sheconcluded that this approach may promote greaterflexibility by allowing the programs to move toward truewatershed restoration.

Kadyszewski suggested that allowing stackable creditsmay have some negative consequences. Wetlands havemultiple functions and the purpose of the §404program is to replace the full complement of wetlandfunctions. However, because a carbon sequestrationproject may have negative consequences for specificwetland functions, trying to assign carbonsequestration credits to a §404 wetland restorationproject would lead to a net loss of wetland functions.Just because credits can stack does not mean theecosystem gains will always be positive for all types oftrades.


Coan addressed the water quality trading andstacking issue. She suggested that BMPs can providelow, medium, and high levels of service. They could beassigned additional credits if they provide a higherlevel of service. For example, if a riparian buffer usedwarm season grasses or wildlife plantings, rather thanfescue, it should be eligible for more credits becauseit may be providing a wildlife habitat function.

Robertson voiced his support for the acre as a holisticmeasure. He stated that functions should not beunbundled and sold separately. An ecosystem cannotbe viewed as the sum of its parts, which can bedistributed across the landscape. Vertebrate habitat,for example, cannot be separated from terrestrialhabitat. If there is an attempt to divorce functions asif they were commodities, there will be significantmeasurement problems. The number of ecologicalfunctions at a particular site is limited only bylanguage and the imagination of ecologists. Thenumber of functions that are recognized at a site ispurely a policy decision. He warned that separatingfunctions is not likely to be backed by ecologists.

Parker agreed with Roberson and stated that anecosystem is greater than the sum of its parts. Sheadded that there is no way that policy can decidewhat an ecosystem’s functions are. The role of policyis to determine which of those functions are valuedenough to be codified into a trading program.

Joyner stated that cross-media trading, for examplecarbon dioxide for nitrogen, is far less palatable thanstackable credit trading.

Urban stated that water quality trading programsdesigned to comply with the §402 program shouldallow for stackable credits because one project cangenerate credits for multiple nutrients. However,under §404, the regulatory program requires thereplacement of a bundle of functions, so creditsshould not be stackable in this context.

Regas observed that the discussion represents asynthesis of thinking from a number of differentdisciplines. The economist’s perspective does not takeaway from the ecologist’s perspective. She referencedFaeth’s presentation, which suggested that indifferent parts of the country the ability to bundle


and unbundle credits may determine if the supplyand demand curves cross in water quality tradingprograms.

Schubauer-Bergian supported Robertson’s comments.He cautioned that stackable credits will requireconsideration of the landscape mosaic and maycreate species winners and losers.

Mehan agreed with Regas’s comments. Although theenvironment is indivisible, economic value can bedenominated by humans. Water quality tradingrequires incentives to support the development ofmarkets. As such, he stated that there is no downsideto unbundling for this kind of trading. He suggestedthat if trading can discern the economic valuederived from restoring lost values and functions of a“laser-leveled” parcel of farmland, the field haseverything to gain and nothing to lose.

Hurld added to Shubauer-Berigan’s comments. Whenan ecosystem is managed for a certain credit type,one function may be enhanced at the cost of anotherfunction. This triggers legal responsibilities that mustbe addressed by regulatory agencies.

Schary suggested looking at other financial marketsfor models of how various financial services are splitup, such as mortgages. She stated that baselines mustbe considered when determining how many creditsshould be allocated. Credit should only be assignedwhen it is clear that value has been added.

Kieser stated that there are multiple environmentalbenefits that would accrue from water qualitytrading. Market forces can help drive morecomprehensive restoration projects. There should beincentives for farmers to bundle values, rather thantrying to reduce only one nutrient. He noted thatmitigation bankers are trying to enhance theirprojects and add value through multiple credits andvalues. He supports the unbundling of functions if theresult is a more comprehensive restoration project.

Schubauer-Berigan advised that mitigation providersshould not try to replace the same wetland typeeverywhere, even if a specific type provides morefunctions than another. It is necessary to considerboth the cost-effectiveness and the biologicalintegrity of functions. The market should not be theonly factor that drives this process.


Stimulating Creation of aPoint/Nonpoint Source TradingSystem on a Watershed Scale


Donald Hey, The Wetlands Initiative

Hey’s presentation focused on stimulating theestablishment of point/nonpoint source tradingprograms. He noted that the conference participantshad not discussed the magnitude of the water qualityproblem. Studies have determined that 700,000 tonsof nitrogen must be removed from the MississippiRiver and 100,000 tons must be removed from theIllinois River per year. The cost of achieving thesereductions through point source control is billions ofdollars. Hey believes regulatory agencies can find themoney to oversee water quality trading programs ifthey can achieve water quality goals in a more costeffective manner. In addition, conference participantsdid not seem to feel the water quality problem isparticularly urgent. However, it is critical andpossible for action to occur now. There is enoughunderstanding about watershed hydrology to moveforward. Perhaps there are not enough engineers atthe conference to endorse this claim, but it is indeedvery possible to monitor, measure, and proceed withwater quality trading programs today.

The most significant hurdle to overcome inimplementing trading programs is economics. Theonly thing that drives water quality in this country iseconomic concerns. Water quality programs cannotrely upon the good nature of farmers; these programscannot be voluntary. The cost of fertilizer is minimalcompared to the costs of operating a farm, andfertilizer guarantees the farmer revenue. There is aneed to pay attention to the economics and scale ofthe proposed solutions. The value of nutrients being“flushed down our agricultural and urban sewers” isworth about $250 million per year in Illinois alone.The question becomes how to turn this waste/moneyinto a valued product. The answer can be found byimplementing large-scale pilot projects. Heysuggested the establishment of several large-scalenutrient “farming” projects (installing wetlands,instead of growing corn and soy beans, to harvestnitrogen, phosphorus and carbon) in each state.

For large-scale projects to succeed we need a betterunderstanding of how to design BMPs. The onlyeffective practice is one that controls grade andcreates detention time. In order to sequester carbonand phosphorus, remove nitrogen, and settle

sediment, projects must include detention timesaround 8-10 days. Farming should continue, but largeparts of the watershed or stream corridor need to beconverted to a controllable grade.

Hey offered Goose Pond as an example of a pilotproject that is successfully managing nutrients. The4,000-acre site was designed to provide grade andwater depths that result in detention times of 6-8days. This project determined the appropriate flowrate, draw down sequence, and filling sequence.There is an inverse relationship between methaneand draw down that must also be considered, alongwith water, carbon, and nitrogen budgets, air flux,and the exchange between sediments and soils. Thisproject is designed to allow for the measurement ofinflow and outflow. After these design elements areconsidered, the project can quantify the value andnumber of credits that will be generated. Full costaccounting for these types of relationships isimperative, and more importantly, possible. Theserelationships can be measured and the economicmagnitude of the problem makes such measurementscost-effective. Hey stated that modeling will not workand it is financially feasible to monitor nutrientfarms.

Financing the aforementioned pilot projects will be achallenge. Hey suggested that the wastewatertreatment industry finance these projects. Aneconomic analysis of the seven wastewater treatmentplants in Greater Chicago’s Water ReclamationDistrict found that it will cost $2.5 billion for pointsources to meet the water quality criteria. The sameamount of nutrients could be treated by using 200,000acres of land, which would save the point sources $1.5billion in total, or $110 million per year. If thetreatment plants are forced to install advancedwastewater treatment technology they will consumeconsiderable energy, which is senseless from anenvironmental perspective. The wetland pilot projectswill demonstrate that nutrients can be removed withconsiderable energy savings and a net carbon loss.


For wastewater treatment plants to finance thesepilot projects they need some consideration from theEPA. The plants should be given a five to ten-year“pass” on having to build new treatment plants untilmore research is completed. If these pilot projectswere implemented now, by the time Illinois passesstrict water quality standards the first five-yearpermit cycle will already have passed and there willbe no losers.

Hey stated that the environmental community isgenerally in support of his proposal. At the end of thisfive to ten-year pilot period there will be a lot moreinformation available regarding the market structureand contractual relationships between buyers andsellers of credits. These ideas will have been tested sothat when it is time to implement a larger-scaleprogram the required information will be available.


Questions & Answers

Biorn-Hansen asked Hey about the cost of the hypoxiaproblem. Hey responded that no economic estimateshave been defined for the water quality problem, norhave the economic values associated with recreationor freshwater quality been addressed. These issuesneed to be better defined before the economic factorscan be fully considered.

Jones asked what the wastewater treatment facilitieswould get out of participating in such a program afterinvesting $1.5 billion over five years. Hey respondedthat the funds would buy nutrient credits. TheChicago Water Reclamation District is proposing tocontribute $10 million for the physical infrastructureand own 40 percent of the nutrient credits. The targetsite is 150 miles downstream from their discharge, sothey will sell credits to entities downstream orupstream.

Noyes asked for clarification about the proposedphysical structures. Hey explained that they areproposing the installation of a series of wetlands toprovide grade control along the Illinois River ortributaries. The wetlands would allow for inflow andoutflow to be measured. Noyes expressed hisskepticism with the plan because there is a carbondeficiency on the land that can only be solved byputting carbon at the headwaters on the farmland.This will prevent it from moving and eliminate theneed for catchment structures downstream. Heyargued that this point could be resolved by placingnutrient farms at the headwaters. He suggested thatthe nutrient farms should not be regulated under§404 so that they can be converted back to farmlandif the price of corn and soy beans increases. Noyesargued that reducing or eliminating tillage will keepthe carbon on the land and prevent the loss ofnutrients and sediment. The answer is not to catchnutrients and sediment after they have started tomove, but prevent them from moving in the firstplace.

34 See: http://www.wetlands-initiative.org/.



Wilson expressed interest in additional informationon nutrient farming. Hey responded that this idea hasbeen developing for several years. EcologicalEngineering, Restorational Ecology, and theHydrologic Institute of America have publishedpapers on the practice. The most recent study hasbeen conducted by Water Environment ResearchFoundation (WERF). Many of these papers can befound on The Wetlands Initiative’s website.34

Gookin wondered how many acres of wetlands wouldbe needed for a large pilot project. Hey respondedthat for the Illinois River they have estimated thataround 400,000 acres of wetlands would be needed totreat the nutrients that are discharged by pointsources. There is a temporal demand for wetlands;January is the most critical month for treating pointsources. The rest of the year the land can be used toaddress inputs from nonpoint sources. The projectwould require monitoring at several hundred inflowand outflow sites. These sites could be linked toalready-existing levies or pumping stations. WERF’seconomic study showed that between $200 and $300per acre of net profit can be earned by nutrientfarming, which would save the water reclamationdistricts 50 percent of their costs.

Joyner asked about the location of the wetland inrelation to the river. Hey responded that the wetlandscould be adjacent to the river. The water would bepumped out of the river into the wetland and thenback into the river, or they could be locatedupstream, like beaver dams. Joyner expressedconcern that in Florida these treatment wetlandswould be required to have an NPDES permit. Hey saidthe Illinois EPA did not require them to secure anNPDES permit because they are not mechanicallyadding anything to the water.


The goal of the final facilitated discussion was toidentify the assurances or other incentives that areneeded to help stimulate the establishment of apoint/nonpoint water quality trading system on awatershed scale. Participants offered the followingsuggestions for stimulating water quality tradingprograms:

1. There is a need for good nonpoint source assessment and monitoring tools that are tailored regionally and are transparent, replicable, and science-based (Coan, Kadyszewski).

2. EPA should provide guidance on the role of third parties (brokers or traders) in water quality trading and on liability issues (Schary).

3. There is a need to impose an enforceable requirement on a watershed scale (Korb, McElwaine).

4. Permit standards and limits need to be viewed aspermanent to avoid confusion and non-

compliance (Biorn-Hansen).

5. The economic impacts of the nutrient problems must be quantified, such as the Gulf hypoxia problem, so players cannot contest the legitimacy of a trading program (Biorn-Hansen).

6. Water quality standards based on sound science must drive water quality trading programs (Lanyon).

7. Transaction costs should incorporate liability issues; unlimited buyer liability will limit trading (McElwaine).

8. It is necessary to more fully develop and articulate the legal argument for what it would take to get the environmental community to support water quality trading, perhaps through development of a paper (O’Grady).

9. Regulatory staff need to have performance targets that are measurable to make trading work (O’Grady).

10. EPA and USDA should work with states to identify and promote ten-year pilot projects;


USDA should reassure the agriculture community that water quality trading programs will not be a gateway to the NPDES program (Alderman, Denisoff, D. Hall, Lanyon).

11. The risk of failure should be distributed among the buyer, seller, and regulatory agencies (Jones).

12. Water quality trading programs may not be able to solve the water quality problems of watersheds that are dominated by nonpoint source pollution; we should not create unrealistic expectations among watershed stakeholders about what water quality trading programs can accomplish (Jones, Joyner).

13. We need EPA guidance on how to allocate reductions to nonpoint sources that is more specific than that provided in TMDLs (Joyner).

14. If reductions cannot be met through nonpoint source reductions, future reductions should be spread between point and nonpoint sources. Alternatively, nonpoint sources can be assigned a separate reduction goal that the agricultural community can meet collectively (Coan, Joyner).

15. There is a need for more clarity on the nonpoint source baseline for generating a credit (L. Hall, Joyner).

16. An option would be to get money from the farm bill to tackle nonpoint source problems (Lanyon).

17. The National Mitigation Banking Association recommends the development of flexible guidance to encourage trading, with restrictions that could be tightened in the future. We also need to develop generally accepted credits or units related to achieving the desired water quality goals, which should be concise and uniform (Alderman, Denisoff, Lucero).

18. There is a need for a driver or economic incentives to initiate water quality trading, whether through stronger regulations or more teeth in enforcement (Alderman, Denisoff).

19. Liability must be transferred away from the permittee (Alderman, Denisoff).


20. USDA is in the final stages of developing an environmental credit trading policy that will increase the opportunities for agriculture to become involved in trading (Lucero).

21. Point to point trading is also important and will require rules and guidance (Joyner).

22. TMDLs are important drivers for restoration, but they are also caps that prevent facility expansion. TMDLs will be a huge driver in Florida because facilities will need to buy credits if they want a pollution allocation and water quality trading is a way to handle their rapid growth (Joyner).

35 See slide 18 at: http://www2.eli.org/pdf/wqtforum/presentations/Urban.pdf.


WRAP-UP AND SUMMARY

Diane Regas, U.S. Environmental Protection Agency

Regas provided a summary of what she heard fromparticipants and where she sees EPA moving in thefuture on the issue. There was a lot of agreementamong forum participants that we need water qualitytrading as a tool for achieving better environmentalresults for less money. There are many differentapproaches that can accomplish this goal. EPA is notaiming to have a “one size fits all” strategy but tofoster a variety of effective approaches. EPA needs tomake it easier to initiate new trading programs byreducing some of the barriers discussed earlier. Thisforum has shown that there is great potential forresolving water quality challenges through private,for-profit trading involving a credit banker or broker.

This forum also highlighted the differences betweenwetland mitigation banking and water quality trading.Urban’s chart35 illustrates the differences betweenthese two practices, including spatial and temporaldifferences, distributing the projects versusconsolidating them, credit counting in perpetuity formitigation banking versus the limited-term credits forwater quality trading, and finally, the Clean Water Actliability issues for the two different approaches.

The forum discussion has clarified some importantissues that EPA needs to consider. Some of theseissues include ensuring legitimacy, managing risk anduncertainty/liability, incentives and disincentives,valuation of credits, and roles.

Ensuring the legitimacy of credit brokers/bankers is akey issue. There must be high standards for marketparticipation. Third parties must be required to meeta high threshold if they want to participate asbrokers. There needs to be adequate accountability,monitoring, and modeling. The scale and landscapecontext of the project, however, will help dictate theoptions for using site-by-site monitoring or modeling.There is also a need for certification, auditing, andavoiding conflicts of interest. This forum has helpedsignificantly to clarify the need to ensure legitimacyin the credit broker role.

Managing risk and uncertainty were repeated pointsof discussion during the course of the forum.Addressing the liability issue will remain first andforemost as EPA considers how to enable this process.The challenge is to determine how to distribute riskswhile satisfying the needs of both the regulator andcredit buyer for confidence that permit limits will bemet. The discussion has presented a variety ofpossible solutions that will be examined. Anotherissue is the need to find a balance between additionalmeasuring and monitoring of pollutant reductionsand the trade-offs in terms of costs and certainty. Theforum participants raised many ideas for states toconsider as they seek to address issues of liability,measuring, and modeling for their trading programs.These options include contract insurance,indemnification, and excess credit banking bybrokers. Trading ratios can also be used to managerisk and the uncertainty between point and nonpointsource pollution reductions, as well as help toproduce greater environmental benefits. Managingrisk includes issues related to certification and thevery important concerns regarding transparency.

Another theme of the forum is the need to focus onthe incentives and disincentives of developing waterquality trading programs. We need a betterunderstanding of the extent to which the NPDESprogram, §303(d) listing, and TMDLs are sufficient todrive trading. The wetland mitigation bankers havedemonstrated the importance of establishing a levelplaying field. Having strict standards in one part ofthe field and less strict standards elsewhere willaffect the size of the market. The ability to bundleand stack credits may also create incentives anddisincentives. However, we need to be mindful thatallowing credit bundling and stacking may lead to thedevelopment of “Byzantine rules” for trackingmultiple credits or double counting. EPA mustaddress the agricultural industry’s fear of the NPDESsystem, possibly by relying upon a broker to providesome distance from the regulatory program. Anotherpotential disincentive in the system is the limitationsof government staff and budgets to administer theseprograms. We do not want government to become abottleneck in the implementation of these programs.

WRAP-UP AND SUMMARY


The valuation of credits is another issue that must beaddressed. There are scientific and economic modelsthat have been used successfully to value credits andcreate tradable credits, but there is more workneeded to reduce the uncertainty surrounding thesemodels.

A final theme of the forum was the roles of differentplayers. It is very important for EPA and the states toconsider who can play different, critical roles mosteffectively and efficiently. These roles include that ofbuyer, seller, credit certifier (third party orgovernment), and regulator. The regulator is theentity that creates and enforces agreed-uponobjectives and standards. It can be either agovernment entity or another institution orassociation.

The forum discussions have emphasized that each ofthese themes must be further addressed to ensurethat water quality trading advances. There arealready pilot projects underway, but there isenormous potential for water quality trading beyondthese projects. EPA will take several steps in the nearfuture to further this goal. First, ELI will publish areport based on this forum that will be available onELI’s web site along with presentations and audiorecordings. Second, EPA will continue to providetraining and information to states and otherstakeholders on the agency’s two existing guidancedocuments related to trading (2003 trading policy and2004 guidance on evaluating the readiness ofwatersheds for trading). Third, EPA and USDA are co-sponsoring a national water quality tradingconference scheduled for May 2006. A link toinformation about this conference may be found at:http://www.epa.gov/owow/watershed/trading.htm.

EPA will review the issues raised by this forum anddetermine if there are additional steps needed. Mostimportantly, EPA must consider whether a frameworkshould be developed for potential brokers to clarifythe boundaries for dealing with liability and otherissues. Regas stated that the forum made clear thatthere is a lot of interest in the development of suchguidance, and the wetland mitigation bankingexperience has demonstrated that such guidancecould be helpful in fostering the development of moretrading programs. Finally, EPA will continue to workwith states to develop drivers in the form of numericnutrient standards.

12:35–1:10 pm LUNCH PRESENTATION:The Use of Water Quality Trading and Wetland Restoration to Address Hypoxia in the Gulf of Mexico

12:35–12:55 pm G. Tracy Mehan, III Cadmus GroupPaul FaethWorld Resources Institute

12:55–1:10 pm Questions & Answers

1:10–1:25 pm BREAK

1:25–3:15 pm Lessons Learned from Point-Nonpoint Source Trading

1:25–1:55 pm n CASE STUDYDennis O'Grady South Nation Conservation

1:55–2:25 pm n CASE STUDY Alley RinghausenGreat Rivers Land Trust

2:25–3:15 pm Questions & Answers

3:15–3:30 pm BREAK

3:30–4:30 pm Legal and Financial Liability – Issues in Mitigation Banking and Water Quality Trading

3:30–3:45 pm n PRESENTATION: A Wetland Mitigation Banking PerspectiveGeorge I. Platt Wetlandsbank, Inc.

3:45–4:00 pm n PRESENTATION: A Water Quality Trading PerspectiveCyrus JonesWashington Suburban Sanitary Commission

4:00–4:45 pm Questions & Facilitated Discussion

4:45 pm ADJOURN

6:00–7:30 pm RECEPTION – Cosmos ClubSponsored by the National Mitigation Banking Association Hosted by former ELI President, Bill Futrell

July 11 – 12, 2005Carnegie Endowment for International PeaceWashington, DC

DAY ONE: July 11, 2005

8:30–9:00 am REGISTRATION & CONTINENTAL BREAKFAST

9:00–9:15 am WELCOMEBenjamin Grumbles Assistant Administrator for Water U.S. Environmental Protection Agency

9:15–9:30 am INTRODUCTIONSJessica Wilkinson Environmental Law Institute (Facilitator)

9:30–9:45 am Review of Agenda, Objectives, & Ground RulesJessica Wilkinson Environmental Law Institute

9:45–10:25 am Background: The History and Status of Wetland Mitigation Banking and Water Quality Trading

9:45–10:05 am Palmer HoughU.S. Environmental Protection Agency,Wetlands Division

10:05–10:25 am Lynda HallU.S. Environmental Protection Agency, Assessment & Watershed Protection Division

10:25–10:40 am Questions & Answers

10:40–10:55 am BREAK

10:55 am–12:10 pm The Challenges of Point/Non-Point Source Trading

10:55–11:15 am n PRESENTATION Dennis King University of Maryland

11:15 am–12:10 pm Questions & Facilitated Discussion

12:10–12:35 pm BREAK


APPENDIX A

AGENDA:National Forum on Synergies Between Water Quality Trading and Wetland Mitigation Banking

DAY TWO: July 12, 2005

8:30–9:00 am CONTINENTAL BREAKFAST

9:00–9:05 am Review of Ground Covered and Remaining Discussions

Jessica Wilkinson Environmental Law Institute

9:05–10:25 am The Banking Experience: Environmental Performance Standards & Credit Release

9:05–9:25 am n PRESENTATION: Craig Denisoff Wildlands, Inc.

9:25–10:25 am Questions & Facilitated Discussion

10:25–10:40 am BREAK

10:40 am–12:20 pm Bank Review and Certification Requirements

10:40–11:00 am n PRESENTATION: A Wetland Mitigation Banking Perspective David UrbanLand and Water Resources, Inc.

11:00–11:20 am n PRESENTATION: A Third Party Auditor PerspectiveHank Habicht Global Environment & Technology Foundation

11:20 am–12:20 pm Questions & Facilitated Discussion

12:20–1:20 pm LUNCH

1:20–2:40 pm Multiple Credit Types for A Single Project Site

1:20–1:40 pm n PRESENTATION Andrew McElwaine Pennsylvania Environmental Council


2:40–2:55 pm BREAK

2:55–4:15 pm Stimulating Creation of a Point/Non-Point Source Trading System on a Watershed Scale

2:55–3:15 pm n PRESENTATION Donald Hey The Wetlands Initiative


4:15–4:35 pm Feedback from Participants

4:35–4:55 pm Wrap-Up and Closing StatementsDiane Regas Director Office of Wetlands, Oceans & Watersheds, U.S. Environmental Protection Agency

4:55 pm ADJOURN


APPENDIX A

Agenda(Continued)

Anne CoanNatural Resources DirectorNorth Carolina Farm Bureau FederationP.O. Box 27766Raleigh, NC 27611Phone: 919-788-1005Email: [email protected]

Carol CollierExecutive DirectorDelaware River Basin Commission25 State Police DriveP.O. Box 7360West Trenton, NJ 08628-0360Phone: 609-883-9500 x200Email: [email protected]

Jeff CorbinChesapeake Bay FoundationCapitol Place1108 E. Main Street, Suite 1600Richmond, VA 23219Phone: 804-780-1392Email: [email protected]

Craig DenisoffWildlands, Inc.3855 Atherton RoadRocklin, CA 95765Phone: 916-435-3555Email: [email protected]

Keith DollarManager, Engineering & Technical ServicesGulf States Paper Corp.1400 Jack Warner ParkwayTuscaloosa, AL 35404Phone: (205) 562-5475Email: [email protected]

Donna Downing Environmental Protection SpecialistU.S. Environmental Protection AgencyWetlands and Aquatic ResourcesRegulatory Branch, Wetlands Division1200 Pennsylvania Avenue, N.W. (4101T)Washington, DC 20460Phone: (202) 260-8795Email: [email protected]

Katharine DowellEnvironmental Protection SpecialistU.S. Environmental Protection AgencyWater Policy Staff4101M, 1200 Penn Ave., NWWashington, DC 20460Phone: 202-564-1515Email: [email protected]

Albert EttingerSenior Staff AttorneyEnvironmental Law and Policy Center35 East Wacker Drive, Ste. 1300Chicago, IL 60601Phone: 312-795-3707Email: [email protected]

Paul FaethExecutive Vice President and ManagingDirectorWorld Resources Institute10 G Street N.E.Washington, DC 20002Phone: 202-729-7688Email: [email protected]

Curt FehnChemical EngineerU.S. Environmental Protection Agency,Region 461 Forsyth St.Atlanta, GA 30303Phone: 404-562-8692Email: [email protected]

Mary GookinPresidentGookin Technical Target MarketingServices4402 Woodbine AveDayton, OH 45420Phone: 937-781-9757Email: [email protected]

Benjamin GrumblesAssistant Administrator for WaterU.S. Environmental Protection Agency1200 Pennsylvania Ave., N.W.Room 6105 (4502T)Washington, DC 20460Phone: 202-564-5700Email: [email protected]

Leslie AldermanExecutive DirectorEarthMark CompaniesSuite 40012800 University DriveFt. Myers, FL 33907Phone: 239-415-6223Email: [email protected]

Tara AlldenSoutheast Regional ManagerEnvironmental Banc & Exchange220 Chatham Business DrivePittsboro, NC 27312Phone: 919-545-2929Email: [email protected]

Sonja Biorn-HansenEnvironmental EngineerOregon Department of EnvironmentalQualitySurface Water Quality811 SW Sixth AvenuePortland, OR 97204-1390Phone: 503-229-5257Email: [email protected]

Sean BlacklockeEconomistCDM87/89 Morehampton Rd.Donnybrook, Dublin 4 IrelandPhone: 011-353-1-663-2900Email: [email protected]

Howard BleichfeldVan Ness Feldman1050 Thomas Jefferson Street, N.W.Washington, DC 20007Phone: 202-298-1945Email: [email protected]

Allan BrockenbroughWater Permit Program ManagerVirginia Department of EnvironmentalQualityP.O. Box 10009Richmond, VA 23240Phone: 804-698-4032Email: [email protected]

APPENDIX B

Participant ContactInformation


Mark KieserActing ChairEnvironmental Trading NetworkKieser & Associates536 E. Michigan Ave., Ste. 300Kalamazoo, MI 49007Phone: 269-344-7117Email: [email protected]

Dennis KingResearch ProfessorUniversity of MarylandCenter for Environmental ScienceP.O. Box 38Solomons, MD 20688Phone: 410 326 7212Email: [email protected]

Suzanne KlimekDirector of OperationsNorth Carolina Ecosystem EnhancementProgram1652 Mail Service CenterRaleigh, NC 27699-1652Phone: 919-715-1835Email: [email protected]

Barry KorbSenior Program AdvisorU.S. Environmental Protection AgencyOffice of Policy, Economics, andInnovation1200 Pennsylvania Ave., N.W.MS 1809TWashington, DC 20004Phone: 202-566-2307Email: [email protected]

Dick LanyonDirector, Research and DevelomentDepartmentMetropolitan Water Reclamation Districtof Greater Chicago100 E. Erie StreetChicago, IL 60611Phone: 312-751-5190Email: [email protected]

Carl LuceroNatural Resources SpecialistU.S. Department of AgricultureNatural Resources Conservation Service5601 Sunnyside Avenue, Mail Stop 5473Beltsville, MD 20705Phone: 301-504-2222Email: [email protected].

Hank HabichtChief Executive OfficerGlobal Environment & TechnologyFoundation2900 S. Quincy St., Ste 410Arlington, VA 22206Phone: 703-379-2713 x255Email: [email protected]

Dusty HallMiami Conservancy District38 E. Monument AvenueDayton, OH 45402Phone: 937-223-1271Email: [email protected]

Lynda HallSenior Policy AnalystU.S. Environmental Protection AgencyOffice of Wetlands, Oceans and Watersheds1200 Pennsylvania Ave. NW 4503TWashington, DC 20460Phone: 202-566-1210Email: [email protected]

Matt HeberlingEconomistU.S. Environmental Protection AgencyOffice of Research and Development26 W. M. L. King Dr. (MS A-130)Cincinnati, OH 45268Phone: 513-569-7917Email: [email protected]

Donald HeySenior Vice PresidentThe Wetlands Initiative53 West Jackson Boulevard, Suite 1015Chicago, IL 60604Phone: 312-922-0777 x113Email: [email protected]

Palmer HoughEnvironmental ScientistU.S. Environmental Protection AgencyWetlands DivisionRoom 6105, Mail Code 4502T1200 Pennsylvania Avenue, NWWashington, DC 20460Phone: 202-566-1374Email: [email protected]

Kathy HurldEnvironmental Protection SpecialistU.S. Environmental Protection AgencyOffice of Wetlands, Oceans and Watersheds1200 Pennsylvania Ave. NW 4503TWashington, DC 20460Phone: 202-566-1210Email: [email protected]

Cyrus JonesRegulatory Planning and ComplianceManagerWashington Suburban SanitaryCommission14501 Sweitzer LaneLaurel, MD 20707Phone: 301-206-8831Email: [email protected]

Daryll JoynerProgram AdministratorFlorida Department of EnvironmentalProtection2600 Blair Stone RoadMail Station 3510Tallahassee, FL 32399-2400Phone: 850-245-8431Email: [email protected]

John KadyszewskiTeam CoordinatorWinrock International1621 N. Kent Street Suite 1200Arlington, VA 22209Phone: 703-525-9430 x618Email: [email protected]

Dick KempkaDirector of Energy and TechnologyPartnershipsDucks UnlimitedNational Headquarters1 Waterfowl WayMemphis, TN 38120-2351Phone: 901-758-3795Email: [email protected]

Virginia KiblerEconomistU.S. Environmental Protection Agency1201 Pennsylvania Ave., N.W.Washington, DC 70460Phone: 202-564-0596Email: [email protected]


APPENDIX B

Participant Contact Information(Continued)

Andrew McElwainePresident and CEOPennsylvania Environmental Council130 Locust St., Ste. 200Harrisburg, PA 17101Phone: 717-230-8044 x16Email: [email protected]

Tracy MehanPrincipalThe Cadmus Group, Inc.1901 North Fort Myer Dr, Ste 900Arlington, VA 22209Phone: 703-247-6106Email: [email protected]

Michael Mikota NNEMS FellowU.S. Environmental Protection AgencyWetlands DivisionRoom 6105, Mail Code 4502T1200 Pennsylvania Avenue, NWWashington, DC 20460Phone: 202-566-2537Email: [email protected]

Brian NoyesDistrict ManagerColonial Soil and Water ConservationDistrictPO Box 190Quinton, VA 23141Phone: 804-932-4376Email: [email protected]

Dennis O'GradyGeneral ManagerSouth Nation Conservation15 Union St.Berwick, OntarioCanada, K0C 1G0 Phone: 613-984-2948 x226Email: [email protected]

Amy ParkerNational Nutrient CoordinatorU.S. Environmental Protection AgencyOffice of Water/Office of Science andTechnologyHealth and Ecological Criteria Division (MC4304 T)1200 Pennsylvania Ave. NWWashington, DC 20460Phone: 202-566-1341Email: [email protected]

George PlattGeneral Counsel/PrincipalWetlandsbank Inc.200 E. Broward Blvd. #2100Fort Lauderdale, FL 33301Phone: 954-596-2411 or 954-847-3828Email: [email protected]

John PowersSenior EconomistU.S. Environmental Protection AgencyWater Policy Staff, Office of Water1200 Pennsylvania Avenue, N.W. (4101M)Washington, DC 20460Phone: 202-564-5776Email: [email protected]

Eric RaffiniEnvironmental ScientistU.S. Environmental Protection AgencyOffice of Wetlands, Oceans and Watersheds1200 Pennsylvania Ave. NW 4503TWashington, DC 20460Phone: 202-566-1390Email: [email protected]

Diane RegasDirectorU.S. Environmental Protection AgencyOffice of Wetlands, Oceans and Watersheds1200 Pennsylvania Ave. NW 4503TWashington, DC 20460Phone: 202-566-1146Email: [email protected]

Alley RinghausenExecutive DirectorGreat Rivers Land TrustP.O. Box 821Alton, IL 62002Phone: 618-467-2265Email: [email protected]

Morgan RobertsonU.S. Environmental Protection AgencyWetlands Division (4502T)1200 Pennsylvania Avenue NWWashington, DC 20460Phone: 202-566-1173Email: [email protected]

Cynthia RobinsonPresidentRobinsong Ecological Resources, Inc.107 Kauffman CircleMadison, AL 35758Phone: 256-325-5325Email: [email protected]

Claire ScharyOffice for Environmental Management &InformationEPA Region 10 (EMI-163)1200 Sixth Ave.Seattle, WA 98101Phone: 206-553-8514Email: [email protected]

Joseph Schubauer-BeriganResearch EcologistU.S. Environmental Protection AgencyOffice of Research and DevelopmentNational Risk Management ResearchLaboratory26 W. Martin Luther King DriveCincinnati, OH 45268Phone: 513-569-7734Email: [email protected]

Andrew SeligmanEnvironmental ScientistU.S. Environmental Protection Agency,Region 31650 Arch St., 3WP12Philadelphia, PA 19147Phone: 215-814-2097Email: [email protected]

Jeremy SokulskyPrinciple Water Markets AnalystEcosystem Marketplace1266 Mountain Meadow Dr.South Lake Tahoe, CA 96150Phone: 650-283-7997Email: [email protected]

Mark SudolChief, Regulatory ProgramU.S. Army Corps of Engineers441 G Street NWWashington, DC 20314-1000Phone: 202-761-8560Email: [email protected]


APPENDIX B


Gerald TalbertIndependent ConsultantNational Association of ConservationDistricts1532 South Rolling RoadRelay, MD 21227Phone: 410-247-1973Email: [email protected]

David UrbanLand and Water Resources, Inc.9575 W. Higins Road, Ste. 470Rosemont, IL 60018Phone: 847-692-7170Email: [email protected]

Tom WallDeputy DirectorU.S. Environmental Protection AgencyOffice of Water, Assessment and WatershedProtection Div.1200 Pennsylvania Ave., N.W.Washington, DC 20460Phone: 202-566-1869Email: [email protected]

Stuart WilsonAssistant DirectorNonpoint Source ProgramVirginia Department of Conservation andRestoration203 Governor StreetRichmond, VA 23219Phone: 804-786-4382Email: [email protected]

Robert WolcottU.S. Environmental Protection Agency1200 Pennsylvania Avenue, N.W.Washington, DC 20460Phone: 202-564-2055Email: [email protected]


APPENDIX B


For more than three decades, the

Environmental Law Institute has

played a pivotal role in shaping

the fields of environmental law,

management, and policy domestically

and abroad.Today, ELI is an inter-

nationally recognized, independent

research and education center.

Through its information services,

training courses and seminars, research

Environmental Law Institute

2000 L Street, N.W., Suite 620

Washington, D.C. 20036

Telephone: (202) 939-3800

Fax: (202) 939-3868

www.eli.org

programs, and policy recommendations,

the Institute activates a broad

constituency of environmental

professionals in government, industry,

the private bar, public interest groups,

and academia. Central to ELI’s mission is

convening this diverse constituency to

work cooperatively in developing

effective solutions to pressing

environmental problems.

The Institute is governed by a board

of directors who represent a balanced

mix of leaders within the

environmental profession. Support for

the Institute comes from individuals,

foundations, government, corporations,

law firms, and other sources.

national forum on synergies betweenwater quality trading ...wetland mitigation banking; and explore...

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