Cap and trade for water pollution -- 'trendy, hip, glitzy' and controversial

While a cap-and-trade plan for U.S. greenhouse gases is off the table and out of sight in Washington, a market-based plan for cleaning up water pollution in the Chesapeake Bay has emerged as topic A in the sprawling watershed.

While details of how a baywide cap-and-trade system for water are murky, debate over it is dividing stakeholders into strange-bedfellow camps and ginning up tensions in the long-running, federal-led restoration effort.

Consider, for example, that U.S. EPA's cap-and-trade plan -- also called water-quality credit trading -- has the support of two groups that disagree on almost everything else, the Chesapeake Bay Foundation and the American Farm Bureau Federation.

"People have a visceral response to markets and water quality trading," said Dan Nees, senior research associate at the University of Maryland's Environmental Finance Center. "It's really unlike anything I've ever seen."

At its most basic, the cap-and-trade plan lets water polluters that clean up their discharges beyond mandated limits profit from their cleanup by selling their excess pollution reductions to other entities. A farmer, for example, could sell credits for taking steps to reduce pollution washing off cropland to operators of a sewage treatment plant.


That scheme could slash the cost of the EPA-led Chesapeake Bay cleanup by nearly half, according to a federal study unveiled last week. The system could also become a model for other restorations in the Mississippi River, the Great Lakes and other ecosystems.

But the plan is opposed by a small but vocal coalition of environmentalists who say the system is ripe for abuse and could undermine the joint effort by federal, state and local governments across the 64,000-square-mile watershed.

The coalition had threatened to sue EPA over the pollution-credit proposal, arguing that the policy would lead to more pollution. But the threat dissolved after a top financial supporter of one coalition member, Potomac Riverkeeper, promised to shut its wallet if legal action were taken (Greenwire, April 20).

At stake is the high-profile restoration of the Chesapeake Bay, the nation's largest estuary, whose watershed drains the District of Columbia and parts of Delaware, Maryland, New York, Pennsylvania, Virginia and West Virginia. The bay is choking on excessive nutrients -- phosphorus and nitrogen discharged by sewage treatment plants and fertilizers washing off farms, lawns and parking lots.

Picking up where two prior government-led restoration efforts failed, EPA in 2010 launched the most ambitious cleanup to date, under executive order from President Obama. The agency divided the bay into 92 segments and mandated that states develop and implement plans to achieve specific, numeric targets for reducing nitrogen, phosphorus and sediment that would put the bay on a path to full recovery by 2025.

Many of the most obvious and egregious sources of industrial pollution have been largely stanched since the passage of the 1972 Clean Water Act. Experts agree that achieving further gains will be hard-fought and expensive.

The Obama administration effort would effectively mandate high-tech and expensive pollution-reduction systems at industrial facilities and municipal sewage and wastewater treatment plants across the watershed. And it would force all stakeholders to focus on the most stubborn pollution: fertilizer- and manure-laden runoff from farmland.

The Clean Water Act is ill-equipped to stanch such "nonpoint" sources of pollution, and agribusiness has sued EPA, arguing that the agency, in fact, lacks the authority to do so.

Study sees market opportunities

Farmers, regulators and most environmentalists agree that any approach to cleaning up the bay should include a component that is market-based.

EPA's water-credit approach comes in response to critics of the restoration effort who say $1 million invested to stop fertilizer runoff in farming areas would go further to clean up the bay than $1 million invested in more high-tech pollution controls at a single treatment plant.

Proponents say the cost-benefit imbalance among polluters could be harnessed to the bay's advantage by a water credit-trading system.

Farmers could implement so-called best management practices -- planting cover crops to reduce soil erosion and installing vegetative buffer zones along creeks to soak up pollution -- and generate "credits" that could be sold to water utilities in the city.

Under that scheme, its backers say, farmers earn, developers save money and the bay wins.

"The cost per acre of best management practices in central Pennsylvania are going to be a lot less than, say, in Montgomery County, Maryland," said Mike Mittelholzer, assistant staff vice president in regulatory affairs for the National Association of Home Builders. "In concept, it's definitely an option we'd like to have on the table."

The cost of compliance for treatment plants and other entities whose wastes flow from discharge pipes would be cut 49 percent under the broadest trading scenario, according to a study by consultant RTI International of Research Triangle Park, N.C. RTI International presented its study last week to the Chesapeake Bay Commission, a tri-state legislative body that advises lawmakers of Maryland, Virginia and Pennsylvania on the bay restoration. The commission has yet to take a position on trading.

The savings cited in the study are possible if credits are allowed to be traded across all six states and between point and nonpoint sources, the report says.

"Potential cost savings are greatest when trading is allowed across the entire watershed," RTI International economist George Van Houtven told the commission at its meeting last week in Washington.

Only limited trading now takes place in small markets in the three commission states. Even under the most restrictive trading scenario -- in which credits can be traded only within the same drainage basin and state, from point source to point source -- overall savings come in at 20 percent, according to RTI's report.

The report relies on several assumptions. Among them: The specific amount of pollution reduction achieved by best management practices on farmland can be established and maintained with certainty.

That is important not only to pollution-credit buyers, who will want to ensure they are getting something real and quantifiable for their money, but also to regulators, who are legally obligated to guard against phantom gains.

"I think nearly everyone agrees there are some very real issues that need to be addressed as we move forward," said Joseph Maroon, a consultant to the commission.

Maroon highlighted to the commission last week the difficulties and uncertainties of quantifying nonpoint-source pollution, the verification, certification and monitoring systems that would require, and the complexities of establishing and policing a uniform, cross-state trading market.

In a market-based approach to solving these market questions, the U.S. Department of Agriculture recently offered $10 million in grants to anyone with innovative proposals on how to set up a water quality trading markets in watersheds such as the Chesapeake Bay (Greenwire, Jan. 13).

But to some environmentalists, the unanswered questions are too fundamental to allow states to continue expanding existing trading programs to meet EPA's pollution-reduction mandates. Opponents of trading want the provision struck from EPA's Chesapeake Bay plan until solutions are found.

"If they're saying trading is not there yet because these mechanisms and safeguards are not in place, but we should work on getting those safeguards in place -- well, why don't you let me know when those safeguards are in place, and then we can talk about trading," said attorney Scott Edwards, of the advocacy group Food and Water Watch.

Edwards' group is working to revive the lawsuit that fizzled when Potomac Riverkeeper dropped out.

Michelle Merkel, another attorney with Food and Water Watch, called it a "fight for the integrity of the Clean Water Act."

"It's effectively privatizing our public waterways and allowing polluters to use them as waste disposal sites," Merkel said. "This is about privatization, and that's not something at Food and Water Watch that we support."

Making pragmatism match enthusiasm

Proponents of the many variations of cap and trade -- whether applied to air or water pollution -- frequently point to its successful application in the interstate fight against acid rain in the 1990s.

The cap-and-trade approach developed by the Environmental Defense Fund and written into the 1990 Clean Air Act mandated cutting sulfur dioxide (SO2) emissions from power plants in half, while letting industry decide how to do it by buying and selling credits.

By 2000, scientific measurements taken in waterways and national parks were confirming the program's success.

Most agree that quantifying the water quality benefits of land-management practices on farmland in the bay watershed is far more difficult than measuring SO2 emissions from smokestacks.

On farmland, Edwards said, "there are no measurements; there is no verification, there is no monitoring system in place."

The Clean Water Act, he said, does not allow for trading. And despite the success of the EPA acid rain program, he added, there are more examples of failed attempts at cap and trade. (Edwards argues that Europe's top-down regulatory approach to acid rain produced better results.)

"What you've got here is basically the Wild West of nutrient trading," Edwards said of the bay trading program. "We'll never know if they're reducing their loads or just selling make-believe credits. It's voodoo."

Rena Steinzor, law professor at the University of Maryland and president of the left-leaning Center for Progressive Reform, is only slightly more sanguine.

"It's going to happen, and when it happens, there are two dangers," she said. "One is that the system is not well-designed. ... The second is that you build it, and no one comes."

Steinzor, a frequent critic of EPA's Chesapeake Bay Program for what she sees as its frequent failure to live up to promises, nonetheless says that a credit-trading program could be made to work.

"We think it can help and contribute if it's managed very carefully," she said.

The reason the acid rain program was successful, she said, was that there were continuous emission monitors at power plants; there is nothing similar in the bay landscape.

"The advocates of trading, sometimes their enthusiasm exceeds their pragmatism," she said.

The water pollution system, Steinzor said, would rely on farmers' submitting to regular checks that they are maintaining their land to produce the requisite benefits. Would industrial dischargers, she said, be willing to buy credits if they are held accountable for failures of the seller to deliver those gains?

"If trading is a way to accelerate the application of those best management practices, that would be grand," she said. "It's a very trendy, hip, glitzy, hot way of approaching environmental problems, and the danger is that it's implemented in a careless way."

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