MEMORANDUM

To: Shawn M. Garvin, Administrator for EPA’s Mid-Atlantic Region

From: Arlynnell Dickson, Adviser to the Administrator for EPA’s Mid-Atlantic Region

Re: Chesapeake Bay Nutrient Trading

Date: April 25, 2013

Introduction:

The Chesapeake Bay has had a long and troubling history with pollution and excessive nutrients

in its waters. Over the past few decades, the Bay’s condition has continued to worsen. Nitrogen,

phosphorous, and sediments are the main pollutants causing eutrophication, dead zones, public health

issues, and the contamination of drinking water. The major culprits contributing to these ecological and

human health problems are point sources and nonpoint sources. Together, these sources of pollution are

causing the water quality of the Bay to steadily decline. Fortunately, the Chesapeake Bay’s watershed is

comprised of six states, Virginia, Maryland, West Virginia, Pennsylvania, New York, and Delaware,

which are all committed to restoring the Bay and reducing the effects of nutrient pollution.

The EPA is currently working with the states to implement a pollution diet for the Bay called a

Total Maximum Daily Load, or TMDL under the Clean Water Act. The TMDL is currently in its second

phase and is on track to restore Bay quality and reduce nutrients to the optimum level by 2025 (Falk

2013). One market-based approach proposed to assist polluters in complying with regulations is nutrient

trading. While there are many potential benefits and drawbacks associated with nutrient trading, it is in

the best interest of the EPA and all stakeholders involved to accept this program as a part of the TMDL

implementation plan.

Background:

To combat the issues associated with the excess nutrients and pollution in the Chesapeake Bay,

the EPA established a TMDL and a plan for implementation throughout the watershed. In 2010, after

voluntary programs did not succeed in achieving water quality standards, the EPA developed the most

comprehensive multijurisdictional TMDL to date (U.S. Library of Congress 2012). The legislation

created by Congress that allows the EPA to create a TMDL is found in the Clean Water Act. Under

Section 303(d), the Clean Water Act “requires states to identify waters that are impaired by pollution . . .

and establish a TMDL of pollutants to ensure that water quality standards can be attained” (U.S. Library

of Congress 2012). This section explains that if the state’s water quality standards are not being met, then

the EPA must intervene and create a TMDL, or a pollution diet for the body of water.

In order to meet these requirements, the states designed a plan of action for their specific

locations’ point sources and nonpoint sources. A point source can be “attributed to a specific location,

such as a wastewater treatment plant” (Chesapeake Bay Foundation). This means that the amount of

pollution discharged can be easily determined and located. Contrastingly, a nonpoint source includes

nutrients that “run off the ground from any land use that enters the waterways,” including discharges from

agriculture, feedlots, lawns, urban areas, and forests (Chesapeake Bay Foundation). O control these

sources, the TMDL requires states to “prepare [Watershed Implementation Plans] in three phases

identifying specific reductions and control measures to achieve needed pollutant reductions from point

sources and nonpoint sources” (U.S. Library of Congress 2012). These plans set the framework for action

in the states and their plan to reduce nutrients, as well as pollution in each of their jurisdictions. While the

states may create their own individual plans, each must be approved by the EPA before they can be

carried out.

Currently, there is a court case questioning the authority of the EPA and its work associated with

the TMDL. In American Farm Bureau Federation and Pennsylvania Farm Bureau v. U.S. EPA,

agricultural and builder interest groups are arguing that the EPA is surpassing its authority under the

Clean Water Act and is impinging “on the responsibilities of the states to assign pollution reductions to

individual sources” (U.S. Library of Congress 2012). Furthermore, the interest groups question the

“science and accuracy of computer models that EPA used in setting overall pollution limits” (U.S. Library

of Congress 2012). The EPA is defending their actions by claiming that the states were involved every

step of the way in the development of the TMDL (U.S. Library of Congress 2012). Overall, the EPA

wants to ensure that each program is rigorous enough to avoid the detrimental effects associated with

excess nutrients in the Bay and its tributaries.

A surplus of nutrients in a body of water has the potential to cause many problems to human

health as well as entire ecosystems. In the bay, excess nutrients such as phosphorus, nitrogen, and

sediments are causing eutrophication and dead zones. When there is a surplus of nutrients in the water, it

causes algae blooms that block the sunlight, and when the algae die, it sinks to the bottom, decomposing

and depleting oxygen (U.S. Library of Congress 2012). This process creates dead zones in the Bay where

there is a small percentage of oxygen and relatively no life thriving, disrupting the entire ecosystem and

its foundation. Another set of problems that nutrients pose for the Bay are the potential health effects to

humans. Public health problems stemming from the presence of nitrogen in drinking water include “blue

baby syndrome, which can cause illness and death in babies and has been related to spontaneous abortions

and increased cancer risk” (Lawrence 2012). Furthermore, experts claim that “elevated nutrient levels can

lead to the proliferation of harmful algae and pathogenic microoganisms like Vibria bacteria,

cryptosporidium, and giardia” (Lawrence 2012). All of these consequences to health can be avoided if the

TMDL is efficiently implemented and executed in the Chesapeake Bay. One hotly debated option that is

being considered to help sources of pollution with TMDL compliance is nutrient trading.

Currently, there is a court case questioning the legality of nutrient trading. In Food and Water

Watch and Friends of the Earth v. U.S. EPA and Lisa Jackson, the environmental interest group is

“challenging the legality of the water quality trading portion of the plan, saying that trading programs are

filled with uncertainty and are vulnerable to nonpoint source owners selling credits based on unverified

pollution reductions” (U.S. Library of Congress 2012). Once again, the uncertainty of science is being

called into question with the TMDL policy. While there is always some degree of uncertainty in science,

there are many discrepancies when attempting to quantify the amount of nutrient runoff from nonpoint

sources. Since nonpoint sources cannot be attributed to a specific location, it is difficult to tell if the

pollutants are coming from agriculture, lawns, feedlots, parking lots, or streets (Chesapeake Bay

Foundation). The key to running a successful program is monitoring the uncertainty. EPA addresses this

issue by using trading ratios, monitoring, modeling, and BMP efficiency estimates (U.S. Environmental

Protection Agency 2012b). Thus, if executed and monitored efficiently, trading programs can work to

reduce nutrient pollution and its detrimental effects.

The economy will be greatly impacted by the TMDL nutrient trading program. Since in most

cases it is less expensive for farmers and nonpoint sources to reduce their nutrient levels, these

participants would be able to generate extra revenue by selling their credits to point sources that face

higher costs in complying with TMDL standards (World Resources Institute 2009). Stakeholders such as

farmers and industries would be more willing to accept a nutrient trading program because it would make

complying easier for firms while also generating revenue for the farmers. On the other hand,

environmental groups question the ethics of being able to pay to pollute. With nutrient trading, there is a

potential for nutrient hot spots and environmental justice concerns associated with water quality and

public health (Lawrence 2012). Collectively, nutrient trading has its potential benefits and drawbacks, but

a further look into the different policy options will show that trading can be a useful tool in meeting

TMDL requirements.

Description of Options/Arguments:

Nutrient Trading is a market-based approach that allows the exchanging of pollutants between

different sources in order to meet water quality standards. Pollution trading is an alternative method that

“provides economic incentive for voluntary pollutant reductions from point and nonpoint sources, to

improve and preserve water quality” (U.S. Environmental Protection Agency 2012a). The program allows

for more flexibility in compliance between sources and motivates polluters to follow regulations. Under a

nutrient trading scheme, a “facility with a higher pollutant control cost can buy a pollutant reduction

credit from a facility with a lower control cost thus reducing their cost of compliance” (U.S.

Environmental Protection Agency 2012b). Basically, the EPA sets a cap on the amount of pollutants that

can be emitted from each source, and then the sources that minimize their discharges to below their

required level can sell their extra credits.

Some critics argue that nutrient trading will not work to achieve the determined water quality

standards, and argue in favor of a traditional method called Command-and-Control policy. This approach

is used when a standard is set, usually by the EPA, and then sources of pollution are forced to comply

with the regulation, no exceptions (Experimental Economics Center 2006). There are definite benefits

associated with Command-and-Control such as its uniform approach. Command-and-Control designates

consistent standards that all firms must meet, ensuring that the amount of pollution is actually reduced.

An example of this is a design standard, which regulates the “current technology and gives specific rules

about . . . pollution treatment” (Experimental Economics Center 2006). However, the downside to this

type of regulation is that it can be extremely expensive for firms to comply and apply the new

technologies. Also, experts claim that it is difficult for a “centralized government agency, to stay on the

cutting edge of pollution control technology” (Experimental Economics Center 2006). With so many new

innovations and the variability of costs between firms, the EPA cannot accurately judge which method or

technology is the best option for all firms.

Though it is true that Command-and-Control can sometimes work reduce the amount of pollution

emitted, there is no economic incentive for firms to comply. As a result, frequently, the “enforcement is

weak, compliance is low, and the goal of pollution reduction isn't reached” (Experimental Economics

Center 2006). There are high costs involved for both the firms to comply and the EPA to enforce the

regulations. Thus, a never ending circle of economic inefficiency is created (Experimental Economics

Center 2006). This issue could easily be resolved if an economic incentive for compliance was

incorporated into the plan of action, such as the benefits of nutrient trading.

Nutrient trading is a crucial component to the implementation of the Chesapeake Bay’s TMDL.

The potential benefits include the net improvement of water quality, incentives to reduce pollution,

involvement of the agriculture industry, stimulus to the economy, and public review. Nutrient trading,

when implemented effectively and in compliance with the Clean Water act, has the capability to achieve

the same water quality improvements of the TMDL at an overall lower cost (World Resources Institute

2009). This scenario achieves the desired water quality, while also giving sources more flexibility. Since

the cost to reduce nutrient pollution is different between sources, the polluters with lower costs will be

able to sell their extra credits after compliance to other polluters with higher costs. Furthermore, trading

“encourages adoption of less expensive pollution reduction practices that are typically faster and easier to

implement” (World Resources Institute 2009). These practices will accelerate pollution reduction because

of the economic incentive to comply. Since it is cheaper for farmers and members of the agricultural

industry to comply by enacting Best Management Programs, they will not only reduce a large amount of

nutrients polluting the Bay, but also earn additional revenue by selling their credits (World Resources

Institute 2009). The savings of nutrient trading are projected to greatly help the area’s struggling

economies, for savings have been estimated at 43-55 percent (World Resources Institute 2009).

One final benefit of nutrient trading programs is that their development and finalization requires

public review. This holds firms and the EPA responsible in the execution and consequences of nutrient

trading. The EPA states that “all stakeholders interested in their local watershed including conservation

organizations and watershed groups, should be involved in the development of the trading program” (U.S.

Environmental Protection Agency 2012b). All parties are also accountable for “reviewing, commenting

on, and challenging credit-generating proposals” (Falk 2013). This process allows the public to comment

on the trades every step of the way. All of these benefits must be seriously considered when evaluating

the prospect of nutrient trading.

Despite nutrient trading’s undeniable benefits, some critics are attempting to ban nutrient trading

altogether. They highlight the uncertainties and complications in predictions of nutrient reductions from

nonpoint sources. A major concern is that nonpoint source owners will sell credits based on “unverified

pollution reductions” (U.S. Library of Congress 2012). However, the EPA insists that the uncertainty will

be monitored and managed through trading ratios, BMP efficacy estimates, inspections, and thorough

reporting (U.S. Environmental Protection Agency 2012b). As long as the trades are effectively developed

and regulated, pollution reduction can be achieved with minimum levels of uncertainty. Another concern

many environmentalists have about nutrient trading is that it will create pollution hot spots and

environmental justice concerns. Some believe that low income communities will be the most at risk

because they do not have the means to prevent pollution in their areas (Lawrence 2012). Despite these

concerns, the EPA ensures that all trades will be in compliance with the Clean Water Act, as not to further

pollute any body of water (U.S. Environmental Protection Agency 2012b). Though there is a potential for

uncertainty and drawbacks associated with nutrient trading, these consequences can be avoided if the

states, government, and public work diligently together.

Recommendation:

Command-and-Control policies alone are not effective enough to reach the TMDL goals by 2025.

The EPA should encourage the development of nutrient trading programs in addition to Command-and-

Control policies in order to restore water quality in the Chesapeake Bay. The overall benefits of nutrient

trading certainly outweigh the negatives. Providing economic incentives for firms and nonpoint sources to

comply with regulations is the key to achieving the goals outlined by the TMDL. The EPA should strive

to design fair and effective program for trading based on science that is sure to result in net improvements

of water quality (Falk 2013). Careful and diligent oversight of nutrient trading is essential, especially

when monitoring runoff from nonpoint sources. In order to minimize uncertainty, the EPA should be

steadfast not only when monitoring BMP efficacy estimates, but also when enforcing the predetermined

standards set for pollution (U.S. Environmental Protection Agency 2012a). The EPA must prohibit the

trade of nutrients until a source has achieved its required pollution reductions. Above all else, the EPA

should work earnestly to ensure that all trading programs in the Chesapeake Bay are in compliance with

the Clean Water Act.

Furthermore, it is crucial that the EPA, state, and local governments cooperate and communicate

on a regular basis so that the TMDL and nutrient trading program can be implemented effectively. All

stakeholders must be involved in the planning for both programs in order to reduce controversy and

encourage compromise. The TMDL goals will not be fully achieved if all parties and governments are not

involved. The EPA should have the final say when making executive decisions, but bringing in different

perspectives can only help and should be encouraged. Therefore, if all levels of government cooperate

and take the necessary precautions, the potential consequences of nutrient trading can be bypassed, saving

the EPA time and money, while also restoring the Chesapeake Bay a more efficient way.

Conclusion:

Restoring the original quality of the Chesapeake Bay is the most important priority for the EPA.

If the TMDL is adequately implemented and enforced in the Bay’s watershed, its delicate ecosystems will

be given the chance to revitalize and restore current dead zones. Public health issues from drinking water

will begin to dwindle, and the Bay will be given the chance to thrive again. However, these ambitious

goals will not become a reality unless nutrient trading is incorporated into the TMDL implementation

plans. Given the option of nutrient trading, sources of pollution will be more motivated to reduce their

emissions and help restore the Chesapeake Bay. The EPA is a crucial contributor to the development,

implementation, and enforcement of the TMDL, and the position it takes on nutrient trading has the

capacity to influence the entire program. Thus, it is in the best interest of the EPA to encourage well

developed nutrient trading programs in order to efficiently reach the goals established by the Chesapeake

Bay’s TMDL.

Works Cited

Chesapeake Bay Foundation, “Facts About Nutrient Trading,” http://www.cbf.org/

document.doc?id=141.

Experimental Economics Center, “Command and Control,” EconPort, 2006. http://www.econport.org/

content/handbook/Environmental/pollution-control-revised/Traditional-Pollution-

Techniques/Traditional-methods-sub-page.html.

Falk, Hilary Harp, “Nutrient Trading Must Protect or Improve Water Quality,” April, 11, 2013. Choose

Clean Water Coalition, http://choosecleanwater.org/press-room/blog/nutrient-trading-must-

protect-or-improve-water-quality/.

Lawrence, Roberts, “Nutrient Trading a Dirty Deal for the Bay,” The Baltimore Sun, December

9, 2012. Accessed March, 6, 2013. http://articles.baltimoresun.com/2012-12-09/news/bs-

ed-nutrient-trading-20121207_1_nutrient-output-nitrogen-and-phosphorus-nutrient-

levels.

U.S. Library of Congress, Congressional Research Service, Clean Water Act and Pollutant Total

Maximum Daily Loads, by Claudia Copeland, CRS Report R42752. November 20, 2012.

Accessed March, 27, 2013. http://congressional.proquest.com/congressional/result/Pqpresult

page.gispdfhitspanel.pdflink/http%3A$2f$2fprod.cosmos.dc4.bowker-dmz.com$2fapp-bin

$2fgis-congresearch$2f4$2f7$2fd$2f6$2fcrs-2012-rsi-0540_from_1_to_22.pdf/entitle

mentkeys=1234.

U.S. Environmental Protection Agency. (a) Chesapeake Bay TMDL: Ensuring Results. March 6, 2012.

Accessed March, 27, 2013. http://www.epa.gov/reg3wapd/tmdl/ChesapeakeBay/Ensuring

Results.html.

U.S. Environmental Protection Agency. (b) Frequently Asked Questions About Water Quality Trading.

March 6, 2012. Accessed March, 27, 2013. http://water.epa.gov/type/watersheds

/trading/tradingfaq.cfm\

World Resources Institute, “How Nutrient Trading Can Help Restore the Chesapeake Bay,” December

2009. http://pdf.wri.org/factsheets/factsheet_nutrient_trading_chesapeake_bay.pdf.