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Great Lakes Commission releases water quality trading economic feasibility report

For immediate release: January 19, 2015  |   Download News Release PDF  |   View Report Webpage

Ann Arbor, Mich. – The Great Lakes Commission today released a report concluding a nine-month effort to determine whether water quality trading is economically feasible in the Lower Fox River Watershed.

The Lower Fox River Basin Water Quality Trading Economic Feasibility Assessment analyzes the potential demand for Water Quality Trading (WQT) credits by wastewater treatment facilities (WWTF) and others that hold water quality permits and the potential supply for those credits, primarily from upstream agricultural landowners but also from municipalities.

The report finds that WQT is considerably more cost-effective—and therefore the demand is likely greater—for WWTFs and for municipal separate stormwater systems facing higher permit compliance costs. It also found that credits can be generated from agricultural sources in the watershed, but that agricultural sources of credits varies geographically and conservation efforts alone will not likely meet all pollution reductions needs.

The Lower Fox River drains into Green Bay on Lake Michigan and is a major source of nutrients and other pollutants causing water quality problems in the bay.

Water quality trading is an innovative, market-based approach whereby credits are earned for reducing pollution and those credits are sold to entities that are faced with high pollution control costs. Trading enables a cost-effective approach to pollution reduction when polluters are facing very different costs to control the same pollutant.

The Fox P Trade project, for which this study was commissioned, is a three-year initiative, led by the Great Lakes Commission in partnership with the U.S. Department of Agriculture Natural Resources Conservation Service (NRCS) and the Wisconsin Department of Natural Resources (Wisconsin DNR). Fox P Trade aims to establish a program to trade phosphorus (P) and total suspended solids (TSS) credits in the Lower Fox River Watershed of Wisconsin, which has been subject to stricter discharge limits for P and TSS since 2012 through a U.S. EPA-approved document known as a Total Maximum Daily Load (TMDL).

“Completing an analysis of the phosphorus credit supply and demand is an important component to achieve the overall goal of establishment of a credit trading program in the Lower Fox Watershed,” said Tom Krapf, the USDA NRCS assistant state conservationist in Wisconsin. “The results from the economic feasibility analysis will help to identify water quality trading opportunities within the watershed.”

In March 2014 the Fox P Trade project chose a team of national experts on water quality trading to analyze the economic feasibility of trading in the Lower Fox River Watershed. The team was led by Kieser and Associates, LLC of Kalamazoo, Mich., and included XCG Consultants Ltd. of Ontario, Calif., and Troutman Sanders LLP of Washington, D.C.. “We very much appreciate the effort Kieser and Associates put into this analysis,” noted Jim Baumann of the Wisconsin DNR.

The consultant team assessed the demand for buying credits by examining pollutant load reductions needed to achieve permit compliance consistent with the 2012 Lower Fox River TMDL. The study specifically looked at 33 wastewater treatment facilities and  25 permitted municipal separate stormwater systems (MS4s) in the Lower Fox River Watershed that hold water discharge (effluent) permits reflecting the TMDL limits for P and TSS. The supply analysis focused on potential credit generation from agriculture. (Though it is possible for WWTFs and MS4s to produce and sell credits, that was not included as part of this study.)

The overall economic feasibility of WQT in the Lower Fox was assessed by comparing costs a credit buyer (e.g., water quality discharge permit holder) would pay for traditional wastewater treatment facility upgrades with the costs of credits. Credit costs were assessed from two different credit sellers. First were costs that aMS4 would incur by generating credits through installation and operation of urban Best Management Practices, specifically wet retention ponds. The second suite of costs was those associated with installation of various conservation practices on agricultural lands.

On the supply side, the study shows that the number of credits that can be generated depends on where you are in the watershed. It further finds that credit supply in the Lower Fox market is currently limited, in part because farms must first achieve fairly stringent state agricultural standards designed to protect water quality before they can sell credits. Nonetheless, the analysis shows that enhanced conservation within row crop agriculture can generate cost-effective credits for sale. The report observes that other factors affect market conditions for water quality trading, such as the kind of conservation practices, which will likely change over time as well as buyer and seller willingness to participate, which can be influenced by numerous factors besides cost.

Russ Rasmussen, head of the Water Division at the Wisconsin DNR, noted:  “The Fox P Trade Project Feasibility Study gives us a very useful ‘ball park’ analysis of the potential demand and supply for nutrient and sediment water quality trade credits in the Lower Fox River Basin. It provides insights into the specific challenges and opportunities facing the wastewater and stormwater permittees in the basin.”

The report recommends several actions that can overcome current challenges and expand opportunities to support a more robust WQT market in the Lower Fox River Watershed, such as:

  • —engaging local agricultural and conservation professionals to identify willing landowners with high potential credit generation sites;
  • encouraging WWTFs capable of treating beyond their requirements to pursue trading as a seller; and
  • developing credit estimation methods for pollution reduction activities not considered in this report, including additional land conservation practices and technologies.

“The study affirms that there is demand for water quality trading in the Lower Fox and that credits can be generated for sale,” said Program Director Victoria Pebbles of the Great Lakes Commission, who is leading the overall Fox P Trade effort. “We know that the actual costs of a water quality trade will vary depending on the unique circumstances of the buyer and their permit conditions, as well as the location of the seller and the types of conservation practices/BMPs installed to generate credits.”

Actual costs of a trade will also depend on how trades are structured, whether they are done, for example, through an auction or broker, and whether trading process for buyers and sellers is clear, practical and straightforward from administrative and regulatory standpoints. Pebbles explained that these are next steps for the Fox P Trade project.

Contact: Victoria Pebbles, 734-971-9135 (office), vpebbles@glc.org

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The Great Lakes Commission, chaired by Kelly Burch, executive director of oil and gas operations for the Pennsylvania Dept. of Environmental Protection, is an interstate compact agency established under state and U.S. federal law and dedicated to promoting a strong economy, healthy environment and high quality of life for the Great Lakes-St. Lawrence region and its residents. The Commission consists of governors’ appointees, state legislators, and agency officials from its eight member states. Associate membership for Ontario and Québec was established through the signing of a “Declaration of Partnership.” The Commission maintains a formal Observer program involving U.S. and Canadian federal agencies, tribal authorities, binational agencies and other regional interests. The Commission offices are located in Ann Arbor, Michigan. Learn more at www.glc.org.

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