Three States Join Water Quality Cap-and-Trade Program

E-newsletter Issue #98 | August 16, 2012

A signing ceremony last week set up the world’s largest water quality cap-and-trade program. It’s not centered in Europe or on the east or west coasts, but in the Midwest.

Indiana, Kentucky and Ohio became the first states to adopt the same set of trading policies and procedures to limit the amount of nitrogen and phosphorous—or nutrients—running off into the Ohio River. Farmers will adopt best practices that limit nutrient runoff. Power and wastewater treatment plants will be able to buy those credits, even across state lines, to help offset their environmental impact.

The program—the Ohio River Basin Water Quality Trading Project—is the brainchild of the Electric Power Research Institute. The institute is an independent, nonprofit organization that conducts research, development and demonstration projects regarding electricity for the public’s benefit.

Jessica Fox, senior scientist at the institute, said excess nitrogen and phosphorous in the Ohio River eventually ends up in the Gulf of Mexico. The nutrients encourage algae growth, which consumes all the oxygen in the water, killing fish and coral and resulting in a large dead zone in the Gulf each summer.

Fox said many things—such as power plants, agriculture, wastewater treatment plants and even cars—are adding to the nutrient load in water,.

“This is a very vexing ecological problem,” she said. “You really have to work with a whole bunch of people to address the situation. You have to get stakeholders together who normally never sit across from each other at a table.”

Fox said in the two-year demonstration project, farmers will receive funding to help pay for conservation measures that will be verified as reducing nutrients running off into water. For instance, farmers can install a buffer strip between their fields and a waterway. The buffer strip limits how many nutrients run into the waterway and also can become a habitat for wildlife, which provides additional ecological benefits.

“The project has to be structured in a way that creates upfront benefits for everybody,” Fox said. “For the farmers, their benefit is that we’re providing funding to put conservation practices on the ground that are going to make their farm work better, that’s going to improve their yield, that’s going to maximize the amount of labor going into their farm. … They want to do these practices.”

Fox said the case for this kind of cap-and-trade program is even easier to make for industries. It can be significantly cheaper to spend $100,000 to buy credits if a plant is slightly over the amount of nutrients its permit allows, rather than spending millions to upgrade technology to bring it into compliance.

Peter Tennant, executive director of the Ohio River Valley Water Sanitation Commission, said there can be an economic cost all along the Ohio River with algae blooms. The commission has been involved in the water quality trading project since work began in 2009.

“There are forms of algae that can make you sick if it’s in your drinking water,” Tennant said. “The water utilities ultimately have to do extra treatment if there’s an algae bloom going on, so there is a financial cost as well as an environmental one.”

Brydon Ross, director of energy and environmental policy for The Council of State Governments, said this pilot project is an important step.

“This landmark agreement between agriculture, conservationists, industrial facilities and states could eliminate up to 30 tons of nutrients and runoff a year from being discharged into our nation’s waterways just from its initial implementation,” Ross said. “The program is designed to expand to other states in the basin by giving farmers and industries financial incentives to implement best-management practices without a one-size-fits-all regulatory approach.”

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