Water quality trading

Water quality trading is a market-based approach to the protection and restoration of surface waters, another tool to be used in conjunction with existing voluntary, regulatory, and financial assistance programs. Such market-based approaches offer flexibility to regulated entities and may achieve greater water quality and environmental benefits than traditional regulatory approaches alone, at a lower cost, according to the U.S. Environmental Protection Agency. EPA estimates that flexible approaches to improving water quality could save $900 million annually compared to the least flexible approach. Market-based approaches can also create economic incentives for innovation, emerging technology, voluntary pollution reductions, and greater efficiency in improving the quality of the nation’s waters.

How does it work?

Businesses, wastewater treatment facilities, urban stormwater systems, agricultural operations, and other sources of water pollutants have a wide range pollution control costs. Sources facing high pollution-control costs can save money by buying environmentally equivalent or superior reductions in the form of water quality credits from sources with much lower pollutant-reduction costs.

Depending on the credit-generation methods, credit trading can have ancillary benefits such as restored wildlife habitat, wetland creation, stream bank stabilization, and carbon sequestration. The buyer may not specifically “purchase” these benefits in a trade, though they may happen as a result of trading and reward sellers with more sellable credits.

The MPCA is interested in exploring the trading potential for various pollutants, particularly nutrients, sediment, and temperature, and cross-pollutant trading opportunities. (For example, watershed-based phosphorus reductions to address in-stream dissolved oxygen deficiency by reducing the algal loads in the watershed.) Other areas of interest include reducing excess flows, which can contribute to stream bank erosion, and options for other tradable pollutants. Any sectors whose activities influence Minnesota’s surface water quality and quantity may participate in trading. These include individuals, companies, public advocacy groups and governmental entities whose interests involve point source discharges, urban, construction, industrial and agricultural stormwater sources, agricultural drainage management, and others.

How are trades enforced?

Trades are implemented through NPDES permits. Using point to point trading for phosphorus an example, the buyer's phosphorus mass limit will be adjusted upwards and the seller's phosphorus mass limit will be adjusted downwards in proportion to the extent of the trade. The NPDES permit issued to the buyer, such as a new or expanding facility, will be subject to public notification. The trade is not effective until it is reflected in the NPDES permit. For wastewater treatment facilities, adjusted mass limits apply to both the buyer's and seller's discharge, in addition to any other phosphorus limits that may be applicable to the treatment facility, such as a concentration limit. Once the period of the trade ends, each facility's phosphorus permit limit reverts to its original value.

Trade boundaries

Water quality trades and offsets may not contribute to violations of water quality standards (aka ‘hot spots’). Credit generation and use must be upstream of the targeted body of water and in most situations, trades may not occur where a  waterbody that does not meet water quality standards for the pollutant of concern is located between an upstream credit user (buyer) and a downstream credit generator (seller). As a result, in most cases, all participating sources must be upstream of the closest downstream impaired waterbody.

Trade ratios

Trade ratios ensure that the amount of pollutant reduction resulting from the trade has the same effect as the reduction required without the trade. Potential components of a trade ratio include:

  • Location: the location of the sources in the watershed relative to the downstream area of concern
  • Delivery: the distance between the buyer and seller if the trade is to meet permit requirements at the outfall
  • Uncertainty: the lack of surety of nonpoint source reductions
  • Equivalence: the different forms of the same pollutant discharged from the trading partners, such as biologically available phosphorous and bound phosphorous
  • Retirement: additional water quality improvement

In general, smaller trade ratios are applied to situations where there is greater certainty about the pollutant load sources involved in a trade, and pollutant fate and transport dynamics are well understood. Larger trade ratios apply where less is known about participating sources and watershed dynamics. For example, relatively low trade ratios in the 1.1 to 1.0 range would apply to a point to point source trade between thoroughly monitored wastewater treatment facilities in close proximity to each other. Larger trade ratios of 2.6 to 1.0 are commonly applied with more uncertain credits generated at a nonpoint source for a trade with a well monitored wastewater treatment facility. Expect even greater trade ratios for credit exchanges between two unmonitored sources such as nonpoint source BMPs and municipal stormwater.

History

In 2007, MPCA began exploring creating rules related to water quality trading. But the 2014 Legislature expanded pollutant trading options, so the rulemaking effort was no long necessary. Learn more about the 2007 effort on the rulemaking web page.

Examples of trading in Minnesota

Rahr Malting Company, Shakopee

Permit ID: MN0031917

Receiving Water: Minnesota River

Pollutant of Concern: Carbonaceous Biochemical Oxygen Demand (CBOD)

Trade Start Year: January 8, 1997

Credit Demand: 150 lbs/year

Credit Supply: 212.8

Rahr wanted to expand their discharge to include treated process wastewater to be discharged to the Minnesota River. This receiving water was impaired for dissolved oxygen, so no additional loadings were allowed. In order to grant Rahr a permit for 150 pounds per year of CBOD, they were required to reduce nonpoint loadings within the Minnesota River basin. It was agreed that if the trades they implemented resulted in more than the required 150 lbs/yr, they would be granted the additional loading. Therefore, a limit of 212.8 lbs/yr was issued. This value cannot be increased without additional trades and analysis.

Trade Ratio: 2.6:1

Trading Projects: Rahr implemented five trades on four sites:

        Trade site 1 - Riparian area natural and woody vegetation establishment on the Minnesota River.

        Trade site 2 - Riparian area natural and woody vegetation establishment on the Cottonwood River.

        Trade site 3 - Livestock exclusion and bank stabilization on 8 Mile Creek.

        Trade site 4 - Bluff stabilization on the Rush River.

 

Southern Minnesota Beet Sugar Cooperative, Renville County

Permit ID: MN0040665

Receiving Water: County Ditch 37 and County Ditch 45

Pollutant of Concern: Phosphorus

Trade Start Year: April 7, 1999

This facility originally discharged to County Ditch 37. The co-op desired to expand, and they added a discharge to County Ditch 45, which was required to be offset by nonpoint trading for phosphorus.

Trading Projects: SMBSC implemented three trading projects on one site and one trading practice on many sites:

        Trade site 1 - Cattle exclusion, filter strip and bank stabilization on the East Fork of Beaver Creek.

        Trade site 2 - Cover crops planted on beet fields

 

Princeton Wastewater Treatment Facility, Princeton

Permit ID: MN0024538

Receiving Water: Rum River

Pollutant of Concern: Phosphorus

Trade Start Year: July 24, 2015

In 2009, Princeton received a NPDES permit for a discharge to the Rum River, which was considered a new discharge upstream of an impaired water. Princeton had not received a waste load allocation from any downstream TMDL and therefore was required to offset their phosphorus discharge by conducting a Point-Point trade. They entered into a trading agreement with the MCES - Metro WWTF. Prior to the 2009 permit expiring, MCES informed Princeton that it was no longer interested in continuing the Point-Point trade. In order to continue discharging, Princeton pursued a NPDES permit that included Point-Nonpoint trading requirements in place of the Point-Point trading requirements.

Trade Ratio: 2.6:1

Trading Projects: Princeton implemented five trading projects on five sites. Each trading project consisted of bank and/or bluff stabilization along the Rum River.

Redwood Falls WWTP and New Ulm WWTP

Buyer: Redwood Falls WWTP (Permit ID: MN0020401)

Seller: New Ulm WWTP (Permit ID: MN0030066)

Target Waterbody: Lake Pepin

Pollutant of Concern: Total Phosphorus

Trade Start Year: 2016

Credit Demand: 1,384 lbs/year

Credit Supply: 1,522 lbs/year

Total Value: $38,800/year

Unit cost: $25/kg

On February 24th, 2014, the MPCA issued an NPDES permit for the Redwood Falls WWTP which included a 1,460 kg/year total phosphorus effluent limit and the option to achieve compliance with the limit by upgrading the existing wastewater treatment facility or through water quality trading.  On February 23rd, 2016 the City of Redwood Falls entered into a pre-TMDL trading agreement with the City of New Ulm.  The City of Redwood Falls sought water quality trading credits to offset a portion of discharge of total phosphorus from its existing wastewater treatment facility to the Minnesota River.  The reissued NPDES for Redwood Falls’ existing wastewater facility contained a new water quality based effluent limit developed for the restoration of Lake Pepin.  

Trade Ratio: 1.1:1

Princeton WWTP and Met Council's Metropolitan WWTP 

Buyer: Princeton WWTP (Permit ID: MN0024538)

Seller: Metropolitan Council/Metropolitan WWTP (Permit ID: MN0029815)

Trade Type: Point-Point

Target Waterbody: Lake Pepin

Pollutant of Concern: Total Phosphorus

Trade Start Year: 2009

Trade End Year: 2015

Credit Demand: 5,000 lbs/year

Credit Supply: 6,000 lbs/year

In December 2008, the City of Princeton (City) entered into a pre-TMDL Total Phosphorus (TP) trade agreement with the Metropolitan Council Environmental Services (MCES).  The City sought water quality trading credits to offset the discharge of TP from its proposed WWTF to the Rum River.  Due to the fact that the proposed discharge was upstream of an impaired water, an NPDES permit could not be issued unless the entire effluent TP loading was offset by reduction from other sources in the watershed.   MCES agreed to offset the City’s effluent phosphorus load; however, in lieu of monetary compensation  for the trade, the MCES required the development of nonpoint source Best Management Practices (BMPs) in or near the City to offset the TP loading resulting from the new discharge.   MCES and the City agreed to a point-nonpoint trade ratio of 2:1, resulting in the offset of 10,000 lbs/year of TP through nonpoint source reductions.  Over the course of the permit term the City developed five streambank restoration projects in accordance with the trade agreement.  In 2014 the MCES informed the City that the point-point trade would not be renewed upon permit expiration. The City subsequently worked with MPCA staff to incorporate credits generated by the five streambank restoration projects directly into its NPDES permit.

Trade Ratio: 1.2:1

 

MNDOT Heath Creek Rest Area and Northfield WWTP

Buyer: MNDOT Heath Creek Rest Area (Permit ID: MN0069639)

Seller: Northfield WWTP (Permit ID: MN0024368)

Target Waterbody: Byllesby Reservoir

Pollutant of Concern: Total Phosphorus

Trade Start Year: 2011

Credit Demand: 8.33 kg/year

Credit Supply: 10 kg/year

Total Value: $1,200/year

Unit cost: $120/kg

DiscussionIn May 2011, the Minnesota Department of Transportation (MNDOT) entered into a pre-TMDL Total Phosphorus (TP) trade agreement with the City of Northfield (City).  MNDOT sought water quality trading credits to offset the discharge of TP from its proposed Interstate 35 Heath Creek Rest Area wastewater treatment facility (WWTF) to the Heath Creek.  Due to the fact that the proposed discharge was upstream of an impaired water, an NPDES permit could not be issued unless the entire effluent TP loading was offset by reduction from other sources in the watershed. On June 30, 2011 the MPCA issued an NPDES permit for the MNDOT Heath Creek Rest Area which includes an 8 kg/year TP effluent limit.  Simultaneously, the MPCA modified the Northfield WWTP NPDES permit to reduce the effluent TP limit by 10 kg/year from 7,184 kg/year to 7,174 kg/year. The trade agreement was terminated in 2017 when the Byllesby Reservoir TMDL was completed and a wasteload allocation established for the MNDOT Heath Creek Rest Area

Trade Ratio: 1.2:1

 

Other trading in Minnesota

Minnesota River Basin General Phosphorus Permit

Permittees under Appendix B of this permit have the option of buying or selling phosphorus credits in accordance with the terms of the permit.

Factsheets and publications

Other resources

 

If you have questions or comments on water quality trading, please email us at WQtrading.PCA@state.mn.us.