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The Virginia Nutrient Credit Trading Program – How Program Structure and Pricing Affects Willingness to Participate and the Ability to Develop Optimal Compliance Plans Through Trading

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The Chesapeake Bay is impaired by nutrients and the Bay states have developed TMDL-like “tributary strategies” and related programs to restore water quality.. In addition to programs addressing non-point sources – the largest share of the nutrient load – Virginia has embarked upon an ambitious program to reduce point source nutrient loads by 2010, or as soon as possible thereafter. Point source dischargers have been assigned individual wasteload allocations (WLAs) to be implemented through a Clean Water Act watershed general NPDES permit (General Permit) for nitrogen and phosphorus. Other aspects of the program include innovative point source-point source and point source-nonpoint source nutrient trading, state grant funding, and low-cost state revolving loans. In the absence of nutrient trading, all 127 significant Virginia wastewater treatment facilities, both municipal and industrial, would be required to meet their WLAs independently. For most facilities, this would involve treatment plant upgrades to be completed by 2010. The resultant demand for designers, construction contractors, skilled labor, and materials could significantly increase the capital cost of compliance, already estimated at approximately two billion dollars (2 B). Virginia wastewater dischargers are now in the process of building and implementing a large-scale trading program to improve the overall cost effectiveness of the Chesapeake Bay nutrient reduction effort, to avoid the anticipated “construction crunch”and the associated cost impacts and time delays, and to accommodate continued economic growth and development within the watershed.

The trading program was authorized by legislation (House Bill 2862 and Senate Bill 1275) passed by the Virginia General Assembly and approved by the Governor on March 24, 2005. It allowed for the formation of a voluntary trade facilitation organization, the Virginia Nutrient Credit Exchange Association (The Exchange) consisting of municipal POTW and industrial NPDES permit holders. By January 1, 2007, all 127 significant NPDES facilities were required to be registered under the General Permit. Every significant discharger is required to submit a nutrient compliance plan to the Virginia Department of Environmental Quality (DEQ) by August 1, 2007, either individually to meet its own WLA, or through The Exchange in conjunction with other owners. It is anticipated that compliance plans will rely on a combination of treatment upgrades and voluntary nutrient credit trading among the 127 facilities. The nature and extent of this market-based approach to regulatory compliance is unprecedented on this scale.

This paper will focus on The Exchange's policy decisions, including its adoption of internal trading rules and a credit pricing methodology, and will explain the rationale for those decisions. The paper will review the actions taken by the owners in deciding whether and to what extent to participate in nutrient credit trading. Reasons for owner willingness to participate will be presented from discussions held during the compliance plan development process. An attempt will be made to compare the adopted compliance plans with theoretical economically optimal plans developed using a trading optimization model constructed for The Exchange. The paper will present policy recommendations for optimizing the benefits of nutrient credit trading program performance based on progress in developing Virginia's nutrient credit trading program.

Document Type: Research Article


Publication date: January 1, 2007

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