Virginia’s nutrient credit trading program, significantly expanded by the General Assembly in 20121, may soon be in operation as the Virginia Department of Environmental Quality (DEQ) and stakeholders are winding up the lengthy regulation development process.  The broad program will include many new participants and, while the program applies statewide, it is intended in part to enable the Commonwealth to meet its Phase I Watershed Implementation Plan (Phase I WIP) commitments to reduce nitrogen and phosphorus in the Chesapeake Bay watershed.  The draft regulation hews closely to legal requirements in many respects.  However, anticipated regulatory compromises in some areas threaten the program’s ability to reduce nutrients and, therefore, the Commonwealth’s success in meeting its Phase I WIP commitments.  Careful monitoring of the developing regulations will be necessary to ensure that trading achieves its goals, does not degrade local water quality and ensures the Commonwealth’s water quality programs remain consistent with the Clean Water Act and the State Water Control Law.

Virginia has been engaging in market –based nutrient trading for almost a decade.  Its first nutrient credit exchange program, enacted in 2005, was designed to ensure that wastewater treatment plants and other industrial facilities could meet applicable nutrient caps. The Commonwealth’s trading programs were expanded in 2009 to help new development activities meet the “no net increase in pollution” requirement reflected in stormwater regulations now coming on line.

In 2010, Virginia’s Phase I WIP proposed a broadly expanded nutrient trading program that would include more participants, make pollution reduction more cost-effective and increase flexibility for regulated entities in meeting the nutrient reductions assigned in the Chesapeake Bay TMDL (Bay TMDL). In its 2012 Session, the General Assembly enacted legislation to meet these goals.  This legislation authorized the participation of additional entities: municipal separate storm sewer systems (MS4s), industrial facilities with stormwater permits, certain animal operations (CAFOs), and permitted construction operators; and it authorized these regulated entities to meet their permit obligations by acquiring certified nutrient credits. Specific measures are intended to ensure that trading actually reduces (rather than relocates) pollution.  Among others, no entity may generate and sell credits unless it has first met its own WIP-compliant pollution reduction obligation (“baseline”); and only pounds reduced beyond baseline are eligible to be certified and then traded. Moreover, consistent with the Clean Water Act and Virginia law, the legislation specified that trading should not degrade local water quality.

Once completed, the regulation implementing the new trading law will supply the details to govern the expanded trading process.  For credit generators, the regulation prescribes the steps to apply for credit certification, including the submission of a detailed implementation plan that shows how credits will be generated and maintained, and it sets out certain baseline calculations for agricultural operations and urban practices. The regulation also describes certain aspects of the regulatory framework, specifying that DEQ will ensure an application’s administrative and technical completeness prior to credit certification, may inspect the credit generation facility and review all required records, and has the right to suspend or terminate a credit generation facility for noncompliance and other reasons. The regulation also prescribes financial assurance requirements to guarantee continued effectiveness of the generated and certified credit over its term.

The process of developing the regulation has also given rise to several areas of concern, as noted below.   Continued scrutiny is appropriate to ensure the final regulation creates a program strong enough to meet Virginia’s Phase I WIP commitments, the Clean Water Act and the State Water Control law.

Recommendations
Baselines for Credit Generation.  Virginia’s trading legislation rests on the principle that no entity may trade until that entity first meets and then exceeds its own baseline, and it requires baselines in the Chesapeake Bay watershed to be set at levels prescribed by the Phase I WIP. Similarly, the regulation must:

• Ensure that baselines for all Bay watershed generators meet the standard by providing sufficient details on how to calculate WIP-consistent baselines for all facility types, including urban stormwater retrofits.
• Reject the use of resource management plan (RMP) program compliance as baseline for credits generated from agricultural operations, because the RMP program will not be WIP-consistent in all circumstances.
• For credit generation outside the Bay watershed (and for trading to meet local TMDLs), the regulation should specify requirements that are consistent with water quality standards.

Additionality and Leakage
The regulation should clearly define the temporal and geographic limits of credit generation to ensure accurate accounting.  To address these ideas, the regulation should:

• Incorporate the requirement of additionality:  No tradable credit may be generated for practices already in place or that are funded for a difference purpose.
• To ensure additionality in the Bay watershed,  credits (e.g., from land-use conversion) must be generated within a time frame consistent with the assumptions of the Phase I WIP and the Bay TMDL.  Similarly, credits to be traded must not arise from BMPs for which the owner has been funded through cost-share programs or similar programs.
• Fully implement the “management unit” concept. This concept applies the same baseline to all contiguous parcels deeded to the same landowner that includes the nutrient-credit-generating site within its boundaries.
• Credit Generation and  Release.  Trading will not achieve the purposes intended by the Phase I WIP unless all traded credits deliver the expected pollution reduction benefits.  The regulation should provide:
• No credits should be certified unless they are generated from best management practices or other practices approved by the Chesapeake Bay Program
• No credits should be generated for certification and trading until DEQ has determined that all  practices for establishing baseline are in place and properly maintained.

Local Water Quality
The underlying trading legislation clearly states that local water quality requirements must be met.   The regulation accordingly must provide adequate local water quality protections.  For example, the regulation should:

• Mandate use of credits that were generated upstream (not downstream) by entities that discharge directly into impaired waters. Mandate use of upstream credits also by  entities that indirectly discharge to impaired waters unless such discharger demonstrates no adverse impact to local water quality to DEQ.
• Specify how far upstream from the discharge site the credit must be generated.  

Transparency and Public Participation
Transparency is critical to an effective trading program in which the public has confidence. For this regulation, transparency requires:

• Ensuring that the regulation provides adequate notice of the criteria on which DEQ will make its decisions.  For example, the final regulation should specify the practices establishing  baseline – not just for agricultural, urban and land-use conversion credits – but also for all other credit-generating entities. 
• Requiring that the public have – not just website notice of proposed credit-generating facilities – but also an opportunity to provide informed comment on any credit generation proposal following public access to, and review of, pertinent information on the generation facility’s management, operations and maintenance.

Inspection and Enforcement
Appropriate inspection and enforcement will be critical to ensuring that the program is successful in meeting its pollution reduction goals.  Accordingly, the regulation should:

• Specify key elements of a strong enforcement framework that will include DEQ inspection of each proposed credit generating facility prior to certifying credits, periodic monitoring within a specified timeline of the performance of each credit generation facility, and submission of monitoring information to DEQ in the annual report.
• Clarify that a portion of the fees collected will be used for enforcement.