Building the Chesapeake Bay’s Game-Changing Cap-and-Trade Water Scheme

Chris Santiago

Ten years ago, the US federal government gave the states around the Chesapeake Bay a decade to clean up their act.  Now that the states have failed, the feds want to impose mandatory cap-and-trade on water pollutants across the entire watershed.  Ecosystem Marketplace examines the diverse forces driving this massive undertaking – and the legal challenges that await.

16 May 2010 | Bernie Fowler is jumping for joy. The retired state senator from Maryland has been fighting to clean up the Chesapeake Bay for decades. Fowler’s passion for the Bay has even made the 86-year old former waterman something of a legend among his former constituents in Calvert County.

Just what is it that has Fowler so thrilled? In the waning days of the Bush Administration, he and several other plaintiffs, including the Chesapeake Bay Foundation, brought suit against the Environmental Protection Agency (EPA), charging that it hadn’t lived up to its promises to clean up the vast watershed. On Tuesday (May 11th), the EPA and the Bay’s advocates settled their suit. As part of the settlement, the EPA is now legally obligated to implement strict new pollution-reduction standards, including the enforcement of TMDLs (Total Maximum Daily Loads), or a maximum amount of pollution that a water body can assimilate without violating state water quality standards.

Fowler told the Baltimore Sun that the settlement gave him hope that the Bay’s health could improve within his lifetime.

“I’m beginning to see light at the end of the tunnel,” he said. “And that makes me happy.”

First Test for Environmental Market Team

The settlement led directly to the release of the Obama Administration’s new strategy for cleaning up the Bay.   Long in the works, the scheme mandates that the EPA impose pollution caps on the Bay and that the US Department of Agriculture (USDA) lead the development of a watershed-wide  water-quality trading  market.

“In partnership with Bay states, EPA will issue guidance concerning credits for nutrient and sediment reduction to accompany the Chesapeake Bay TMDL, which is expected to be final in December of 2010,” the strategy paper states. “EPA will work with the newly formed Environmental Market Team to assure that tools and protocols developed by the team are reflected in this and subsequent guidance to greatest extent possible.”

That team will be coordinated by the USDA’s Office of Environmental Markets (OEM).

A Perfect Storm

These developments are just two of several activities — mostly stemming from the federal government — that are bringing ecosystem markets to the Chesapeake Bay watershed. Call it a “perfect storm” of legislative, executive, and judicial efforts.

Peter Marx, a Senior Policy Advisor at the National Wildlife Federation, likens these efforts to a three-legged stool.

“The first part of the stool is the TMDL mandate, which stems from a 2000 Virginia court case,” Marx explained. “The court basically gave the Bay States 10 years to produce a healthy Bay.” If the Bay states failed to meet the goals, the federal government would then be responsible for implementing a TMDL cap.

The stool’s other two legs, according to Marx, are the Obama Administration’s Executive Order 13508, which called for the creation of the strategy paper released last week, and the Chesapeake Clean Water and Ecosystem Restoration Act of 2009, which was introduced by Maryland Senator Ben Cardin and Congressman Elijah Cummings.   Colloquially known as the Cardin Bill, it substantially increases funding for Bay restoration efforts and calls for federal regulation of TMDLs on the Bay.

The purpose of the Executive Order, issued by President Obama in May, 2009, is to “protect and restore the health, heritage, natural resources, and social and economic value of the nation’s largest estuarine ecosystem and the natural sustainability of its watershed.”

Solidifying the Legal Foundation

The executive order will probably face a challenge from opponents arguing that the Administration has over-reached its mandate – a charge that an actual law wouldn’t face.   TMDL proponents have two answers to that: the Cardin Bill and the American Power Act (sometimes referred to as the climate-change, carbon, or global warming bill), which would enshrine the caps in law.

Recently introduced by Senators John Kerry and Joe Lieberman, the carbon bill is massive in scope and even includes a provision for water quality trading.

That provision was inserted in an effort to gain support for the Carbon Bill from the agricultural community, on the premise that it would offer farmers who reduce their agricultural runoff a potential source of income.   Instead, however, it has sparked opposition from large segments of the agricultural community, who traditionally resist any legislation that brings government inspectors onto their property.

How Do Market-Based Strategies Fit In?

Flush with billions of dollars in stimulus money and strong backing from the White House, the EPA is eager to stimulate market activity immediately. But just how will the market be built?

The strategy calls for the USDA to take the lead on setting up water markets, but sources tell Ecosystem Marketplace that some within the EPA want the agency to create its own trading scheme.   Others within the EPA want the agency to use its ample resources to buy nitrogen and phosphorous credits – thus putting the government in the position of acting as a nutrient bank.   Neither approach, however, has widespread support within the agency, sources said.

Whichever path it takes, it is clear that once the EPA brings its resources to bear, things will start to move more quickly. Voluntary schemes have done a good job of “piloting” compliance markets, but the imposition of real pollution caps will actually spur the market.

That’s the opinion, at least, of Peter Woicke, former Executive Vice President and Chief Executive Officer of the International Finance Corporation.

“With caps on certain nitrates and other substances, its becoming easier to do trading,” he says.

In order to understand why this is such a giant leap forward, it would help to look at the history of efforts to clean up the Chesapeake Bay and where some of those efforts have failed.

Overcoming Conflicting Jurisdictions

The Chesapeake Bay is vast, fed by 150 rivers and waterways and encompassing more than 64,000 square miles. It is so huge, in fact, that it includes parts of six states, as well as the District of Columbia.

This, of course, is part of the problem: Because the watershed is part of so many different jurisdictions, building a coherent strategy for restoration has been problematic at best.

Efforts to revive the Chesapeake Bay have been faltering for years. Since the passage of the 1972 Clean Water Act, billions of dollars have been poured into the Bay, but with less than spectacular results. Due to bickering among municipalities and lack of enforcement, Chesapeake Bay agreements in 1983, 1987, and 2000 all failed to deliver. There have been some success stories, including a recently resurgent crab population, but there is roughly the same number of “dead zones” in the watershed as there was when efforts began.

Will Baker, president of the Chesapeake Bay Foundation, cited these failures as reasons for suing the EPA.

“Until a single entity, with watershed-wide responsibility and authority, is in place or until the federal government asserts its authority under the Clean Water Act, the cleanup is unlikely to be managed systemically,” Baker said. “Only a systems approach to restoring a natural resource as complex as the entire Chesapeake Bay Watershed will ultimately work.”

Why is the Bay so Bad?

So what exactly needs to be done? There are three main contaminants in the watershed: nitrogen, phosphorous, and sedimentation.

“Storm water runoff is one of the four major sources of pollution,” Baker said. “The other three are agricultural runoff, airborne deposition, and sewage treatment plant and industrial discharges.”

The practices and technologies for reducing storm water runoff are readily available. Farms can, for example, reduce their run-off by changing the way they till, plant, or fertilize – at a cost of about 1/65 of what factories in the developed world would pay to reduce their levels of pollution emissions, according to one study. This is where nutrient banks come in. In theory, industrial polluters will opt to pay farmers to reduce their pollution emissions along a river when those factories can’t afford to invest in technology to further limit their own discharges.

The Clean Water Act already requires municipalities to meet certain standards, but these standards have largely been ignored.

“In our region, the first locality to institute a storm water management permitting system that includes nitrogen limits is Montgomery County,” Baker said. “The Montgomery County program, while not perfect, can be a model for other jurisdictions in the watershed.”

Marx is lobbying for the Cardin Bill – in part because it puts in place load and waste load allocations for nutrients and sediments.

“The bill provides $1.5 billion for storm water implementation, with a 2025 deadline for meeting TMDLs,” Marx said. “It puts the burden of the deadline on the states. It includes two-year milestones, and accountability mechanisms if those milestones are not met well enough and fast enough.”

The Cardin Bill is actually an amendment to the reauthorization of the Clean Water Act, which must be reauthorized every five years. The Clean Water Act usually allocates $25-$30 million per year, but the Cardin Bill ups the ante and also adds TMDLs.

All Those Opposed

More than a few parties have misgivings about “healing” the Bay with market-based strategies. Some of the critics of this plan come as no surprise, including some energy companies, the National Home Builders Association, and the National Farm Bureau. (Representatives of both organizations were unavailable for comment.) But the debate over trading pollution credits has also made strange new bedfellows.

The National Farm Bureau and the National Waterkeepers’ Alliance, for example, have often been at odds when it comes to the restoration effort. However, both organizations appear to be less than enthusiastic about the introduction of trading schemes.

Opposition to conservation may seem strange for the Waterkeeper Alliance. But according to Michele Merkel, Chesapeake Regional Coordinator at the Waterkeeper Alliance, the organization “believes that market-based approaches to water pollution control undermine the very spirit and letter of the Clean Water Act.” However, because members programs in the Chesapeake do not have a unified position on the Cardin Bill, the Alliance does not formally oppose it.

The National Farm Bureau is calling the Cardin Bill a “hidden tax.” Concern over government control of water trading seems to be trumping the benefits of Payments for Ecosystem Services (PES).

Both Marx and Woicke are quick to point out, however, that a number of farmers support trading in the Chesapeake Bay.

“It is the National Farm Bureau and Big Agriculture that oppose trading,” said Woicke, “not the farmers themselves.”

False Advertising?

Some critics and policymakers are leery of efforts to win over farmers by telling them they can earn money from a cap-and-trade scheme.

In a Bay Journal article, Kurt Stephenson, an economics professor at Virginia Tech, and Leonard Shabman, a resident scholar at Resources for the Future, said such arguments   position markets in an irresponsible way.

“The fundamental problem with the discussion now under way is equating trading with ways to generate revenue,” Stephenson and Shabman said. “The focus on trading as a revenue source is an unfortunate diversion from the real opportunities to employ market-like programs for water quality management.”

Dan Nees agrees.

“Our ultimate goal is not to promote water quality trading for its own sake. We see it as a tool, but what we really care about is efficiency, transparency, and everything that goes into a market,” said Nees, who runs The Chesapeake Fund, a voluntary reduction scheme spearheaded by Forest Trends (publisher of Ecosystem Marketplace), the Chesapeake Bay Foundation, and the World Resources Institute.

Market-Based Strategies and the Bay

Market-based strategies create incentives for the private sector to get into the ring and grapple with complex questions—and be rewarded for finding the answers. With the EPA set to step in and take control of cleanup efforts in the Chesapeake Bay, the question becomes: Where does the government’s job end and the private sector’s begin?

Despite the fact that the EPA will dwarf the private sector, its entrance into trading schemes will spur its growth in several ways.

For one, real caps and real demand drivers will now be in place. A compliance-driven scheme has already been successfully implemented in Lake Okeechobee in Florida, but this will be the first time that a real pressure to reduce will exist, which means demand for the markets.

Additionally, the creation of government-backed markets will give others the opportunity to experiment with coupling multiple markets – beginning with water and carbon.

“If there is going to be a big pot of federal money, we can now demonstrate, or at least test the idea of bringing in other markets with nitrogen,” Nees said. “You don’t get many chances to do that.”

Regardless of how the EPA’s plans play out, it seems clear that — for the foreseeable future, at least — TMDLs are here to stay, and with them, ecosystem markets. The question is not whether or not to trade, but how can trading be made to be more efficient, transparent, and effective?

In addition to working with Bay jurisdictions and other federal agencies, as the language of the Executive Order puts it, the EPA can look to the experience and on-the-ground understanding of the private sector.

Chris Santiago is a freelance writer and editor who frequently blogs for He most recently worked at McGraw-Hill and “got green” at Oberlin College.

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