EPA 903-B-01-001

CBP/TRS 254/01

	







Prepared by:

The Chesapeake Bay Program

Nutrient Trading Negotiation Team

March 2001
Printed for the Chesapeake Bay Program by the Environmental Protection Agency

Recycled/Recyclable – Printed with Vegetable Oil Based Inks

on Recycled Paper 30% Postconsumer
Chesapeake Bay Program

Nutrient Trading

Fundamental Principles and Guidelines

2001

_________________________________________________________

410 Severn Avenue, Suite 109

Annapolis, Maryland 21403-2500

1-800-YOUR-BAY

http://www.chesapeakebay.net

Prepared by:

The Chesapeake Bay Program

Nutrient Trading Negotiation Team

Allison Wiedeman, Chesapeake Bay Program

Julie Trask, Chesapeake Research Consortium

i

PREAMBLE

This document presents fundamental principles and guidelines for nutrient trading in the

Chesapeake Bay watershed. The Chesapeake Bay Program convened the Nutrient Trading

Negotiation Team (Negotiation Team) in June 1999 for the purpose of exploring the feasibility

of nutrient trading for point and nonpoint sources in the Chesapeake Bay watershed and, if

appropriate, develop nutrient trading guidelines for the Bay jurisdictions to use on a voluntary

basis. The outcomes of the Negotiation Team’s deliberations are presented herein. This

document is not a regulation. Rather, it is intended to be used on a voluntary basis as a guide for

those Bay jurisdictions that choose to establish nutrient trading programs.

The Negotiation Team was composed of a wide array of interested stakeholders from across the

Chesapeake Bay watershed—Federal, state, and local governments, as well as municipal,

industrial, agricultural, environmental, and public interests, were among those represented. 

Using a facilitated consensus-based approach, the Negotiation Team derived the nutrient trading

fundamental principles and guidelines found in this report. Fundamental principles represent the

elements that the Negotiation Team deemed essential for an equitable, environmentally

protective, yet viable, trading program. The guidelines are what the Negotiation Team deems

important for the jurisdictions to consider when developing and implementing a trading program.

This document is a resource for the user in becoming familiar with, or developing and

implementing, a trading program for nutrients. The document is based on the Negotiation

Team’s comprehensive consideration of numerous other trading programs and approaches,

substantial research, and corresponding lengthy negotiations. General guidance is provided in

this document: certain program details will need to be determined by individual Bay

jurisdictions, should they implement a trading program. This document has undergone public

review and revisions were made, according to public comment, where the Negotiation Team

deemed appropriate.

Should the signatory states pursue trading programs, the Negotiation Team recommends that the

definitions, principles, and guidelines contained in this document be reevaluated two to three

years after implementation and actual operation of such programs. A reevaluation should

provide the opportunity for trading programs to adapt as reduction goals change, new water

quality data becomes available, new technologies evolve, policies such as “smart growth” are

implemented, cap strategies are developed, and as tributary strategies are revised. Recognizing
* See Exhibit 1.2 or Section 3.3 for a definition of Fundamental Principle #2.

ii

the importance of land use efforts such as “smart growth” in Bay restoration, the Negotiation

Team agreed,

1) that if it can be established that trading only within a major Bay tributary substantially 

constrains “smart growth” or cap strategy or tributary strategy implementation

initiatives, and

2) that trading with an adjoining major Bay tributary would yield significant environmental

benefits,

then the reevaluation may include a close examination of Fundamental Principle #2*

 to consider

the potential for allowing trades across major Bay tributary boundaries. Any changes to the

definitions, principles, and guidelines must be adopted through negotiation by consensus in a

manner consistent with the adoption of the existing definitions, principles, and guidelines.
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HOW TO USE THIS DOCUMENT

It is important for the reader to understand that, due to the very complex nature of this subject

matter, this document should be read in its entirety to fully comprehend how all of the facets of a

trading program work together and to avoid the meaning of any individual facet from being taken

out of context. For example, a reading of the fundamental principles alone will not provide all of

the information necessary to accomplish trading. Rather, it is necessary to comprehensively

consider the fundamental principles together with the guidelines and supporting options herein to

develop a complete trading program.

This document is not a regulation but a guide for the states to use on a voluntary basis when

developing their own trading programs. Certain words frequently associated with statutes or

regulations (e.g., must, should, may, will, etc.) have been carefully used in this report to reflect a

hierarchy of importance or strength of the feeling by the Negotiation Team. In this report, the

Negotiation Team’s use of the words “must” and “will” reflect essential elements of a successful

and defensible nutrient trading program, the word “should” reflects the Negotiation Team’s

strong recommendation for inclusion of such elements in a trading program, and the use of the

word “may” reflects optional elements that are worthy of consideration.

Hierarchy of Language Chosen by the Negotiation Team

“Must” reflects what the Negotiation Team concludes are essential

components of a successful and defensible program

“Should” reflects the Negotiation Team’s strong recommendation for

inclusion within a trading program

“May” reflects optional elements the Negotiation Team considers

worthy of consideration
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The Principles and Guidelines Established in This Document Are Agreed to by

Consensus by The Chesapeake Bay Program Nutrient Trading Negotiation Team

February 2001

Primary Negotiators Stakeholder Group

Robert Koroncai U.S. EPA, Region III ___________________________________

Allison Wiedeman Chesapeake Bay Program ___________________________________

Jerry Griswold Chesapeake Bay Program ___________________________________

Virginia Kearney State of Maryland ___________________________________

John Rhoderick State of Maryland ___________________________________

David Bingaman Commonwealth of Pennsylvania ___________________________________

Robert Yowell Commonwealth of Pennsylvania ___________________________________

Stuart Gansell Commonwealth of Pennsylvania ___________________________________

Mark Bennett Commonwealth of Virginia ___________________________________

John Kennedy Commonwealth of Virginia ___________________________________

Roy Hoagland Regional Environmental Interest

Stella Koch Regional Environmental Interest ___________________________________
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Patricia Jackson Local Watershed Interest

Helen Murphy Public Interest

Jean Packard Public Interest

Cy Jones Municipal Point Source Interest

Bill Leary Municipal Point Source Interest

Jud White Industrial Point Source

George Kelly Industrial Point Source

Steele Phillips Rural Nonpoint Source

Don Robinson Rural Nonpoint Source

Lynne Hoot Rural Nonpoint Source

Barbara Moore Storm Water Interest

Larry Gavan Storm Water Interest
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Exhibit 1.1 Potential Benefits of Trading

(adapted from U.S. EPA, 1998)

Economic Benefits:

• Reduces costs for individual sources contributing to water

quality problems.

• Allows dischargers to take advantage of economies of

scale and treatment efficiencies that vary from source to

source.

• Reduces overall cost of addressing water quality problems

in the watershed.

• Creates market demand for new innovative technologies.

Environmental Benefits:

• Achieves equal or greater reduction of pollution for the

same or less cost.

• Creates an economic incentive for dischargers to go

beyond minimum pollution reduction and also encourages

pollution prevention and the use of innovative

technologies.

• Can reduce cumulative pollution loading, improve water

quality, accommodate growth, and prevent future

environmental degradation.

• Can address the broader environmental goals within a

trading area; e.g., ecosystem protection, ecological

restoration, improved wildlife habitat, endangered species

protection, etc.

• May encourage pollution reduction to occur sooner and at

increased rates.

Social Benefits:

• Encourages dialogue among stakeholders and fosters

concerted and holistic solutions for watersheds with

multiple sources of water quality impairment.

EXECUTIVE SUMMARY

The purpose of this Nutrient Trading Fundamental Principles and Guidelines document is to

provide guidance on developing and implementing a nutrient trading program within the

Chesapeake Bay watershed. Growing populations and agricultural industries in the watershed

have put pressure on our ability to maintain and achieve nutrient reduction goals necessary for

the health of the Bay and its living resources. In spite of the many traditional nutrient reduction

measures already in effect, such as end-of-pipe technology and Best Management Practices

(BMPs), nutrient loads will continue to increase unless new and alternative reduction and

maintenance methods and programs are employed. Nutrient trading is viewed as a possible tool

among a realm of techniques and actions that may be used to counteract nutrient increases.

In June 1999, the Chesapeake Bay Program

organized a multi-stakeholder Nutrient

Trading Negotiation Team for the purpose

of exploring the feasibility of nutrient

trading in the Chesapeake Bay watershed

and, if appropriate, prepare guidelines for

voluntary use by states in the development

of their respective nutrient trading

programs. This document presents the

results of these discussions and describes

fundamental principles and guidelines for

nutrient trading as proposed and agreed to

by the Negotiation Team. The Negotiation

Team recognized that, if designed

appropriately, this market-based tool

potentially offers a means to achieve

pollution reduction in cost-effective and

environmentally sound ways. The

potential benefits of trading are listed in

Exhibit 1.1.

Through a professionally facilitated

process, the Negotiation Team came to

consensus on a number of fundamental

principles and general guidelines aimed at

ensuring consistent, compatible, and
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environmentally beneficial approaches between Chesapeake Bay Program jurisdictions and

adherence to Chesapeake Bay Program goals and established agreements. Fundamental

principles, presented in Exhibit 1.2, represent the highest order of importance and establish the

* Please see Preamble for information on the application of Fundamental Principles.

Exhibit 1.2 Fundamental Principles *

Fundamental Principle #1

Trades must not produce water quality effects locally, downstream, or Baywide that

• violate water quality standards or criteria

• do not protect designated uses

 or

• adversely impact living resources and habitat.

Fundamental Principle #2

Trading will be allowed only within each major Bay tributary (i.e., Susquehanna, Potomac, Rappahannock, York, James,

Patuxent, Maryland Western Shore, Virginia Western Shore, Maryland Eastern Shore, Virginia Eastern Shore) among all

signatory states and nonsignatory states if they adopt the appropriate allowance and are consistent with the Chesapeake

Bay Program’s nutrient trading guidelines and state tributary strategies.

Fundamental Principle #3

The nutrient trading program must be consistent with Federal, state, and local laws and regulations, be flexible enough to

adapt to future changes in these laws and regulations, and enable participation of all potential sources as determined by

the market place.

Fundamental Principle #4

The nutrient trading program must be consistent with the Chesapeake Bay Program's nutrient reduction goals and state

tributary strategies.

Fundamental Principle #5

Each trade must result in a net reduction in nutrient loadings or contribute to maintenance of a tributary nutrient cap. Net

reduction in loadings or maintenance of a cap shall be calculated based upon the estimated tributary loadings at a point in

time determined by the state.

Fundamental Principle #6

Sources should implement nutrient reduction actions to achieve the 40% reduction goal, as well as the goals adopted for

the tributaries south of the Potomac River prior to pursuing a nutrient trading option.

Fundamental Principle #7

Traders must be in substantial compliance with all local, state, and Federal environmental laws, regulations, and programs.

Fundamental Principle #8

The involvement of a diverse group of stakeholders must be sought in the design and implementation of state trading

programs and related public education initiatives.
viii

vital foundation for the program. Fundamental principles are deemed by the Negotiation Team

to be essential for an equitable, environmentally protective, yet viable, trading program. 

Guidelines, presented in Exhibit 1.3, are organized around six key elements of a trading program:

• Identifying nutrient reduction goals

• Determining eligibility

• Performing trade administration

• Ensuring accountability

• Assessing progress

• Involving stakeholders.

These guidelines are what the Negotiation Team deems important for the jurisdictions to

consider when developing and implementing a trading program.

Exhibit 1.3 Guidelines

GUIDELINES FOR IDENTIFYING NUTRIENT REDUCTION GOALS

Trading to Achieve or Maintain the Chesapeake Bay Nutrient Cap

1. Trading should be allowed among “like” source types in order to achieve the 40% nutrient reduction goal. This means

that point sources could trade with point sources, and nonpoint sources could trade with nonpoint sources, but point

sources could not trade with nonpoint sources.

Within several years after the implementation of a trading program, the states may reexamine the success or failure of

trades to date in achieving the goal and, thereafter, determine if cross-source trading to achieve is appropriate.

Once the 40% nutrient reduction goal is met, trades should be allowed within and across source types to maintain

nutrient reduction goals or further reduce nutrient levels.

2. For trading to occur within a major Bay tributary, the nutrient trading program must incorporate (a) specific nutrient

loading allocations established to provide water quality conditions necessary to protect living resources in the tributary

and the Bay; (b) a baseline and a cap for nutrient loads for the tributary; and (c) allowances for point and nonpoint

sources.

GUIDELINES FOR DETERMINING ELIGIBILITY

Guidelines Applicable to All Source Categories

3. Total Nitrogen and/or Total Phosphorus are the forms of nutrients eligible for trading.

4. Eligibility consideration should be given to all potential point and nonpoint sources to the extent allowed under current

local, state, and Federal programs.

5. A source may receive credits for reductions in both nitrogen and phosphorus through the operation of a facility or the

implementation of a BMP that reduces both nutrients.

6. Entities that are not considered sources may purchase credits (e.g., for the purpose of banking credits or retirement).

7. Any source receiving state or Federal funds to achieve nutrient reductions through the development or installation of any

nutrient reduction equipment, technology, or structural BMP cannot buy credits to achieve those reductions. If state or

Federal funds are used to cost share nutrient controls that generate credits, only the portion of those credits not paid for

by the state or Federal cost share are available for trading.
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Exhibit 1.3 Guidelines (Cont’d)

GUIDELINES FOR DETERMINING ELIGIBILITY (CONT’D)

Additional Nonpoint Source Eligibility Guidelines

8. All farmers (sellers) must be following a state certified Nutrient Management Plan to be eligible to participate in trading.

9. All BMPs must meet NRCS standards and be part of a Conservation Plan.

Urban Eligibility Guidelines

10. All nonagricultural nonpoint source storm water systems governed by a state and/or Federal storm water permit(s) are

eligible to generate measurable and certified credits for those reductions that exceed permit requirements. For those

storm water systems not governed by permit, each must have comparable requirements (to permitted systems) prior to

the generation of nutrient reduction credits.

GUIDELINES FOR PERFORMING TRADE ADMINISTRATION

Baywide Program Oversight

11. The Chesapeake Bay Program should have an opportunity to comment on state programs with respect to fundamental

principles, consistency, interstate trades, and program effectiveness.

State-Level Program Oversight and Management

12. Each state will be responsible for program oversight and the applicable level of day-to-day program management. 

These functions should include the following:

 • Establishing policy direction

 • Certifying credits

 • Establishing guidance on eligible trades

 • Registering and tracking the generation of credits, including quantities retired for net water quality benefits

 • Monitoring compliance

 • Enforcing program requirements

 • Evaluating program performance.

Establishment of Central State Coordinating Office

13. A central trading coordinating office should be established within each state to track the administration of trades. The

organization may be formed within an existing state government or formed from a conglomerate of state and local

stakeholders.

Trade Ratios

14. Each trading program should address the following ratios:

 • Delivery ratios

 • Special needs ratios

 • Retirement ratios

 • Uncertainty ratios.

Trade Facilitation

15. Each trading program should address trade facilitation, including those activities that support the negotiation and

recording of completed trade transactions. Specific activities and roles should be determined by the states.
x

Exhibit 1.3 Guidelines (Cont’d)

GUIDELINES FOR ENSURING ACCOUNTABILITY

Guidelines for Assessing Performance

Point Sources

16. Self monitoring and reporting of nutrient reduction should be required for participants in the trading program.

Nonpoint Sources

17. All nonpoint source controls should be inspected to ensure the control is properly sited, the materials and plans satisfy

established quality specifications, and the installation job meets performance standards.

18. All nonpoint source controls should undergo an annual on-site assessment by a qualified inspector to ensure proper

functionality (e.g., look for signs of sedimentation and erosion to identify inefficient BMPs). In addition, the nonpoint

source should allow right of entry by the state or its designated agent, and the states should use scheduled spot check

inspections to supplement scheduled random inspections.

States

19. States will be responsible for performing, collecting, and analyzing ambient water quality monitoring and overall

program assessment.

20. In addition to ambient water quality monitoring, states should include other types of data (e.g., weather patterns, slope,

soil types, effluent monitoring data) to predict the effectiveness of trades, to assess whether trades are meeting and

maintaining water quality standards, and whether traders are meeting applicable limits.

Guidelines for Account Balancing

Point Sources

21. Point sources will monitor and report on a monthly basis. A yearly accounting period should be used to assess the

trade.

22. Point sources should have mechanisms in place to calculate the credits or portions of credits eligible for trading.

Nonpoint Sources

23. Annual account balancing periods should be used for nonpoint sources based upon seasonal monitoring.

24. Nonpoint sources should have mechanisms in place to calculate the credits or portions of credits eligible for trading.

Guidelines for Enforcement and Compliance

General

25. The trading agreement will be enforceable by the state. After considering a variety of options, including general state

permits, state regulations, and contracts, the Negotiation Team strongly recommends that trades should be governed

by a state general permit or regulation issued under the state’s water quality laws (versus Clean Water Act) and that the

public will be provided opportunity for input prior to the execution of a trade. If a state elects to utilize a contract as a

vehicle for enforcement, the contract development and enforcement processes must provide the same elements as if

within the state’s regulatory or general permit program, including public participation prior to the execution of a trade. 

Any NPDES permittee with a nutrient effluent permit limit desiring to trade should have the trade linked to its permit.

Point Sources

26. The state will maintain oversight of facility monitoring and reporting and will perform periodic compliance checks. The

state will have full compliance and enforcement responsibilities, such as those performed under existing Clean Water

Act programs and protocols.
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Exhibit 1.3 Guidelines (Cont’d)

GUIDELINES FOR ASSESSING PROGRESS

Monitoring Trades and Trading Impacts

27. States will perform ambient monitoring and modeling to assess the effect of trading programs in achieving or

maintaining baywide (e.g., 40% reduction goal) and tributary specific nutrient reduction goals. These monitoring and

modeling efforts should build upon existing efforts currently used by states and trading participants. Point sources

involved in nutrient trading must monitor and report total nitrogen and total phosphorous discharges as applicable to the

trade. Nonpoint source monitoring should be conducted to provide sufficient data to demonstrate the effectiveness of

trading actions. If monitoring is not utilized, then nonpoint source pollutant loading reductions will be determined based

upon data and analysis obtained from the Chesapeake Bay Program’s Watershed Model. If the modeling approach is

used, trading ratios must be applied to accommodate for uncertainty.

State Tracking Mechanisms

28. States must develop mechanisms to collect and track trading information that is compatible with existing mechanisms

used by the Bay Program for assessing progress toward achieving and maintaining nutrient reduction goals (e.g.,

watershed model, BMP tracking system, environmental indicators, State of the Bay Report). Tributary-specific

information must be collected by the state and aggregated to demonstrate how trading supports the achievement and

maintenance of nutrient reduction goals. Information requirements include the following:

 • Total annual load reduction of nitrogen and phosphorous

 • Total annual load reduction of nitrogen and phosphorous by type of trade (p-p, p-nps, nps-p, nps-nps)

 • Total annual load reduction of nitrogen and phosphorous by discharger type (point source, agricultural, and urban

nonpoint sources)

 • Net loading reduction of nitrogen and/or phosphorous generated by trading partners

 • Comparison of pre-trading water quality conditions to post-trading water quality conditions

 • Total number of trades made

 • Total annual number of trades

 • Determination of whether cumulative effects of the trading program are contributing to achieving tributary strategy

goals.

Reporting Baywide Progress

29. The Chesapeake Bay Program must provide a similar Baywide analysis (as outlined under the State Tracking

Mechanisms guideline) based on the trading information it receives from the states.

Evaluating Accountability, Compliance, and Enforcement

30. States must track the actions of trading partners, compliance with trade agreements, and any enforcement action taken. 

Information requirements for each tributary watershed and the state include the following:

 • Total annual number of trading partners subject to periodic compliance checks

 • Total annual number of trading partners deemed to be out of compliance with existing regulatory requirements

 • Total annual number of trading partners deemed to be out of compliance with the terms of their trade agreement

 • Total annual number of trading partners that corrected noncompliance issues

 • Total annual number of trades subject to enforcement penalties.

Establishment of a Central Coordinating Office

31. The central coordinating office, as described under the Guidelines for Performing Trade Administration, will be

responsible for the state’s responsibilities contained in these Assessing Progress guidelines.

Additional Information to be Provided by Buyer

32. Buyers of credits must provide available information and reason(s) for trades, including the following:

 • Credit price

 • Timeframe of trade

 • Nutrient reduction (in lbs)

 • Existing cost savings estimates.
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Exhibit 1.3 Guidelines (Cont’d)

GUIDELINES FOR INVOLVING STAKEHOLDERS

33. Each state should create or use existing citizens advisory committees to be part of the nutrient trading program within

each state.

34. Each state may choose to create a demonstration program.

35. States should provide broad public notification of trades as they occur, including notification to local watershed groups.
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TABLE OF CONTENTS

PREAMBLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

HOW TO USE THIS DOCUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi

1.0 Introduction .............................................................1

2.0 Background .............................................................2

2.1 Motivation for a Trading Program in the Chesapeake Bay Watershed . . . . . . . . . . . 3

2.2 Closing the Gap with Market-Based Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

2.3 Federal and Chesapeake Bay Trading Initiatives ............................5

2.4 Approach To Developing Nutrient Trading Guidelines for the Chesapeake Bay . . . 7

3.0 Foundations for Nutrient Trading in the Chesapeake Bay . . . . . . . . . . . . . . . . . . . . . . . . . 10

3.1 Key Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

3.2 Geographic Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

3.3 Fundamental Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

3.4 The Six Elements of the Nutrient Trading Program . . . . . . . . . . . . . . . . . . . . . . . . . 16

4.0 Guidelines for Identifying Nutrient Reduction Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

5.0 Guidelines for Determining Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

6.0 Guidelines for Performing Trade Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

7.0 Guidelines for Ensuring Accountability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

8.0 Guidelines for Assessing Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

9.0 Guidelines for Involving Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

10.0 Recommended Next Steps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Appendix A. Public Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Appendix B. Negotiation Team Membership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Appendix C. Key Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Appendix D. Trading Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Appendix E. Trade Tracking Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Appendix F. Implementation Options for Trade Accountability . . . . . . . . . . . . . . . . . . . . . . . . 65

REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
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LIST OF EXHIBITS

Exhibit 1.1 Potential Benefits of Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi

Exhibit 2.1 The Effects of Nutrient Over-Enrichment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Exhibit 2.2 Potential Benefits of Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Exhibit 3.1 Key Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Exhibit 3.2 Ten Major River Basins of the Chesapeake Bay Watershed . . . . . . . . . . . . . . . . . 13

Exhibit 3.3 Nutrient Trading Concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Exhibit 9.1 Nutrient Trading Program Development: Stakeholder Process . . . . . . . . . . . . . . 33

Exhibit D.1 Model Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

LIST OF TABLES

Table D.1 Nutrient Removal Efficiencies of Nonpoint BMPs . . . . . . . . . . . . . . . . . . . . . . . . 49

Table D.2 Uncertainty Ratios Established by Other Programs . . . . . . . . . . . . . . . . . . . . . . . . 49

Table D.3 BMP Nutrient Removal Efficiencies and Ratios in the Tar Pamlico Program . . . 52

Table D.4 Rahr Malting Co., Pollutant Equivalency Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Table D.5 Delivery Factors from the Watershed Model Draft Progress 2000 Scenario . . . . . 56

Table D.6 Estimated Nutrient Reduction Efficiencies for Main BMP Categories . . . . . . . . . 59

Table D.7 Procedure for Calculating Nutrient Credits from BMPs . . . . . . . . . . . . . . . . . . . . 60

Table D.8 Nitrogen Loading Factors: Conventional Tillage, Conservation Tillage, and

Hayland; Land Use Acreage and Edge of Stream Loading Factors (LF) in

lbs/acre . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
1

1.0 Introduction

This report presents the outcomes from the Chesapeake Bay Program Nutrient Trading

Negotiation Team’s deliberation process on the feasibility of nutrient trading in the Chesapeake

Bay watershed. It is meant to serve as a nonprescriptive guide for Chesapeake Bay watershed

states to use in developing their nutrient trading programs, as they deem appropriate. The report

will also aid potential trading participants in understanding the concept of trading and the

expected process for trading in the Bay.

A draft of these guidelines was made available to the public for review on September 8, 2000. 

A series of 16 public meetings were held in a variety of locations across the watershed for the

purpose of educating the public on these guidelines. One hundred and eighteen (118) written

comment letters were received prior to the close of the comment period on October 27, 2000. 

The Nutrient Trading Negotiation Team (Negotiation Team) considered these comments and

made changes where appropriate. A summary of these comments, along with a description of the

major commenter issues and the changes made by the Negotiation Team after consideration of

these comments, has been compiled and is entitled “Summary of Public Comments Submitted on

the Chesapeake Bay Program Nutrient Trading Fundamental Principles and Guidelines.” See

Appendix A for a synopsis of the public meetings, public comments, and responses to these

comments.

Using a consensus-based process, the Negotiation Team identified key definitions, fundamental

principles, and guidelines for a Chesapeake Bay nutrient trading program. In addition, the

Negotiation Team identified implementation options for specific elements of a trading program. 

Recognizing the differences among jurisdictions in the watershed, options are presented to

provide ideas that will help entities identify the best approach for their situation. The options

were developed from research and case studies—they are not based on consensus.

This report begins by providing detailed background information on nutrient reduction activities

in the Chesapeake Bay watershed and explains the reasons for considering nutrient trading as a

tool to assist in nutrient reduction. This report continues by presenting definitions and

fundamental principles agreed upon by the Negotiation Team. A description of the six elements

of a trading program follows in Sections 4.0 through 9.0. These sections contain the guidelines

the Negotiation Team concluded were important factors to consider, should the Bay jurisdictions

pursue nutrient trading. Section 10.0 discusses future steps recommended prior to developing a

large watershed trading program.
2

Exhibit 2.1 The Effects of

Nutrient Over-Enrichment

Excess nutrients may cause the excessive growth of

microscopic floating plants called algae. When algae

populations explode, or bloom, the water becomes cloudy and

blocks light to submerged aquatic vegetation (SAV). Without

enough light, SAV dies. Because SAV provides food and

shelter for many Bay animals, such as crabs and fish, this

results in wide-spread damage to the Bay.

Algae blooms from excess nutrients also cause another

problem—reduced oxygen levels in the Bay’s waters at certain

times of the year. Oxygen is necessary for all Bay life, but each

summer as dying algae from the spring blooms sink, they are

consumed by microscopic animals and bacteria in a process

that uses up oxygen in the water. This algae decay, plus hot

summer weather, often rob the Bay’s deep waters of life-giving

oxygen. If oxygen levels fall too low, Bay organisms can die.

2.0 Background

One of the greatest water quality challenges

facing the Chesapeake Bay is excess

nutrients. This overabundance of

phosphorus and nitrogen in Bay waters is a

form of pollution that harms the Bay’s

aquatic life and other living resources (see

Exhibit 2.1).

In response to this growing problem, key

government entities in the Bay region—

Maryland, Pennsylvania, Virginia, District

of Columbia, U.S. Environmental

Protection Agency, and the Chesapeake Bay

Commission—signed the Chesapeake Bay

Agreement in 1983. This agreement

established a cooperative approach to

addressing the Bay’s problems and initiated the voluntary partnership between citizens in the

scientific community and governments at local, state, and Federal levels known as the

Chesapeake Bay Program.

In 1987, the original agreement was strengthened with the signing of a new Bay Agreement that

set a goal to reduce the controllable nitrogen and phosphorus loads entering the Bay by 40% from

1985 levels by the year 2000. Each of the signatory jurisdictions that signed these agreements

(Maryland, Virginia, Pennsylvania, District of Columbia) proceeded to develop “tributary

strategies,” which presented their approach to meeting the reduction goals. After almost two

decades of concentrated effort, the signatories to the Chesapeake Bay Agreement recently

reaffirmed their partnerships and recommitted and strengthened their efforts in the June 2000

signing of Chesapeake 2000. By far the most comprehensive and far-reaching of the three Bay

Program agreements, it reaffirms the commitment to achieve and maintain the 40% nutrient

reduction goal agreed to in 1987, as well as specific tributary strategies goals. In fact, the 2000

Agreement’s goal is to delist the Chesapeake Bay from the impaired water bodies list for

nutrients and sediments by 2010. As part of this goal, by 2003, new tributary strategies will be

revised to reflect new load reductions for nitrogen and phosphorous assigned to each major

tributary based on water quality conditions necessary to protect aquatic living resources.
3

Studies performed as part of the 1997 Reevaluation of the Nutrient Reduction Goal and in

support of the Chesapeake 2000 initiative show that it is necessary to go beyond reduction

approaches implemented to date and think creatively about additional, new, and alternative

reduction methods. One option the Chesapeake Bay Program is considering, which is the focus

of this document, is nutrient trading. Simply stated, nutrient trading is the transfer of nutrient

reduction credits, specifically nitrogen and phosphorus, between buyers (entities that purchase

nutrient reduction credits) and sellers (entities that offer nutrient credits for sale). After

evaluating the range of nutrient reduction techniques utilized thus far in Chesapeake Bay

restoration efforts, the Chesapeake Bay Program found that although it was getting close to

meeting the 40% Nutrient Reduction Goal, it may fall short of fully achieving the goal, even with

full implementation of current approaches. New techniques, such as nutrient trading, may

provide an additional tool needed to close the gap. In keeping with its program philosophy of

voluntary, collaborative cooperation among the watershed’s jurisdictions, the Bay Program’s

effort to develop nutrient trading guidelines seeks to maximize state flexibility while ensuring

consistent and compatible approaches that are in keeping with overall Bay Program goals.

The remainder of this chapter discusses the motivation for a trading program in the Chesapeake

Bay watershed, the closing of the gap with market-based approaches, Federal and Chesapeake

Bay trading initiatives, and the approach to developing nutrient trading guidelines for the

Chesapeake Bay.

2.1 Motivation for a Trading Program in the Chesapeake Bay Watershed

Although great progress has been made in reducing point and nonpoint source nutrient pollution

to the Chesapeake Bay, more needs to be accomplished to meet Chesapeake Bay Program

reduction goals. This is especially critical as population pressures continue to mount throughout

the watershed. Between 1970 and 1997, the watershed’s population increased by 28% to 15.1

million people (U.S. EPA Chesapeake Bay Program, 1999). This trend is expected to continue

well into the future. New people will exert additional pressures on the Bay’s fragile ecosystem. 

For example, more and more wastewater will be discharged to already strained wastewater

treatment plants. These population increases, and their ancillary effects on community

infrastructure, land use patterns, and pollution generation, will make it difficult to meet

Chesapeake Bay Program goals or even to hold the line in the future. The Chesapeake Bay

Program and its partners will need every tool at their disposal.

In addition to ongoing Chesapeake Bay Program efforts to reduce nutrient pollution, U.S. EPA is

working with states across the country on the development of the Total Maximum Daily Load

(TMDL) regulations. Unlike the tributary strategies that are part of the voluntary framework of

the Chesapeake Bay Program, TMDLs are part of the Clean Water Act’s regulatory framework. 
4

Section 303(d) of the Clean Water Act addresses waterways that are not “fishable and swimable”

by requiring states to identify those waters and develop TMDLs for them, with oversight by U.S.

EPA. Implementation of TMDLs then requires that point and nonpoint sources reduce pollutants

to achieve the pollutant loadings established by the TMDL through a variety of Federal, state,

tribal, and local authorities, programs, and initiatives. Trading is one option that can occur under

a TMDL framework since a TMDL establishes the loading capacity of a defined watershed area

and thus the allocation for that area.

Each jurisdiction within the Chesapeake Bay watershed is confronting the issue of TMDLs and is

in varying stages of implementing TMDLs for impaired water bodies. In addition, Chesapeake

2000 addressed TMDLs. The new Agreement contains a commitment to remove the Bay from

the list of impaired waters by 2010 with a goal of precluding the need to develop regulatorybased TMDLs for nitrogen and phosphorus.

2.2 Closing the Gap with Market-Based Approaches

Market-based approaches to environmental management, such as watershed-based trading, have

the potential to enhance the suite of traditional approaches and achieve the needed reductions in

nutrient loadings. The driving force behind market-based approaches differs from traditional

approaches to environmental management. In a market-based approach, participants determine

how best to meet a particular goal. The focus moves from compliance to performance. Marketbased approaches use competition to increase efficiency and cost-effectiveness by letting the

market determine which source can best reduce pollution without prescribing how to achieve the

reduction.

Trading programs are emerging in a variety of locations nationwide as a means to achieve

pollutant reductions in cost-effective and environmentally sound ways. In simple terms, trading

programs provide a mechanism for determining the most cost-effective means of nutrient

reduction via the process of buying and selling pollution reduction credits—in the case of the

Chesapeake Bay, nutrient reduction credits. Through this program, the seller of the credits

provides cost-effective means of removing or preventing additional pollutant discharges and the

buyer of the credits has access to these more affordable means. Central to this kind of system is

that overall pollution discharge is not increased within a particular area—the total pollution

control requirements in an area such as a watershed or subbasin will be met, but the aggregate

cost of compliance across nutrient sources is reduced (Stephenson et al., 1995).

There are several different types of trading programs used throughout the country. Point-to-point

trading programs enable trading between individual point sources (e.g., between wastewater

treatment plants), point-nonpoint nutrient trading systems refer to trading opportunities between
5

Exhibit 2.2 Potential Benefits of Trading

(adapted from U.S. EPA, 1998)

Economic Benefits:

• Reduces costs for individual sources contributing to water

quality problems.

• Allows dischargers to take advantage of economies of

scale and treatment efficiencies that vary from source to

source.

• Reduces overall cost of addressing water quality

problems in the watershed.

• Creates market demand for new innovative technologies.

Environmental Benefits:

• Achieves equal or greater reduction of pollution for the

same or less cost.

• Creates an economic incentive for dischargers to go

beyond minimum pollution reduction and also encourages

pollution prevention and the use of innovative

technologies.

• Can reduce cumulative pollution loading, improve water

quality, accommodate growth, and prevent future

environmental degradation.

• Can address the broader environmental goals within a

trading area; e.g., ecosystem protection, ecological

restoration, improved wildlife habitat, endangered species

protection, etc.

• May encourage pollution reduction to occur sooner and at

increased rates.

Social Benefits:

• Encourages dialogue among stakeholders and fosters

concerted and holistic solutions for watersheds with

multiple sources of water quality impairment.

point source dischargers (e.g., wastewater treatment plants) and nonpoint sources (e.g., a farming

operation), and nonpoint-nonpoint trading may occur between nonpoint sources such as

agricultural operations. The most appropriate type of trading program for an area depends on

factors such as the type of sources within a location (e.g., point sources vs. nonpoint sources),

discharge limitations placed on those sources through mechanisms such as discharge permits, and

whether a limitation or “cap” for a pollution load over a geographic area exists.

Trading programs are a market-based approach to environmental protection, intended to result in

a more equitable, efficient, cost-effective means to address water quality problems. They may

encourage pollution reduction to happen sooner and at increased rates. As such, trading

programs supplement existing regulatory and nonregulatory approaches to control pollutant

discharges. It is a tool used in water resource management for which all watershed pollutant

sources, both point and nonpoint, contribute to reducing pollutant without any one source bearing

an excessive financial burden.

Trading is also considered an innovative

way for community stakeholders (e.g.,

regulated sources, nonregulated sources,

regulatory agencies, and the public) to

develop more “common sense” solutions to

water quality problems in their watersheds. 

According to U.S. EPA’s Effluent Trading

in Watersheds Policy Statement, trading

potentially offers a number of economic,

environmental, and social benefits (see

Exhibit 2.2).

2.3 Federal and Chesapeake Bay

Trading Initiatives

The Federal government has long

considered trading a potential approach in a

suite of environmental management tools. 

U.S. EPA, for example, has studied the idea

of trading programs as cost-effective tools

for achieving water quality objectives for

almost 20 years (Podar, 1996). Trading

gained increased attention when President

Clinton and Vice President Gore publically
6

promoted market-based approaches to environmental management through the Reinventing

Environmental Regulation strategy released in 1995.

As a result of this strategy, U.S. EPA issued a Policy Statement in early 1996 that reaffirms U.S.

EPA’s support of watershed-based trading programs, describes the types of trading systems, and

outlines the benefits associated with trading. The 1996 Policy Statement described how U.S.

EPA will promote watershed-based trading:

“EPA will actively support and promote effluent trading within watersheds to achieve

water quality objectives, including water quality standards, to the extent authorized by

the Clean Water Act and implementing regulations. EPA will work cooperatively with

key stakeholders to find sensible, innovative ways to meet water quality standards

quicker and at less overall cost than with traditional approaches alone. EPA will assure

that effluent trades are implemented responsibly so that environmental progress is

enhanced, not hindered” (U.S. EPA, 1996a).

In May 1996, U.S. EPA published the Draft Framework for Watershed-Based Trading intended

for local and national community groups, members of the regulated and nonregulated

community, and governmental organizations. This framework provides background information

on trading; describes the conditions necessary for a successful trade; gives a template of issues

(e.g., regulatory, economic, scientific, institutional, etc.) that facilitates the identification and

evaluation of trading opportunities; and provides worksheets and checklists to evaluate if

potential trades meet threshold conditions (U.S. EPA, 1996b).

The states of Maryland, Virginia, and Pennsylvania also are exploring the possibility of nutrient

trading as an additional tool in their nutrient reduction efforts.

Maryland

In August 1997, the Maryland Department of the Environment (MDE) developed a trading

concept paper entitled “Maryland Department of the Environment Concept Paper for a Nutrient

Trading Policy” in an effort to address the issue of allowing for continued development of

municipal wastewater treatment plants while still meeting the Chesapeake Bay nutrient reduction

goals. At this point, the concept paper remains a draft document.

The Water Environment Research Foundation is also sponsoring a study to design a trading

program for Maryland. This project is being performed in consultation with Maryland

stakeholders including MDE, the Maryland Department of Agriculture, the Maryland Department

of Natural Resources, and the Maryland Association of Municipal Wastewater Agencies. 
7

Trading scenarios will involve point-to-point or point-to-nonpoint sources. This study is

expected to be completed in the Spring of 2001.

Virginia

The Virginia Water Quality Improvement Act includes a clause that requires investigation of

trading as a means to meet its goals. The Virginia Department of Environmental Quality (DEQ)

is currently in the process of working with stakeholders to develop a point-to-point source

trading program in Virginia. DEQ is working with the Virginia Water Resources Resource

Center to hold stakeholder meetings for this purpose. DEQ has also formed a Water Resources

Committee consisting of stakeholder groups to advise the DEQ Director on matters relating to

Virginia’s water resources. One of the topics this group plans to address is trading.

Pennsylvania

U.S. EPA sponsored an effort to simulate trading programs for several Bay basins in

Pennsylvania for which TMDLs have been developed. A workgroup of Pennsylvania

stakeholders was formed to assist in this project, including the Pennsylvania Department of

Environmental Protection (PADEP), the Chesapeake Bay Foundation, the Pennsylvania

Municipal Authority Association, and the Chesapeake Bay Program. The product of this

endeavor, completed in September 1999, was to develop a manual to elaborate on issues

regarding point/nonpoint source trading (U.S. EPA, 1999). Additionally, the state legislature

endorsed a resolution on February 9, 2000, expressing an interest in pursuing trading.

2.4 Approach To Developing Nutrient Trading Guidelines for the Chesapeake

Bay

Working within the framework of the Chesapeake Bay Program, the Trading and Offsets

Workgroup (TOWG) of the Nutrient Subcommittee convened a team of Bay watershed

stakeholders (the Negotiation Team) to further examine the concept of nutrient trading.

The Negotiation Team included representatives from major stakeholder groups throughout the

Chesapeake Bay watershed that were interested in and/or affected by a potential nutrient trading

program. The following interests were represented:

• Virginia, Maryland, Pennsylvania, and the District of Columbia

• Regional environmental interests

• Local watershed interests

• Local government interests
8

• Public interests

• Municipal and industrial point source interests

• Rural and urban nonpoint source interests

• Stormwater interests

• Chesapeake Bay Program

• U.S. Environmental Protection Agency.

Full membership is presented in Appendix B.

The Negotiation Team met intensely for more than a year between June 1999 and August 2000. 

The Negotiation Team was charged with examining the concept of nutrient trading, and if

appropriate, developing recommendations for nutrient trading guidelines. Each signatory to the

Chesapeake Bay Agreement has different geographic, social, and economic conditions and,

accordingly, are taking different approaches to reducing nutrients to achieve Chesapeake Bay

Program goals. Therefore, the Negotiation Team’s efforts were to provide guidelines, not

prescriptions, to ensure that nutrient trading approaches in the Chesapeake Bay watershed are

consistent and compatible between jurisdictions and fully supportive of Chesapeake Bay

Program goals.

The Negotiation Team used an educational and

consensus-based approach for exploring nutrient

trading and developing guidelines. Significant

time was spent developing an understanding of

nutrient trading concepts, reviewing approaches

and lessons learned from other areas, and

considering how this information could be applied

in the Chesapeake Bay.

Throughout the guidelines development process,

the Negotiation Team worked with trained facilitators to develop consensus on the structure and

content of the Chesapeake Bay nutrient trading guidelines. Consensus-based guidelines were

developed for the following aspects of a trading program:

• Fundamental principles

• Definitions

• Identifying nutrient reduction goals

• Evaluating eligibility

• Performing trade administration

Consensus-Based Approach

The first meeting of the Negotiation Team (June 30,

1999) adopted ground rules for the negotiation

process, including the following definition of

consensus: “Consensus means that all the

negotiators would agree they could accept the

proposed option or guideline, even if a negotiator

might prefer a different position, and be willing to

make compromises that satisfy the interests of their

constituents to help the team move forward.”
9

• Ensuring accountability

• Assessing progress

• Involving stakeholders.

Negotiation Team members met in small groups to deliberate specific questions associated with

the above topics and to develop recommendations to bring back to the plenary session. Plenary

sessions were used to review small group recommendations and to come to a group consensus on

what to incorporate into the guidelines. This iterative process of small group work and plenary

sessions was supplemented by review and agreement on the draft fundamental principles and

guidelines document. The guidelines presented in this document represent the results of this

cumulative effort.
10

3.0 Foundations for Nutrient Trading in the Chesapeake Bay

Several key components provide the foundation for developing effective nutrient trading

guidelines for the Chesapeake Bay. Because the watershed encompasses multiple jurisdictions

and potentially many participants in a trading program, it is necessary to use a common language

and adopt common definitions to support development of consistent and compatible programs. 

Although each jurisdiction is unique, some level of consistency and compatibility is necessary to

ensure that Chesapeake Bay Program goals, including the capability to monitor and report

progress, are met.

It is also necessary to have a clear idea of what geographic area a trading program will address. 

The geographic area covered by a program—the program scope—is an important consideration

for local water quality. As the distance between trading partners increases, the ability to focus on

local water quality may become more difficult; however, if the geographic area is too restrictive,

the number of potential trading partners and the incentives for trading may decrease to a level

where the program is no longer viable. Concerns about local water quality may be

accommodated through an effective trading framework that carefully addresses participant

eligibility, program monitoring, and accountability.

An effective trading framework must address a range of issues that will drive the program from

inception to completing a trade to monitoring program effectiveness and water quality results. 

Each element in the framework provides the opportunity for developing discrete guidelines that

will support a properly operating trading system. The Negotiation Team considers six elements

as providing the framework for the Chesapeake Bay nutrient trading guidelines—identifying

nutrient reduction goals, determining eligibility, performing trade administration, ensuring

accountability, assessing progress, and involving stakeholders.

3.1 Key Definitions

Nutrient trading is an emerging environmental management approach. As such, terminology is

still evolving and often similar terms have different meanings from one program to the next. 

Definitions for key trading terms provide the building blocks for a trading framework and

guidelines. Because of this, the Negotiation Team felt it important to use the consensus process

to adopt common definitions. Exhibit 3.1 summarizes the key definitions for a trading

framework. A full set of definitions is presented in Appendix C. The definitions presented in

Exhibit 3.1 have guided the Negotiation Team’s discussions and should be incorporated into any

framework developed for trading in the Chesapeake Bay. The following narrative demonstrates

how these definitions apply in a Chesapeake Bay trading framework.
11

Exhibit 3.1 Key Definitions

Allowance The allowed nutrient load a source may

discharge.

Baseline The numeric level of nutrient load at a particular

point in time that serves to establish nutrient

reduction goals and allowances.

Buyer An entity that purchases nutrient credits.

Cap The total nutrient load that is allowed to be

discharged into a given water body. The cap is

the baseline minus the amount of load reduction

needed to meet the goal. The cap is equal, or

greater than, the sum of the allowances.

Credits The amount of nutrient load reduced below the

allowance.

Nutrient

Trading

The transfer of nutrient reduction credits,

specifically those for nitrogen and phosphorous.

Seller An entity that offers nutrient credits for sale.

Source A nutrient source whether point, nonpoint, or

third party. The Negotiation Team agreed to use

the term “source” in place of “discharger.”

Nutrient trading is the transfer of nutrient

reduction credits, specifically nitrogen and

phosphorous, between buyers (entities that

purchase nutrient credits) and sellers (entities

that offer nutrient credits for sale). Credits

become available when a seller has reduced

its nutrient load below what it is allowed to

discharge to the receiving water body. The

allowable nutrient load a source may

discharge is referred to as an allowance.

For example, if a point source is able to

reduce nitrogen below what it is otherwise

required to do, it may sell that reduction in

the form of credits to another source (possibly

another point source or a nonpoint source)

that cannot meet its requirements (either

because of cost, technology limitation, water

quality requirements, etc.). For a trading

system to work, credits need to be quantified

and expressed in a common unit of measurement so that they may be measured, monitored, and

tracked. Typically, flow and concentration are required to quantify an allowance and/or credit,

resulting in total nutrient load (expressed as pounds, tons, kilograms, or some other unit of

measurement—typically pounds) per unit of time (e.g., day, month, year). In the case of

nonpoint sources, the load may have a spatial component as well (e.g., pounds/acre/year).

3.1.1 Trading and Cap Issues

In the Chesapeake Bay watershed, allowances and credits are generated because a limitation, or

cap, was placed on the amount of nutrients that could be discharged in the watershed. As

described in Chapter 2.0 of these Guidelines, the Chesapeake Bay Program established a 40%

Nutrient Reduction Goal from 1985 levels for the controllable loads of nitrogen and phosphorus

entering the Chesapeake Bay by the year 2000. The year 1985 was selected as the baseline—the

numeric level of nutrient load into a given water body at a particular point in time—for

determining the nutrient reduction goal. A baseline is the starting point from which nutrient

reduction goals and allowances are established. The Negotiation Team adopted the 1985

baseline as established by the 1987 Chesapeake Bay Agreement. Subsequent agreements or

actions such as the Chesapeake 2000 Agreement or the adoption of a TMDL regulatory
12

framework could establish alternative baselines for the Chesapeake Bay Program’s nutrient

trading framework. Therefore, the Negotiation Team decided that it is imperative that the

program be flexible to accommodate potentially changing baselines and caps.

The 40% reduction goal provided the basis for which the baywide nutrient cap was determined. 

Similarly, it formed the basis for establishing tributary-specific nutrient reduction goals and caps

that are expressed in the Tributary Strategies for each of the 10 major tributary basins in the

Chesapeake Bay watershed (see Exhibit 3.2).

3.1.2 Types of Trades

Nutrient trading can incorporate point or nonpoint sources of nutrients. Point sources are pipes

or other fixed, discrete conveyances that discharge directly into water. Typically, point sources

are regulated under the Clean Water Act. Sewage treatment plants are the main point source of

nutrients to the Chesapeake Bay.

Nonpoint sources of nutrients are more diffuse—either washed off the land, leached into ground

water, or deposited from the air. Agriculture, especially crop fertilization and livestock

production, contributes most of the nonpoint source nutrients to the Chesapeake Bay, although

runoff from urban and suburban areas is a growing problem. Most nonpoint sources are not

regulated, although they may participate in a variety of incentive and other nutrient reduction

programs (e.g., agricultural cost share) or be required to submit and implement nutrient

management plans.

In developing these Guidelines, the Negotiation Team considered point and nonpoint sources of

pollution. Four possible trading opportunities can occur: point-point, point-nonpoint, nonpointpoint, and nonpoint-nonpoint. In a point-point system, allowances are created and assigned to

discrete point sources and trading may occur between those sources provided the fundamental

principles and guidelines are met. For example, a wastewater treatment plant could trade with

another wastewater treatment plant. Point-point trading is the easiest to quantify because

monitoring programs are more established and the location of discharges is confined to a discrete

conveyance.

Point-nonpoint/nonpoint-point trading expands the opportunities for trading by enabling point

sources and nonpoint sources to participate. Again, each source must have an allowance to

determine the availability of, or need for, credits. In this scenario, a point source will seek to

obtain credits from a nonpoint source. For example, a point source operator may pay a farmer to

implement a BMP that will more cost-effectively reduce the total nutrient discharge (Stephenson

et al., 1995). It is also conceivable that nonpoint to point source trading could occur.
13

30 0 30 60 Miles

N

NY

PA

VA

WV

MD DE DC

Susquehanna

Potomac

James York

Rappa.

Patux.

W. Shore MD

E. Shore MD

E. Shore VA

Exhibit 3.2 Ten Major River Basins of the Chesapeake Bay Watershed
14

Nonpoint-nonpoint trading refers to trading between nonpoint sources, such as two farmers. If

one farmer wanted to expand production or use different techniques that would increase the

nutrient discharge above his/her allowance, the farmer would seek another nonpoint source,

likely another farmer, who had credits to sell because his/her nutrient load was below the

allowance—possibly due to innovative BMPs. Nonpoint source trading is the most difficult to

quantify and measure because it is difficult to monitor these diffuse sources of nutrients. Often

programs use the efficiency of BMPs (e.g., amount of load reduction per a given BMP) as a

starting point for determining the availability of credits.

3.2 Geographic Scope

An important element of a Chesapeake Bay trading program is the geographic scope, or areal

extent and spatial boundaries, of the program. Geographic scope can encompass many different

options and scales (e.g., between or within various government jurisdictions, such as counties or

states; between or within watersheds of varying sizes). In order to maximize program

participation, a larger geographic scope is useful. On the other hand, the farther the trading

partners are from each other, the more difficult it is to ensure that local water quality goals are

met. The geographic trading boundary must also allow for efficient administration of credit

exchange.

The Negotiation Team adopted the Chesapeake Bay Program’s 40% Nutrient Reduction Goal as

the basis for the trading program’s cap. Because this trading framework requires the assignment

of consistent and equitable allowances derived from the cap, trading will only be allowed among

sources from signatory states (Maryland, Pennsylvania, Virginia, and the District of Columbia). 

Trading opportunities may be expanded to include a non-signatory state if that state adopts an

appropriate allowance set by the Chesapeake Bay Program and adheres to the Chesapeake Bay

Program’s nutrient trading guidelines presented in this document.

Trading may occur between states as long as the trade is within the major tributary boundaries, 

such as between Maryland and Virginia in the Potomac River basin. According to Fundamental

Principle #2 below, however, trading would not be allowed between different basins in different

states, such as between the Susquehanna and the Potomac Basins.

Using watershed boundaries as a starting point, trading will be allowed within a particular

tributary among all signatory states and nonsignatory states if they meet all fundamental

principles and trading guidelines. Additional scope considerations are described below in

Fundamental Principle #2.
15

3.3 Fundamental Principles

Fundamental principles are the key criteria that must be met for a successful and defensible

nutrient trading program. They help to define and clarify key assumptions underlying the

Chesapeake Bay Program’s nutrient trading guidelines and provide a critical foundation that can

be applied when determining the appropriateness of a trade. The Negotiation Team felt the

fundamental principles to be the backbone of a trading program and spent a considerable amount

of time negotiating these principles to arrive at a consensus. Note that the first fundamental

principle essentially states that local water quality will not be impacted by trades. This is an

overarching theme that any trading program must incorporate when considering trade location

and nutrient credit exchanges. Implementation of this principle will ensure that pollution “hot

spots” will not result from trades. The fundamental principles for nutrient trading in the

Chesapeake Bay follow:

Fundamental Principle #1

Trades must not produce water quality effects locally, downstream, or Baywide that

• violate water quality standards or criteria

• do not protect designated uses

or

• adversely impact living resources and habitat.

Fundamental Principle #2

Trading will be allowed only within each major Bay tributary (i.e., Susquehanna, Potomac,

Rappahannock, York, James, Patuxent, Maryland Western Shore, Virginia Western Shore,

Maryland Eastern Shore, Virginia Eastern Shore) among all signatory states and

nonsignatory states if they adopt the appropriate allowance and are consistent with the

Chesapeake Bay Program's nutrient trading guidelines and state tributary strategies.

Fundamental Principle #3

The nutrient trading program must be consistent with Federal, state, and local laws and

regulations, be flexible enough to adapt to future changes in these laws and regulations, and

enable participation of all potential sources as determined by the market place.

Fundamental Principle #4

The nutrient trading program must be consistent with the Chesapeake Bay Program's nutrient

reduction goals and state tributary strategies.

Fundamental Principle #5

Each trade must result in a net reduction in nutrient loadings or contribute to maintenance

of a tributary nutrient cap. Net reduction in loadings or maintenance of a cap shall be
16

Identifying Nutrient

Reduction Goals

Assessing

Programs

Determining

Eligibility

Ensuring

Accountability

Performing Trade

Administration

Involving

Stakeholders

Exhibit 3.3 Nutrient Trading Concept

calculated based upon the estimated tributary loadings at a point in time determined by the

state.

Fundamental Principle #6

Sources should implement nutrient reduction actions to achieve the 40% reduction goal, as

well as the goals adopted for the tributaries south of the Potomac River, prior to pursuing a

nutrient trading option.

Fundamental Principle #7

Traders must be in substantial compliance with all local, state, and Federal environmental

laws, regulations, and programs.

Fundamental Principle #8

The involvement of a diverse group of stakeholders must be sought in the design and

implementation of state trading programs and related public education initiatives.

3.4 The Six Elements of the Nutrient Trading Program

Nutrient trading for the Chesapeake Bay

Program can be envisioned as a six-part

model containing distinct activities,

events, and roles/responsibilities. Exhibit

3.3 illustrates the major elements of the

framework and the relative relationship

among the elements. The arrows in the

diagram indicate that the trading program

is dynamic and iterative. The length of

time to cycle through a trade is yet to be

determined. Sections 4.0 through 9.0

describe in detail the Negotiation Team’s

recommended guidelines associated with

each element.

• Identifying Nutrient Reduction Goals—The bay-wide goals established by the

Chesapeake Bay Program for nutrient reduction or individual tributary specific goals. In

the context of a trading program, these goals will correspond to and be congruent with

appropriate allowances associated with tributary strategies.

• Determining Eligibility—Activities to determine the number and types of credits that

may be traded. Eligibility identifies the forms of nutrients that may be traded and
17

provides guidelines on what entities can participate. Potential trading entities may

include point and nonpoint sources that meet certain minimum qualifications (e.g., be in

substantial compliance with local, state, and Federal environmental regulations and

programs).

• Performing Trade Administration—Identifies roles and responsibilities within the

trading framework. Specific activities for the Chesapeake Bay Program and states are

defined. Also, this element addresses the need for a central coordinating office and

application of trade ratios.

• Ensuring Accountability—Post-trade monitoring and assessment of the effectiveness of

the trade, including but not limited to, enforcement of the terms and conditions of a

trade, provisions for extraordinary agreements, and recording updates to the trade. 

Issues of default and/or expiration of credits would be monitored and managed based on

the terms and conditions established prior to the trade. Monitoring of local water

quality conditions also is addressed.

• Assessing Progress—Tributary and Baywide assessment of the effectiveness of the

trading program outcomes, especially in terms of the nutrient reduction goals for

individual traders, basins, and subbasins. This also includes the type of trade agreement

and tracking credits bought and sold to make sure overall Chesapeake Bay basin goals

are met. Issues of equity and efficiency would also be analyzed and summarized.

• Involving Stakeholders—A set of activities and opportunities for any interested party to

observe the trading program, monitor nonproprietary information about the trading

program operation and accomplishments, and offer comments for improvement.
18

4.0 Guidelines for Identifying Nutrient Reduction Goals

Every trading program must have a goal or cap that drives the trading process. The term “cap”

also is generally used to describe the total load allocation of a pollutant that can be discharged to

a water body. Caps can be Total Maximum Daily Loads (TMDLs) established pursuant to the

Clean Water Act or they can be goals established pursuant to the Chesapeake Bay Program. 

Guideline #2 was added to reflect the new Chesapeake 2000 agreement, which states that these

loading allocations will be established to provide water quality conditions necessary to protect

living resources. Guideline #2 also acknowledges that allowances for point and nonpoint sources

will need to be defined in order to successfully operate a trading program.

In the case of a water-based nutrient trading program, quantifying a cap on nutrient loads that

may be released to a particular watershed or other geographic area serves as that goal. From this

cap, specific allowances may be determined. Until new load allocations are set according to the

Chesapeake 2000 agreement, the 40% Nutrient Reduction Goal, established by the Chesapeake

Bay Program in 1987, will serve as the initial cap for a nutrient trading program in the

Chesapeake Bay. Due, however, to improved science and evolving technologies and other

related programs (e.g., Chesapeake 2000 or TMDLs or tighter reduction goals), this goal may

change over time. A trading program must have the flexibility to adapt to changing goals.

The operating premise for many Chesapeake Bay Program activities is achievement of 40%

reduction in nutrient loading from 1985 levels by the year 2000. This 40% reduction goal

establishes an overall cap of nutrients that can be discharged into the Bay and is defined on a

tributary-specific basis through the use of Tributary Strategies. The tributary load allocations

provide a starting point for determining caps and source allowances for a nutrient trading

program. These allowances based on nonregulatory Tributary Strategies will serve as the

Trading to Achieve or Maintain the Chesapeake Bay Nutrient Cap

1. Trading should be allowed among “like” source types in order to achieve the 40% nutrient reduction goal. This

means that point sources could trade with point sources, and nonpoint sources could trade with nonpoint sources,

but point sources could not trade with nonpoint sources.

Within several years after the implementation of a trading program, the states may reexamine the success or failure

of trades to date in achieving the goal and, thereafter, determine if cross-source trading to achieve is appropriate.

Once the 40% nutrient reduction goal is met, trades should be allowed within and across source types to maintain

nutrient reduction goals or further reduce nutrient levels.

2. For trading to occur within a major Bay tributary, the nutrient trading program must incorporate (a) specific nutrient

loading allocations established to provide water quality conditions necessary to protect living resources in the

tributary and the Bay, (b) a baseline and a cap for nutrient loads for the tributary, and (c) allowances for point and

nonpoint sources.
19

primary operating premise for these nutrient trading guidelines unless superceded by new goals

or regulatory requirements. Trading may be one option, along with other measures identified in

the Tributary Strategies to improve water quality in the Bay and its tributaries, so that these

waters may be removed from the impaired waters list (delisted) prior to the time frame when a

Baywide tidal TMDL would need to be established.

The primary consideration in the implementation of any trading program is whether it will serve

as a reliable tool for achieving nutrient reduction goals; therefore, a trading program must be

designed to maximize the ability to do this. Guideline #1 makes a key distinction between

trading to achieve the cap and trading to maintain the cap. Trading to achieve would allow

similar source types to trade to meet their tributary strategy nutrient reduction load allocations. 

Trading to maintain would require that sources first meet their tributary strategy load allocations

prior to participating in trades across source types (e.g., point to nonpoint source trading). Once

met, these sources could then trade to maintain to stay within their tributary strategy load

allocation. The Negotiation Team spent a considerable amount of time determining whether

trades could occur to meet and/or maintain the cap and arrived at a consensus on the guideline

presented above; however, the Negotiation Team also recognized that the jurisdictions are

responsible for determining when the 40% goal has been met.
20

5.0 Guidelines for Determining Eligibility

One necessary component to any trading program is the determination of who will be eligible to

trade. Clear eligibility requirements help to delineate the rights and responsibilities of trading

partners and are essential to ensuring that the other guidelines, especially fundamental principles,

are achieved. Eligibility is based in part on the program’s overall nutrient reduction goals and its

ability to enforce a particular type of trade and monitor for compliance. Eligibility must be broad

enough to enable an adequate available number of trading partners, while ensuring that

applicable water quality goals are met. Certain details can be included in a trading program to

address issues of equity, trading ratios, minimum qualifications of a trader, past performance of

classes of credits, and similar qualifications.

Eligibility consideration should be given to all potential sources (discrete point sources such as

Publicly Owned Treatment Works [POTWs] and industries, urban diffuse sources, and

agricultural nonpoint sources) to the extent allowed under current local, state, and Federal

programs. Baywide, 25% of the nitrogen loading is attributable to point sources, while 59% is

discharged by nonpoint sources. Given this, the Negotiation Team concluded that it is important

to allow trading among point and nonpoint sources. Point source-point source, nonpoint sourcenonpoint source, nonpoint source-point source, and point source-nonpoint source trades could,

Guidelines Applicable to All Source Categories

3. Total Nitrogen and/or Total Phosphorus are the forms of nutrients eligible for trading.

4. Eligibility consideration should be given to all potential point and nonpoint sources to the extent allowed under

current local, state, and Federal programs.

5. A source may receive credits for reductions in both nitrogen and phosphorus through the operation of a facility or the

implementation of a BMP that reduces both nutrients.

6. Entities that are not considered sources may purchase credits (e.g., for the purpose of banking credits or retirement).

7. Any source receiving state or Federal funds to achieve nutrient reductions through the development or installation of

any nutrient reduction equipment, technology, or structural BMP cannot buy credits to achieve those reductions. If

state or Federal funds are used to cost share nutrient controls that generate credits, only the portion of those credits

not paid for by the state or Federal cost share are available for trading.

Additional Nonpoint Source Eligibility Guidelines

8. All farmers (sellers) must be following a state certified Nutrient Management Plan to be eligible to participate in

trading.

9. All BMPs must meet NRCS standards and be part of a Conservation Plan.

Urban Eligibility Guidelines

10. All nonagricultural nonpoint source storm water systems governed by a state and/or Federal storm water permit(s)

are eligible to generate measurable and certified credits for those reductions that exceed permit requirements. For

those storm water systems not governed by permit, each must have comparable requirements (to permitted

systems) prior to the generation of nutrient reduction credits.
21

with appropriate guidelines, be implemented in an effort to capture as much reduction potential

as possible from all sources.

The Negotiation Team made an important distinction in Guideline 7 with regard to trading versus

use of public funds to obtain reductions. It was agreed upon, by consensus, that any source

receiving state or Federal funds to achieve nutrient reductions cannot use those reductions to

generate credits for sale or to buy credits. An exception to this guideline, however, is for Federal

facilities trading among or within other Federal facilities.

All sources are eligible to trade pursuant to various eligibility criteria per source type and class of

trade. When determining eligibility guidelines, the Negotiation Team considered requirements

for buyers and sellers of credits among the following categories of sources:

• Point source

• Agricultural nonpoint source

• Nonagricultural nonpoint source (e.g., urban diffuse sources).

Point Sources

The point source category for trading includes facilities that are regulated under the National

Pollution Discharge Elimination System (NPDES) permitting program and discharge effluent

from a discrete location (e.g., outfalls such as a pipe). For the most part, these sources include

wastewater treatment plants and regulated industries. Because these sources tend to discharge

nutrients from discrete outfalls, it is easier to monitor the level of nutrients being released, and,

therefore, accounting of nutrient loads (credits) is more easily quantified and accurate.

Agricultural Nonpoint Sources

Agricultural nonpoint sources, on the other hand, are often more diffuse and difficult to measure. 

The Negotiation Team reached a consensus on a number of agricultural nonpoint source

eligibility criteria. It was decided that all farmers must have a nutrient management plan in place

that meets state standards to be eligible to participate in trading. Not all practices associated with

this plan are capable of generating credits. Those that were built using government cost-share

funds would not be eligible; instead, reductions in nutrients associated with cost-share funded

practices would be applied toward achieving the state’s 40% nutrient reduction goal. The

Negotiation Team also felt that while some inequities may arise, BMPs installed prior to a state

adopting a trading program would not be tradeable. Additional guidelines associated with
22

agricultural nonpoint source trading are outlined in 8 and 9 of the guidelines summary box at the

beginning of this section.

Urban Diffuse Sources

Urban diffuse sources includes runoff from built (e.g., existing developments, city streets,

parking lots) and nonbuilt (e.g., yards, parks) environments and areas under construction. 

Additionally, urban diffuse sources may encompass combined sewer overflows, also subject to

Federal regulation. Some of this runoff makes its way directly to streams and other water bodies,

and some is collected in storm sewer systems. Many jurisdictions have regulations in place for

runoff collected by storm sewers (referred to as storm water). On a national level, many

municipalities will be regulated under either the Phase I or Phase II NPDES Storm Water

Program.

There are many possibilities for integrating nutrient trading into an urban diffuse source program. 

Clearly, it must be integrated with existing regulatory programs. Potential buyers from this

category may be residential or commercial developers; sellers may be localities who are

implementing large holding ponds or upgrading septic tanks.
23

Baywide Program Oversight

11. The Chesapeake Bay Program should have an opportunity to comment on state programs with respect to

fundamental principles, consistency, interstate trades, and program effectiveness.

State-Level Program Oversight and Management

12. Each state will be responsible for program oversight and the applicable level of day-to-day program management. 

These functions should include the following:

• Establishing policy direction

• Certifying credits

• Establishing guidance on eligible trades

• Registering and tracking the generation of credits, including quantities retired for net water quality benefits

• Monitoring compliance

• Enforcing program requirements

• Evaluating program performance.

Establishment of Central State Coordinating Office

13. A central trading coordinating office should be established within each state to track the administration of trades. The

organization may be formed within an existing state government or formed from a conglomerate of state and local

stakeholders.

Trade Ratios

14. Each trading program should address the following ratios:

• Delivery ratios

• Special needs ratios

• Retirement ratios

• Uncertainty ratios.

Trade Facilitation

15. Each trading program should address trade facilitation, including those activities that support the negotiation and

recording of completed trade transactions. Specific activities and roles should be determined by the states.

6.0 Guidelines for Performing Trade Administration

Actual implementation of a trading program can be complex, involving many different roles and

responsibilities by a range of entities. It is important to clearly define the administrative roles

necessary to smooth implementation of the program. Trade administration also encompasses

specific components of program operation—the mechanism(s) and agreement vehicles for

implementing trades, duration of trading agreements, establishing credit prices, tracking trades,

and program funding.

Establishment of a nutrient trading program involves the transfer of nutrient credits from one

entity (seller) to another (buyer). In order to ensure that transactions occur smoothly, efficiently,

and in a legally defensible manner, and to foster the long-term viability of a credible trading

program, it is essential that administrative and organizational requirements, including responsible

parties, are clearly defined. When establishing administrative requirements, it is important to
24

clearly identify the entities in charge of program oversight and day-to-day program management,

actual trade facilitation, and other aspects of a trading program (e.g., public involvement,

technical support). It is also important to define administrative components, such as the

enforcement mechanism to be used to implement trades and the duration of a trading agreement. 

Trade administration options—including roles/responsibilities and program components—to be

considered by states in the development of their nutrient trading programs are provided below. 

An overview of trading ratios, including options to be considered by the state, is presented in

Appendix D. These ratios are a key component to administering a trading program.

Administrative Roles for Trade Administration

The Negotiation Team identified four primary and two ancillary functions that must be addressed

in a trading program. These are program oversight, program management, stakeholder

involvement, trade facilitation and tracking, technical support, and public education, respectively. 

The four primary functions are described below.

Baywide Program Oversight. While the Negotiation Team felt it important for each state to be

responsible for its own oversight and management, the Team agreed that a Baywide program

oversight body should be established to ensure consistency across state programs. This body

would be composed of representatives from all pertinent stakeholder groups (state agencies,

buyers and sellers, environmental interest groups, etc.). The Team identified the Chesapeake Bay

Program as the best oversight entity.

State-Level Program Oversight and Management includes setting policy direction on eligible

trades and program evaluation. It also includes management activities associated with credit

certification, compliance monitoring, and enforcement. The Negotiation Team reached

consensus on the need to have each state responsible for program oversight and management

within its respective state.

Trade Facilitation and Tracking includes those activities that support the negotiation and

recording of completed trade transactions. In general, this role includes brokering trades by

providing information and participant matching. Specific activities may include the following:

• Helping to match buyers with sellers

• Identifying, verifying, and prioritizing trading partners
25

• Assisting potential trading partners in understanding the regulatory and legal framework

of the program and providing advice on how participating in the program may or may

not serve their interests

• Helping potential trading partners to negotiate and prepare trade agreements

• Registering and tracking the generation and use of credits, including quantities retired

for net water quality benefits

• Keeping a Web site of information on current trading prices, available credits, interested

buyers and sellers, and other information to facilitate the union of buyers and sellers.

Appendix E provides examples of forms that could be used for trade tracking.

Program Components of Trade Administration

Several components of program operation also are encapsulated under trade administration. 

These components identify the appropriate mechanism(s) for implementing trades, the timing

and duration of a trading agreement, the approach for establishing the price of credits, and

techniques to fund program implementation. Discussions from the Negotiation Team’s

deliberations in these areas are defined below.

• Mechanism(s) for Implementing Trades—Negotiated trades will be recorded in an

enforceable document that serves as a contract between buyer and seller. The details of

that document should be left flexible and will be determined by individual states

according to their specific trading policies.

• Duration of Trading Agreement—The duration of a contractual agreement should be

contingent upon the type of trade. Using the framework of the Clean Water Act, the

maximum duration of a trading contract will be 5 years, corresponding to the length of a

NPDES permit. Trade contracts involving nonpoint sources should be appropriately

shorter to reflect their higher risk, unless a longer duration can be justified.

• Establishing Credit Prices—The prices of credits typically are established by the

market’s supply and demand curves. Appropriate trade administration design should

allow sufficient demand to be created for credits. The trading program should follow as

simple and flexible a design as possible to reduce transaction costs, while still ensuring

that water quality objectives are protected. Grant programs should be used in such a

way as to incentivize nutrient trading; for example, larger grants could be offered early

in a 10-year program.
26

• Program Funding—To launch the program would require state support at the outset. 

In particular, the state should investigate incentives for participation, such as grant

programs (e.g., larger grant offerings earlier in the program). Eventually, the program

could be funded through participant fees.
27

Guidelines for Assessing Performance

Point Sources

16. Self monitoring and reporting of nutrient reduction should be required for participants in the trading program.

Nonpoint Sources

17. All nonpoint source controls should be inspected to ensure the control is properly sited, the materials and plans

satisfy established quality specifications, and the installation job meets performance standards.

18. All nonpoint source controls should undergo an annual on-site assessment by a qualified inspector to ensure proper

functionality (e.g., look for signs of sedimentation and erosion to identify inefficient BMPs). In addition, the nonpoint

source should allow right of entry by the state or its designated agent, and the states should use scheduled spot

check inspections to supplement scheduled random inspections.

States

19. States will be responsible for performing, collecting, and analyzing ambient water quality monitoring and overall

program assessment.

20. In addition to ambient water quality monitoring, states should include other types of data (e.g., weather patterns,

slope, soil types, effluent monitoring data) to predict the effectiveness of trades, to assess whether trades are

meeting and maintaining water quality standards, and whether traders are meeting applicable limits.

Guidelines for Account Balancing

Point Sources

21. Point sources will monitor and report on a monthly basis. A yearly accounting period should be used to assess the

trade.

22. Point sources should have mechanisms in place to calculate the credits or portions of credits eligible for trading.

Nonpoint Sources

23. Annual account balancing periods should be used for nonpoint sources based upon seasonal sampling.

24. Nonpoint sources should have mechanisms in place to calculate the credits or portions of credits eligible for trading.

Guidelines for Enforcement and Compliance

General

25. The trading agreement will be enforceable by the state. After considering a variety of options, including general

state permits, state regulations, and contracts, the Negotiation Team strongly recommends that trades should be

governed by a state general permit or regulation issued under the state’s water quality laws (versus Clean Water

Act) and that the public will be provided opportunity for input prior to the execution of a trade. If a state elects to

utilize a contract as a vehicle for enforcement, the contract development and enforcement processes must provide

the same elements as if within the state’s regulatory or general permit program, including public participation prior to

the execution of a trade. Any NPDES permittee with a nutrient effluent permit limit desiring to trade should have the

trade linked to its permit.

Point Sources

26. The state will maintain oversight of facility monitoring and reporting and will perform periodic compliance checks. 

The state will have full compliance and enforcement responsibilities, such as those performed under existing Clean

Water Act programs and protocols.

7.0 Guidelines for Ensuring Accountability
28

Trading programs require methods and mechanisms that ensure all entities comply with their

trading agreements. With established protocols for monitoring, reporting, and enforcement,

participating entities can measure and communicate successes and challenges associated with a

trading program. Several components comprise the accountability element in the nutrient trading

framework:

• “Balancing the Account”—A tracking process that summarizes the amount of nutrients

actually discharged compared to the allowances held.

• Assessing Performance—The synthesis of different types of monitoring (environmental

quality, overall program performance, and facility-specific actions) to determine the

efficacy of the program in meeting its goals.

• Ensuring Compliance and Assigning Responsibility—Inspection and enforcement

programs.

The Negotiation Team addressed each aspect of accountability, arriving at the following

consensus-based guidelines. Three assumptions underpin these accountability guidelines. First,

the threat of regulation exists. Second, other participation incentives, such as grant money, exist. 

Third, allowances have been determined and are known by all sources. Additional

implementation options for trade accountability are presented in Appendix F.

Accounting Balancing

The Negotiation Team suggests that a monthly reporting and annual accounting be performed for

point source trades. Recognizing the difficulties in collecting data and the potential for variation

from natural factors such as weather, the Team recommended an annual accounting period for

nonpoint sources—more frequent reporting is not required. Sampling for nonpoint sources,

however, should be performed seasonally when runoff is most likely to occur.

Assessing Performance

Monitoring consists of ambient water quality monitoring, facility discharge monitoring and

facility contractual compliance, proper BMP implementation and maintenance, and overall

program assessment. The states should be the responsible parties for performing ambient water

quality monitoring and overall program review and assessment. State efforts may be

supplemented by referencing other monitoring networks, such as compliance monitoring by

sources and citizen monitoring. Each point source facility is responsible for its own discharge

monitoring and contractual compliance, reporting to the states on a monthly basis. The state will
29

maintain oversight of facility monitoring and will perform periodic compliance checks. The state

will have full compliance and enforcement responsibilities as identified in the trading agreement.

Monthly monitoring for point sources is suggested to enable adequate tracking of nutrient

reduction through trading and to provide sufficient time to take corrective action in the event that

trading contracts are not being honored or anticipated results are not being achieved. It is further

recommended that monitoring for nonpoint sources be performed on a seasonal, rather than

annual, basis to better account for storm events and periods of wet weather. Account balancing

for nonpoint sources would be on an annual basis.

Ensuring Compliance and Assigning Responsibility

In order for buyers and sellers to enter into a trading arrangement, some sort of agreement, such

as a contract, must be written and signed by the two parties. This document will be enforceable

by the state.

Under the contract with the buyer, a seller is responsible for providing nutrient reduction credits;

however, the buyer is ultimately responsible for ensuring those credits are delivered so that the

contract requirements can be achieved. In the event of seller default, a buyer can seek legal

recourse against the seller. Additionally, a seller stands to loose its state certification, as well as

may be required to repay the buyer for her/his investment or pay penalties per the terms and

conditions spelled out under the contract.

Ultimately, a buyer is held accountable by the state to meet its allowance, through the purchase of

credits or other reduction mechanisms. States will allow adequate time for a buyer to correct for

noncompliance before enforcement penalties are levied. States also will provide information to

buyers on alternative credit availability.

Additionally, the trading agreement must be enforceable by the state. The Negotiation Team

favors use of a state general permit or regulation issued under the state’s water quality laws. A

general permit not only affords enforceability, it allows for public review.

In certain cases in which nutrient specific limits exist in NPDES permits, there must be a linkage

between this permit and a general trading permit. The Negotiation Team believes this is certainly

necessary in the cases in which the NPDES permittee is the buyer and desires to purchase credits

in order to meet its nutrient limits (thereby possibly discharging above its permit requirements). 

The Negotiation Team further determined that there is room for discretion, however, when an

NPDES permittee desires to sell credits (or discharge below its permit limit).
30

Monitoring Trades and Trading Impacts

27. States will perform ambient monitoring and modeling to assess the effect of trading programs in achieving or

maintaining baywide (e.g., 40% reduction goal) and tributary specific nutrient reduction goals. These monitoring and

modeling efforts should build upon existing efforts currently used by states and trading participants. Point sources

involved in nutrient trading must monitor and report total nitrogen and total phosphorous discharges as applicable to

the trade. Nonpoint source monitoring should be conducted to provide sufficient data to demonstrate the effectiveness

of trading actions. If monitoring is not utilized, then nonpoint source pollutant loading reductions will be determined

based upon data and analysis obtained from the Chesapeake Bay Program’s Watershed Model. If the modeling

approach is used, trading ratios must be applied to accommodate for uncertainty.

State Tracking Mechanisms

28. States must develop mechanisms to collect and track trading information that is compatible with existing mechanisms

used by the Bay Program for assessing progress toward achieving and maintaining nutrient reduction goals (e.g.,

watershed model, BMP tracking system, environmental indicators, State of the Bay Report). Tributary specific

information must be collected by the state and aggregated to demonstrate how trading supports the achievement and

maintenance of nutrient reduction goals. Information requirements include the following:

• Total annual load reduction of nitrogen and phosphorous

• Total annual load reduction of nitrogen and phosphorous by type of trade (p-p, p-nps, nps-p, nps-nps)

• Total annual load reduction of nitrogen and phosphorous by discharger type (point source, agricultural, and

urban nonpoint sources)

• Net loading reduction of nitrogen and/or phosphorous generated by trading partners

• Comparison of pre-trading water quality conditions to post-trading water quality conditions

• Total number of trades made

• Total annual number of trades

• Determination of whether cumulative effects of the trading program are contributing to achieving tributary

strategy goals.

Reporting Baywide Progress

29. The Chesapeake Bay Program must provide a similar Baywide analysis (as outlined under the State Tracking

Mechanisms guideline) based on the trading information it receives from the states.

Evaluating Accountability, Compliance, and Enforcement

30. States must track the actions of trading partners, compliance with trade agreements, and any enforcement action

taken. Information requirements for each tributary watershed and the state include the following:

• Total annual number of trading partners subject to periodic compliance checks

• Total annual number of trading partners deemed to be out of compliance with existing regulatory requirements

• Total annual number of trading partners deemed to be out of compliance with the terms of their trade agreement

• Total annual number of trading partners that corrected noncompliance issues

• Total annual number of trades subject to enforcement penalties.

Establishment of a Central Coordinating Office

31. The central coordinating office, as described under the Guidelines for Performing Trade Administration, will be

responsible for the state’s responsibilities contained in these Assessing Progress guidelines.

Additional Information to be Provided by Buyer

32. Buyers of credits must provide available information and reason(s) for trades, including the following:

• Credit price

• Timeframe of trade

• Nutrient reduction (in lbs)

• Existing cost savings estimates.

8.0 Guidelines for Assessing Progress
31

The goal of a trading program is its driving force, influencing all other elements of the program

and determining the goal for each participating entity. Therefore, it is important to measure

progress toward the overall goal to determine if the trading program is on track. Using the

information collected through the accountability element, those responsible for administering the

trading program and the sources participating in the program should be able to assess the

effectiveness of the program.

Nutrient trading should realize the goals set by the program and lead to improved water quality. 

These guidelines recommend that a nutrient trading program establish performance indicators

and assessment criteria. While eligibility and accountability address criteria for individual trades,

this trading element on assessment and indicators seeks to measure the effectiveness of the

overall trading program.

To assist in the process of certifying and tracking trades and obtaining the basic information

needed to assess the progress of the program, it is recommended that certain standard forms be

developed and used when implementing a trading agreement. The forms in Appendix E (Trade

Tracking Forms) are designed after the Lower Boise River effluent trading program. They offer

a concise template for the type of information that should be collected in order to effectively

track, certify, and publicize trades. A Reduction Credit Certificate form should be completed by

the seller as part of the individual trading agreement, and should be sent to a central office that

collects this information. This form specifies the amount of pounds being traded, taking into

consideration all trading ratios, and delineates the length of time that trade is valid. This form

should be certified by a qualified official to ensure the reduction methods are properly

implemented and estimates and/or calculations are correctly performed.

The buyer of a trade should complete a Trade Notification Form. This form would be sent to the

central tracking office, as well as to the state regulatory authority, along with other state reporting

requirements, such as an NPDES permit. The Notification Form identifies the seller and buyer

and the pounds being sold and bought. Both buyer and seller sign this form.

These forms and the tracking results should be available to the public at all times.

It is recommended that costs be documented and reported for all trades. This is invaluable

information for determining the overall effectiveness of a trading program. Thus, it is

recommended that the reduction credit certificate form also include a place to declare the selling

price of the credits being sold. Similarly, for the trade notification form, a place should be

included to request information on the amount of money the buyer will be providing the seller,

and their assessment of their nutrient reduction costs should they not engage in trading.
32

9.0 Guidelines for Involving Stakeholders

This element of a trading program establishes two-way lines of communication and provides

mechanisms for the public to participate in the program. To garner support for a trading

program, members of the public need access to information and a mechanism for providing input

and feedback. Early stakeholder involvement, and an effort to maintain involvement throughout

the process, help to increase public confidence that water quality goals are being met in a costeffective manner.

Enveloped in each element of the nutrient trading program is the need for stakeholder outreach

and involvement. All interested parties will want to know that their interests are being met in the

nutrient trading strategy and that the program is helping to achieve water quality goals. The

TOWG’s success in bringing together the major stakeholders together as a Nutrient Trading

Negotiation Team demonstrates its commitment to stakeholder involvement. Citizen

involvement is a subcomponent of this stakeholder outreach, as it will increase public

understanding and support for final guidelines and future development of trading programs.

Exhibit 9.1 illustrates a suggested series of steps that states may take when developing and

implementing a trading program.

33. Each state should create or use existing citizens advisory committees to be part of the nutrient trading program within

each state.

34. Each state may choose to create a demonstration program.

35. States should provide broad public notification of trades as they occur, including notification to local watershed

groups.
33

Exhibit 9.1 Nutrient Trading Program Development: Stakeholder Process
34

10.0 Recommended Next Steps

Prior to development of a large watershed trading program, the Bay states may find that

approaching trading in a series of phases will work best. For example, Maryland will have

access to a study being performed to assess the nutrient trading market in this state. 

Pennsylvania is considering forming a nonprofit task force to develop state-specific trading

guidelines based on this document, and Virginia is forming a stakeholder workgroup to evaluate

market-based incentives for point sources based on this document. The results of these efforts

will certainly provide valuable information on the viability of trading in the Bay watershed.
35

Appendices
36

Appendix A. Public Comments

This Appendix covers the following topics:

A.1: Public Meetings

A.2: Public Comments and Major Issues

A.3: Changes Made in Response to Public Comments

A.4: STAC’s Comments and Major Issues

Public review of the Trading Guidelines consisted of 16 public meetings around the Bay

watershed, solicitation and receipt of 118 written public comments, and also a review organized

by the Bay Program’s Scientific and Technical Advisory Committee (STAC). The Negotiation

Team made changes in response to these comments where it considered changes appropriate. 

Changes not made in response to comments were generally because the Team believed that such

comments related to details more appropriate for consideration by the individual jurisdictions in

the development of their own programs, or because the comments were evenly balanced on both

sides of a particular issue such that the Team’s negotiated consensus reflects the best

compromise on that issue. A summary of these comments is provided in a document entitled

Nutrient Trading in the Chesapeake Bay Watershed, Public Comments Summary, January 2001.

A.1 Public Meetings

Sixteen public meetings were held during September and October 2000. The dates and locations

are listed below. Generally attendance ranged from 3–30 attendees at each of the public

meetings. Participants included stakeholders from a variety of disciplines, ranging from public

citizens, environmental advocates, industry, and local governments. Discussions focused on

educating the participants on the concept of trading more than the specifics of an individual

trading program. Proceedings for each meeting have been compiled by each of the jurisdictions

hosting the meetings. These proceedings, compiled into a document entitled Nutrient Trading in

the Chesapeake Bay Watershed: Public Meeting Proceedings, January 2001, can be found on the

Chesapeake Bay Program’s Web site at www.Chesapeakebay.net.

Nutrient Trading Public Meeting Details

State Meeting Location Meeting Building Meeting Dates/Times

Virginia Bridgewater Bridgewater Retirement Center September 26, 10-12pm

Manassas Manassas Battlefield Holiday Inn September 28, 2-4pm, 7-9pm

Richmond VA Power Office in Innsbrook, VA October 3, 2-4pm,7-9pm

Pennsylvania Williamsport DEP North Central Office September 28, 2-4pm, 7-9pm

Harrisburg DEP Rachel Carson Bldg October 5, 2-4pm, 7-9pm

Wilkes-Barre DEP NE Office September 26, 2-4pm, 7-9pm

Maryland Laurel WSSC Headquarters September 26, 2-4pm,7-9pm

Hagerstown Hagerstown Community College September 27, 7-9pm

Eastern Shore Salisbury State September 29, 7-9pm

D.C. D.C. Martin Luther King Library October 10, 6:30-8:30pm
37

A.2 Public Comments and Major Issues

One hundred and eighteen comment letters were received by the jurisdictions and the

Chesapeake Bay Program collectively on the Draft Nutrient Trading Guidelines document. A

summary of all of the comments, entitled Nutrient Trading in the Chesapeake Bay Watershed,

Public Comments Summary can be obtained via the Chesapeake Bay Web site. This summary is

an assimilation of the individual comment summaries prepared by each jurisdiction for the

comments they received. Hard copies of the individual jurisdiction comment summaries are also

available at the Chesapeake Bay Program, as well as hard copies of the actual comment letters.

The major issues presented by the comments are delineated below.

a) Guideline #1: trading to meet or maintain the reduction goals

Many believe that trading should not occur until after achievement of the 40% goal. On the other

hand, many believe that this would unnecessarily restrict the market. Many believe that trading

only between “like sources” will eliminate the most likely partnering of buyers and sellers.

b) Fundamental Principle #3:

Trading should have a defined cap within which to trade. Many felt that this should be

accomplished via TMDLs. Many stated that trading should not occur until TMDLs are

established.

c) Fundamental Principle #4

Many believe that trading should result in a net reduction, and not just remain as is.

d) Fundamental Principle #5: what does strive to do its part to meet the 40% goal

Many are confused about what this means.

e) Fundamental Principle #6

Many believe that trading within the major tributaries is too large an area for trades to ensure

water quality. On the other hand, many felt that this would unduly restrict the market. Also,

many were concerned that it is important to restrict the possibility of producing pollution hot

spots.

f) Guideline 24: Permitting Trades

Many felt that trading should occur within the NPDES permit system, especially where local

water quality is at issue. This is because general permits are not sufficiently transparent and do

not include sufficient opportunities for public participation. Many felt that enforcement and

accountability cannot be guaranteed if not in the NPDES permit system.
38

g) The section on ratios needs to be corrected, and/or clarified.

h) Monitoring

Water quality in streams or rivers with trades must be closely monitored. The guidance must

require the establishment of a water quality monitoring program, which requires monitoring by

the traders and the state. Many stated that the guidelines do not go into enough detail on this.

i) Trade Mechanism

Many comments were submitted regarding the trade mechanisms that would be in place for

trading. Many wanted more information and felt the Guidance document is lacking here. The

concept of individual trades versus a dynamic trading system was mentioned and several

recommended providing guidance on this. A dynamic trading system, where available trades are

generated and posted in a clearinghouse type fashion, available for sale on the open market was

often mentioned as a preferable approach to limiting trades to individual relationships, which

would bog down a trading program.

A.3 Changes Made in Response to Public Comments

The Nutrient Trading Negotiation met after the public comment period closed on October 27,

2000, to discuss the comments and to reach consensus on any changes resulting from the

comments. The following changes were made to the November 29, 2000, draft document.

a) Additional language to be put into the guidelines:

For trading to occur within a major Bay tributary, the nutrient trading program must incorporate

(a) specific nutrient loading allocations established to provide water quality conditions necessary

to protect living resources in the tributary and the Bay, (b) a baseline and a cap for nutrient loads

for the tributary, and (c) allowances for point and nonpoint sources.

b) Trading To Achieve or Maintain the Chesapeake Bay Nutrient Cap (Guideline #1)

Trading should be allowed among “like” source types in order to achieve the 40% nutrient

reduction goal. This means that point sources could trade with point sources, and nonpoint

sources could trade with nonpoint sources, but point sources could not trade with nonpoint

sources.

Within several years after the implementation of a trading program the states may reexamine the

success or failure of trades to date in achieving the goal and, thereafter, determine if cross source

trading to achieve is appropriate.

Once the 40% nutrient reduction goal is met, trades should be allowed within and across source

types to maintain nutrient reduction goals or further reduce nutrient levels.

Add to text: Allow states to make the determination (40% goal discussion)
39

c) Fundamental Principle #4

Change the fundamental principle from “Each trade must achieve no change in nutrient loadings

or a net reduction in nutrient loadings” to “Each trade must result in a net reduction in nutrient

loadings or contribute to maintenance of a tributary nutrient cap. Net reduction in loadings or

maintenance of a cap shall be calculated based upon the estimated tributary loadings at a point in

time determined by the state.”

d) Fundamental Principle #5

Change this fundamental principle from “Every source should strive to do its part in reaching the

40% reduction goal prior to considering the nutrient trading option.” to: “Sources should

implement nutrient reduction actions to achieve the 40% reduction goal, as well as the goals

adopted for the tributaries south of the Potomac River prior to pursuing a nutrient trading

option.”

e) Placement of Fundamental Principle #6

Move Fundamental Principle #6 on geographic scope to Fundamental Principle #2 so that the

reader will see the direct connection between no impacts on local water quality to the geographic

scope of a trading effort.

f) The Ratio Appendix

The Appendix on ratios was corrected to properly describe the use of ratios by other programs in

the country

g) Guidelines for Enforcement and Compliance

24. Add “Any NPDES permittee with a nutrient effluent permit limit desiring to trade should

have the trade linked to its permit.”

Add in the text a statement about discretion as to whether an NPDES permittee wishing to SELL

credits must have its NPDES permit linked to a trading agreement.

h) Guideline 22

Annual account balancing periods should be used for nonpoint sources based upon seasonal

monitoring.

i) Guideline 24

Add a statement in the text about how trading between Federal facilities is an exception to

guideline 24 regarding use of public funds to trade.

j) Change the title to “ Nutrient Trading Fundamental Principles and Guidelines”
40

k) Add appendix about public meetings, comments, and responses.

l) Insert A, for page 14 under section 3.2: Geographic Scope

Trading may occur between states as long as the trade is within the major tributary boundaries, 

such as between Maryland and Virginia in the Potomac River basin. According to Fundamental

Principle #6 below, however, trading would not be allowed between different basins in different

states, such as between the Susquehanna and the Potomac River Basins.

m) Insert B, for page 28 under section 7.0: Ensuring Accountability

Remove second paragraph under “Assessing Performance” and replace with the following: 

“Monthly monitoring for point sources is suggested to enable adequate tracking of nutrient

reduction through trading and to provide sufficient time to take corrective action in the event that

trading contracts are not being honored or anticipated results are not being achieved. It is further

recommended that monitoring for nonpoint sources be performed on a seasonal, rather than

annual, basis, to better account for storm events and periods of wet weather.”

n) Insert D on page 14 under section 3.3 Fundamental Principles, just after the second to

last sentence of the first paragraph:

Note that the first fundamental principle essentially states that local water quality will not be

impacted by trades. This is an overarching theme that any trading program must incorporate

when considering trade location and nutrient credit exchanges. Implementation of this principle

will ensure that pollution “hot spots” will not result from trades.

A.4 Comments Received by STAC

The Chesapeake Bay Program’s STAC also provided comments on these trading guidelines. Not

only was the Chair of STAC intricately involved in planning and organizing the Negotiation

Team and their meetings, and providing technical expertise to the Team, but STAC also

reviewed this document in addition to selecting three additional experts on trading in the United

States to review this document and provide comment. The six people that performed this review

follow:

Kurt Stephenson, Virginia Tech

Pat Norris, Michigan State University

Leon Danielson, North Carolina State University

Claire Schary, EPA with the Idaho Trading Program

Dave Batchelor, Michigan Department of Environmental Quality

Mark Tedesco, EPA with the Long Island Sound Program

Below is a summary of their comments. Hard copies of these comments may be obtained from

the Chesapeake Bay Program.
41

a) Each reviewer made complimentary comments to begin the review.

It is a comprehensive document that is well written and should be easy for users to understand. 

The level of consensus that has been achieved is remarkable. It is a valuable resource to potential

users. Great effort to get stakeholder involvement. Stakeholder involvement increases chances

of program success. State flexibility allows states to select the approach that fits them best. 

Highly prescriptive trading programs have not proven to be very successful—these fundamental

principles and guidelines strike a good balance in this regard.

b) Simple extension of command and control

Given the 34 guidelines, the system is a direct extension of the existing command and control

system. Voluntary exchange can not exist. Simple extensions of command and control systems

will not bring about the allowance markets that are the truly innovative solutions for water

quality management.

c) Centralized regulatory agency versus decentralized allowance markets

This document does not provide information, guidelines, or discussion devoted to the

characteristics needed for an allowance market to function. No distinction exists between

centralized regulatory agency versus decentralized allowance markets. The trading framework

embodied in the document provides a workable approach only for a highly managed program.

d) Allowance market development is missing

None of the eight fundamental principles deals with requirements for allowance market

development. Property right conditions necessary for investment in aggressive pollution control

activities are not provided for in this document.

e) Establishment of exchange commodity

The document leaves a lot to be desired on establishing the exchange commodity. A

fundamental fact that is glossed over in the text is that the largest hurdles to overcome in

establishing a market-like alternative is, in fact, establishing the exchange commodity—a limited

number of enforceable discharge allowances. It is not clear from reading the document why a

nitrogen source would want to purchase credits under the voluntary framework. At least one

party to a trade must have a source specific, enforceable allocation. The treatment of trading

credits versus adjusting allocations needs clarification. In many credit-trading programs,

allocations remain the same but compliance is determined based on the discharge adjusted by the

sale or purchase of credits. The definition of an allowance sounds like a TMDL-like definition of

a waste load allocation for a point source, but it is unclear throughout the document whether the

individual nonpoint sources will receive a TMDL-like load allocation.
42

f) Requirement severely restrict trading

The guidelines establish a number of requirements that severely restrict trading and the benefits

trading offers. These factors will substantially decrease the number of trades and the economic

and water quality benefits that could be achieved. Greater benefit at lower costs can be achieved

through trading programs that establish a cap and let the market decide where the most costeffective reductions can be found. The requirement that the buyer is liable for a seller’s actions

will diminish the willingness to trade. From an economic standpoint, it is not clear why point/

nonpoint trades are forbidden until after the 40% reduction is achieved. Because point sources

have made reductions, their marginal cost are lower than less controlled nonpoint sources—large

economic gains could be achieved with point/nonpoint trades. This document begs the question

as to what incentive exists for a source to participate. The guidelines do not allow a source to

trade to meet the limited specified by the allowance. If trading cannot be used to meet initial

allowances, then how can it be used to meet the initial tributary load allocation or cap? If the

public has the opportunity to comment prior to each trade, this would be an onerous and costly

requirement that would most likely kill a trading program. The guidance requires states to certify

credits but does not indicate how this will be done. It is not clear whether Fundamental

Principles #4 and #5 allow sources to achieve a net 40% reduction through trading. These two

principles will affect how targets and baselines are set and determine the performance of the

program. The guidance removes the least cost options of reducing storm-water loading. The

guidance creates “maximum extent practical” control technology requirements. The requirement

for trading “like sources only” may create a barrier to municipal source participation. 

Restrictions on cross tributary trading severely restrict benefits from trading. A potentially big

economic and environmental opportunity is being missed by not allowing trading between point

and nonpoint sources at the outset. Explain the term prioritizing trade partners. Any prioritizing

should be left to the private sector. The state should not be an enforcer of private contracts. The

compliance design creates a tremendous administrative burden to the state by calling for a

certification program for screening prospective buyers and sellers and then for certifying credits

prior to trade approval.

g) Restrictions on use of cost-share funds

Restrictions on use of cost-share funds should be decided by the rules of the programs that

provide those funds, not the trading programs. The document does not indicate how trading will

be coordinated with nutrient management plans. Additional direction is needed on how to handle

nonpoint sources, cost share monies, and nutrient management plans.

h) Compliance for nonpoint sources

It is unclear how compliance from nonpoint sources will be determined.

i) Working documents

The guide must be perceived as a “working document” and be revised after experience on actual

cases.
43

Appendix B. Negotiation Team Membership

CHESAPEAKE BAY NUTRIENT TRADING NEGOTIATION TEAM INVITEES

# Stakeholder Group Principal Member Alternate

1 US EPA, Region III Robert Koroncai, EPA R3

Chief, WV & VA Branch

Water Protection Division

215-814-5730

koroncai.robert@epa.gov

Patricia Gleason, EPA R3

Chief, DC & MD Branch

Water Protection Division

215-814-5740

gleason.patricia.epa.gov

2 Chesapeake Bay Program Allison Wiedeman, EPA

Chesapeake Bay Program Office

410-267-5733

wiedeman.allison@epa.gov

Jerry Griswold, USDA/NRCS

Chesapeake Bay Program Office

410-267-5754

griswold.jerry@epa.gov

3 District of Columbia Jim Collier, DC Dept. of Health

Program Manager

202-645-6601 ext 3040

jcollier@mail.environ.state.dc.us

Mike Marcotte, WASA

Chief Engineer

202-645-6309

marcottem@aol.com

4 State of Maryland Virginia Kearney, MDE

Water Management Administration

410-631-3574

vkearney@mde.state.md.us

Rich Eskin, MDE

Tech & Reg. Serv. Div.

410-631-3691

reskin@mde.state.md.us

5 State of Maryland Royden Powell, MDA

Asst. Secretary, Off.of Res.Consv.

410-841-5867

powellrn@state.md.us

John Rhoderick, MDA

Administrator, Off. of Res. Consv.

Operations

410-841-5865

rhoderjc@mda.state.md.us

6 Commonwealth of

Pennsylvania

Dave Bingaman, PA Dept. of Agriculture

Bur. of Plant Industry

717-772-5208

dbingaman@agric.state.pa.us

Karl G. Brown, PA State Conservation

Comm.

Exec. Secretary

717-787-8821

kbrown@agric.state.pa.us

7 Commonwealth of

Pennsylvania

Robert Yowell, PA DEP

Regional Director

North Central Region

570-327-3695

ryowell@state.pa.us

Stuart Gansell, PA DEP

Director Bureau of Watershed

Conservation

717-783-7420

sgansell@state.pa.us

8 Commonwealth of Virginia Mark Bennett, VA DCR

804-371-7485

mbennett@dcr.state.va.us

Stu Wilson, VA DCR

804-786-4382

swilson@dcr.state.va.us

9 Commonwealth of Virginia Alan Pollock, VA Dept. of Env. Quality

Chesapeake Bay Program Manager

804-698-4002

aepollock@deq.state.va.us

John Kennedy, VA Dept. of Env. Quality

804-698-4312

jmkennedy@deq.state.va.us

10 Chesapeake Bay

Commission

Ann Swanson, CBC Director

410-263-3420

aswanson@ari.net

Tom Beauduy, CBC

717-232-1103

tbeauduy@srbc.net
# Stakeholder Group Principal Member Alternate

44

11 Regional Environmental

Interest

Roy Hoagland, CBF

804-780-1392

rhoagland@savethebay.cbf.org

Stella Koch, Audubon Naturalist Society

703-669-3922

stella@audubonnaturalist.org

12 Local Watershed Interest John Flood, Severn River Comm.

410-267-9692

Patricia Jackson, James River

Association

804-730-2898

 jra@i2020.net

13 Public Interest Helen Murphy, Garden Club of VA

804-472-3094

htmurphy@sylvaninfo.net

Jeane Packard, Fairfax County

Federation of Citizen Associations

703-978-4782

jeanp22032@aol.com

14 Local Government Paul Gunther, Queen Anne’s County

Extension Director, MD. Coop. Ext.

410-758-0166

pg24@umail.umd.edu

Robert Shaffer, PA State Association of

Township Supervisors

Gannett Fleming Engineers & Planners

717-763-7211

rshaffer@gfnet.com

15 Municipal Point Source

Interest

Cy Jones, MD Assoc. of Municipal

Wastewater Agencies (MAMWA)

301-206-8831

cjones1@wssc.dst.md.us

Bill Leary, VAMWA

Executive Director

South Central Wastewater Authority

804-861-0111

wjlscwwa@erols.com

16 Industrial Point Source Jud White, Virginia Power

804-273-2948

judson_white@vapower.com

George Kelly, MD Chamber of Commerce

410-781-0072

gkelly@ebxusa.com

17 Rural Non-Point Source Steele Phillips, MD Soil Consv. Dist.

410-376-3372

Don Robinson, Lancaster County Consv.

Dist./District Manager

717-299-5361

don-robinson@nacdnet.org

18 Rural Non-Point Source John Chlada, Perdue Farms

410-860-4232

john.chlada@purdue.com

Lynne Hoot, MD Association of SCD

410-956-5771

lynnehoot@aol.com

19 Storm Water Interest Barbara Moore, Virginia Municipal

League

Director Land Use & Env. Serv.

804-649-8471

barbmoore@att.net

Larry Gavan, City of Alexandria,

Transportation & Environmental Services

703-519-3400 (x188)

larry.gavan@ci.alexandria.va.us
45

Appendix C. Key Definitions

Accounting Method of recording outcomes of monitoring. The accounting period

can be monthly or yearly or other frequency. Regardless of the period,

success of a trade will be documented, generally in pounds per year or

other unit measurement.

Allowance The allowed nutrient load a source may discharge.

Banking Banking is a system where credits are stored for future use or sale

(trade). These banked credits can be used at a future time when the

discharger needs them, can be traded, or can be retired. Banking systems

can be centrally arranged by a banking entity thereby creating a market

place in which credit buyers and sellers can locate one another at a

minimal transaction cost. The bank can be operated by a regulatory

entity, or another public, private, or nonprofit organization.

Baseline The numeric level of nutrient load at a particular point in time that

serves to establish nutrient reduction goals and allowances.

Best Management

Practices (BMPs)

BMPs refer to practices implemented by nonpoint sources designed to

reduce discharges to surface water. Practices include runoff or erosion

management systems at agricultural or construction sites and animal

waste storage systems on farms.

BNR BNR refers to Biological Nitrogen Removal, an advanced waste

treatment process that lowers the amount of nitrogen released in a plant’s

effluent. Many states in the Chesapeake Bay watershed are promoting

BNR as a technique to help meet tributary strategy goals.

Buyer An entity that purchases nutrient credits.

Cap The total nutrient load that is allowed to be discharged into a given

waterbody. The cap is the baseline minus the amount of load reduction

needed to meet the goal. The cap is equal to, or greater than, the sum of

the allowances.

Credits The amount of nutrient load reduced below the allowance.

Nutrient Management

Plan

A comprehensive plan to manage the amount, placement, timing, and

application of animal waste, fertilizer, sludge, or other nutrients.

Monitoring Period Frequency of assessing nutrient reduction through performance

inspections.

Nutrient Trading The transfer of nutrient reduction credits, specifically those for nitrogen

and phosphorous.
46

An open trading system allows regulated sources to modify their permits

to reflect an exchange of pollution control requirements. In an open

system, discharge limitations are imposed on individual sources and

effluent allowances are only created when a source discharges less than

the amount allowed under a permit. Open trading systems are common

in the air emission trading program (adapted from Water Science

Reporter. Effluent Allowance Trading: A New Approach to Watershed

Management. National Institutes for Water Resources, 1996). Open

trading is a system that refers to a situation in which there is no pollutant

load cap on a water body.

A partially closed trading system sets a limitation or “cap” on nutrient

loading for a geographical area and for a specified group of sources. The

system allocates nutrient loading control responsibility to individual

group members in the form of allowances. After allowances are

distributed, sources can trade as long as total nutrient loading within the

system does not exceed the pollution cap (adapted from Water Science

Reporter. “Effluent Allowance Trading: A New Approach to

Watershed Management.” National Institutes for Water Resources,

1996). Partially closed systems are where discharge allowances are

assigned to some, but not all, of the sources.

A fully closed trading system amplifies the partially closed trading

concept and applies it to all nutrient load sources in a given watershed

(adapted from Water Science Reporter. “Effluent Allowance Trading: 

A New Approach to Watershed Management.” National Institutes for

Water Resources, 1996). Fully closed systems are where discharge

allowances are assigned to all of the sources.

Offset The term “offsets” will be used to specifically refer to reductions a new

or expanding (or otherwise unaccounted for) source must accomplish

prior to being allowed to operate in an impaired water body. Offsets will

refer to the means in general of accomplishing pollution reduction,

which could include trading or other efforts, such as technology

reductions, alternative offsite land use conversions, etc.

Retiring Credits Credits can be retired, or taken out of, the market. For example, states,

other administrative units, environmental groups, or speculative

investors could purchase credits from a market, thereby reducing the

amount of allowances that could be discharged into a body of water.

Seller An entity that offers nutrient credits for sale.

Soil Conservation and

Water Quality Plan

A comprehensive plan addressing natural resource management on

farmlands directed toward the control of erosion and sediment loss and

management of animal waste or agricultural chemicals to minimize their

movement from agricultural land to surface waters.
47

Source A nutrient source whether point, nonpoint, or third party. The

Negotiation Team agreed to use the term source in place of discharger.

“T” The goal of acceptable soil loss will be equal to “T”, or tolerable soil

loss. If this is not achievable the farmer, in consultation with the

planner, can determine that site conditions and farming practices warrant

an acceptable rating of “2T.”

Trading Ratios To account for the uncertainty regarding the effectiveness and

monitoring of nonpoint source controls, trading ratios are applied in the

cases in which nonpoint sources are involved. For example, a trading

ratio of 2:1 means that for every pound increase in pollutant traded by a

point source, there must be a corresponding two-pound trade from a

nonpoint source.

Transaction Costs Transaction costs are expenses for trading participants that may be

required in order to establish a trade, including public and private

participants and administrators. Transaction costs often include

administrative, negotiation, legal, and documentation costs.

Water Quality Criteria Water quality criteria indicate levels of water quality expected to render

a body of water suitable for its designated use. Criteria are both numeric

and narrative. Numeric criteria are scientifically derived ambient

concentrations developed by EPA or states for various pollutants of

concern to protect human health and aquatic life. Narrative criteria are

statements that describe the desired water quality goal. Criteria are

based on specific levels of pollutants that would make the water harmful

if used for drinking, swimming, farming, fish production, or industrial

processes.

Water Quality

Standards

Water quality standards refer to the law or regulation that designates the

beneficial use or uses of a water body or a segment of a water body and

the water quality criteria that is necessary to protect the use or uses of

that particular water body. Water quality standards also contain an antidegradation policy. The water quality standard serves a twofold

purpose: (a) it establishes the water quality goals for a specific water

body and (b) it is the basis for establishing water quality-based treatment

controls and strategies beyond the technology-based levels of treatment

required by sections 301(b) and 306 of the Clean Water Act, as amended

by the Water Quality Act of 1987.

Watershed A drainage area or basin in which all land and water areas drain or flow

toward a central collector such as a stream, river, or lake at a lower

elevation.
48

Appendix D. Trading Ratios

CONTENTS: Summary of Trading Ratios in Other Programs

Examples of Other Trading Programs

Trading Ratios for the Chesapeake Bay

Example Credit Calculations

Summary of Trading Ratios in Other Programs

Many nutrient trading programs across the country apply several types of trading ratios to

accommodate uncertainty, especially if nonpoint sources are participating, and to ensure

protection of water quality. Typically, various ratios will account for the loss of a pollutant as it

travels over land or in water, accommodate the uncertainty of reduction method (e.g., BMPs)

efficiencies, or ensure a net water quality benefit. The use of ratios is essential in attaining the

equivalency of credits between all permutations of trades (i.e., nonpoint-nonpoint,

nonpoint-point, point-point). Although each program develops and adopts ratios that are best

suited to its needs, the following are the most commonly used trading ratios:

• Delivery Ratios

• Uncertainty Ratios

• Water Quality Ratios

• Retirement Ratios.

It is important to note that these common ratio names may vary across programs. For example,

one program may use the term “location ratio” instead of “delivery ratio.” Although the

terminology varies, the concepts are similar.

Delivery Ratios

Delivery ratios apply discount factors to compensate for a pollutant’s travel over land or in water

(or both) and may be applied to point, as well as, nonpoint sources. Delivery ratios generally

account for attenuation (i.e., the rate at which nutrients are reduced through natural processes,

such as hydrolysis, oxidation, and biodegradation, on their way through tributaries to the

mainstem of the water body). The ratio varies depending on the location of the source from the

mainstem. The general idea is that the greater the distance the pollutant has to travel, the greater

the pollutant loss will be. This ratio would work to equalize a trade between a source high in the

tributary and one near the mainstem. This ratio is also often termed a “location ratio.”

Uncertainty Ratios

Point source nutrient discharges are relatively constant and easily quantified. By contrast,

nonpoint source nutrient discharges are more uncertain and are readily influenced by storm

events, seasonal variations, and site-specific physical and chemical characteristics. In addition,

the BMPs applied to nonpoint sources generally provide a reduction potential that is an estimate

rather than a measured value. As an example, Table D.1 shows the percentage of nitrogen and

phosphorus typically removed by a number of nonpoint controls. Note the wide ranges reported,

especially for nitrogen.
49

Table D.1 Nutrient Removal Efficiencies of Nonpoint BMPs

BMP % Nitrogen Removed % Phosphorous Removed

Urban storm water management 25–32 20–64

Pasture 20 14

Animal waste management

– Cattle, swine

– Poultry

80

14

80

14

Cover crops 34–51 10–20

Forested buffer 48–65 10–20

Grassed buffer 35–50 53

Source: Chesapeake Bay Watershed Model Application and Calculation of Nutrient and Sediment

Loadings. Appendix H. August 1998.

To accommodate for this range of potential efficiencies, most trading programs attempt to

address nonpoint reduction uncertainties by assigning a rate greater than 1:1 (i.e., requiring that

more than one nonpoint credit be traded for one point source credit). As Table D.2 shows, the

most popular rate used is 2 nonpoint credits for 1 point source credit (2:1). The U.S. EPA’s

Draft Framework for Watershed-Based Training (U.S. EPA, 1996b) cautions against using ratios

that are too stringent and those that eliminate the economic benefits of trading.

Table D.2 Uncertainty Ratios Established by Other Programs

Program Ratio Program Ratio

Tar Pamlico Basin 2 to 3:1 Rahr Malting Co. 2:1

Lake Dillon 2:1 Bear Creek 1:1 (PS/PS)

Chatfield Basin 2:1 Cherry Creek Basin 1.2 to 3:1

Kalamazoo 2:1 Red Cedar River 2:1

Water Quality Ratios

Water quality ratios may be included to account for the effect a source has on local water quality,

or to relate the relative impact of pollutant reductions in any given watershed segment (e.g.,

tributary) to mainstem water quality goals, such as indicators of dissolved oxygen and living

resources. Water quality ratios would account for situations, including nonattainment areas or

sensitive areas such as wetlands, lakes, or wildlife sanctuaries, that may require additional water

quality considerations. The increase in loads in such areas could have a greater impact than in

less sensitive areas. In such cases, sources could have their reductions discounted by a factor

(e.g., 10%) to achieve greater water quality protection. The water quality ratio and the delivery

ratio are similar in that both involve location, but a delivery ratio addresses attenuation and

considers source location relative to the distance from the water body of concern. A water

quality ratio addresses location relative to special conditions in the receiving water; if needed, it

may exist in addition to delivery ratios.
50

Retirement Ratios

A certain percentage of an available credit may be retired (i.e., excluded) from trading in order to

increase the potential for a water quality benefit or to provide a margin of environmental safety

(similar to an uncertainty ratio) for the overall trading program. Some programs require, for

example, that 10% of the available credits for sale be taken off the market before any trades are

negotiated. When evaluating the potential use of retirement ratios, it is important to also

consider issues of cost, equity, and future economic growth. Options for retirement ratios

include the following (McCatty, 1999):

• Requiring that a portion (e.g., 10%) of all credits traded by both point and nonpoint

sources is contributed to the state. This is a fairly equitable approach, and, if the

percentage is small, should not impose too onerous a cost on participants.

• Requiring that BMP credits expire at the end of the rated life of the installation. This is

a reasonable requirement; however, difficulties may arise in multiple BMPs installed

over an extended period of time and in the case of BMPs functioning efficiently beyond

their rated lifespans.

• Requiring that all credits be retired at the end of 5 years. This is the approach taken in

the Michigan program. It establishes a level playing field for all participants. In

addition, the duration is sufficiently long enough for planning and assessment purposes.

• State agencies, citizen groups, or environmental nonprofits may purchase credits with

the express purpose of immediately retiring them. Such action may be warranted in

locations or periods of worsening water quality. It is, however, a costly option for all

concerned and, by removing credits from the market place, may serve to dampen the

market for trading and restrictive growth.

• Entities that cease to operate may be required to retire all or a portion of their credits. 

This policy may be pursued in areas in which growth is being discouraged for

environmental reasons.

• Credits may be retired as part of penalties imposed on entities that continue to violate

their terms of trade for an extended period of time (e.g., over two years).

Examples of Other Trading Programs

The following is a brief discussion of methods used by seven nutrient trading programs to

determine various trading ratios. The programs are Long Island Sound, Lower Boise River, Tar

Pamlico Basin, Michigan State, Cherry Creek Basin, Southern Minnesota Beet Sugar

Cooperative, and Rahr Malting Co.

Long Island Sound

The proposed Long Island Sound trading program developed trading ratios based on the

discharge’s effect on the water quality once it reaches the Sound. The ratios attempt to equalize
51

the impact on dissolved oxygen levels of nitrogen discharged in various areas of the Sound. The

program focuses on point-point trades. The main components are as follows (McCatty, 1999):

• The watershed is divided into 11 management zones. Normalized exchange rates, in

terms of dissolved oxygen improvements in the Sound, were developed for each zone.

• Zones with the greatest influence on dissolved oxygen levels are given an exchange rate

of 1.0. Zones with lower impacts are given values less than 1.0.

• Attenuation factors that take into account nitrogen losses in its travel downstream to the

Sound are assigned to several tiers within each management zone. This ensures that

reductions reflect levels of nitrogen delivered to the Sound.

• The exchange rate is calculated by multiplying the zone exchange rate and the tier

attenuation factor and is intended to equalize the value of nitrogen removal between the

respective management zones. Zones close to the Sound are assumed to deliver 100%

of their pollutants to the Sound and, therefore, are not adjusted for attenuation.

• The exchange rate within each zone is set at 1:1.

Lower Boise River

The Lower Boise River program also proposes geographically based exchange rates using three

types of water transport ratios: river location ratios, drainage delivery ratios, and site location

factors (Schary, 2000).

River location ratios address the geographic relationship between sources located directly on the

Boise River and the river's mouth at Parma, which is where it joins the Snake River and is the

TMDL’s point of concern. The ratios were established using a mass balance model that accounts

for river flow and phosphorous concentrations, factoring in inflow, outflow, and groundwater in

this heavily altered river system. For a given source, the river location ratio is equal to the

amount by which the phosphorous loading at Parma would increase (or decrease) if one pound

more (or less) were discharged at that location.

Drainage delivery ratios account for transmission losses (e.g., uptake by vegetation, infiltration

to groundwater, etc.) in a drain or tributary. They are calculated by subtracting from 100 the

number of miles a source located on a drain or tributary is from the mouth of the drain, then

dividing that number by 100.

Site location factors address the potential for diversion and reuse of water below the point of

discharge to the drain or tributary. Taken together, drainage delivery ratios and site location

factors reflect the portion of the reduction that will be realized at the confluence of the drain or

tributary with the river. When the three factors are applied to an amount of reduction (measured

or calculated in “local pounds”) by multiplying the four numbers together, the result is a uniform

unit of measurement termed “Parma Pounds.” This creates a common unit for measuring

increases and decreases at different locations and will ensure that their effects on water quality
52

offset each other. Trades are converted back into local pounds when they are reported on the

Discharge Monitoring Report (DMR). The permit’s effluent limit for phosphorous for the point

source is also expressed in pounds.

An uncertainty discount is applied to nonpoint source reductions, but it should be noted that it is

only applied to those reductions that are not measured, and for which an estimating calculation is

made instead. “Calculated credits” are those for which the amount of marketable credits will be

determined by a calculation because direct monitoring of reductions is technically infeasible or

too costly. The uncertainty discount is a multiplier that will reduce the number of transferable

credits generated by a calculated nonpoint source reduction to account for variability in the

effectiveness of the practice. It is applied prior to the conversion of the “local pound” credit

amount into “Parma Pounds,” and the amount of the uncertainty discount will be specified along

with the BMP’s design, installation, and maintenance specifications in the BMP list being

developed by local, state, and Federal agencies.

Tar Pamlico Basin

The Tar Pamlico Basin Association is composed of point sources that work cooperatively to meet

nutrient caps set by the state. If the Association does not meet its goals, it must purchase offsets

by paying a pre-set price per pound to the state’s Agriculture Cost-share Program for nonpoint

sources. In the Tar Pamlico program, point sources that are members of the Association

purchase credits for $29.00 per kilogram of nutrient discharged above the Association’s cap. 

This fee is paid into an agricultural BMP cost-share fund managed by the North Carolina

Division of Soil and Water Conservation Service. Trading ratios are based on the nutrient

reduction efficiencies of three categories of BMPs: (a) animal waste management, (b) cropland

practices without water control structures, and (c) cropland practices with water control

structures (McCatty, 1999).

Table D.3 summarizes the nutrient reduction efficiencies and trading ratios adopted by the North

Carolina Department of Environmental Management based on the results of monitoring data,

studies, and best professional judgment. In addition to the applicable trade ratio, a discount

factor of 30% is applied to credits to account for in-stream losses to Washington (McCatty,

1999).

Table D.3 BMP Nutrient Removal Efficiencies and Ratios

in the Tar Pamlico Program

BMP

% Nutrient

Removal

NPS/PS

Trading Ratio

Animal waste management systems 50 2:1

Crop management practices without water control structures 30 3:1

Crop management practices with water control structures 60 Not Provided

Michigan State

The statewide program proposed by the Michigan Department of Environmental Quality also

uses trading ratios to address uncertainty and to provide a net water quality benefit, as well as
53

discount factors to address distance, directionality, toxicity, and equivalence. Credits, called

discharge reduction credits (DRC), are determined by subtracting reduced discharge level (RDL)

from the baseline (B): DRC = (B – RDL). This quantity, minus the water quality contribution,

represents the actual quantity of credits available for trading. Baseline calculations for BMPs

take into account pollutant-specific loading associated with existing land uses and management

practices (McCatty, 1999).

Each point source is required to retire (or in this case, make a one-time contribution of) to the

Department of Environmental Quality 10% of the credits traded to account for uncertainty and to

provide a net water quality benefit. Nonpoint sources contribute 50% (i.e., a nonpoint source/

point source trade ratio of 2:1). To further safeguard water quality, the Michigan draft rules

contain options for site-specific and trade-specific ratios and an additional 10% discounting for

locations upstream of impoundments or other protected areas (McCatty, 1999).

Cherry Creek Basin

Exchange rates in the Cherry Creek program are established on a project-specific basis in the

range of 1.3:1 to 3:1. The Cherry Creek Basin Authority assigns lower ratios to more

established, stable projects, and higher ratios to those with greater technical or institutional

uncertainties. Criteria for assigning exchange rates are based on institutional, variability, and

best professional judgment factors, as follows (McCatty, 1999):

Institutional Factor: This is an assessment of the reliability, stability, accountability,

financial, administrative, and technical ability of the project owner or operator. Authority

projects receive the highest Institutional Factor of 1.00.

Variability Factor: Calculated by dividing overall annual average phosphorus removal by

the 95th percentile of the dataset of monitoring data.

Best Professional Judgment Factor: Accounts for scientific uncertainties and is based on

(a) data limitations and assumptions, (b) level of establishment of the project, (c) project

location, and (d) timing of pollutant reductions. For example, a factor of 1.0 is assigned to

projects close to the Cherry Creek reservoir, which are well established and fully operational

and have several years of comprehensive monitoring data. Others not so well established

and documented receive a discount factor less than 1.0.

The exchange rate (E) for each project is obtained by multiplying Institutional Factor (IF) by

Variability Factor (VF) by Best Professional Judgment Factor (BPJ): E = IF × VF × BPJ.

The Discharge Credits or pounds of phosphorus available for trading = quantified

phosphorus removal × exchange rate.

Southern Minnesota Beet Sugar Cooperative

Southern Minnesota Beet Sugar Cooperative uses an exchange rate of 2.6 for its nonpoint

trading, determined as follows (McCatty, 1999):
54

+ 1.0 = base 1:1 trading ratio

+ 0.6 = engineering safety factor reflecting potential site-site variations

+ 1.0 = net reduction factor to achieve load reductions that improve water quality.

 2.6

Its NPDES permit contains procedures for calculating phosphorus reductions from each of the

approved BMPs using Universal Soil Loss Equations or Revised Universal Soil Loss Equations,

sediment delivery tables, and nutrient enrichment tables. The Natural Resources Conservation

Service and the local Soil and Water Conservation District determine the Revised Universal Soil

Loss Equation coefficients on a site-by-site basis. The list of approved BMPs comprises the

following (McCatty, 1999):

• Soil erosion BMPs

• Cattle exclusion

• Rotational grazing with cattle exclusion

• Critical area set aside

• Constructed wetland treatment systems

• Alternate surface tile inlet

• Cover cropping.

Rahr Malting Co.

The Rahr Malting NPDES permit includes procedures, similar to those of Southern Minnesota

Beet’s, for calculating estimates of pollutant reduction for livestock exclusion, soil erosion

BMPs, rotational grazing with livestock exclusion, critical area set-asides, and wetland treatment

systems. An overall safety factor of 2 is built into the estimates, effectively a 2:1 ratio. The

program defines one credit as equivalent to 1 pound of CBOD5 discharged per day. Table D.4

gives equivalency rates for the various pollutants (McCatty, 1999).

Table D.4 Rahr Malting Co., Pollutant Equivalency Rates

Trade Parameter Measured Value/Day

Metro Reach BMP

CBOD5 Credit

Upstream BMP

CBOD5 Credit

Phosphorus 1 pound 8 units 8 units

CBOD5 1 pound 1 unit Not Provided

Nitrogen 1 pound 4 units 1 unit

Sediment 1 ton 0.5 units 0.5 units

The phosphorus to CBOD5 exchange rate is 1:8 and CBOD5 to nitrogen is 1:4. This means that

the discharger is allowed to release 8 pounds of CBOD5 for every pound of phosphorus removed

by BMPs and 4 pounds of CBOD5 for every pound of nitrogen removed (net of 50% safety

factor) for the life of the BMP.

The Rahr Malting exchange rate is, therefore, a combination of a 2:1 ratio to account for BMP

uncertainties, and ratios ranging from 1:8 to 1:1 to equate the various pollutants with CBOD5

(McCatty, 1999).
55

Trading Ratios for the Chesapeake Bay

The Negotiation Team determined that the following ratios should be considered when

developing a trading program in the Chesapeake Bay watershed:

• Delivery Ratios

• Uncertainty Ratios

• Special Needs Ratios (Note: the Negotiation Team opted to use the term “special

needs” in place of “water quality”; they are referring to the same ideas.)

• Retirement Ratios.

The Chesapeake Bay Watershed Model is an application of the Hydrologic Simulation Program:

Fortran model to the Chesapeake Bay watershed. It is one part of an integrated system of models

designed to assess the impact of nutrient loads on the Bay system and includes (a) refined land

use coverage, (b) loads for all land uses, (c) point source loads, and (d) load reductions expected

from applied control measures (e.g., BMPs). This model is available to provide information for

ratio determination for the Bay watershed as described below.

Delivery Ratios

Delivery ratios for the Chesapeake Bay, available from the Bay Program’s Watershed model,

account for attenuation during nutrient transport and are estimations of the quantity of nutrients

from sources throughout the Bay that reach the Fall Line. Nutrients discharged below the Fall

Line experience minimal delay before entering the Bay; hence, there is little need to discount for

attenuation in these areas. Table D.5 presents example delivery factors for nitrogen and

phosphorus above the Fall Line. These delivery ratios were derived from a draft watershed

model run simulating year 2000 conditions. The factors may change with respect to different

model scenarios, sometimes by as much as 50%. Thus, it is recommended that trading programs

developed in the next few years use the delivery factors developed by the watershed model’s

final 2000 Progress Run (available from the Bay Program Office). The delivery factors derived

from the watershed model are determined for each of the approximately 100 model segments that

the Bay watershed is divided into. Exhibit D.1 is a map of the model segments that can be

correlated with the segment delivery factors in Table D.5.

Preston et al., working on regression modeling of nutrient loading in the Bay watershed, report

that areas of northeastern and southern Pennsylvania, parts of Maryland, and parts of the lower

Eastern Shore have the highest delivered nitrogen loading to the Bay. Areas with high

incremental yields and relatively low delivered yield include the New York part of the watershed

and parts of central Maryland and western Virginia. Highest delivered yields are areas that drain

directly to large streams or are areas of high incremental loading close to the Bay.

Another source of delivery ratios is the U.S. Geological Service’s SPARROW model, which has

a finer resolution than the Bay Watershed model. This model divides the Bay watershed into

approximately 1,400 model segments. Delivery ratios were derived for each segment in a similar

way to the Bay watershed model.
56

Table D.5 Delivery Factors from the Watershed Model

Draft Progress 2000 Scenario

Nutrient Delivery Factors for 2000 Scenario

TN Factor Segment TP Factor Segment

0 650 0 650

0.026 250 0.4079 120

0.0833 265 0.4079 720

0.1593 330 0.4079 710

0.2163 190 0.4079 700

0.2812 270 0.4079 140

0.3134 300 0.4079 110

0.3511 235 0.4079 100

0.4959 10 0.4079 80

0.5056 240 0.4079 70

0.5148 200 0.4079 20

0.5321 20 0.4079 60

0.5348 160 0.4079 30

0.5438 170 0.4079 90

0.5445 750 0.4079 40

0.5805 260 0.4079 10

0.5843 310 0.4079 50

0.5872 230 0.4178 240

0.6002 280 0.4178 235

0.6283 730 0.4741 300

0.6443 50 0.4741 310

0.6539 210 0.484 260

0.6708 175 0.484 250

0.6822 770 0.566 730

0.7114 700 0.566 750

0.7168 740 0.566 160

0.7396 30 0.566 220

0.7456 90 0.566 210

0.7568 100 0.566 200

0.7782 60 0.566 190

0.7948 290 0.566 180

0.8036 180 0.566 740

0.8082 720 0.566 170

0.8321 220 0.566 175

0.8483 40 0.6905 770

0.8577 760 0.731 340

0.8622 340 0.731 330

0.8959 780 0.8706 780

0.8976 70 0.9381 265

0.9637 110 0.9381 290

0.9766 710 0.9381 270

0.9838 120 0.9381 280

0.9867 80 0.9438 230

1 490 0.9635 760
Nutrient Delivery Factors for 2000 Scenario

TN Factor Segment TP Factor Segment

57

1 370 1 490

1 380 1 370

1 410 1 410

1 390 1 380

1 400 1 390

1 930 1 400

1 470 1 930

1 850 1 840

1 860 1 850

1 870 1 860

1 880 1 870

1 890 1 880

1 900 1 890

1 830 1 900

1 920 1 470

1 820 1 920

1 940 1 810

1 950 1 940

1 955 1 950

1 960 1 955

1 965 1 960

1 970 1 965

1 980 1 970

1 910 1 980

1 580 1 910

1 430 1 560

1 440 1 430

1 450 1 440

1 480 1 450

1 990 1 480

1 500 1 990

1 510 1 500

1 540 1 510

1 840 1 830

1 560 1 550

1 420 1 820

1 590 1 580

1 600 1 590

1 610 1 600

1 620 1 610

1 630 1 620

1 800 1 630

1 810 1 800

1 550 1 420

1.0321 140 1 540
58

Exhibit D.1 Model Segments
59

Uncertainty Ratios

Determinations of uncertainty are based primarily on the reliability and efficiency of nonpoint

nutrient reduction controls. (Camacho [1992] defines efficiency as 1 – post BMP/pre-BMP ×

100.) The Bay model uses 21 BMP designations for its assessments. For this discussion of

uncertainty ratios, the designations are consolidated into 5 categories, and nutrient reductions are

averaged within categories (see Table D.6).

The ranges given indicate the variations in nutrient reduction efficiencies and are an indicator of

BMP reliability. Here the assumption is made that the larger the range, the greater the variability

and need for discounting to compensate for the associated uncertainty. While it appears that

uncertainty ratios in the range of 1.5 – 3 would be generally applicable in the Bay watershed, it

may be necessary to conduct more thorough analyses prior to adopting actual uncertainty ratios.

Table D.6 Estimated Nutrient Reduction Efficiencies for Main BMP Categories

BMP Categories % N Removed % P Removed

Animal waste management system (cattle, swine) 80 80

Urban storm water 25–33 20–64

Resource protection 25–75 25–75

Non-structural cropland 4–20 8–40

Nutrient management plans (cover crops) 34–51 10–20

Source: Summarized from Chesapeake Bay Watershed Model Application and Calculation of Nutrient and

Sediment Loadings. Appendix H. Table 2.2. August 1998.

Special Needs Ratios

The Negotiation Team also determined that a ratio should be considered to account for areas in

which special factors (e.g., sensitive waters or areas needing living resources protection) are

involved. This special needs ratio is essentially a water quality ratio in that it would account for

local water quality situations that may require additional protection for a variety of reasons.

Retirement Ratios

Credits may be retired (i.e., removed from trading) to provide net water quality benefits. For

example, a portion (say 10%) of all credits traded by both point and nonpoint sources may be

required to be contributed to the state. There are issues of cost, equity, and future economic

growth to be considered, however, when doing so. Some related retirement scenarios follow:

• Requiring that all credits be retired at the end of 5 years. This is the approach taken in

the Michigan program. It establishes a level playing field for all participants. In

addition, the duration is sufficiently long for planning and assessment purposes.

• State agencies, citizen groups, or environmental nonprofits may purchase credits with

the express purpose of immediately retiring them.

• Entities that cease to operate may be required to retire all or a portion of their credits.

This policy may be pursued in areas in which growth is being discouraged for

environmental reasons.
60

Example Credit Calculations

The best source of data quantifying nonpoint loads is again the Bay watershed model. Camacho

(1992) gives edge-of-stream loading factors for conventional tillage, conservation tillage,

hayland, pasture, animal waste, forest, and urban areas for 63 watershed segments. The

following example illustrates the use of loading factor, nutrient reduction efficiency, uncertainty

ratio, and transport factor to quantify available BMP credits.

Example: (Note: this example assumes that the farmer meets all eligibility requirements before

trading.) A farmer located in the Lower Potomac has 500 acres of conservation tillage and

wishes to trade nitrogen. How many credits would the farmer have available for sale? For the

answer, follow the steps outlined in Table D.7.

Need to know Answer

Watershed segment 220

Loading factor 13.5 lbs. N/acre/year

Nutrient reduction efficiency 21.3%

Uncertainty ratio 3:1

Transport factor 0.8315

Table D.7 Procedure for Calculating Nutrient Credits from BMPs

Step 1 Determine watershed segment. Segment 220

Step 2 Check nitrogen loading factor for conservation in this segment (Table D.8). 13.5 lbs. N/acre/yr

Step 3 Calculate total nitrogen load from 500 acres (500 × 13.5). 6,750 lbs N

Step 4 Check nutrient reduction efficiency for conservation tillage. 21.3%

Step 5 Calculate nutrient removed by conservation tillage (6,750 lbs × 21.3%). 1,438 lbs N/year

Step 6 Reduce by 3:1 uncertainty ratio for conservation tillage (1,438/3). 476 lbs N/year

Step 7 Look up transport factor for nitrogen from segment 220 (Table D.5). 0.8315

Step 8 Reduce by transport factor for segment 220 (476 × .8315). 398 credits (lbs N/year)

available for sale.*

*Note that additional discounting to reflect water quality impacts and benefits also may be applied.

Note that a location in neighboring segment 200, which has a loading factor of 22.2 lbs/acre/year

and a transport factor of 0.5746, would have a similar amount of nitrogen credits (406 lbs) from

500 acres of conservation tillage.

The information in Table D.7 is for one BMP example. In reality, multiple BMPs are often

implemented over an extended period of time as part of an integrated resource management

system. Such a scenario makes it difficult to separate load reductions associated with each BMP. 

For trading purposes, it should be sufficient to group these BMPs together, calculate the nutrient

reductions for each type, and sum reductions for the entire group. Monitoring over an extended

period would serve to validate these estimates.
61

Table D.8 Nitrogen Loading Factors:

Conventional Tillage, Conservation Tillage, and Hayland;

Land Use Acreage and Edge of Stream Loading Factors (LF) in lbs/acre

Segment

Conventional Tillage Conservation Tillage Hayland

Acres LF Acres LF Acres LF

10 100,723 20.1 10,869 16.7 226,565 10.8

20 160,951 19.0 10,943 16.7 401,085 11.0

30 78,620 18.8 14,797 18.0 240,216 12.1

40 126,240 21.6 54,651 17.7 63,556 11.0

50 37,257 33.2 9,509 32.7 54,900 17.7

60 66,122 31.1 43,988 29.1 134,578 17.1

70 62,800 25.9 44,435 24.3 62,979 15.3

80 144,248 24.9 133,753 21.2 149,693 7.9

90 24,395 23.4 29,316 20.0 71,198 8.8

100 91,758 21.4 62,717 18.1 148,417 7.6

110 173,581 31.7 200,603 24.0 152,836 11.2

120 104,846 23.4 85,976 19.4 70,578 7.7

140 27,034 20.2 37,578 15.8 20,404 7.5

160 17,350 24.6 11,180 17.2 57,926 6.1

170 7,080 23.4 2,998 18.7 37,911 11.1

175 13,174 245.0 11,118 18.5 41,362 10.1

180 84,971 23.1 168,939 19.3 199,500 5.3

190 21,425 33.9 49,723 28.2 116,083 8.5

200 22,470 28.3 32,018 22.2 88,901 7.3

210 38,588 23.2 127,498 18.9 97,542 6.0

220 8,121 17.6 69,422 13.5 71,578 5.4

230 25,054 15.2 37,390 11.0 121,214 10.3

235 7,131 20.5 5,094 16.0 8,852 9.4

240 4,081 17.3 18,703 13.3 2,816 7.4

250 9,007 25.8 5,830 20.5 14,837 10.1

260 17,381 22.0 28,427 16.7 28,076 9.3

265 335 22.3 738 17.9 10,845 8.9

270 8,075 31.9 37,671 24.2 162,192 11.6

280 25,308 23.0 29,341 17.8 147,753 10.4

290 11,562 23.3 14,252 17.4 21,120 8.4

300 33,120 24.2 37,019 18.4 52,912 8.4

310 8,054 23.0 2,600 18.2 217 7.7

330 2,225 17.4 10,233 14.5 4,845 5.2

340 4,956 18.5 8,806 14.5 5,352 4.8

Source: Excerpted from Camacho, R. 1992. Financial Cost Effectiveness of Point and Nonpoint Source Nutrient

Reduction Technologies in the Chesapeake Bay Basin. ICPRB Report 92-4. December 1992. Table A-1.
62

Appendix E. Trade Tracking Forms

Chesapeake Bay Program Nutrient Trading Program
63

Trade Notification Form

TO BE COMPLETED BY THE BUYER

Name of Buyer

Type of Facility or Operation

Permit # (if applicable)

Name of Authorized Representative of Buyer

Phone Number

TO BE COMPLETED BY THE SELLER

Name of Seller

Type of Facility or Operation

Permit # (if applicable)

Name of Authorized Representative of Seller

Phone Number

TO BE COMPLETED BY EITHER PARTY

Parameter Being Traded

Amount of Nitrogen or Phosphorus Traded

(specify units)

Sellers Reduction Credit Certificate #

Dates the Trade Will Be in Effect

Purchasing Price of the Trade (include all

units)

Costs of Nutrient Removal (in the same units

as the purchase price) if a Trade Were Not

Conducted

I certify that the above information is accurate and truthful to the best of my knowledge and is in accord with the

state’s trading program.

Signature of Authorized Representative of Buyer: _________________________________

Signature of Authorized Representative of Seller: _________________________________
64

Reduction Credit Certificate Form

CERTIFICATE NUMBER: ____________________________

Name of Seller Facility or Operation:

Address:

Phone #:

Location of Source Being Traded (water body and lat/long):

Parameter Being Traded (Nitrogen or Phosphorus):

Type of Source Being Traded:

Nutrient Reduction Being Applied:

Monitoring Method and Frequency:

Amount Available for Trading (Credits Generated) (specify units):

Selling Price of a Credit (specify units):

Show below the calculations used to determine the Credits Generated (identify all ratios applied):

Contact Name:

I certify that the information provided above is accurate and truthful to the best of my knowledge.

Signature of Authorized Representative of Seller:____________________________________
65

Appendix F. Implementation Options for Trade Accountability

This appendix presents implementation options related to administrative roles and program components for trade

administration. The Negotiation Team presents these options for consideration by states in the development of their

trading programs.

Stakeholder Involvement Options

Responsible Entity Option Description Examples

Multi-Disciplinary Steering

Committee or Authority

This entity would be a multidisciplinary authority

comprising key stakeholders, such as state

agencies, environmental interest groups, trading

participants (buyers and sellers), and the public. It

would be responsible for providing overall program

guidance to the state; ensuring a representation of

a diversity of views from program managers,

program participants, and affected parties; and

creating opportunities for public consultation.

Although this is most similar to the structure and

role assignment identified by the Negotiation Team,

no examples have been identified at this time. Most

existing programs assign a steering committee or

authority more administrative and program

management responsibility.

State Agency This would be a state entity currently responsible

for Chesapeake Bay Program Activities.

Michigan’s Surface Water Quality Division of

Michigan’s Department of Environmental Quality is

responsible for both program management and

program guidance, but collaborates with

representatives from agriculture, municipal,

industrial, environmental, private sector, and

regulatory agencies for program guidance and

stakeholder involvement.

Multi-Jurisdictional

Management Authority

This type of authority would be composed of

representatives from each of the local jurisdictions,

as well as from regional, state, and Federal

organizations involved in watershed protection. 

Because of its governmental nature, its role is

expanded to include other administrative/program

management responsibilities, such as the approval

of project proposals, and monitoring.

The Cherry Creek Basin Authority is composed of

two cities, four counties, and seven special districts,

as well as seven ex-officio members of regional,

state, and Federal organizations involved in

watershed protection. It is responsible for creating

the opportunity for public comments and

consultations and providing liaisons with state

agencies, in addition to other program management

responsibilities.

Combination Government/

Participant Steering

Committee

This entity would comprise both governmental

representatives and program participants.

The Chatfield Basin Watershed Authority

(Colorado) is composed of representatives from 10

point sources and 5 regional, state, and Federal

organizations. This authority allocates wasteload

among its members, reviews applications, monitors

trades, and provides technical support.

Association of Program

Participants

This method uses a narrower definition of

stakeholder involvement to include only the source

participants in a trading program.

North Carolina’s Tar Pamlico Association is a

nonprofit organization composed of 14 point

sources responsible for allocating allowances

among its members and ensuring its group load cap

is met. This approach may not be appropriate for a

program that allows both point source and nonpoint

source trades with numerous diverse trading

participants.
66

Trade Facilitation Options

Responsible Entity Option Description Examples

State In most existing trading programs, trade facilitation

is considered a state responsibility.

Michigan Department of Environmental Quality will

create a trading registry that will be updated daily

and readily accessible through the Internet. Useful

for trading programs in which there is the potential

for a significant number of participants.

Trading Partners Any two or more sources that have entered into a

trading agreement.

Trading partners of the Minnesota’s Sugar Beet Coop and Rahr Malting Co. trading programs take an

active role in locating nonpoint source partners and

negotiating the terms of trades. This hands-on

approach is well suited for trading programs in

which the likely number of participants is relatively

few.

Independent Trade Brokers Private sector companies, or other independent

organizations, with the requisite financial, legal,

technical, and negotiation skills act as intermediaries between a wiling buyer and willing seller

to define the credit price and trades terms that are

mutually acceptable to both parties and in

accordance with all government regulations. A

brokerage system could be set up as a periodic

auction or an ongoing commodity exchange.

In addition to offering a registry of credits, the

environmental brokerage service of Cantor

Fitzgerald offers trading seminars, technology

evaluations, market price indexes, and

assessments for the air emissions trading program. 

The use of independent brokers avoids potential

conflicts of interest that may arise when a

regulatory agency is in charge of both trade

facilitation and program oversight.

Electronic Commerce

Brokerage Services

A subset of independent trade brokers are

e-commerce services, whereby potential traders

could conduct trades and access information on

up-to-date credit prices, the market, technical

assistance, etc. directly from an online brokerage

service/clearinghouse. This option provides the

potential for reduced transaction costs.

Cantor Fitzgerald (see above).

GreenOnline.comTM uses the Internet to conduct

environmental commerce on a global scale. It is an

electronic marketplace for news, information,

products, communications, materials, and services

pertaining to environmental commerce.

Technical Assistance Options

Responsible Entity Option Description Examples

State Program managers and staff from state

government can provide information on available

technologies for credit generation and procedures

for obtaining credits. This option also could

include an extension branch of a state university.

The North Carolina Department of Environmental

Management as part of its program oversight role

for the Tar Pamlico Program provides technical

support by tracking nutrient tradeoffs relative to

allocations and imposing individual point source

nutrient limitations where localized water quality

problems exist.

Steering Committee or

Authority

(See description under Stakeholder Involvement

options.)

A technical review committee of the Cherry Creek

Basin Authority prepares and assesses technical

proposals.

The Chatfield Watershed Authority provides

technical support to trades.

Independent Trade Brokers Trade brokers can provide assistance in preparing

contractual agreements and providing advice on

legal and regulatory issues. They could also be a

repository for the latest information on available

technologies for credit generation.

Cantor Fitzgerald offers trading seminars and

technology evaluations for the air emissions trading

program.
67

Options for Program Components of Trade Administration

Program components for trade administration identify the appropriate mechanism(s)

for implementing trades, the timing and duration of a trading agreement, the approach for

establishing the price of credits, and program incentives/funding. The Negotiation Team agreed

upon the general terms for implementing trades, the duration of a trading agreement, the

establishment of credit prices, and program funding. The details of each of these program areas

will need to be defined by each state at the time of program development. General options and

examples of how other trading programs around the country have addressed these elements are

provided below. (Note: Additional research is needed to complete examples.)

Duration of Trading Agreement Options

Option Description

Five Years The Negotiation Team felt the duration of a contractual agreement should be contingent

on the type of trade. The Team also felt that the maximum duration of a trading contract

should be 5 years, corresponding to the length of an NPDES permit according to the

Clean Water Act. Trade contract involving nonpoint sources should be appropriately

shorter to reflect their higher risk, unless a longer duration can be justified.

Uniform Duration There is the option of having a uniform trade duration for all trades. This duration could

be based upon the NPDES cycle. One advantage of this approach is that it allows for the

integration of trade monitoring functions with other NPDES control requirements resulting

in administrative savings. The principle disadvantage of this approach is that it imposes a

regulatory cycle designed for point sources on nonpoint sources. This may disqualify the

use of short-term nonpoint source BMPs from being used within the market.

Shorter Durations In general shorter duration periods allow for the market to be more responsive to changes

in both the cost of control technology and changes in land use. Shorter durations also

allow regulators flexibility in addressing potential issues, such as emerging hot spots or

problems of default. Regulators could wait until after the trade has expired before taking

action. This would avoid the potentially costly process of renegotiating trades, and would

help to foster confidence among trading program participants.

Longer Durations On the other hand, longer trade duration periods contribute to market stability. They are

more advantageous for long term financial planning of both buyers and sellers, and the

transaction costs from trading are reduced as the frequency of having to trade is reduced.

Variable Durations Based on the

Period Credits Are Needed

Assigning trading agreement durations to correspond to the length of time an individual

buyer needs credit reductions could result in a more efficient allocation of credits and

dynamic trading markets. There would be less likelihood of credit banking; however,

administrative costs would likely increase and short durations may be difficult to monitor. 

Buyers who underestimate demand may experience difficulties securing credits on short

notice, resulting in episodes of noncompliance and adverse water quality impacts.

Contingent on Type of Source

Control

The duration of the trade can be contingent upon the type of source control being used to

generate the credits. For example, in the Tar Pamlico program, structural BMPs are

eligible to generate credits for 10 years, or longer as provided for in BMP contracts, while

nonstructural BMPs have a credit life of 3 years.
68

Credit Pricing Options

Option Description

Direct Negotiations Many programs currently rely upon direct negotiations between buyers and sellers. 

Direct negotiations for each trade typically result in a per credit price that is unique to that

trade. As mentioned earlier, direct negotiations can be cumbersome and inefficient for

larger markets, and a credit auction may be more appropriate.

Auctions There are numerous types of auctions that could be used. Uniform price auctions may

be an appealing approach because they are viewed by many participants as being more

equitable. In this type of auction, buyers and sellers submit bids and offers for credits,

the auction is called, and a single credit price is then determined, which is used for all

transactions.

Permitting Authority State sets price of credits in reserve pool to sell to sellers in default. While the market

would determine the initial credit price for credits exchanged between buyer and seller,

the state may wish to set a higher price for credits in a reserve pool that will be sold to a

seller who would otherwise default on his/her trade agreement with a buyer unless

he/she purchases credits from the reserve pool. The additional funds generated through

the sale of these reserve credits could be invested in BMP installments in potential “hot

spot” areas. The Cherry Creek and Tar Pamlico programs offer examples of this special

case of price setting.

Program Incentive Options

Option Description

Program Simplicity The Negotiation Team agreed that trade administration design should be simple (while

protective) so that sufficient demand be created for credits and transaction costs

minimized.

Grants The Negotiation Team recommends that grant programs be used in such as way as to

incentivize nutrient trading; for example, larger grants could be offered early in a 10-year

program.
69

REFERENCES

Camacho, R. 1992. Financial Cost Effectiveness of Point and Nonpoint Source Nutrient

Reduction Technologies in the Chesapeake Bay Basin. ICPRB Report 92-4. December.

Chesapeake Bay Program. 2000. Summary of Public Comments to the Draft Nutrient Trading

Guidelines and Fundamental Principles. September.

Kerns, Waldon R., and K. Stephenson. 1996. Market-based Approaches and Trading

Conditions and Examples. Watershed ’96 Conference Proceedings.

McCatty, Thelma. 1999. “Discussion Paper #7–Trading Ratios and Exchange Rates.” Prepared

for the Chesapeake Bay Program’s Nutrient Trading Negotiation Team.

Podar, Mahesh, Richard M. Kashmanian, Donald J. Brady, H. Dhol Herzi, and Theresa Tuano. 

1996. Market Incentives: Effluent Trading in Watersheds. Watershed ’96 Proceedings.

Preston, D.S., R. Smith, G. Schwartz, R. Alexander, and J. Brakebill. (No date). Spatially

Referenced Regression Modeling of Nutrient Loading in the Chesapeake Bay Watershed.

Schary, Claire. Letter to Waldon Kearns, Professor of Resource Economics, Virginia Tech,

October 17, 2000.

Stephenson, Kurt, W. Kerns, and L. Shabman. 1995. Market Based Strategies and Nutrient

Trading—What You Need to Know. Prepared for the “Market-based Strategies and Nutrient

Trading” workshop. November.

U.S. Environmental Protection Agency (U.S. EPA), Chesapeake Bay Program. 1999. The State

of the Chesapeake Bay: A Report to the Citizens of the Bay Region. EPA 902-R99-013. 

October.

U.S. EPA, Office of Water. 1996a. Effluent Trading in Watersheds Policy Statement. February

9. Federal Register 61 (28): 4994–96.

U.S. EPA, Office of Water. 1996b. Draft Framework for Watershed-Based Trading. EPA

800-R-96-001. May.

U.S. EPA, Office of Water. 1999. Final Report, Results of Water-Based Trading Simulations. 

September.

U.S. EPA, Office of Wetlands, Oceans and Watersheds. 1998. Effluent Trading in Watersheds

Policy Statement. http://www.epa.gov/owow/watershed/tradetbl.html.