When too much nitrogen and phosphorus runs into lakes and rivers, the result is a bloom of algae that–if it gets bad enough–can suffocate fish and other life in the water.
Some of the biggest culprits of nutrient pollution are sewage treatment facilities, power plants, and farm fields. But here’s the thing: The cost of clean-up isn’t equal. It may be cheaper for a farmer to reduce pollution than the power plant.
That’s the underlying motivation behind water-quality trading. It’s a way of reducing the overall amount of pollution at the lowest overall cost. If it’s cheaper for a farmer to stop run-off from fields than for the sewage plant to install complex filters, then a scheme allows the sewage plant owner to pay the farmer to take bigger actions. The plant still has to meet its regulatory requirements, but the company could pay someone else to reduce their impact through a credit system.
The idea has been around for at least a decade, and several states have passed laws to allow it. What’s different about a new project in the Ohio River Basin is that it’s crossing several state lines, allowing credits to be traded interchangeably no matter where buyers and sellers are located. If the pilot phase is successful, the system could eventually see eight states and numerous industrial sites and farmers involved.
The Ohio River Basin project is being managed by the Electric Power Research Institute (EPRI), a member organization that researches issues relevant to the power industry (see the video it made above). It recently sold the first 9,000 “stewardship credits” to Duke Energy, Hoosier Energy, and American Electric Power, and it’s now working with farmers to reduce their fertilizer impacts. That includes installing “buffer strips” so water run-off is filtered before it enters waterways. Another option is installing concrete feeding areas for cows, so manure is collected rather than running away. Or perhaps planting trees, covering crops, and putting in fences, so rivers and animals are separated.
During the pilot phase, which runs to the end of 2015, farmers are paid the equivalent of $10 for every pound of nitrogen and phosphorus they keep out of the basin, with EPRI meeting 75% of each project’s cost (there are about 20 at the moment). The reductions are then translated to credits, and made available to buyers.
“We see a lot of opportunity in trading because it is a cost-effective approach for reducing nutrient loading, which comes from many sources,” says Jessica Fox, who leads EPRI’s program. “Potentially, you can have better water outcomes at a lower cost than if everyone tried to do it on their own.”
Fox emphasizes that EPRI is not necessarily advocating water-quality trading (though it sounds like it). One the goals of the pilot is to get into the nitty-gritty of whether the program works in practice at effectively reducing nutrient pollution and finding out if loopholes get in the way.
The big question is what price the credits will achieve on the open market and whether that creates a meaningful incentive. At the moment, EPRI puts it at $10 per pound to cover the costs of the scheme. The first public auction this fall will determine which other companies might want to buy the credits from EPRI, and at what amount.
“That’s when you’re really going to know that people are willing to pay, and whether we can recover the money,” Fox says.