E X E C U T IsVummary
E
Water Environment
Research Foundation
Stock No. 97IRM5E
Nitrogen Credit Trading in
Maryland: A Market Analysis for
Establishing a Statewide Framework
Watershed Management
B e n efits
 Shows that trading options at three
geographic scales in Maryland could
provide significant to substantial cost
savings when compared to meeting a
loading cap without trading.
 Concludes that various factors, such
as source point vs. nonpoint trading
and cross-tributary trading, can
strengthen or weaken a credit market,
which expands or diminishes opportunities for greater cost-effectiveness.
 Presents previously unavailable
information and analyses that are critical to regional watershed management
strategies.
 Provides a replicable, systematic,
and scalable approach to evaluating
trading opportunities.
Related Products
Nitrogen Credit Trading in the Long
Island Sound Watershed (stock no.
D00300)
Phosphorus Credit Trading in the
Kalamazoo River Basin: Forging
Nontraditional Partnerships (stock no.
D00311)
For more, go to www.werf.org/
watersheds/watersheds_trading.cfm.
Contractor
Elise F. Bacon, M.P.P.
Principal Investigator
CH2M HILL
Watershed-based trading is a way for water quality agencies and community stakeholders to develop common-sense, cost-effective solutions to water quality problems in
their watersheds, according to the U.S. Environmental Protection Agency (U.S. EPA). It
is a flexible alternative that may allow communities within a watershed to grow and
prosper while retaining a common commitment to water quality. U.S. EPA believes that
credit-trading options can be an effective and efficient means of lowering nutrient intake
and increasing water quality within individual watersheds. Nevertheless, it is often difficult to establish a trading program.
The research team for this project explored whether a market for nitrogen credits can
help publicly owned treatment works (POTWs) in Maryland achieve cost-effective nitrogen loads. The last of five WERF-funded trading projects that examine the significance
of the 1996 U.S. EPA Draft Framework for Watershed-based Trading, this report analyzes and defines potential trading markets.
Defining the Market
This project evaluates whether a trading option could enable biological nitrogen
removal (BNR) plants to achieve a 62.5 percent nitrogen reduction over 1985 loads more
cost-effectively than if all plants treated to 5 mg/L or better. Currently 65 Maryland
POTWs already have or will install BNR technology to achieve average annual nitrogen
concentrations of about 8 mg/L.
Project Team
Project Subcommittee
C. Norman Pearson, Jr., M.S.
CH2M HILL
Cy Jones, Chair
Washington Suburban Sanitary
Commission
Marya Levelev
Maryland Department of the Environment
Karl Ott
Washington Suburban Sanitary
Commission
John Rhoderick
Maryland Department of Agriculture
Tanya Tomasko Spano
Metropolitan Washington Council of
Governments
Lauren Wenzel
Maryland Department of Natural
Resources
Allison Wiedeman
Chesapeake Bay Program, U.S. EPA
W. Wesley Eckenfelder, Jr., D.Sc., P.E.,
D.E.E.
Eckenfelder Inc.
Stephen A. Estes-Smargiassi
Massachusetts Water Resources
Authority
Jim Hagerman
TVA Clean Water Initiative
Thomas P. O' Connor
Mahesh K. Podar, Ph.D.
U.S. Environmental Protection Agency
Carolyn M. White, J.D.
U.S. Air Force Legal Services Agency
Nitrogen Credit Trading in Maryland: A Market Analysis for Establishing a Statewide Framework
If a credit market exists that can reduce the total costs of additional reductions of nitrogen loads into the Chesapeake Bay, then
the next question is: What are the threshold conditions for this
market? This project used the Chesapeake Bay Program’s
Principles and Guidelines (2001) [for trading] as a basis to frame
the objectives of the analysis, make decisions about methodology
and assumptions, and evaluate the sensitivity and implications of
the results. It looked at the critical economic, technological, and
aggregate environmental conditions and found that the watershed
appears to support creation and operation of a viable trading market, and the potential cost savings with trading are compelling for
Maryland POTWs.
Market Simulations
The best framework for designing and implementing trading
projects in Maryland may be the tributary strategies developed for
each of the 10 major watersheds in the state. Trading across
selected tributaries provided greater savings than trading that was
restricted to within each of the 10 tributaries.
Point–nonpoint trading simulations showed increased cost savings in some tributaries above the level provided by point–point
trading alone. This research showed that potential tributary-level
cost savings ranged from 8 percent to 60 percent, and statewide
savings ranged from $9 million to $12 million annually with trading, compared with staying under a loading cap without trading.
Allowing cross-tributary trading provides additional savings
compared to trades confined within tributaries. Cost savings
might be reduced if certain POTWs have fewer credits to sell or
charge more per credit, or if nonpoint source trading ratios or
credit prices are higher than assumed. Savings achievable under a
trading program may be greater to the extent that a market helps
uncover lower cost or more environmentally valuable reductions,
or provides incentives for technological innovation in point
source and nonpoint source nitrogen control.
Managing Nutrient Reduction Programs
Maryland has made considerable progress reducing nitrogen
loadings but not without great financial expenditures. To achieve
additional reductions, cost-management strategies must be considered. POTWs could create credits by keeping loadings below
their cap. Nonpoint sources — agricultural, urban, and rural —
could sell credits from best management practices beyond the
level needed to achieve a 62.5 percent nitrogen reduction.
Point–point trading should not be overlooked as a potentially
important strategy — nonpoint source credits will not always be
less expensive than point source credits. The report also proposes
to add best management practices (BMP) credits for stormwaterrelated projects and restoration on undeveloped land.
Although urban BMP credits were not cost-effective in this
study, they should be considered a potentially important part of
a trading market in other watersheds. In addition, with better
cost estimates and a wider range of BMPs from which to
choose, urban BMPs might actually be economical in
Maryland. Undeveloped land, public and private, is another
potential source of credits. In this study, resource credits were
c o s t - e ffective in selected cases. If a watershed has a significant
number of degraded areas, such as wetlands or stream corri-
EXECUTIVE
summary
dors, restoration projects might provide an important source of
credits and should be examined.
Scalable Results
The cost differentials among POTWs provide direction to
planners, regulators, and policymakers to focus first on those that
provide the greatest return per investment dollar when prioritizing
and targeting funding for the next round of upgrades.
The general analysis can be scaled down or up as necessary
with respect to size of the watershed examined, number of potential trading partners, timeframe evaluated, precision level of cost
and other data, and other factors. This project also showed that
before a successful trading program can be established, users
need to know the market, potential participants, and possible
opponents. This knowledge will need to be used to successfully
communicate with participants and other stakeholders. Failure to
accomplish these tasks can significantly delay progress on evaluating trading and ultimately using credit markets to support watershed restoration.
Conducting a market analysis gives stakeholders a better sense
of who is likely to be interested in creating credits and who might
be interested in buying credits. It also reveals pivot points such as
prices or situations under which supply and/or demand for credits
significantly shift. This information can be important to POTW
decision-makers in both the early and later stages of developing a
trading program. For example, it can be used in selecting and
designing pilot demonstrations and evaluating how alternative
policies and rules might support or depress a trading market.
The project results strongly indicate that trading options may
provide opportunities to achieve environmental objectives at substantially lower costs, and possibly faster than approaches that
require all POTWs to lower nitrogen concentrations.
The research on which this report is based was funded in part
by the United States Environmental Protection Agency (U.S.
EPA) through Cooperative Agreement No. CX-824468-01 with
the Water Environment Research Foundation (WERF). Unless
an EPA logo appears on the cover, this report is a publication of
WERF, not EPA. Funds awarded under the cooperative agreement
cited above were not used for editorial services, reproduction,
printing, or distribution.
Subscribers, order your complimentary copy of this
report by calling (703) 684-2470. Additional copies are
available at $10 each. Or visit WERF’s website at
www.werf.org and click on the “Product Catalog.”
Non-subscribers may be able to order WERF publications
through WEF (www.wef.org) or IWAP (www.iwap.co.uk).
For details, visit WERF’s Product Catalog at
www.werf.org/acb/webpage.cfm?WebPage_ID=3&did=7.
Refer to stock no. 97IRM5E.
10/02