P-NPS pollutant trading refers to the substitution of nonpoint source pollutant load reductions for point source load reduction requirements by a discharger permitted under the National Pollutant Discharge Elimination System (NPDES). · The investigation concludes that P-NPS pollutant trading could prove to be a very useful policy instrument for the Water Quality Division. If properly designed and implemented, it has the potential to promote efficiency, equity and effectiveness while integrating point- and nonpointsource programs in the context of basin management. Introducing P-NPS trading does not appear to pose significant legal problems, although the relationship between P-NPS trading and National Pollutant Discharge Elimination System (NPDES) permit requirements needs to be carefully considered. However, based on an evaluation of its potential use in managing phosphorus loadings, P-NPS . trading appears likely to be feasible only in a limited set of circumstances. There are several reasons for this. First, the widespread assumption that additional pollutant reductions can be achieved at much less cost from nonpoint sources than through additionalpoint source controls turns out not to be generally true. Over a wide range of circumstances, the opposite appears to hold true in Minnesota. That is, for moderate or large-sized municipal treatment systems where the initial concentration of total phosphorus in the waste influent is moderate to high, and the permitted effluent concentration level does not sink below 1 mg P/1, the cost of phosphorus removal tends to be low relative to nonpoint sources. Where one or more of these conditions does not hold, municipal treatment control costs may be higher than nonpoint source costs, and P-NPS trading may be advantageous. Moreover, phosphorus reduction costs are unique for each treatment plant, and may be sufficiently high to make P-NPS trading seem worthwhile even for plants which may appear on: the surface to fit into a low-abatement-cost category. On the nonpoint source side, the cost of phosphorus reduction often is higher than expected. On the surface, certain phosphorus-reducing best management practices (BMPs) appear to be very low cost or even costless, such as residue management and nutrient management, in that they involve farm management changes that have been demonstrated to result in increased net income. However, closer consideration reveals significant costs associated with these BMPs in the context of P-NPS trading. First, lack of adoption by landowners indicates some kind of resistance that has to be overcome. An educational program may be required, at a significant cost. In one Ctean Water Partnership project in south-central Minnesota, the cost of running such a program per pound of expected phosphorus load reduction was in the neighborhood of $12 to $15 per pound. This alone is roughly double or triple the estimated unit cost of phosphorus removal to an effluent concentration of 1 mg P/1 at the municipal wastewater treatment systems at Rogers and Rochester, for example, or at the Metro plant in the Twin Cities. Add a $5-$10 per acre incentive payment, and the nonpoint source cost of phosphorus removal skyrockets to the range of $48 to $70 per pound. And this may not even cover all the costs .that would be required unde P-NPS trading, such as the cost of negotiating and enforcing contracts with dozens or hundreds of landowners. There are other nonpoint source BMPs where such costs would be much reduced. In the case of feedlots, for example, large quantities of phosphorus loading reductions can be obtained at a few individual sites through manure containment structures, making general educational programs, and the enforcement of many individual contracts, unnecessary. Even here, however, the cost of nonpoint source phosphorus loading reductions are often on a par with point source reduction costs, rather than far below them. Exceptions include small municipalities, or larger facilities where influent concentrations of phosphorus are low~- in the range of 2-4 mg P/1, for example -or where severe reductions below Minnesota's 1 mg P/1 limit are required. In such cases, manure containment may offer considerable savings. However, even where a clear cost advantage exists in favor of nonpoint source measures, it is not assured that P-NPS trading would be desirable. Besides efficiency, three additional criteria in. particular come into play: equivalence, additionality, and accountability. • Equivalence refers to the physical substitutability of point and nonpoint source loadings, a prerequisite for P-NPS trading that raises complex questions. There are often significant differences in the time and place of loadings from these two· classes of pollution sources. Are nonpoint loads that enter the river after storms, typically at high flow, equivalent to point source loads that enter the river at a constant rate, yearlong? What if a distance of 10 or I 00 miles separates point and nonpoint source loadings? Can they still be treated as equivalent? In addition, there may be significant chemical differences between point and nonpoint source loadings. Point source loads typically are very high in biologically available phosphorus, whereas nonpoint source loadings tend to be very high in·particulate phosphorus (except for feedlots). Or, it may be that a point source is faced with a BOD limit, against which it wishes to trade · upstream nonpoint source loading reductions. Since BOD has a site-specific impact on water quality, how can equivalent upstream loading reductions be defined and quantified? These are the kinds of questions that arise under the equivalence criterion. • Additionality requires that nonpoint source load reductions that are credited to a point source in a P-NPS trade would not have occurred otherwise, in the absence of P-NPS trading. The Division needs to develop a policy on additionality to provide guidance to potential parties to P-NPS trading. What exactly does additionality mean? Additional to nonpoint source measures that have already been applied? Additional to nonpoint source measures that are planned under current programs? Additional to nonpoint source measures that landowners should be applying, and units of government should be demanding; according to existing pollution control rules? Additional to what landowners are likely to do in their own economic self-interest, in the case of nutrient management, for example? Or additional to what the public should demand of landowners in the way of minimum land stewardship practices that are practical, affordable and effective? How the Division decides these questions will greatly influence which BMPs remain eligible for P-NPS trading, and therefore how much it is likely to cost to obtain nonpoint source reductions. • Accountability refers to the need to ensure that a P-NPS trade satisfies the above criteria of equivalence and additionality, and that terms of the trade agreement are . being lived up to. For example, have the nonpoint source BMPs specified in the trading agreement been implemented? Are they being maintained? Are they as effective as at first believed? A larger question of accountability is, will the application of these BMPs have a water quality impact that is comparable to the impact that would have resulted from equivalent point source loading reductions? The degree of monitoring ofBMP implementation and.maintenance, and of water quality trends, that is required under trading will depend on the degree of accountability desired. The answer to this question could greatly influence the cost . and practicability of P-NPS trading . . · In practice, P-NPS trading will involve a search for workable tradeoffs between point and nonpoint source load reductions that satisfy the criteria of efficiency, addi~ionality, equivalence and accountability as well as a few others such as flexibility and perhaps public acceptance .. This search may take a lot of time or a little time, depending on the quantity of loading reduction required, the possible alternative methods of reduction that are at hand, and the complexity of the issues involved. There is a danger that the need to meet all of the above criteria, and to answer all the questions they raise, will present severe barriers to P-NPS trading.· If this happens, the potential advantages of trading may never be realized. These advantages could be very significant -- for point sources facing high costs of additional pollutant reduction, for communities seeking a way to involve . both point and nonpoint sources in meaningful pollutant reduction activities, and for the Water Quality Division, which requires new, flexible policy instruments in order to integrate point and nonpoint source programs to solve water quality problems in the context of basin management. In order to reduce potential barriers to P-NPS trading, the Division may wish to offer point sources permit compliance alternatives that include two basic approaches to P-NPS trading. Under the first approach, the point source would be responsible for contracting with nonpoint sources for specific quantities of pollutant load reduction. This option would be likely to appeal · to smaller point sources who could identify a few. nonpoint sources for achieving its required reductions. A policy guidance would be provided to clarify all the requirements which the PNPS trade would have to satisfy. Under the second approach, a point source interested in P-NPS trading would be given the opportunity to satisfy its load reduction requirement simply by paying into a fund dedicated to nonpoint source pollutant reductions. Payments would be bl;lSed on the required volume of pollutant load reduction, and the anticipated cost of achieving equivalent, additional and enforceable load reductions from no1,1point sources. Severai types of payment schemes could be devised, and integrated with permit enforcement. For example, the point source could be required to pay a surcharge on exceedences of the parameter in question, for discharges in excess of the limits prescribed in its NPDES permit, in a stipulation agreement or in a Memorandum of Understanding. The state then would be responsible for assuring that this payment was used to obtain equivalent, additional and enforceable pollutant reductions from nonpoint sources. The cost of undertaking this responsibility would be covered in the surcharge. These topics are explored at length in the following evaluation of P-NPS trading, which includes two case studies. These case studies are a retrospective examination of two municipalities where phosphorus removal to an effluent concentration of 1 mg P/1 was recently required, and where the necessary treatment plant modifications have already been made. In view of the nature of the water quality problem which prompted the limit on phosphorus, the cost of compliance with this limit through plant improvements, and the possibilities for nonpoint source reductions in the watershed in question, it is asked whether some form of P-NPS trading might have achieved equivalent water quality protection at less cost. The limited number of potential sites for case studies in Minnesota resulted in a somewhat unusual use of this means of policy exploration. Since in both cases point source reductions were available at relatively low cost, it was necessary to investigate a number of what-if scenarios to investigate the conditions under which P-NPS might have paid off. It would have been better to describe an actual case where P-NPS trading would have clearly paid off, but the rather limited range of application of Minnesota's phosphorus control policy made it difficult to identify such a case. If current discussions of the phosphorus policy relative to the problems in the Minnesota River lead to a broader application of the state's 1 mg P/1 limit, there will be no shortage of municipalities where some form of P-NPS trading would offer considerable cost savings, provided that a user-friendly P-NPS trading option exists. In particular, smaller municipalities and point sources with relatively low initial concentrations of phosphorus in their wastewater are likely to encounter high costs of treatment. That, anyway, is what the following investigation strongly suggests. Easing the burden of compliance for such dischargers may turn out to be one of the main benefits of P-NPS trading, but this depends on the details of whatever trading policy the Division decides to develop. It is hoped that this report will be helpful in identifying the most important questions.that such a policy raises, and in beginning to explore the range of possible answers and their consequences.
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