Nutrient credit trading means what you might expect it to mean — the purchase and sale of nutrient credits for the purpose of nutrient-related regulatory compliance. But what exactly are nutrient credits, how are they generated, who buys them, and for what purpose are they doing so? The primary goal of this two-part article is to introduce readers (i.e., farmers, project developers, investors and others) to the concept of nutrient credit trading (NCT), explain how these markets are created and operated, and highlight the potential opportunity for anaerobic digester owners and operators.
Part I provides baseline information about NCT, details the legal and regulatory framework that gives rise to these trading markets, and demonstrates how anaerobic digestion projects can generate tradable nutrient reduction credits. Part II (to appear in next month’s BioCycle) will explore NCT markets as applied in actual case study examples. While Part I is admittedly in the legal and regulatory weeds of the issue, it is very important to understand how these programs are formed in order to recognize potential opportunities and be prepared to capitalize once they come online.

Market-Based Solution

Nutrient credit trading provides a market-based solution to a recognized environmental harm — in this case, impaired water quality in rivers, lakes, estuaries and other water bodies due to over enrichment of nutrients. Severely impaired waters create a literal dead zone where neither plant nor animal can survive. Rather than having regulators mandate specific technology fixes for each particular regulated entity, NCT programs provide flexibility in meeting compliance burdens and encourage the market to find and reward those capable of producing the lowest cost solutions.
For example, a farmer might be able to adopt certain best management practices (BMPs) to reduce nutrient loading at a cost lower than that faced by a municipal separate storm sewer system (MS4) operator for comparable reductions. (An MS4 is required to comply with federal storm water management rules.) Under a NCT program, the farmer will be encouraged to reduce its nutrient loading below the level required for regulatory compliance because of the potential to sell the excess nutrient reductions (nutrient reduction credits or “credits”) to the nearby MS4 operator.
While designed to achieve an aggregate solution to water quality problems throughout an entire water body, NCT programs are nevertheless typically structured to prevent localized problems from arising. In other words, a properly designed NCT program will include standards to protect against an entire cluster of polluters using credits for compliance while maintaining pollution levels that seriously impair local water quality.

Clean Water Act as Catalyst

The regulatory framework for NCT programs lies in the federal Clean Water Act (CWA). The following thumbnail sketch shows how NCT programs can ultimately emerge from the CWA apparatus. By recognizing some of the early indicators, a forward-looking farmer, project developer or investor could be well-positioned to take advantage of the emerging opportunity.

Basic CWA Elements

The CWA’s stated goal is “to restore and maintain the chemical, physical, and biological integrity of the Nation’s waters,” and it endeavors to do so by making unlawful “the discharge of any pollutant by any person” without a permit. This second phrase, while seemingly simple, nevertheless raises three very important (and often complicated) questions: Who is considered a “person”? What is a “pollutant”? And what does it mean to “discharge”? In brief, a “person” is just about anybody (e.g., natural person, corporation, government entity, etc.), a “pollutant” includes just about anything added to a water body (e.g., garbage, sewage, waste, nutrients, heat, etc.), and a “discharge” is the release of a pollutant from a pipe or other type of discrete conveyance (i.e., from a “point source”).
Examples of point sources include wastewater treatment and other industrial facilities. With respect to agriculture, the definition of “point source” also includes concentrated animal feeding operations (CAFOs) but explicitly excludes “agricultural storm water discharges and return flows from irrigated agriculture.”
Any and all other means by which pollutants may find their way into water bodies are considered “nonpoint sources.” Examples include agricultural fields, urban centers and suburban landscapes. Implicit in its definitions and regulation of point sources, therefore, is the fact that the release of pollutants from a “nonpoint source” is not considered a “discharge” under the CWA and thus not regulated in the same manner as are point source discharges.
This distinction between point and nonpoint sources is important because only point sources are explicitly required to receive a National Pollutant Discharge Elimination System (NPDES) permit for discharges. The CWA’s oversight of nonpoint sources (which is indirect and modest by comparison) comes under a state’s adoption and enforcement of “water quality standards,” which can take either a narrative (e.g., fishable, swimmable, drinkable, etc.) or numerical form.
Water quality standards apply to an entire water body and all of its sources of pollution — both point and nonpoint. When water quality standards cannot be met (i.e., when waters are “impaired”), the state must take action to achieve compliance — this typically involves creation of a total maximum daily load (TMDL). A TMDL is conceptually similar to a pollution diet — i.e., the level of pollutants that a water body can bear and still maintain its health, according to the best available science.

Impact of TMDL

To carry out the TMDL development process (i.e., in particular, to develop the water quality model and determine baseline loadings and allocations), states have used traditional “notice and comment” rulemaking proceedings. While each state process and individual proceeding will be unique, all provide interested parties (i.e., point and nonpoint sources, environmental nonprofits, other government agencies, etc.) the opportunity to submit comments and data to help better inform the regulator’s understanding of the best available science. The regulator must then consider and respond to all submitted comments and data in promulgating a final TMDL. If it fails to do so, stakeholders will have reasonable grounds to submit legal challenges.
As mentioned above, a state will allocate permission to release regulated pollutants among both point and nonpoint sources. Point sources receive waste load allocations (WLAs), which are incorporated into their existing NPDES permits; nonpoint sources are assigned broader load allocations (LAs) and informed about ways they can demonstrate compliance, usually through the adoption of certain BMPs.
The TMDL process, therefore, leads to a numerical limit on nonpoint source pollution runoff. Compliance is demonstrated by adoption of sufficient BMPs based on projected and verified nutrient reduction capacity.

Enforcement

A final note on CWA enforcement, because without enforcement of regulations, there is no economic incentive for regulatory compliance. States have the delegated authority from EPA to enforce the CWA in whatever manner they deem appropriate. In the absence of sufficient state action (for example, with respect to a lack of penalties for regular or egregious violations of a discharge permit), EPA may withdraw delegated authority and oversee the state program itself. If forced to levy financial penalties for CWA noncompliance, EPA is authorized to do so at a level of $25,000/violation/day.
Even with this enforcement mechanism in place, there are still far too many instances where state and federal enforcement is woefully inadequate. The use of NCT programs for TMDL compliance, however, inserts into the marketplace (and thus, the political arena) another stakeholder interested in seeing the rule enforced. As NCT programs provide flexibility and lower-cost solutions, states are more actively considering them as tools for TMDL compliance. Furthermore, greater awareness of the linkage between nutrient over-enrichment and the harms felt by interested stakeholder groups has also increased the political leverage that supporters of full TMDL enforcement can exert towards their goal. Still, the matter of enforcement remains an open question.

NCT AND TMDL Compliance

The first step in implementing a TMDL is to assign WLAs and LAs among the various regulated sectors and entities. After receiving a baseline allowance and gauging its present loading levels, a regulated entity (either point or nonpoint source) will then decide its best course of action for regulatory compliance. One option will be to simply do the bare minimum required to comply. Another option, of course, could be to go beyond its baseline allocation and generate credits equal to the excess.
An NCT program has the potential to take one of three forms: 1) Available to point sources for regulatory compliance, with credits generated only by other point sources; 2) Available to point sources for compliance but allowing for both point and nonpoint source generated credits; or 3) Available to both point and nonpoint sources, with compliance allowed from point or nonpoint source generated credits. Programs that allow point sources to meet their regulatory burden by means of nonpoint source generated credits, however, will likely also include step-up ratios that require, for example, two or three pounds of nutrient reductions from a nonpoint source for each pound of nutrient reduction claimed by the point source.

Opportunity for AD

Anaerobic digestion (AD) does not by itself reduce nutrient levels of the given feedstock (though it does reduce volume, odor and pathogen presence, while also breaking down nutrient-laden compounds into forms more readily available to plants). For example, even with common post-digestion solids separation practices such as screen separation, belt press, screw press and centrifuge, the separated liquid digestate can still contain upwards of 60 to 80 percent of the nitrogen and phosphorus present in the original feedstock.
This 20 to 40 percent reduction might be sufficient to satisfy certain on-site TMDL compliance burdens, which could be a farmer’s only true concern. By implementing an AD system for manure that would otherwise be directly land applied, however, farmers will have also laid the
foundation for further nutrient concentration and isolation by means of additional digestate processing equipment. Beyond mere on-site compliance, therefore, is a potential revenue stream in the form of credit sales to other regulated entities.

Nutrient Recovery

Supplemental equipment for additional liquid digestate processing can include ultrafiltration, reverse osmosis, flash vacuum distillation and ion exchange adsorption. These technologies can be used either in isolation after traditional solids separation or in conjunction with others (e.g., ultrafiltration followed by reverse osmosis).
While the efficiencies of additional technology options vary, one study calculated the step-by-step reductions of a mesophilic AD system (digesting swine manure, poultry litter and corn silage) after basic solid separation technology, centrifugal decanting, ultrafiltration and reverse osmosis (Chiumenti, 2010). Table 1 shows the level of total solids, total nitrogen, phosphorus, and potassium present in the raw digestate slurry compared to that present in the ultimate liquid effluent.
As the table demonstrates, additional digestate processing technology can dramatically reduce the nutrient levels of land-applied effluent. In this example, the reduction amounts to 98.3 percent of nitrogen, all but trace amounts of phosphorus, and 99.15 percent of potassium. Depending on the amount of feedstock that would have otherwise been directly land applied, the potential for credit generation could be enormous.

Credit Generation

While the regulatory process for quantifying credits generated is not necessarily simple, it should nevertheless at least be straightforward. First, a farmer that land applies raw animal waste will have to determine its present loading based on the nutrient content of the waste. The next step involves identifying the farmer’s baseline allocation under the TMDL and assessing the nutrient reductions that would be generated from the required baseline BMPs.
With the assistance of an AD engineer and nutrient recovery technology vendor, the farmer would then be able to design an AD system with additional digestate processing and measure the nutrient contents remaining in the final liquid effluent. The difference between the baseline allocation and the actual nutrient loading after land application of the treated liquid digestate would be the ultimate amount of credits generated.
After following the appropriate steps for official registration, verification and certification of its credits, the final piece is for the farmer to locate and agree to terms with another regulated entity for whom the cost of on-site compliance is higher than the farmer’s cost of production.
Part II, in next month’s BioCycle, will showcase examples of NCT programs presently in existence (or in the planning phase) and discuss the value of Credits to the parties that generate them and those that may use them for regulatory compliance.
Douglas Ross is the head of the biogas practice at Cleantech Law Partners, a boutique law firm that caters to the unique legal needs of renewable energy developers and other clean technology companies. He can be reached at dross@cleantechlawpartners.com.