This working paper evaluates the opportunities for Pennsylvania farms to sell nutrient credits in a proposed nutrient trading program in the Chesapeake Bay Watershed.

Executive Summary

Chesapeake Bay, the largest estuary in the United States, is a vital economic, cultural, and ecological resource for both the region and the nation. But the water quality and the overall ecology of the bay have been harmed by excess runoff and discharges of nutrients, particularly nitrogen and phosphorus, from farms, pavement, wastewater treatment plants (WWTPs), and other sources responsible for creating excess algal growth.

In response, Congress is considering proposals to improve the health of the Chesapeake Bay watershed.. The “Chesapeake Clean Water and Ecosystem Restoration Act of 2009” (S. 1816, H.R. 3852) would provide significant new resources and tools to help restore the bay, including a baywide (interstate and interbasin) nutrient trading program. With nutrient trading, entities that can reduce below target levels the runoff of nutrients like nitrogen would be able to sell their surplus reductions as “credits” to entities with higher nutrient reduction costs. Nutrient trading thus offers a cost-effective, market-based mechanism for accelerating the achievement of the baywide cleanup goals.

Agricultural sources typically have lower nutrient reduction costs per pound than do other sources of nutrients, such as wastewater treatment plants and municipal stormwater systems.1 This cost advantage opens a window of economic opportunity for farms to sell nutrient credits to those sources facing more expensive nutrient control options. The combination of the government’s cost-sharing agricultural best management practices (BMPs) and the proposed baywide nutrient trading market could benefit Pennsylvania’s farms. First, these cost-sharing programs and conservation payments would cover many of the expenses of the practices that are required before trading can begin. Second, nutrient trading could be a source of new revenue and profit for many (but not all) farms, with the benefits likely varying according to location, preexisting implementation of BMPs, and other factors. Third, a baywide nutrient trading program could increase the demand for credits generated from Pennsylvania farms beyond that of a nutrient trading program restricted to Pennsylvania.