Multi-State Water Program Hopes To Stand On Its Own Two Feet In 2016

20 January 2016 | Ken Merrick remembers standing on his Conser Run Farm and watching the rains flush animal waste and fertilizer into the nearby creek of the same name. On land, these “nutrients” feed crops and fuel farms, but in rivers, they feed algae, which sucks up oxygen and suffocates fish, creating “dead zones” like the one that forms each year in the Gulf of Mexico, fueled by nutrient-rich run-off from farms across the Mississippi River watershed.

Most nutrients do their dirty work close to home, but some of Merrick’s runoff may have ended up feeding the glob in the Gulf – after all, Conser Run’s water flows into Sandy Creek, which gurgles west to the Tuscarawas River and feeds into the Ohio River, which eventually feeds into the Mississippi and the Gulf.

“I wanted to contain it,” Merrick said in a recent promotional video. “I needed to do something or change something to capture what I was losing.”

In 2012, he did just that: with funding, from Electric Power Research Institute’s (EPRI) Ohio River Basin Trading Project, he rebuilt his feed-pad so it slopes away from the river, and he added a storage area for manure, as well as a buffer strip where cows are only occasionally allowed to graze. At the edge of the buffer, he built a fence, and beyond the fence, he lets trees and grasses grow along the river’s edge, mopping up any excess fertilizer before it reaches the creek, and providing habitat for returning wildlife.

Merrick’s conservation activities are all part of EPRI’s ambitious program to finance similar projects on roughly 230,000 small farms across the eight-state Ohio River Basin. The program is still in its pilot phase, but if it evolves as planned, those farmers will receive funding from power plants and wastewater treatment facilities, which in turn will earn “stewardship credits” that they can use to meet sustainability goals and maybe even offset some of their own discharges to meet regulatory requirements.

Proponents say the system will slash pollution and bring dormant waterways back to life by increasing best management practices on the land. The result, they say will be a more resilient landscape than could ever be achieved by simply imposing tighter restrictions on industrial emitters – and at a fraction of the cost.

To date, however, just 35 farmers have joined the program – in part because it’s young, but also because the project team has struggled to find buyers for the credits. As Jessica Fox, a Senior Program Manager at EPRI and the project’s lead, puts it, the project has demonstrated “social and ecological viability”, and now it needs to deliver “economic viability”.

“While government subsidies and generous foundation grants have been critical in getting the program going and continuing to fund it, we need to start showing that we can stand on our own two feet with strong cash-credit cycles,” she says.

To win corporate buyers, however, the project needs to sell corporations on the economic value of environmental integrity – a value that isn’t always readily apparent.

The Pitch and the Program

Water-quality trading (WQT) programs and investments in watershed services (IWS) are proliferating around the world, from Peru to Kenya, as regulators look for cost-effective ways to promote sustainable water use. While each program is unique, they all involve paying farmers to initiate conservation efforts that maintain the watershed. In Kenya’s Rift Valley, for example, flower-growers along Lake Naivasha pay farmers in the Abardares Hills to develop terraces that slow runoff. In return, the flower-growers get both clean water and good PR, while the farmers get financial assistance.

In the United States, buyers have another incentive: under some circumstances, companies that buy credits can use them to reduce their own discharges under the Clean Water Act, provided they go through a process of validation and verification that passes muster with regulators.

ERPI, for example, worked with hydrologists and regulators across the Midwest to measure the impact that changes like the ones Merrick implemented on his farm had in the water, and they used this to develop methodologies and “trade ratios” to make sure credits aren’t over-estimating the discharges reduced. Finally, they created a system for letting third-party verifiers audit projects, and they teamed up with environmental registry Markit to keep track of all credits.

It’s a system designed to generate compliance-grade credits, but EPRI’s own policies mandate that stewardship credit buyers must retire the credits, rather than bank them to meet future regulatory requirements.

“It isn’t an issue with the credits,” Fox says, explaining the credits meet regulatory standards in terms of rigor. “It’s an issue with EPRI as a 501(c)3 nonprofit and our mission. We can only sell credits for people that want to retire them for the public benefit.”

Eventually, EPRI will turn the project over to an entity that can administer a fully functioning environmental market, a system that facilitates trades both to meet sustainability goals and compliance obligations. For now, however, EPRI is in charge, and driving this voluntary demand remains a challenge.

To meet this challenge, among others, they’ve launched a marketing campaign that explains the intricacies of WQT, and they’ve begun reaching out to potential customers beyond their initial targets.

An Ongoing Experiment

EPRI initiated the trading program in 2007 and formally launched it in 2009 – weaving together a network of federal and state agencies, municipalities and private companies while simultaneously working with individual farmers within the Ohio Basin. In August of 2012, the states of Ohio, Kentucky and Indiana formally recognized the plan, making it the country’s largest water quality trading (WQT) project and the only one to cross state lines. The program started piloting trades in 2013, and it transacted its first official credit trade in March of 2014.

At full scale, it would create a market that covers eight states, 46 power plants, thousands of wastewater utilities and nearly a quarter-million farms – and, because the Ohio is the largest tributary to flow into the Mississippi River, its success has much larger implications than just the Ohio Basin or the Midwest.

To-date, the project has reduced nutrient pollution by nearly 100,000 pounds, according to the project team.  Their immediate goal is to sell those credits to industry and other interested parties, and then to put the proceeds into new farms.

The Demand Dilemma

Stewardship credits are currently bought and sold individually often over the phone, but EPRI had planned to introduce an auctioning system last April, which would allow for faster and more numerous trades to take place. Although interest was high, many companies raised concerns about the credit’s certainty when it came time to participate in the auction and actually purchase credits, and the auction was first postponed to May and then put on hold indefinitely.

“Big companies can’t turn on a dime, and we found corporate budgets didn’t align with the time of the auction,” says Fox. “There was a need for more time to integrate the water quality credits into company roadmaps.”

Companies also favored an integrated approach, the team found, wanting to buy credits that delivered carbon benefits along with water quality.

For Fox, it’s all part of the learning process.

“We could have easily spent manifold the amount of money doing a theoretical research study on the potential of an auction, but we didn’t do that,” she says. “We jumped in and tried it and it just didn’t materialize this time around.”

Marketing, Outreach, and Adaptation

In that entrepreneurial vein, the team has launched a multi-pronged effort to both educate its initial target customers and reach out to new ones.

On the education front, EPRI and the American Farmland Trust, a project collaborator, launched a new video series, including the one featuring Merrick, to make sure potential buyers are clear on the concept.

On the expansion front, one area it’s exploring is impact investing for conservation, a space that more than doubled between 2009 and 2013. That led to a November meeting chaired by Encourage Capital, an investment fund focused on investments that deliver social and environmental impacts.

Encourage hosted the Ohio Basin trading team along with Pennsylvania’s Infrastructure Investment Authority, PennVest, to see if they were missing any obvious impediments or selling points. Not surprisingly, participants concluded that technical complexity and buyer distrust were two major – and clearly interrelated – challenges, and singled out demand uncertainty from regulatory change.

The project is also testing out involvement in the carbon markets as its stewardship credits hold potential to reduce greenhouse gasses, good news when considering how possible buyers favored credits with a carbon benefit. Reduced fertilizer use, for instance, results in a reduction in greenhouse gasses in the atmosphere as well as nutrient runoff in waterways. The team is exploring this element through stacking water quality credits with those of carbon sequestration.

The American Carbon Registry and the Verified Carbon Standard are working with the project to assess its ability to generate carbon credits, and last year, the US Department of Agriculture awarded the project with a $300,000 Conservation Innovation Grant to develop stacked credits.

The Regulatory Option

Although EPRI’s mission prohibits sales for compliance purposes, Fox says the project is looking into new approaches where certain project collaborators can own portions of credits, and, unhindered by a mission statement similar to EPRI’s, can sell these credits for regulatory obligations.

That, however, requires regulatory certainty: put simply, if regulators don’t clearly lay out rules for the next few years, buyers won’t buy – while, at the same time, if technology keeps making it cheaper and easier for them to drive down their own discharges, industry doesn’t have an incentive to pay farmers.

It is, in other words, a complex dilemma – as EPRI pointed out in a report late last year, which found that trading programs were buffeted as much by politics and economics as regulation or technology.

“It isn’t as simple at looking at drivers and where they’re predicted to be because so many pieces can come along and complicate it,” Fox says.

Fortunately, a new project funder, the US Endowment for Forestry and Communities, is one collaborator stepping up to this regulatory option. It committed $1.5 million to the trading project, with much of that to flow towards activities that utilize forestry as a best management practice in reducing nutrient pollution. The credits the Endowment helps generate will be registered under its name, Fox explains, and the Endowment will assume ownership of those credits, selling them to whomever they see fit.

“The Endowment will test another level on this project where EPRI isn’t the sole aggregator of credits,” Fox says.

A Breakout Year?

The proceeds from 2014, which are available to view on the project’s online registry, have been re-invested back into the project, into conservation activities in Midwest farms. One recent buyer is the University of Connecticut, which is purchasing 229 credits as part of a collaborative study with EPRI to research the co-benefits of water quality trading projects like wildlife habitat, carbon storage and farm animal welfare. Analysis under review suggests that ecosystem services co-benefits could increase water quality credits 34%.

If that analysis holds up, it will provide another selling point, one of several the team is exploring in 2016 – the year the project team hopes to kick-start buyer demand and propel the project into its next phase.

Kelli Barrett is a freelance writer and editorial assistant at Ecosystem Marketplace. She can be reached at [email protected].