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Good morning.  I am John Bell.  I am Governmental Affairs Counsel for Pennsylvania Farm Bureau, on whose behalf I appear before the Committee today.  Pennsylvania Farm Bureau is a statewide general farm organization that represents more than 42,000 farm and rural families in the Commonwealth.  We appreciate the opportunity to provide you our thoughts concerning Pennsylvania’s Chesapeake Bay Tributary Strategy, particularly with respect to the nutrient trading program that has been developed under the Strategy.

I understand the issue that Committee members are most interested in hearing from my testimony is Farm Bureau’s perspective on nutrient trading.  Before I begin addressing that issue, I would like to focus some attention on the role that Pennsylvania agriculture has played in the overall effort to improve conditions in the Chesapeake Bay.  I’ve attached to my prepared statement a copy of a letter jointly submitted by Farm Bureau President Carl Shaffer and DEP Secretary Kathleen McGinty in response to a recent editorial by the Harrisburg Patriot on Pennsylvania agriculture and the Bay.

I’ve also attached a copy of a news release by the Department of Environmental Protection which highlights the role that Pennsylvania agriculture has played in improving environmental stewardship in the Bay watershed.  I believe the information contained in these documents speaks for itself, and will hopefully give the Committee members a clearer perspective of the requirements that are imposed on agriculture to maintain and improve water quality and what farmers are doing to improve environmental stewardship in the Bay watershed.

I’ll also mention another term to you that may prove to be a more significant cause of nonpoint source nutrient pollution to the Bay – legacy sediment.  Legacy sediment is the residual of the build up of soils along stream banks from the proliferation of damming that occurred along Pennsylvania streams during the 1800s to provide a source of power for mills and other businesses.  Professors at Franklin and Marshall University’s Earth and Environment Department are conducting continuing studies of the prevalence of mill damming that occurred and the geological effects of sediment build up, the trapping of nutrients within built up soils, and release of nutrients from sediment soils.  Although their work is far from complete, we may well discover that today’s ecology is paying the price of the unknowing sins of our ancestors in the management of streams.

With respect to Pennsylvania’s nutrient trading program, let me offer some preliminary thoughts on the expectations that the agricultural community had originally when Farm Bureau and other stakeholders who met during the 18-month process to develop the nutrient trading program.  I think it is fair to say that neither Farm Bureau nor any other stakeholder expected nutrient trading to be the magical answer to the overall effort to meet nutrient reduction goals in the Chesapeake Bay.  Time and again, stakeholders restated their belief that nutrient trading would be just one tool to be utilized in the overall effort to meet nutrient loading reduction goals.  So, it should not be shocking that nutrient trading has not rocketed forward at this point.

Farm Bureau viewed the value of nutrient trading in the context of farmers’ overall efforts to implement best management practices (BMPs) on their farms.  We saw nutrient trading to be another means by which farmers could finance costs to improve environmental management of their farms.  Although some were hopeful that nutrient trading might provide significant supplemental income for farmers, we were not envisioning the nutrient trading program as creating a separate business enterprise on the farm.  But we certainly believed that in order for the program to have any success, the program must not create unreasonable barriers for farmers to generate credits through the implementation of BMPs.

The governing rules for nutrient trading that finally resulted from the many stakeholder and workgroup meetings that occurred during this 18-month process were far better than the rules proposed originally at the beginning of the process.  Under the original rules proposed for nutrient trading:

• Farmers would have had to pay more than one-third of the price they received from the sale of nutrient credits to DEP and other governmental agencies engaged in the program in order to cover costs for administration and for “guarantees” of credits sold to purchasers.
• Farmers who received any state or federal assistance in implementing a BMP would not have been eligible to market any of the credits otherwise generated from that BMP.
• In order to be eligible for trading any nutrient trading credits, a farmer would have had to reduce his or her loadings by more than 40 percent beyond the nutrient loadings that would result if the farmer was in full legal compliance with environmental standards.
• If the farmer was able to implement enough BMPs to meet this 40 percent nutrient reduction threshold level to begin to generate nutrient credit s through additional BMPs, the farmer would have only been eligible to sell 1 unit of credit for every 2 units of reduction in nutrient loadings that were estimated to have occurred through the BMP.

Any of these conditions or requirements alone, in our opinion, would have quashed any incentive for farmers to use nutrient trading as a means to economically finance aggressive environmental improvement programs.  Fortunately, DEP and the participating stakeholders saw the wisdom of eliminating or greatly changing the requirements and conditions originally proposed.

Did we obtain everything we sought in the final nutrient trading rules?  No, we did not.  One of the areas of particular concern to us was the ability of persons to generate tradable credits solely through taking lands used in agricultural production out of production.  A developer, for example, could have created nutrient credits through purchasing an active farm and taking that farm out of production, and apply those credits toward any permit the developer needed to obtain for land development.

If the nutrient trading rules would not have imposed any limitations, the developer in my example could have purchased and taken an active farm out of production in one area, and applied the credits for obtaining permits for developing another area.  That second area would have likely been another farm.  We felt this scenario would have seriously negated the strong public policy which has been consistently exercised by agencies of the Commonwealth not to engage in governmental programs that encourage the loss of productive farmland in Pennsylvania.
Through the joint effort of the stakeholders, a compromise was reached, which limited the applicability of credit offset to the particular land being developed, and which made the determination of credits generated from through idling of productive farmland more time specific.  While not perfect, the ultimate resolution of this issue was one that stakeholders were willing to live with.

What are the problems with nutrient trading right now?  The basic answer may be in the simple application of the economic principle of supply and demand.  Both components are needed to make any product a marketable one.  Our view is that there is no existing need by those who may need credits in the future to buy now.  Pennsylvania is still two years away from the deadline of 2010 that has been identified by the Environmental Protection Agency as the point at which further regulatory measures may be imposed in Pennsylvania to remediate the “impaired” Chesapeake Bay watershed.

Those who will likely need to obtain credits to meet their required nutrient reduction goals are not necessarily feeling the pressure to stock up on credits early.  My general understanding of environmental credit marketing programs is that the degree of demand for purchasing credits is most often tied to the extent of environmental requirements that are imposed on the purchaser.

Without some appreciable demand in place, it will be difficult for farmers to seriously consider and incorporate plans for nutrient credit generation and trading in their total nutrient management plan.  BMPs are generally not cheap and cannot be immediately put in place.  The existing lack of demand does not provide the predictability needed to measure and offset costs that farmers will need to incur for BMP implementation.

Another problem seems to be a serious lack of trust among purchasers who may need to rely on purchased nutrient credits to meet permit requirements that the credits they purchase will actually be generated.  Most purchases of nutrient trading credits will be done to meet the purchaser’s nutrient loading demands under federal or state water quality permits.  Purchased credits will become a basis by which compliance with the purchaser’s federal NPDES permit or state clean streams permit will be measured.

We believe there is a strong fear among potential purchasers that reliance on nutrient trading to meet permit requirements will leave them vulnerable to the wrath of sanctions for permit violations if sellers do not follow through with their promise to implement BMPs.  The nutrient trading program has tried to address this issue through a dedication by sellers of a percentage of credits to a “credit reserve” pool that would be tapped in the event any individual seller does not carry out the obligation to implement BMPs.

Still, we sense this effort to create the reserve pool has not allayed the fear among purchasers.  It is our understanding that many municipal officials have decided not to accept any plan for nutrient control offered by developers that involve the use nutrient credits.  We understand the potential risk and consequences for permit violation that could befall a permit holder who tries to purchase nutrient credits in good faith only to find out later that the credits he or she relied on were not generated.

For any nutrient trading program to be viable, it must provide absolute assurance that permit holders who purchase nutrient credits in good faith to meet permit requirements will not be subject to sanctions in the event the seller does not carry out the practices necessary for actual generation of credits.

Another impediment to the nutrient trading program is one that we are not sure the General Assembly or the Administration can correct directly.  The Chesapeake Bay Tributary Strategy and the determination of tradable credits under the nutrient credit trading program are based on the rates of nutrient loadings from Pennsylvania streams and nutrient reductions from BMPs estimated under the Chesapeake Bay Model.  In the abstract, use of the Chesapeake Bay Model to measure tradable credits generated from BMPs makes sense, since this is also the yardstick that the Environmental Protection Agency and state agencies are using to measure environmental conditions and improvements in the Bay.

In practical application, however, assumptions made in the Model seriously reduce the number of tradable credits that a farmer can claim and market under the program.  Under the principles applied in the Model, the determination of reduction in nutrient loadings from BMPs on a farm is not measured on the basis of the reductions in nutrient loadings that the BMP provided to areas neighboring the farm.  The impact is rather measured on the basis of the degree to which the BMP has reduced nutrient loadings at the point of inlet areas immediately adjacent to the Bay.
In order to estimate how a farm BMP in Lycoming County will reduce the nutrient loadings occurring at Maryland inlet, the Model applies what is referred to as an “edge of segment ratio.”  The apparent assumption under this “edge of segment” approach is that while a BMP may have some substantial impact in reducing nutrient loadings to lands immediately neighboring the BMP area, the impact is far less in reducing the nutrients flowing into the Bay at entrance points some distance away.

Use of the Model’s edge of segment ratios has the practical effect of reducing the number of units a seller may trade from a BMP by at least half, and in some areas, by as much as two-thirds.  This serious reduction in tradable credits that occurs through the application of the Model’s edge of segment ratios seriously decreases the opportunities for smaller farms to individually finance their BMPs though nutrient trading.

Many believe that the current measure of tradable credits provides little opportunity for smaller farmers to participate in nutrient trading, and provides essentially no opportunity unless smaller farmers work jointly with other farmers to develop cooperative BMP programs.  Without meaningful opportunities for smaller farmers to finance BMPs, it is not likely a smaller farmer will be able to afford the cost of implementing the BMP on his or her farm.

Notwithstanding the impediments I have described, we continue to be optimistic that nutrient trading can work in the future, and can be helpful in moving Pennsylvania toward meeting the nutrient reduction goals outlined in Pennsylvania’s Chesapeake Bay Tributary Strategy.

Thank you again for this opportunity.  I will try to answer any questions you may have.