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Developing the Willamette Ecosystem Marketplace Targeted Watershed Grant # WS-96027101-0 Submitted to: U.S. Environmental Protection Agency Targeted Watershed Grants Program Alan Henning Submitted by: David Primozich, Executive Director Willamette Partnership 105 High St. SE Salem OR 97128 503.434.8033 June 30, 2008 Special Acknowledgements Dozens of people contributed to the development of the Willamette Ecosystem Marketplace in substantial and meaningful ways. Special acknowledgement goes to the following individuals who were engaged at every level of development, and those who took responsibility for writing reports and documenting work of this project. Ann Sihler Kim Seymour Alan Henning Lisa Bacon Bill Gaffi Mack Martin Bobby Cochran Marv Lewallen Bruce Alward Michael Schindel Cathy Macdonald Neil Mullane Charlie Logue Pamela Wright Claire Schary Peter Ruffier Dana Erickson Ranei Nomura Dan Heagerty Richard Schmid Diane Taniguchi-Dennis Ryan Michie Gillian Ockner Sally Duncan Gina Larocco Sandra Quatier Heather Hosterman Sara Vickerman James Ollerenshaw Sonja Bjorn Hansen Janet Gillespie Stewart Rounds John Miller Terry Buchholz Jonathan Soll Tom Dupuis Kenna Halsey Tom Lindley Kevin Halsey Table of Contents Section 1 Introduction Origins of the Willamette Marketplace...................................................................................................... 1-2 An Opportunity in the Willamette Basin ..................................................................................... 1-2 U.S. EPA Targeted Watershed Grant .......................................................................................... 1-3 Task 1: Market Appraisal .................................................................................................. 1-4 Task 2: Credit Definition and Currency Development ................................................ 1-4 Task 3: Temperature Credit Portfolio ............................................................................ 1-4 Task 5: Market Transaction ............................................................................................. 1-5 Task 4: Marketplace Infrastructure ................................................................................. 1-5 Background on Ecosystem Services Markets ........................................................................................... 1-5 Why Do We Need an Ecosystem Services Marketplace ........................................................... 1-5 What Is an Ecosystem Services Marketplace .............................................................................. 1-6 Section 2 Roles and Responsibilities Project Organization ..................................................................................................................................... 2-1 Willamette Partnership and its Partners ........................................................................................ 2-1 Board of Directors ........................................................................................................................... 2-2 Mid Willamette Valley Council of Governments ........................................................................ 2-4 Project Steering Committee ............................................................................................................ 2-4 Scientific and Technical Work ...................................................................................................................... 2-5 Clean Water Services........................................................................................................................ 2-5 Consulting Team .............................................................................................................................. 2-5 Additional Consultants .................................................................................................................... 2-5 Task Teams ....................................................................................................................................... 2-6 Synthesis Map Working Group ........................................................................................ 2-6 Practitioners Working Group ........................................................................................... 2-6 Transaction Working Group ............................................................................................ 2-6 Technical Team ................................................................................................................... 2-7 Additional Organizational Elements ........................................................................................................... 2-7 Government Agencies ..................................................................................................................... 2-7 Stakeholder Communication, Outreach, and Involvements ..................................................... 2-7 Section 3 Market Appraisal Market Appraisal Process ............................................................................................................................. 3-2 Step 1: Synthesis Map ...................................................................................................................... 3-2 Step 2: Market Characterization ..................................................................................................... 3-5 Step 3: Promising Markets .............................................................................................................. 3-5 Step 4: Temperature Reduction Obligations According to the TMDL ................................... 3-7 Step 5: Demand for Wetland Credits ............................................................................................ 3-9 Step 6: Temperature Supply Using Shadelator........................................................................... 3-10 Time Frame, Participants, and Resources ................................................................................................ 3-12 What the Market Appraisal Revealed ........................................................................................................ 3-12 Lessons Learned ........................................................................................................................................... 3-13 Section 4 Credit Definition Credit Definition and Currency Development Process ........................................................................... 4-3 Step 1: USGS Heat Trading Tool .................................................................................................. 4-3 Step 2: Survey of Credit Definition Methodologies..................................................................... 4-3 Step 3: Assessment of Credit Definition Methodologies ........................................................... 4-4 Step 4: Gaps in Methodologies ...................................................................................................... 4-5 Step 5: Thermal Credit Calculator ................................................................................................. 4-6 Step 6: Site Assessment ................................................................................................................... 4-7 Step 7: Habitat Assessment Methodology .................................................................................... 4-8 Step 8: Riparian Planting Protocols ................................................................................................ 4-9 Time Frame, Participants, and Resources ................................................................................................ 4-10 What Credit Definition and Currency Development Revealed ............................................................ 4-10 Lessons Learned ........................................................................................................................................... 4-11 Section 5 Credit Portfolio Credit Portfolio Process ................................................................................................................................ 5-2 Step 1: Temperature Supply Using Shadelator ............................................................................ 5-2 Step 2: USGS Heat Trading Tool ................................................................................................. 5-3 Step 2: Credit Rating System and Preliminary Issues ................................................................. 5-4 Step 3: Preferred Policy ................................................................................................................... 5-5 Step 4: Rapid Assessment Methodology and Albany Site Assessment .................................... 5-7 Step 5: Methodology for Identifying and Prioritizing Restoration Projects ............................ 5-9 Time Frame, Participants, and Resources ................................................................................................ 5-11 What Development of the Temperature Credit Portfolio Revealed ................................................... 5-11 Lessons Learned ........................................................................................................................................... 5-13 Section 6 Market Infrastructure (Task 4) Market Infrastructure Development Process ............................................................................................ 6-2 Step 1: Market Structure Analysis .................................................................................................. 6-2 Step 2: Centralized Credit Registry and Exchange Tracking System ........................................ 6-3 Step 3: Standard Templates ............................................................................................................ 6-4 Time Frame, Participants, and Resources .................................................................................................. 6-6 What Development of the Market Infrastructure Revealed .................................................................... 6-7 Lessons Learned ............................................................................................................................................. 6-7 Section 7 Transaction Project and Regulatory Language Development (Task 5) Transaction Project Development Process ................................................................................................ 7-2 Step 1: Existing Restoration Projects Inventory .......................................................................... 7-2 Step 2: Potential Transaction Sites ................................................................................................ 7-2 Step 3: Investigation of Potential Transaction Project Sites ...................................................... 7-4 Step 4: Transaction Project Initiation ........................................................................................... 7-5 Step 7: Transaction Coordination................................................................................................... 7-6 Regulatory Language Development Process ............................................................................................. 7-7 Step 1: Existing Permit Framework .............................................................................................. 7-7 Step 2: Permit Language Development ........................................................................................ 7-7 Timeframe, Participants, and Resources .................................................................................................... 7-8 Section 7 Transaction Project and Regulatory Language Development (Task 5) continued What the Transaction and Regulatory Language Development Process Revealed ............................. 7-9 Lessons Learned ........................................................................................................................................... 7-10 Section 8 Policy Considerations Specific to the Temperature Market Set a baseline date .......................................................................................................................................... 8-2 Encourage credit “banking” to promote early actions ............................................................................. 8-2 Encourage the use of a centralized credit registry ..................................................................................... 8-2 Encourage investment in priority areas ...................................................................................................... 8-2 Establish service areas ................................................................................................................................... 8-2 Do not discount credits for time and distance to points of maximum impact .................................... 8-3 Section 9 Continuing the Ecosystem Marketplace An Integrated Ecosystem Services Marketplace ....................................................................................... 9-1 Why Is an Integrated Marketplace Needed ................................................................................................ 9-2 Core Area: Supportive Policies that Encourage and Enable Markets to Integrate and Thrive ....................................................................................................................................................... 9-3 Agree on Ecosystem Goals ............................................................................................................ 9-3 Balance the Use of Outcome-based and Prescriptive Rules ...................................................... 9-4 Encourage Adaptive Management and Risk-Taking ................................................................... 9-5 Integrate Agency Responses across Ecosystem Services ........................................................... 9-5 Core Area: Third-Party Organization to Manage Centralized Market Infrastructure and Standards That Ensure Efficiency and Credibility ...................................................................................................... 9-6 Develop and Certify Measurement, Performance, and Verification Protocols ....................... 9-7 Develop and Certify Credible Verification Entities for Each of the Markets ......................... 9-7 Develop and Manage a Centralized Ecosystem Credit Registry ............................................... 9-7 Manage Assurance Pools Needed to Buffer Against Failure of Mitigation and Offset Credits ................................................................................................................................... 9-8 Foster Nationwide Coordination by Supporting Existing Efforts ........................................... 9-8 Core Area: Technically Sound Credit Accounting Protocols That Define Multiple Credit Types Based on Ecological Functions .................................................................................................................... 9-8 Coordinate Efforts to Create Credit Calculating Methods ........................................................ 9-9 Section 10 Lessons Learned Know whether you are ready ..................................................................................................................... 10-1 Consider carefully whether or not to take a collaborative or advocacy role ....................................... 10-1 Harness the regulated community to push for regulatory changes ...................................................... 10-1 Be sensible about your infrastructure needs ............................................................................................ 10-2 Get to scale ................................................................................................................................................... 10-2 Plan for extensive, consistent, and persistent education and outreach ................................................ 10-2 Stay engaged with stakeholders................................................................................................................... 10-2 Balance technical work, communication, and process management ................................................... 10-2 Keep your eye on your ultimate goal ........................................................................................................ 10-3 Be willing to accept some imperfections .................................................................................................. 10-3 Plan for the post-grant period ................................................................................................................... 10-3 Section 11 References Section 1 Introduction SECTION 1 Introduction In November 2004 the Willamette Partnership had an idea about creating incentives to restore the ecosystems we care about and depend on. We thought that if people with no regulatory obligation knew they could make profits restoring ecosystems that clean and cool our water and support the fish and wildlife we care about, they would do it. We also thought that if people facing strict regulations to reduce environmental impacts could choose to pay others to restore streamside vegetation, wetlands, flow, and floodplains to meet those regulations, they would do so. We thought that if regulatory agencies had technically sound and credible ways to compare the benefits of restoration with the impact being regulated, they would allow it. Finally, we thought that if credible and transparent infrastructure to support these transactions was in place to ensure integrity and protect the public interest in its ecosystems, it would be accepted. Now, more than 4 years later, we are a lot smarter about what it takes to make that happen, and an ecosystem services marketplace in the Willamette Basin is well on its way to becoming a reality. With the help of stakeholders and funding from the U.S. Environmental Protection Agency’s Targeted Watershed Grant Program, over the last 2 ½ years the Willamette Partnership and its many partners have developed the tools, templates, and market infrastructure needed to implement just such a system. A marketplace for temperature improvements is ready for business and the framework of a multi-credit marketplace where many types of ecosystem services credits are traded is in place. The Willamette Partnership has registered three riparian restoration projects with a significant number of temperature credits on a new centralized credit registry and exchange tracking platform and the Partnership is prepared to work with partners to register dozens of additional projects during the coming months. The framework is in place, and the Willamette Partnership is poised to facilitate the first complete temperature trade between buyers and sellers in the marketplace. This transaction can occur once legal issues that have temporarily postponed demand for temperature credits are resolved. The Willamette Partnership, its many active partners, and its consultants can count the following as major accomplishments in the marketplace development process: • Created a tool to guide marketplace investment toward high-priority conservation and restoration areas in the Willamette Basin. • Developed protocols to ensure that restoration projects meet high ecological performance standards. • Identified technically sound methods for quantifying temperature credits generated from riparian shade restoration, wetland restoration, flow augmentation, and wastewater reclamation and reuse, and made substantial progress in developing a path forward to do the same for floodplain restoration. • Determined that there is enough potential supply of temperature credits from restoration actions in priority conservation and restoration areas in the Willamette Basin to meet the expected demand for temperature credits created by the Oregon Department of Environmental Quality’s new Willamette temperature total maximum daily load (TMDL). SECTION 1 - INTRODUCTION.DOC 1-1 INTRODUCTION • Created an easy-to-use temperature credit calculator that potential sellers in the marketplace can use to estimate how many credits they could generate if they restored riparian shade, wetlands, or flow. • Created screening tools that facility managers can use to develop compliance strategies that include trading. Facilities managers can also use a calculator to evaluate the temperature benefits from wastewater reclamation or reuse. • Applied and tested a methodology to rapidly assess a restoration site’s ecological values and its potential to generate multiple types of ecosystem service credits. • Worked with the Oregon Department of Environmental Quality to develop (1) agency policies that will encourage participation in the marketplace and maximize investment in high-priority restoration areas; and (2) draft permit language that will allow dischargers to use temperature trading to comply with the requirements of the new Willamette temperature TMDL. • Created centralized market infrastructure—a credit registry and exchange platform—to register, certify, bank, and track different types of ecosystem service credits as they are generated, bought, and sold; created templates of contracts, agreements, and other documents needed to support transactions in the marketplace. We know what the ecological problems in the Willamette Basin are. We know what to do—and where—to improve conditions. We developed the techniques and tools to translate the ecological benefits of things that need to be done into a temperature measurement that is strictly regulated. We created permit language that enables cities and businesses facing strict temperature limits in their discharge permits to pay people who can do the things that need to be done ecologically to off-set their temperature impacts. We created the market infrastructure needed to enable these transactions to occur in a transparent and credible way. In short, we made it possible for people with regulatory obligations to buy the ecological services created by others who restore ecosystems. We made the tools technically sound so that regulators would allow this new approach and we put the infrastructure in place to make it credible so the public would accept it. Origins of the Willamette Marketplace An Opportunity in the Willamette Basin When functioning properly, the Willamette River and its tributaries would naturally have lots of dispersed, cold-water habitat for salmon, steelhead, and trout. But changes to the environment that keep our farms and forests productive and our cities clean and safe have decreased the availability of the right type of cold-water habitat in the right places, at the right times of year. As a result, current temperature conditions in the river are not good for native species that reside in and visit the river. To help these species thrive, the river’s temperature conditions need to be improved. The Oregon Department of Environmental Quality responded to this problem by designing a temperature TMDL for the Willamette Basin—a regulation that requires permitted entities that contribute to the warming of the river to reduce their impact. Under the TMDL, municipal and industrial dischargers who release clean but warm water to the river are required to meet very 1-2 SECTION 1 - INTRODUCTION.DOC INTRODUCTION specific temperature load limits. The final Willamette temperature TMDL was signed in September 2006. Development of the TMDL created an opportunity in the Willamette Basin to establish an ecosystem marketplace where multiple types of ecosystem credits could be created and traded. The temperature TMDL created the needed catalyst to build a framework that serves the emerging temperature market, but it also laid the foundation for the transactions involving a wide range of other credits for fish and wildlife habitat, water quality and quantity, and more. Significant demand for temperature credits would be created by the TMDL because options to meet the requirements under the regulation are limited. One expensive option is to install technology to cool water before it is discharged to the river. Such solutions achieve the desired end-of-pipe conditions and ensure regulatory compliance, but they do little to improve river conditions that fish depend on. An ecosystem marketplace, on the other hand, would encourage restoration of streamside vegetation, wetlands, and gravel in river channels by people who have no regulatory obligation to do so. In addition to keeping the river water cool, these types of “natural infrastructure” would create the full range of habitat conditions that fish and wildlife need. In addition, market-driven restoration projects in the Willamette River and its tributaries would produce a wide variety of other ecological benefits, such as habitat for other species, erosion control, water storage, and filtration. Thus, an ecosystem marketplace could be used to achieve large-scale ecological goals and not just reduce the cost of regulatory compliance. Those with permits to discharge clean but warm water have not generally had the ability to “build” or acquire natural infrastructure to meet their permit requirements or mitigate their impacts. Likewise, landowners who could choose to “build” natural infrastructure have not had the financial capacity or incentive to do so. If those required through permits to reduce water temperature could pay for others to create the natural infrastructure that provides the conditions that fish need— including cool water—then both permit compliance and significant ecological restoration could occur simultaneously. U.S. EPA Targeted Watershed Grant In November 2005, the Willamette Partnership received a 2 ½-year Targeted Watershed Grant worth $779,000 from the U.S. Environmental Protection Agency. The grant was to fund initial development of an ecosystem marketplace, with a particular focus on temperature objectives. The marketplace was to be designed to eventually accommodate trades of credits or currencies for a range of other ecological services and to enhance general watershed integrity and function in the Willamette Basin. The overall goal of the project was to develop the technical, legal, and regulatory frameworks needed to facilitate exchanges of ecosystem service credits that improve ecological health and sustainability in the Willamette Basin. The ideal initial ecosystem marketplace would have the following characteristics: • Be trusted by regulated parties, private land managers, regulatory agencies, and the public • Meet specific TMDL objectives for reducing temperature in the Willamette river • Drive investments to the restoration actions that will provide the greatest environmental return to the Willamette watershed • Provide financial incentives for land managers to restore ecological values in priority areas SECTION 1 - INTRODUCTION.DOC 1-3 INTRODUCTION • Be capable of facilitating transactions in a variety of ecosystem service credit types that address a full suite of ecological values The project work was broken down into five technical tasks: a market appraisal, credit definition and currency development, temperature credit portfolio, development of the marketplace infrastructure, and market transaction. The technical tasks are summarized below. Task 1: Market Appraisal—Who needs what types of credits for what purpose, and can supply be created through ecological restoration actions? The market appraisal involves analyzing the demand for different types of ecosystem service credits (in part by quantifying temperature reduction obligations under the TMDL) and developing an understanding of the potential supply of credits, when and where they are located, and who would generate them. Because the primary goal of the Willamette Ecosystem Marketplace is ecological restoration, an important aspect of assessing the supply of credits was determining where the high- priority restoration areas are in the Willamette Basin so the marketplace could be structured to encourage activities in those locations and thus produce multiple ecological benefits. Task 2: Credit Definition and Currency Development—How can the ecological benefits of restoration actions be translated into units of measure people understand and want to buy? In ecosystem service markets, offset credits are the unit of trade. Offset credits can be measured in a variety ways, such as tons of carbon, acres of wetlands, or kilocalories per day of water temperature. The credit definition process establishes the basis for calculating the credits that would be generated from different types of restoration projects. For the Willamette Ecosystem Marketplace, this meant working to develop practical and technically sound methods for quantifying the water temperature reductions that would result from wastewater reclamation and reuse, flow augmentation, riparian shade restoration, wetland restoration, and floodplain restoration. Currency development refers to examining the feasibility of a common or “universal” currency that multiple types of ecosystem service credits (temperature reduction, wetlands habitat, carbon sequestration, etc.) could be translated into for use in comparing or exchanging credits. Task 3: Temperature Credit Portfolio—Is it possible to reach the goals established in the temperature TMDL and create significant other environmental benefits by restoring ecosystems? Credit portfolios are developed at two scales: basinwide and site-specific. The basinwide portfolio reflects investments that, if implemented, would result in attainment of the Willamette TMDL for temperature and provide other ecological benefits. The site-specific portfolio characterizes the potential for a specific site to generate multiple types of restoration-related credits for sale or trade in a multi-credit marketplace. Task 4: Marketplace Infrastructure—If people restore ecosystems instead of building onsite or end-of-pipe controls, what systems need to be in place to ensure that restoration actions are real and are being managed over time? Ecosystem marketplaces require unique infrastructure to register, track, and account for credits and ensure their validity and quality through time. A centralized credit registry is needed to operate a 1-4 SECTION 1 - INTRODUCTION.DOC INTRODUCTION credit ledger and the accounting tools that track ecosystem service credits. An administrative and electronic exchange platform is needed to track and report transactions between buyers and sellers. Agreed-upon, documented measurement criteria, performance standards, and verification protocols for credit-generating activities help ensure their quality, and restoration projects need to be monitored over time to ensure that they continue to provide the ecosystem services that give their credits value. These and other regulatory, administrative, and transactional components of the marketplace require a host of documents, databases, written protocols, agreements, and regulatory instruments that together make up the marketplace infrastructure. Task 5: Market Transaction—Can we make a deal? The goal of this task was for the Willamette Partnership to coordinate, facilitate, or support one or more real temperature-reducing actions as credit trading or banking transactions under the auspices of the Willamette Ecosystem Marketplace. This included selecting, researching, and evaluating potential transaction projects and working with agency staff to augment regulatory language to allow temperature trading as a TMDL compliance option. The activities, products, and results of Tasks 1 through 5 are described in detail in the following chapters. Background on Ecosystem Services Markets Why Do We Need an Ecosystem Services Marketplace? As a society, we generally value clean air, clean water, fish and wildlife, and natural landscapes. This concern is demonstrated consistently in polls and validated by the willingness of voters and policymakers at all levels of government to approve the use of public funds for conservation purposes. There are also many regulations that constrain activities deemed harmful to the environment, like destroying endangered species habitat, harming migratory birds, or harvesting fish beyond a legal limit. During the last 30 years, we have made progress addressing some of the most visible and egregious sources of environmental degradation by applying landmark environmental laws such as the Clean Water Act, National Environmental Policy Act, and Endangered Species Act. These laws were intended to address specific environmental problems, such as industrial and wastewater discharges into rivers and streams, site-specific habitat damage, and impacts on individual species. Over time, the limitations of compliance options within existing regulatory frameworks have become increasingly clear. For example, regulations are often effective for stopping or limiting harmful acts, but they may not be particularly effective for encouraging positive or restorative actions. There is growing concern that site-by-site, species-by-species, and pipe-by-pipe approaches to conservation do not create the incentives needed to restore and conserve the ecosystems that sustain the resources we depend on and care about. Worldwide, there is growing interest in the use of market-based approaches for conserving and restoring the important ecological processes that provide services to people. These “ecosystem services” are produced by intact ecosystems: well-managed forests, functioning river floodplains, contiguous bands of diverse streamside shrubs and woodlands, and healthy wet prairies and wetlands. When these ecosystems are allowed to do their work, they purify, cool and store water; they produce oxygen and store carbon; they reduce or prevent damage from flooding; they improve SECTION 1 - INTRODUCTION.DOC 1-5 INTRODUCTION pollination; and they provide fish and wildlife habitat. The shift worldwide is toward quantification of these ecosystem services so the people who can restore and maintain them can get paid for doing so. It is also clear that despite significant investments in land protection and restoration, conservation is not occurring at a scale that will substantially reverse the trend of major declines in native habitat, plants and animals, and clean air and water. Development pressure is projected to continue, especially in the Willamette Valley. Even with existing federal and state regulations, it is likely that ecosystem health in the Willamette Basin will continue to degrade, undermining the region’s economy, natural resource base, and quality of life. Given the current situation, it is difficult to avoid the conclusion that something more is needed to protect and restore the natural resources we value. The Willamette Partnership is seeking to demonstrate alternative compliance options within the regulatory approach—options that reduce the cost and conflict of compliance with regulations while delivering broader ecological results. One way the Partnership is doing this is by leading the effort to build the Willamette Ecosystem Marketplace, which uses market-based incentives and a new suite of tools to drive investment toward ecological priorities in the Willamette Basin. ⇒ The Willamette Partnership. The Willamette Partnership is a coalition of conservation, city, business, farm, and science leaders committed to increasing the pace, scope, and effectiveness of conservation in the Willamette Basin. Board members represent the many diverse interests in the basin that have a stake in its ecological and economic future. Board members have a long history of working together to build the relationships needed to form a consensus on innovative conservation action. The Willamette Partnership believes that restoring the health of an ecologically, socially, and economically complex watershed like the Willamette will require a coordinated approach that no jurisdiction, agency, or private interest has the resources or incentive to undertake alone. What Is an Ecosystem Services Marketplace? An ecosystem marketplace is an organizational structure that leverages the power of economics with landowners and others investing to protect, restore, and maintain ecological values such as clean air, clean and abundant water, fish and wildlife habitat, and other ecosystem “products” that are generally considered public goods. These goods typically are not bought and sold in the way that food, building products, and manufactured goods are, and protecting them for the benefit of everyone usually does not offer the same type of financial rewards. An ecosystem marketplace changes that dynamic by making ecosystem services—temperature or pollution reduction, water purification, carbon sequestration, habitat preservation, natural flood control, and so on—tradable items that can be priced and sold. In the Willamette Ecosystem Marketplace, regulated entities that spend millions of dollars each year on environmental compliance will be able to pay farmers, foresters, and other land mangers for ecological restoration actions that control or offset impacts more effectively than traditional, site- specific approaches to compliance do. Payment occurs through the purchase of offset credits generated once a landowner completes a restoration project and registers the credits for sale in the marketplace. As an example, cities and industries that are required to reduce the impact of their discharges of clean but warm water into rivers and streams would be able purchase temperature offset credits created when land managers plant streamside shade trees, restore wetlands, or reconnect floodplains so that water is cooled naturally. 1-6 SECTION 1 - INTRODUCTION.DOC INTRODUCTION Restoration of natural processes has the potential to create substantially more benefits to the larger ecosystem than traditional engineered approaches to environmental compliance, and in many cases it may be less expensive. In a ground-breaking temperature trading program in the Tualatin River Basin, for example, Clean Water Services (the area’s wastewater utility) invested approximately $12 million to restore streamside vegetation that actually improved conditions for fish, instead of spending $60 million in refrigeration technology that would have guaranteed compliance but provided little environmental benefit. There are many other advantages to developing an ecosystem marketplace that complements existing environmental regulations: • An ecosystem marketplace would tap into sources of investment that currently are not participating in coordinated conservation activities. This increases the scope and scale of investment in conservation, providing additional ecological benefits for the public. • An ecosystem marketplace would provide greater ecological benefits at lower cost to the regulated parties, with the potential to reduce the costs of goods and services to taxpayers and consumers. • Development of industrial sites in the Willamette Valley is severely constrained because land zoned for industrial use within urban growth boundaries tends to be wet, requiring significant mitigation. A functional ecosystem marketplace will increase the availability of large, ecologically significant mitigation banks that have mitigation credits to sell. This expedites development where it belongs while directing investment in conservation to the areas that will provide the greatest environmental benefits. • Rural landowners find it increasingly difficult to remain profitable. Generating ecosystem service credits can create a new source of income, thereby diversifying revenue for rural landowners and providing society with ecological benefits. For these reasons and others, the Willamette Partnership has pursued development of an integrated ecosystem marketplace in the Willamette Basin that will accommodate the sale of multiple types of offset credits, representing many different ecosystem services. SECTION 1 - INTRODUCTION.DOC 1-7 Section 2 Roles and Responsibilities SECTION 2 Roles and Responsibilities A host of individuals, businesses, organizations, associations, municipalities, educational institutions, and agencies played a role in the development of the Willamette Ecosystem Marketplace. Briefly, the effort was led by the Willamette Partnership with the aid of its board of directors and partners and a project steering committee. The Mid-Willamette Valley Council of Governments acted as the Willamette Partnership’s fiscal agent. Much of the technical work was done by a consulting team consisting of David Evans and Associates, Inc. and CH2M HILL. This was augmented with work by Parametrix and three limited-duration task teams. Extensive financial and in-kind services were provided by project partners and friends. Clean Water Services, Defenders of Wildlife, the City of Albany, the City of Eugene, the Association of Clean Water Agencies, The Nature Conservancy, and the Long Tom Watershed Council, in particular, supplied regular, consistent, and practical regulatory and technical expertise that was invaluable. Representatives from Oregon Department of Environmental Quality, the U.S. Environmental Protection Agency, and other government agencies participated extensively in every stage of the project, both formally on the steering committee and task teams and informally through review and advice as the project progressed. Roles, responsibilities, and the administration and management of the project are described in more detail below. Project Organization Willamette Partnership and its Partners The EPA Targeted Watershed Grant was awarded to the Willamette Partnership in November 2005 after being nominated by Oregon Governor Ted Kulongoski and the Confederated Tribes of Grand Ronde. The original proposal included letters of support from 23 Oregon-based organizations who saw value in pursuing an ecosystem marketplace. Supporters included the following: American Heritage Rivers Initiative Portland State University Oregon Association of Conservation Districts Conifer Group Associated Oregon Industries SOLV Oregon Business Association Defenders of Wildlife City of Albany University of Oregon Institute for a Oregon Business Council Sustainable Environment City of Eugene Heritage Seedlings, Inc. Oregon Department of Environmental Quality Wildwood Mahonia City of Portland Oak Lodge Sanitary District Oregon Environmental Council Willamette Riverkeeper City of Salem Oregon Association of Clean Water Oregon State University Agencies Clean Water Services SECTION 2 - ROLES AND RESPONSIBILITIES.DOC 2-1 ROLES AND RESPONSIBILITIES Development of the Willamette Ecosystem Marketplace was led and managed by the nonprofit Willamette Partnership, a coalition of conservation, municipal, industry, agriculture, development, and academic leaders who represent the interests needed to develop consensus on innovative conservation policy and action in the Willamette Basin. The project manager was Willamette Partnership Executive Director David Primozich. The Willamette Partnership was responsible for the strategic direction, general oversight, and stakeholder access needed to establish the Willamette Ecosystem Marketplace. The organization also convened, coordinated, and otherwise supported the activities of the project steering committee and task teams, supervised contractors and consultants, and was responsible for all project deliverables associated with grant-funded activities. Board of Directors The Willamette Partnership Board of Directors met quarterly throughout the project to inform and direct the project management staff and offer strategic guidance and decisions. In addition, the Willamette Partnership Executive Committee participated in day-to-day project oversight activities and served on the project steering committee. Much of the outreach for the project was conducted by board members, who have extensive business and political contacts. Board members worked to ensure that project development occurred in an open and transparent manner and helped to create opportunities for stakeholder input and feedback. During the 2 ½ years of the project, the Willamette Partnership Board of Directors maintained a broad view of the marketplace and helped the project stay focused on the financial and ecological benefits of an integrated, multi-credit marketplace, not just a water quality trading program. The board also worked on policy issues connected to the marketplace. In February 2007, it made the key decision that the Willamette Partnership would take on the responsibility of managing the basic marketplace infrastructure, until another organization could step into that role. The following people serve on the board of directors: • Bill Gaffi (President), General Manager of Clean Water Services, the wastewater management service for the Tualatin River Basin • John Miller (Vice President), President of Wildwood, Inc., an urban design and development firm • Sara Vickerman (Secretary), Senior Director of Biodiversity Partnerships for Defenders of Wildlife • Mike Burton, Vice Provost and Executive Director for extended studies at Portland State University • David Hulse, professor of Landscape Architecture at the University of Oregon and former chair of the Landscape Architecture department • Jim Irvine, president of The Conifer Group, a multifaceted real estate development company • Mark Krautmann, past president of the Oregon Association of Nurseries and the founder and owner of Heritage Seedlings Nursery • Marv Lewallen, Weyerhaeuser’s Environmental Affairs Manager for Oregon 2-2 SECTION 2 - ROLES AND RESPONSIBILITIES.DOC ROLES AND RESPONSIBILITIES • Tom Lindley, partner in the Portland office of the law firm of Perkins Coie LLP • Dean Marriott, Director of Portland’s Bureau of Environmental Sciences • John McDonald, Executive Director of the Oregon Association of Conservation Districts and Director of the Tualatin Soil and Water Conservation District • Jack McGowan, Executive Director of SOLV, an organization that builds community though volunteer action • Chris Mercier, Confederated Tribes of Grand Ronde Tribal Council member • John Moriarty, Statewide Coordinator for the Network of Oregon Watershed Councils • Liz Redon, North Santiam Watershed Council Coordinator • Travis Williams, Executive Director of Willamette Riverkeeper • Duncan Wyse, President of the Oregon Business Council, a nonprofit organization of business executives The Willamette Partnership also received vital financial and in-kind support for its activities from: Clean Water Services City of Albany City of Eugene Defenders of Wildlife Oregon Business Council Oregon Department of Environmental Quality Oregon Association of Clean Water Agencies Associated Oregon Industries City of Portland City of Salem Conifer Group Heritage Seedlings Nursery Long Tom Watershed Council Network of Oregon Watershed Councils Oak Lodge Sanitary District Oregon Association of Conservation Districts Oregon Business Association Oregon Department of Agriculture Oregon Department of Fish and Wildlife Oregon Department of State Lands Oregon Department of Transportation Oregon Economic and Community Development Department Oregon Environmental Council Oregon Governor's Office Oregon State University University of Oregon Institute for a Sustainable Environment Portland State University SECTION 2 - ROLES AND RESPONSIBILITIES.DOC 2-3 ROLES AND RESPONSIBILITIES SOLV Wildwood Mahonia Nursery and Vineyard Willamette Riverkeeper Mid-Willamette Valley Council of Governments The Mid-Willamette Valley Council of Governments is the fiscal agent for the Willamette Partnership and provided staffing, fiscal management for grants and other revenue and expenses, contracting services, and reporting. Project Steering Committee The project steering committee consisted of the Willamette Partnership Executive Committee and two additional board members, regulatory agency staff, interest group representatives, landowners, and other individuals with knowledge and interest in marketplace development. The committee met monthly for the first 1 ½ years of the project and then occasionally after that as needed. There was less need for guidance from the steering committee as the project progressed and attention shifted to completing tasks and project deliverables, rather than setting the direction for marketplace development. On the project steering committee, stakeholders worked closely with project staff, the consultant team, and task teams; participated directly in development of the marketplace; and provided input and guidance during the various stages of the project. Throughout the marketplace development process, the project steering committee focused on the issues related to water temperature trading and transactions. Key contributions of the project steering committee included pushing for simpler, more easily understood marketplace documents and protocols, acting as a sounding board on policy issues, and encouraging the development of a centralized market structure instead of decentralized or facilitated. The following people served on the project steering committee: • Bill Gaffi, Clean Water Services • Neil Mullane, Oregon Department of Environmental Quality • Ranei Nomura, Oregon Department of Environmental Quality • Sonja Bjorn-Hansen, Oregon Department of Environmental Quality • Bobby Cochran, Clean Water Services • John Miller, Wildwood Mahonia • Allen Henning, U.S. Environmental Protection Agency • Claire Schary, U.S. Environmental Protection Agency • Sara Vickerman, Defenders of Wildlife • Gina LaRocco, Defenders of Wildlife • Bob Deal, U.S. Forest Service 2-4 SECTION 2 - ROLES AND RESPONSIBILITIES.DOC ROLES AND RESPONSIBILITIES • Travis Williams, Willamette River Keeper • Marv Lewallen, Weyerhaeuser Company • Louise Solliday, Department of State Lands • Cathy Macdonald, The Nature Conservancy • David Hulse, University of Oregon • David Wester, Oregon Association of Conservation Districts • Ray Jaindl, Oregon Department of Agriculture • Jane Bacchieri, Oregon Governor’s Office • Peter Ruffier, Metropolitan Wastewater Management Commission • Larry Devroy, Port of Portland • Tom Paul, Oregon Water Resources Department Scientific and Technical Work Clean Water Services Staff of Clean Water Services—a wastewater management service that has been instrumental in developing and implementing water quality trading in Oregon—provided regulatory assistance and coordinated technical aspects of the marketplace’s creation. This included work by Charles Logue, Clean Water Services’ Director of Regulatory Affairs, who managed scientific and technical contractors, and Bobby Cochran, who managed market appraisal and marketplace infrastructure tasks. Consulting Team (Technical) Much of the technical work for the Willamette Ecosystem Marketplace was done by consultants David Evans and Associates, Inc. and CH2M HILL. Among other things, the consulting team analyzed temperature reduction obligations under the TMDL, assessed potential credit definition methodologies, developed a thermal credit calculator, researched existing credit trading programs, developed marketplace infrastructure documents and protocols, designed a centralized credit registry, helped prepare for a transaction, and worked to develop permit language that would allow temperature trading as a compliance option. Additional Consultants (Scientific) The Willamette Partnership also contracted with scientists David W. Hulse (University of Oregon) and Stanley V. Gregory (Oregon State University) to investigate the scientific foundation of potential methodologies for defining temperature credits from floodplain restoration. Additional scientific work was done by Parametrix under contract with the City of Albany and Clean Water Services. For the City of Albany, Parametrix developed and applied a rapid assessment methodology for evaluating existing and potential future ecosystem services at individual restoration sites. For SECTION 2 - ROLES AND RESPONSIBILITIES.DOC 2-5 ROLES AND RESPONSIBILITIES Clean Water Services, Parametrix applied a multi-parameter accounting methodology to restoration sites to quantify significant ecological values, beyond just temperature, that occur from restoration. Parametrix also participated heavily in development of the Ecosystem Credit Registry, which records and tracks credits in the marketplace. Task Teams Guided by input from the project steering committee and the Willamette Partnership Board of Directors, project staff convened and coordinated three teams of experts and key stakeholders for various marketplace development tasks. The task teams were intensive, limited-duration work groups that provided input, data, and guidance to project staff and consultants. Synthesis Map Working Group The Synthesis Map Working Group met quarterly for the last year of the project to guide the GIS analysis needed to re-delineate the conservation priorities synthesis map, as described in Chapter 3. The team consisted of representatives from the Oregon Department of Fish and Wildlife, Oregon Habitat Joint Venture, The Nature Conservancy, The Wetlands Conservancy, Oregon Biodiversity Project, Oregon Parks and Recreation, Oregon Department of Environmental Quality, Defenders of Wildlife, Willamette Futures (at Oregon State University), and the Willamette Partnership. The revised synthesis map reflects more recent vegetation and land use data, uses consistent spatial units to delineate high-priority conservation areas, and includes a confidence rating system to convey the accuracy of the data sets. These changes make the synthesis map more meaningful to conservation organizations and more accurate with regard to existing land use and vegetation than previous analyses were. Practitioners Working Group The Practitioners Working Group brought together diverse restoration practitioners—the potential suppliers of credits in the Willamette Ecosystem Marketplace—during the second half of the project. The group’s purpose was to inform processes for project identification, planning, implementation, maintenance, reporting, certification, and payments for offset credits that would help ensure practical, high-quality restoration in the Willamette Basin. Among its activities, the Practitioners Working Group prepared a white paper that explored structural and regulatory incentives to encourage participation in the marketplace and developed a multi-tiered credit quality rating system for temperature credits. The group also developed minimum riparian planting protocols for shade restoration projects that are designed to generate temperature credits. The following organizations were represented in the Practitioners Working Group: the Willamette Partnership, Clean Water Services, Yamhill Soil and Water Conservation District, Tualatin Soil and Water Conservation District, SOLV, Long Tom Watershed Council, Marys River Watershed Council, The Nature Conservancy, Greenbelt Land Trust, McKenzie River Trust, Oregon Habitat Joint Venture, Willamette Riverkeeper, Good Company, Parametrix, the Oregon Department of Environmental Quality, the U.S. Environmental Protection Agency, and the U.S. Fish and Wildlife Service. The group was convened jointly by The Nature Conservancy and Willamette Partnership. Transaction Working Group The transaction working group work intensively over a 2-month period to develop key credit trading documents, such as the credit exchange and registration agreements (see Section 6). These documents help to support near-term credit transactions by outlining (1) buyer and seller responsibilities in exchanging credits, and (2) credit owner and registrar responsibilities in registering 2-6 SECTION 2 - ROLES AND RESPONSIBILITIES.DOC ROLES AND RESPONSIBILITIES credits. The transaction working group consisted of representatives from the City of Eugene, the Long Tom Watershed Council, a private landowner, and the City of Albany. Technical Team A technical team met several times in the summer of 2006 to explore ways of quantifying the ecological outputs of floodplain restoration in the Willamette Basin. Members included scientists from the University of Oregon and Oregon State University and representatives from the Oregon Department of Environmental Quality, the Willamette Partnership, and private consulting firms. Two main concepts emerged from the technical team: “stepping stones” and, as an outgrowth, fish density conversion. “Stepping stones” refers to creation of appropriately located areas in the river characterized by reduced temperature or improved habitat for migrating salmonid species or both. The fish density conversion concept is based on a data-intensive model that incorporates habitat characteristics into estimates of the impact of water temperature on salmon productivity. (See Step 4 of Chapter 4 for more information.) Initial research on the stepping stones concept was completed in 2007, and additional research is under way. The fish density conversion concept also is being explored for application in the Willamette Ecosystem Marketplace. Additional Organizational Elements Government Agencies The Oregon Department of Environmental Quality and the U.S. Environmental Protection Agency played a central role in development of the ecosystem marketplace, in part by serving on the project steering committee and project task teams. The project management structure was designed to encourage agency participation and involvement in marketplace development. In fact, the U.S. Environmental Protection Agency, U.S. Fish and Wildlife Service, U.S. Forest Service, Oregon Department of Environmental Quality, Oregon Department of State Lands, Oregon Water Resources Department, and Oregon Department of Agriculture all were represented on the steering committee or task teams. Less formally, agency personnel worked with project staff and consultants via meetings and consultations to clarify the supply and demand for offset credits, identify and resolve policy issues that affect the marketplace, modify permit language, and update an internal management directive to guide trading of ecosystem service credits as a compliance option. The Oregon Department of Environmental Quality, represented by Neil Mullane, Ranei Nomura, Sonja Bjorn-Hansen, Pamela Wright, Ryan Michie, and Pete Dalke, and the U.S. Environmental Protection Agency, represented by Alan Henning and Claire Schary, were both actively involved in multiple task teams and the steering committee, providing valuable feedback and support throughout every stage of the project. Stakeholder Communication, Outreach, and Involvement The project steering committee and task teams were the primary mechanism for active stakeholder participation and involvement at all stages of marketplace development. Stakeholder communication and outreach was conducted through the individual efforts of the members of the Willamette Partnership Board of Directors and project staff. Executive Director David Primozich accompanied members of the steering committee and the Willamette Partnership Board of Directors to numerous meetings and conferences of stakeholder interest groups to deliver presentations and get feedback on framework development. In addition, a Web site posted during the last year of the project SECTION 2 - ROLES AND RESPONSIBILITIES.DOC 2-7 ROLES AND RESPONSIBILITIES describes ecosystem marketplaces work, the Willamette Partnership’s efforts to develop a marketplace, and publications that document the marketplace development process. The challenges of building an integrated ecosystem marketplace require a diverse set of spaces for information sharing and decision making. It was important to have a core group of stakeholders involved in all aspects of the project, but it was also important to reach out to diverse audiences to build awareness and seek feedback. 2-8 SECTION 2 - ROLES AND RESPONSIBILITIES.DOC Section 3 Market Appraisal SECTION 3 Market Appraisal (Task 1) Assessing supply and demand for the potential Willamette Ecosystem Marketplace was a challenging process. Supply and demand work differently in ecosystem markets than in markets for other kinds of goods and services. In ecosystem markets, supply is driven by the existing natural resource base and the willingness of landowners to manage their lands to produce ecosystem services—either actively through restoration projects or passively by leaving a portion of the landscape to function naturally, without interference. When it comes to demand in an ecosystem market, the drivers are both regulatory (in the form of rules and regulations that require people who impact the environment to buy credits to offset those damages) and voluntary (such as people purchasing carbon credits to offset their own carbon-generating activities or a municipal or industrial discharger seeking an alternative to costly investments in new infrastructure). Regulatory drivers are likely to stimulate the greatest volume of trades and demand. Other factors that shape supply and demand include transaction costs, uncertainty, ecosystem dynamics, and the political environment. Major Accomplishments • Assessment of marketplace potential. Determined that temperature could be a viable market in the Willamette Basin, and that the potential supply of shade in high-priority conservation areas along temperature-impaired streams is more than enough to meet the demand for temperature credits created by the TMDL. • Synthesis map. Delineated areas in the Willamette Basin where rivers and streams are temperature impaired and there is agreement among a variety of conservation organizations that restoration is a high priority. This “synthesis map” can be used to inform marketplace investments. Work is continuing to refine the synthesis map, incorporate more recent data, and develop a web-based spatial tool that will make the map data readily available for users. The Oregon Department of Environmental Quality expects to use data from the synthesis map as it sets its priorities for TMDL implementation. • Market analysis. Characterized the drivers for various potential ecosystem service markets in the Willamette Basin, analyzed the potential demand for wetland mitigation credits in the basin, calculated the demand for temperature credits created by the Willamette temperature TMDL, and identified potential buyers of temperature credits, based on the requirements of the TMDL; also compiled and mapped the potential supply of temperature credits that could be created through restoration of riparian shade along the Willamette River and its major tributaries. The market appraisal for this project examined supply and demand for ecosystem services credits in the Willamette Basin, investigating who the initial buyers might be, what the drivers are for them to participate in the market, and where to direct ecosystem marketplace investments for maximum ecological value. The market appraisal focused on supply and demand at the basin level; however, as part of the marketplace development process, a methodology was developed to perform rapid assessments of ecosystem functions and services at the site level as well (see Chapter 5). This methodology, which assesses a site for its general ecological characteristics, restoration potential, and SECTION 3 - TASK 1-MARKET APPRAISAL.DOC 3-1 MARKET APPRAISAL (TASK 1) preservation opportunities, describes the general ecosystem market potential of individual sites and is useful for understanding how supply can be created through different management alternatives. Developing the market appraisal involved mapping the potential supply of ecosystem credits in the Willamette Basin, analyzing demand in the basin for various types of ecosystem services credits, and quantifying the supply and demand for water temperature reduction credits and wetland mitigation credits over approximately the next five years. In conducting the appraisal, the Willamette Partnership, its consultants, its partners, and various stakeholders performed the steps described below. Market Appraisal Process Step 1: Synthesis Map. Created a synthesis map of conservation and restoration priority areas based on existing plans, documents, and stakeholder input. The map includes responsibilities identified in the Willamette TMDL for temperature and points to opportunities for investment. The Nature Conservancy compiled existing GIS layers to create a synthesis map that shows the priority conservation and restoration areas of six conservation organizations or agencies in the Willamette Basin and where those areas overlap. Locations with many overlaps were considered to be higher priority for conservation and restoration than locations with few or no overlaps. Given the somewhat different objectives of the conservation organizations (birds, wetlands, biodiversity, etc.), it was assumed that restoration projects in the locations with multiple overlaps would provide a broad range of ecosystem services that could be represented as different types of credits in the marketplace. Data layers for the synthesis map of conservation and restoration priorities were contributed by Oregon Habitat Joint Venture, the Oregon Biodiversity Project, the Oregon Department of Fish and Wildlife, Oregon’s Greatest Wetlands, The Nature Conservancy, and Willamette Futures. Once the initial map was completed, an overlay was added of the municipal and industrial entities with immediate thermal load reduction obligations under the TMDL; this was based on the review of the TMDL described under Step 4. The temporary addition of an overlay of temperature-impaired streams (obtained from the Oregon Department of Environmental Quality) showed where high-priority conservation and restoration areas overlapped with reaches where water temperatures exceed standards and, therefore, reductions are needed. Result and Findings of Step 1: The result of Step 1 was a two-dimensional synthesis map of the Willamette Basin that shows, at a coarse scale, locations where (1) temperature reduction credits might be created and there is scientific justification and stakeholder support for restoration; and (2) reductions in thermal loading are required under the TMDL. Temperature-affected high-priority restoration areas on the Willamette River are at the following locations: upstream of Albany, upstream and downstream of the Long Tom River’s confluence with the Willamette River, and downstream of the city of Santa Clara (outside of Eugene). Additional areas are located in the middle reaches of Muddy Creek and the upper reaches of the Long Tom River, where it exits Fern Ridge Reservoir. All six conservation groups or agencies had identified these areas as a high priority for restoration, which makes them potentially promising locations for marketplace investment. 3-2 SECTION 3 - TASK 1-MARKET APPRAISAL.DOC MARKET APPRAISAL (TASK 1) The synthesis map of conservation priorities is available at http://www.willamettepartnership.org/tools-templates/synthesis-map.pdf. Figure 3-1: Synthesis Map of High-Priority Conservation/Restoration Areas and Locations of Key Thermal Load Reduction SECTION 3 - TASK 1-MARKET APPRAISAL.DOC 3-3 MARKET APPRAISAL (TASK 1) ⇒ Adjunct work: The six conservation groups and agencies contributing data to the synthesis map of priority conservation areas used different processes to map their priorities, and some of the data sets were outdated. As a supplement to its work under this grant, The Nature Conservancy is continuing to refine the synthesis map with the aid of the Synthesis Map Working Group, which consists of The Nature Conservancy, The Wetlands Conservancy, Oregon Department of Fish and Wildlife, Oregon Department of Environmental Quality, Oregon Natural Heritage Information Center, Oregon State University, and University of Oregon. So far the synthesis map has been updated with more recent and reliable data (particularly vegetation data), and priority conservation areas have been re-delineated accordingly. The Nature Conservancy is in the process of using the map data to develop a GIS-based spatial tool that makes this information readily available for users. This tool will to be completed in August of 2008. The Oregon Department of Environmental Quality is interested in using ecological priority data from the synthesis map to implement the TMDL, and the agency has formed Stakeholder Technical Teams to help guide TMDL implementation and inform priority setting for trading and other implementation actions. Step 2: Market Characterization. Identified currently functioning and potential future ecosystem markets in the Willamette How Many for How Much? A common question throughout this project has been “How Basin and characterized their drivers, many temperature credits can I get for how much participants (regulatory agencies, buyers, and restoration?” sellers), and potential growth. Modeling done in support of the TMDL, combined with data Step 3: Promising Markets. Identified on the results of restoration projects completed in the markets that are ripe for inclusion in the Tualatin Basin, suggests that restoration projects on Willamette marketplace meaning markets streams roughly 16 to 20 feet wide block approximately 10 million kilocalories per day per mile of stream restored. where the demand for credits is high and the ecological and economic return on How does this relate to the amount of temperature investment would be relatively quick (within reduction needed in the Willamette Basin? A comparison 5 years). between TMDL allocations of thermal load and actual current discharges shows that the immediate need for Findings of Steps 2 and 3: Steps temperature reductions exceeds 1.2 billion kilocalories per day from just eight of the 25 point-source dischargers 2 and 3 provided a picture of the subject to the Willamette TMDL for temperature. That scope of potential market drivers in number will exceed 3 billion in 10 years. the Willamette Basin, at a coarse scale, and which types of credits they Is there enough supply to meet this need? might create demand for. Water At an average of 10 million kilocalories per day per stream quality trading credits and wetland mile restored, using riparian shade alone, we would need mitigation credits emerged as the about 133 miles of stream restoration. In the Willamette most immediately marketable types Valley—excluding the upper elevations of the Coast Range of credits—temperature credits and the Cascades— there are 6,069 stream miles. Of those, 2,050 miles fall within areas identified as priorities because of the new Willamette by multiple conservation organizations. Of the 2,050 TMDL for temperature and wetland stream miles in priority areas, 516 miles are “303d listed” credits because of continuing for temperature impairments, which means they are development along the I-5 corridor warmer than they should be to support cold-water fish. So even if restoration were to occur only in those areas listed that affects wetlands and thus as impaired for temperature and that fall within priorities established by the Synthesis Map Working Group, there is a potential supply of more around 5 billion kcals/per day. SECTION 3 - TASK 1-MARKET APPRAISAL.DOC 3-5 MARKET APPRAISAL (TASK 1) requires mitigation. Much of the known wetland credit demand comes from planned industrial facilities around Corvallis, Albany, and Lebanon. There also is high demand for wetland mitigation credits—and limited supply—in northwestern Clackamas County and western Multnomah County. Oregon already has an active wetland mitigation banking program and an approved conservation banking program for the endangered Oregon chub. These programs have the potential to be part of a multi-credit ecosystem marketplace in the Willamette Basin. Endangered species conservation banking could be expanded beyond chub to include endangered salmon and steelhead and plants and animals dependent on prairie and oak habitat. Other markets active in Oregon include the following: • Columbia Basin Water Transactions Program (instream flow restoration). www.cbwtp.org • Deschutes River Conservancy (instream flow restoration and groundwater mitigation). www.deschutesriver.org • Oregon Water Trust (instream flow restoration) www.owt.org • Klamath Basin Rangeland Trust (instream flow restoration and water quality enhancement) www.kbrt.org • Clean Water Services and DEQ Wastewater Effluent Trading www.cleanwaterservices.org and www.deq.state.or.us/wq/trading/faqs.htm. • Climate Trust (greenhouse gas offsets) www.climatetrust.org • Department of State Lands and Wetland Mitigation Banks www.oregon.gov • Oregon Department of Transportation Mitigation/Conservation Bank www.fhwa.dot.gov/environment/ecosystems/or06.htm The existence of these other markets provides substantial motivation to build an integrated ecosystem services marketplace that can leverage investment to achieve broader ecological goals. Potential future markets that should be considered include markets for transferable development rights, renewable energy, stormwater, green certification, tradable recreation permits, flood hazard mitigation, and pollinator habitat. The findings of Steps 3 and 4 were captured in a primer on Existing and Emerging Markets for Environmental Offset Credits in the Willamette Basin. 3-6 SECTION 3 - TASK 1-MARKET APPRAISAL.DOC MARKET APPRAISAL (TASK 1) Step 4: Temperature Reduction Obligations According to the TMDL. Reviewed the final Willamette temperature TMDL to quantify demand for water temperature reduction credits in terms of kilocalories per day (kcal/day). Demand for temperature credits was quantified by identifying point sources in the Willamette Basin that have temperature-related responsibilities under the TMDL, determining the existing thermal loads of those point sources, and, for three point sources, determining expected future loads. Current and future loads were then compared to the waste load allocation (i.e., the allowed discharge) under the TMDL during low-flow conditions. This comparison shows which point sources will need to reduce or offset their loads, such as by buying temperature credits, and the magnitude of load reduction or credits needed during low flow. Findings of Step 4: Step 4 showed that the potential demand for temperature reduction credits is concentrated among a few entities in the upper Willamette reach—namely the Metropolitan Wastewater Management Commission (MWMC, in Eugene-Springfield), the cities of Corvallis and Albany, the Wah-Chang metals plant, the University of Oregon’s heat plant, the Fort James and Pope and Talbot paper plants in Halsey, and Weyerhaeuser’s Albany paper plant. All major point sources in the upper Willamette reach have thermal loads that exceed their waste load allocations in the TMDL. If these point sources cannot cost-effectively reduce their thermal loads, they may have an interest in acquiring temperature reduction credits. Table 3-1 shows the amount of thermal What Are Service Areas and Why Do They Matter? loading that major point sources must offset. Negative numbers indicate thermal Service areas mark the geographic boundaries within which loads that are within the limits imposed by buyers and sellers of ecosystem service credits can interact. For example, water temperature credits created in the TMDL allocations, so these sources do the Willamette Basin could not be sold to offset an impact not have to reduce or offset their thermal in the Deschutes Basin because the two areas are not load; however, because the TMDL is based hydrologically connected. on points of maximum impact, sources The Willamette TMDL for temperature identifies three that discharge downstream of the point of points of maximum impact in the Willamette River. These maximum impact for one portion of the are the places where the river reaches its maximum Willamette River would not be able to sell temperature. These points of maximum impact create their additional allocation to points service areas for temperature offsets. These points occur roughly at the confluence of the Santiam, Yamhill, and upstream. Columbia rivers. Without exception, point sources in the Water temperature credits generated anywhere in the middle and lower reaches of the watershed upstream of a point of maximum impact are Willamette River have thermal loads that available for use by buyers within or below the service area are at or below their waste load allocations. within which the credits are generated. Thus, credits can The City of Salem and SP Newsprint in be traded upstream through one or more points of maximum impact sections, but not downstream. Such a Newberg, in particular, are well below their system creates a nested pyramid of trading areas in which, allocations (142 kcal/day for Salem in for example, the City of Salem could buy credits from summer and 108 kcal/day for SP projects around Eugene, but the City of Eugene could not Newsprint). buy credits from projects in the Salem area because Salem is below the point of maximum impact to which Eugene is subject. SECTION 3 - TASK 1-MARKET APPRAISAL.DOC 3-7 MARKET APPRAISAL (TASK 1) Table 3-1 Major Willamette River Point Sources and Their Thermal Loads to be Offset (or Reduced) — September 2006 Load to Offset—Summer Load to Offset—Spawning Point Source RM (million kcal/day) (million kcal/day) U of O Heat Plant 181.7 36 141 MWMC 178.0 25 266 Fort James Halsey 148.4 27 101 Pope and Talbot 148.3 70 261 Evanite 132.2 3 10 Corvallis 130.8 8 5 Albany 119.0 8 8 Wah Chang 116.5 19 73 Weyerhaeuser Albany 116.5 59 217 Salem 78.1 -142 -457 SP Newsprint 49.8 -108 NA Newberg 49.7 -9 NA Wilsonville 39.0 -8 NA West Linn Paper 27.7 -22 NA Blue Heron Paper 27.5 0 NA Tri-City 25.5 -32 NA Tryon Cr 20.2 -10 NA Oak Lodge 20.1 -9 NA Kellogg Cr 18.7 -21 NA Siltronics 6.3 -4 NA Thermal loads in kcal/day and the amounts to be offset, both positive and negative, for point sources in the Willamette Basin are documented in Understanding Supply and Demand for Environmental Offset Credits in the Willamette Basin. ⇒ Key Decision: In reviewing the TMDL to quantify demand for temperature reduction credits based on future temperature loading, only three point sources were evaluated: Albany, Corvallis, and the Metropolitan Wastewater Management Commission. Analysis based on future thermal load was limited to these three point sources in part because data on these sources’ future loadings were readily available (the jurisdictions’ projections were included in their petitions to the Oregon Department of Environmental Quality for allocations from the reserve), but also because these three point sources account for so much of the demand for temperature credits in the Willamette Basin. When the final Willamette temperature TMDL was issued in September 2006, the Metropolitan Wastewater Management Commission and the cities of Albany and Corvallis were at imminent risk of exceeding their new waste load allocations under certain conditions. These jurisdictions promptly petitioned the Oregon Department of Environmental Quality for additional allocations from the thermal load reserve, which is included in the TMDL to allow for future population growth and associated increases in effluent discharge and thermal loading. 3-8 SECTION 3 - TASK 1-MARKET APPRAISAL.DOC MARKET APPRAISAL (TASK 1) These sources, Weyerhaeuser Company, and the Northwest Pulp and Paper Association ultimately filed suit against the Oregon Department of Environmental Quality, challenging the waste load allocations in the TMDL and the scientific rigor of the document. These sources generally have common issues and have argued that non-point sources, rather than point sources such as themselves, are the primary contributors of excess heat loads in the Willamette River. Because the TMDL does not account for variations in river temperature in assigning waste load allocations and pulp and paper mills draw water from the river, they contend that it violates DEQ’s rules for facilities to be required to control temperature increases not tied to their own operations. The litigating sources also argued that the waste load allocations should account for “natural thermal potential”—estimates of river temperature if there were no human impacts—instead of biologically based criteria. Another important issue was that the model DEQ used did not address influences on river temperatures, such as U.S. Army Corps of Engineers’ dams, and may have too large a margin of error. The model is reported to be accurate to plus or minus 0.5 degree Celsius, but DEQ is proposing waste load allocations with resolution in the hundredths of a degree Celsius range. In addition, the litigants believe that, because the TMDL is based on only two years of meteorological and hydraulic data, it cannot accurately account for conditions outside of these two years. Finally, the litigants complained that waste load allocations should have been based on average daily effluent temperatures rather than maximum daily temperatures. In a separate case, in 2007 several environmental groups also sued the Oregon Department of Environmental Quality, maintaining that the compliance schedules (which are frequently used in National Pollutant Discharge Elimination System [NPDES] permits and implementing TMDLs) are not allowed under the Clean Water Act. These ongoing lawsuits have prevented the Oregon Department of Environmental Quality from issuing the new NPDES permits that would, in effect, implement TMDL limitations in NPDES permits. Because the need for temperature credits in the Willamette is driven by the waste load allocation limits in NPDES permits, immediate demand for credits does not exist. The market appraisal had been substantially completed before these events occurred. Despite the postponed current demand for temperature credits, implementation of a temperature market for the Willamette has merely been slowed, rather than stopped. Although it will be difficult to complete a full trade in the marketplace until the challenges to the TMDL have been resolved, it still is possible to conduct a transaction, in which credits are created and banked but not applied as an offset. Thus, for the time being, the temperature market in the Willamette may operate more as a banking program than a trading program. Step 5: Demand for Wetland Credits: Worked with the Department of State Lands to quantify (1) the number of wetland mitigation credits scheduled to be available from existing wetland banks or banks in the process of being established; (2) the number of credits needed to mitigate the impacts associated with some of the largest expected sources of development; and (3) representative prices for wetland mitigation credits. Key information about the demand for wetland mitigation credits came via the Industrial Site Certification Program, which is led by the Oregon Economic and Community SECTION 3 - TASK 1-MARKET APPRAISAL.DOC 3-9 MARKET APPRAISAL (TASK 1) Development Department. Wetland assessments are part of the process of certifying sites as ready for industrial development. Data from the certification program, adjusted to account for measures to avoid or minimize impacts to wetlands at development sites, were combined with estimates by the Oregon Department of Transportation and the West Cascades Council of Governments to establish projected demand for wetland mitigation credits in the Willamette Basin in the next several years. Average per-acre costs were calculated using information from the Department of State Lands. The supply of wetland credits was readily determined by checking with existing wetland mitigation banks or banks in the process of being established. Findings of Step 6: There appears to be a shortfall in wetland mitigation credits of about 600 acre–credits. In 2007, at an average value of $60,000 per acre, this equated to an unmet demand value of $36 million. In most instances, demand is for small increments of less than 1 acre. (See Understanding Supply and Demand for Environmental Offset Credits in the Willamette Basin.) ⇒ Policy issue: Third-party purchase of wetland credits: When the market appraisal was written, transactions of wetland mitigation credits were required to occur within the context of a wetland removal/fill permit, meaning that credits could not be sold to third-party buyers who were themselves not in need of credits. Since then, the Department of State Lands has received legislative authority to allow third parties to buy and hold wetland credits for later sale, with the approval of the director of the Department of State Lands. Allowing third-party purchases is expected to help stabilize the quantity and price of wetland mitigation credits in the Willamette Basin. The Oregon Economic and Community Development Department is the first to use this new authority, as part of a pilot program. The Department currently is midway through the process of purchasing between $500,000 and $2 million worth of wetland mitigation credits as a third party, for eventual sale to developers of 16 certified industrial sites in the Upper Willamette Basin where development will cause wetland impacts. The purchased credits must meet certain ecological criteria, as well as be price competitive. Goals of the program include guaranteeing the supply of wetland mitigation credits, bringing down the price of wetland mitigation credits, improving ecological integrity, and making the permitting process for wetland removal and fill more predictable. Step 6: Temperature Supply Using Shadelator. Compiled data that calculated and mapped, at 100-foot increments along much of the Willamette River and its major tributaries, the estimated temperature reductions that would occur if riparian vegetation were restored. The calculations and maps in Step 6 were created in support of the TMDL. They were derived using Shadelator, a component of the Oregon Department of Environmental Quality’s HeatSource river temperature model. Shadelator, which the department developed in support of Clean Water Service’s Tualatin River temperature trading system, uses site characterization data and information on current vegetation to estimate site-specific temperature reductions that would result from various degrees of restoration of riparian shade at a particular site. For the market appraisal, the Oregon Department of Environmental Quality compiled Shadelator results for the bulk of the Willamette River and its tributaries, using comprehensive vegetation data and other site data (elevation, gradient, sun angle, 3-10 SECTION 3 - TASK 1-MARKET APPRAISAL.DOC MARKET APPRAISAL (TASK 1) surrounding topography, etc.) derived through the TMDL development process. The model was run assuming that riparian vegetation would be restored to the site’s potential conditions. The model runs yielded calculations of the solar energy, in Langleys per day (1 Langley is equivalent to 929.03 kcals per day) that would be blocked at each 100-foot segment of river if riparian vegetation were restored within that segment. Results were color-coded and mapped on aerial photos of river reaches to represent the reductions in water temperature that would result from restoration of riparian shade. Red areas on the map represent areas with the greatest potential to reduce heat from solar loads. Figure 3-2 Sample Shade Model Output: Calapooia River SECTION 3 - TASK 1-MARKET APPRAISAL.DOC 3-11 MARKET APPRAISAL (TASK 1) Findings of Step 6: The analysis in Step 6 indicates that the potential supply of temperature credits in the Willamette Basin from riparian shade restoration alone far exceeds the estimated current and 10-year projected demand of around 3 billion kcal/day created by the TMDL. The potential supply from other restoration actions was not quantified because the complex, site-specific nature of flow and wetland restoration actions do not lend themselves to generalized analysis that would produce meaningful results. Time Frame, Participants, and Resources The market appraisal was essentially completed by October 2006, but the supply of temperature credits from riparian shade restoration was not quantified until shortly before the end of the grant period. Ongoing work (past the end of the grant period) will refine the synthesis map of priority conservation areas and develop it into an interactive tool that reflects changing conditions in the Willamette Basin. The Department of State Lands, the Oregon Department of Environmental Quality, Clean Water Services, and the Willamette Partnership’s consultants did most of the work to characterize potential markets and quantify supply and demand for wetland mitigation and water temperature reduction credits. Contributors to the mapping effort included The Nature Conservancy, the Wetlands Conservancy, Oregon Resources Natural Heritage Information Center, Oregon Department of Fish and Wildlife, University of Oregon, and Oregon State University. Maps and data layers came primarily from the Willamette River Basin Planning Atlas (Pacific Northwest Ecosystem Research Consortium 2002), The Wetland Conservancy’s Oregon’s Greatest Wetlands map, The Nature Conservancy’s ecoregional priorities, Oregon Department of Fish and Wildlife’s Conservation Strategy (ODFW 2006), Oregon Resources Natural Heritage Information Center’s species lists (ORNHIC 2004), the National Oceanic and Atmospheric Administration’s National Marine Fisheries Service critical habitat areas (NOAA 2005), and U.S. Fish and Wildlife Service priorities. The Oregon Economic and Community Development Department, Oregon Department of Transportation, and West Cascades Council of Governments contributed information on current and near-term demand for wetland mitigation credits. The final TMDL provided essential information on point sources’ thermal loads and allocations and associated site data that were used in the Shadelator model, which itself was a key tool in completion of Task 1. Municipalities’ petitions to DEQ for additional thermal load allocations also provided useful data on future demand for temperature credits. What the Market Appraisal Revealed Thanks to earlier work by conservation organizations, Oregon’s public universities, and state and federal natural resource management agencies, there already is considerable information about which areas of the Willamette Basin are most important to restore to improve conditions for cold-water- dependent fish and other native plants and animals. Priority areas for restoration have been established, and many ecological restoration activities have been identified. These priority areas are likely to supply water temperature reduction credits and other types of credits to the Willamette marketplace. 3-12 SECTION 3 - TASK 1-MARKET APPRAISAL.DOC MARKET APPRAISAL (TASK 1) Demand for ecosystem service credits is strong when environmental regulations are enforced and when a permittee’s ability to comply with regulations using traditional approaches is limited or would require large expenditures. In these situations, an opportunity to meet regulatory requirements using markets creates demand for environmental offset credits, as long as it is easier and more efficient to participate in the market than it is to comply with regulations using traditional options. Thus regulatory agencies play a key role in creating demand for credits, both through the regulatory standards they establish and through particular policies that ease or complicate participation in the market. In the Willamette Basin, regulatory requirements create significant demand for wetland mitigation and water temperature reduction credits; however, demand for temperature credits is concentrated in a limited geographic region (the upper Willamette Basin) and involves only a few parties, the largest of which are the cities of Albany and Corvallis and the Eugene-Springfield metropolitan area. (The current thermal loads of most other point sources in the middle and lower Willamette are below what they were allocated under the TMDL, so they have little or no need for credits.) Given the limited number of parties in the Willamette Basin needing temperature credits, a fully operational financial exchange platform is not needed at this time; however, some new and unique infrastructure will be required, such as a credit registry. The registry is used to register, track, and account for credits to ensure their validity and quality. This registry function is essential because ecosystem services credits retain their value only if the restoration project that generated them continues to perform its specified ecological function. Thus, the Willamette marketplace will need infrastructure to track ongoing management, monitoring, and reporting regarding restoration projects that generate credits sold in the market. (See Chapter 6 for information on the credit registry and other marketplace infrastructure.) The market appraisal indicates that the total potential supply of temperature credits from shade in the Willamette Valley in priority areas alone is 5 billion kcal/day (not taking into consideration how many landowners would actually conduct restoration projects on their property). This supply is more than adequate to meet the total expected demand of 3 billion kcal/day in the Willamette Basin created by the temperature TMDL, and riparian shade is only one of many types compliance strategies that could be employed. Lessons Learned Focus the market appraisal on the information that is most relevant to your situation and objectives. It is important to understand the general contour of supply and demand, including the general amount, time frame, sources, and geographic range of the demand. But key questions can be answered without comprehensive data about every aspect of the market. For example, the Willamette marketplace appraisal focused on current demand for wetland mitigation and temperature credits. Although it would have been advantageous to know more about future demand for temperature credits, having that information would not have changed the fundamental structure of the marketplace that is being created for the Willamette. Monitor the market. Understanding market supply and demand is an ongoing process because the market is always changing. If there is not already a structure for monitoring the market and making market information available to others, resources may need to be allocated to do so. Monitoring the market is easier if the number of trades is small. SECTION 3 - TASK 1-MARKET APPRAISAL.DOC 3-13 MARKET APPRAISAL (TASK 1) When writing TMDLs, make sure that they are perceived as fair and that technical issues are addressed. Perceived equity in the distribution of the waste load allocation heads off legal challenges and spreads the responsibility for reducing temperature more widely. Additionally, any technical weaknesses in the TMDL could be grounds for challenges that will slow implementation and undercut demand for credits. 3-14 SECTION 3 - TASK 1-MARKET APPRAISAL.DOC Section 4 Credit Definition SECTION 4 Credit Definition and Currency Development (Task 2) In order to buy and sell ecosystem services, the ecological outputs of specific land management activities need to be quantified in units of measure that mean something to the people willing to buy them. In the same way that various agricultural and forest products are described and sold in units relevant to their markets, ecosystem services credits must be described in units of measure relevant to water and air quality, endangered species populations, and habitat types. In other words, the technical basis must be established for calculating the environmental benefits of various types of restoration actions that will generate credits in the marketplace. This is the process of defining credits. Major Accomplishments • Temperature credit definitions. Identified technically sound methods for calculating the temperature reductions that would result from riparian shade restoration, wetland restoration, flow augmentation, and wastewater reclamation or reuse. These methods are based on existing agency flow and temperature models, precedents set by Clean Water Services in the Tualatin River Basin, and wetland demonstration sites in the mid-Willamette Valley. • Thermal credit calculator. Developed a downloadable, Excel-based thermal credit evaluation tool that allows users to quantify the temperature credits that could be created through riparian shade restoration, wetland restoration, flow augmentation, and wastewater reclamation and reuse. The credit calculator allows individual landowners to do a rough estimate of the amount of temperature credits that would be generated through restoration on their property. The tool also provides detailed guidance on how to do a more accurate calculation of actual credits that would be generated, although this more detailed analysis requires additional, fairly sophisticated computer models and some modeling expertise. • Riparian planting protocols. With a diverse group of practitioners, defined minimum revegetation requirements for shade restoration projects designed to generate temperature credits. Having riparian planting protocols and other performance and implementation measures ensures that restoration projects accomplish a range of ecological benefits while also achieving temperature goals. • Floodplain restoration research. Convened and facilitated discussions by technical experts on how to calculate the temperature reductions that would result from floodplain restoration; funded preliminary research on the “stepping stone” concept (the concept of providing appropriately spaced refugia of high- quality habitat for cold-water fish) and developed a strategy for research needed to develop methodologies for calculating temperature reductions from floodplain restoration. Scientists at the University of Oregon and Oregon State University are continuing this research. The suite of potential temperature reduction activities to be included in the Willamette marketplace was limited to restoration activities—actions that improve the ecosystem and provide a variety of ecosystem benefits, including temperature improvements. This decision reflects the Willamette Partnership’s primary goal of restoring the ecosystem of the Willamette Basin, not just reducing the SECTION 4 - TASK 2-CREDIT DEFINITION.DOC 4-1 CREDIT DEFINITION AND CURRENCY DEVELOPMENT (TASK 2) cost of compliance for NPDES permittees (although that is expected too). As described in this section, work was done to define temperature credits from five types of activities: • Riparian shade restoration: Planting trees within riparian areas to provide stream shading, which reduces water temperature. • Wetland restoration: Developing constructed wetlands to cool effluent prior to discharge, restoring natural wetlands, and restoring floodplain wetlands. • Floodplain restoration: Restoring a river’s access to side channels and other floodplain features. • Flow augmentation: Increasing the flow of water instream to increase the velocity of the stream and thus reduce the amount of time water is exposed to solar warming; flow augmentation occurs by diverting water from other uses (for example, releasing water from upstream reservoirs and transferring and/or leasing surface water rights). • Wastewater reclamation/reuse: Reducing the volume of clean, warm water that is discharged to the river. In the first stages of the Willamette marketplace Eyes on the Prize: Broad Ecological Goals project, it was expected that temperature credits from these activities would first need to be defined; however, One of the things that distinguishes the because the Willamette marketplace is ultimately approach the Willamette Partnership is taking to marketplace development from other intended to be a multi-credit marketplace, the programs around the country is the Willamette Partnership also explored ways to define organization’s emphasis on using markets to other types of ecosystem services credits. For both, the achieve broad ecological goals. The goal was to develop practical and technically sound Willamette Partnership approached markets methods of estimating, measuring, reporting, and with a clear understanding of what the ecosystem needed and then attempted to verifying the ecological benefits of various types of translate those actions into units that could be restoration. Getting agreement on these credit applied to various regulatory drivers. definitions and making credits easy to calculate are essential in establishing an ecosystem marketplace. The Willamette Partnership is interested in building ecosystem service markets to improve For the Willamette marketplace, the credit definition ecosystem health and function, rather than simply to reduce the cost of regulatory process involved evaluating different ways of defining compliance (although this is expected to temperature reduction credits that would result from happen, too). restoration activities and wastewater reuse and then developing an analytical tool that helps projects sponsors calculates the number of market-ready credits that would be created as a result of those activities. Environmental performance and implementation measures were identified, for use in tracking the short-term biological performance of restoration projects and forecasting long-term gains. Also as part of this task, other, non-temperature credits that could be created through restoration projects were considered. In the credit definition and currency development process, the Willamette Partnership, its consultants, its partners, and various stakeholders performed the steps described below. 4-2 SECTION 4 - TASK 2-CREDIT DEFINITION.DOC CREDIT DEFINITION AND CURRENCY DEVELOPMENT (TASK 2) Credit Definition and Currency Development Process Step 1: USGS Heat Trading Tool. Developed a point-source trading tool that quantifies the likely effects on river temperature of any heat trade between two point sources along the length of the Willamette River. This tool was developed by the U.S. Geological Survey (USGS) with support from the Willamette Partnership and the Oregon Association of Clean Water Agencies. Flow and temperature models that formed the basis of the Willamette temperature TMDL were used to determine a spatially indexed “heating signature” for each of the modeled point sources. Those signatures were then combined into a user-friendly, spreadsheet-based screening tool that allows a user to increase or decrease the heating signature of each source and thereby evaluate the effects of a wide range of potential point-source heat trades. The accuracy of the trading tool was tested by running the Willamette flow and temperature models under several different hypothetical trading scenarios. Potential users of the trading tool include regulatory agencies and various point sources in the Willamette Basin. Result of Step 1: The USGS heat trading tool quantifies and graphs the likely effects of temperature credit trades between point sources. The tool simulates the temperature effects of trades assuming that the point source generating the temperature credit is doing so by reclaiming or reusing some or all of its wastewater, and thus reducing its discharge. The tool allows potential trading partners to visualize the expected temperature effects of any particular trade along the entire length of the river, and to predict how a trade would change the water temperature at the point of maximum impact for the entire river or for just a certain portion. Metrics calculated by the tool include the number of river miles cooled, the cumulative temperature effect at intervals along the river, the integrated cooling effect at different river reaches, and the difference from the allocated condition at specific point sources. The tool generates plots for the McKenzie and Willamette rivers, including the Coast Fork Willamette. As described in Chapter 5, the U.S. Geological Society is poised to refine the heat trading tool to include components that will calculate the temperature effects of trades involving riparian shade reduction. This will extend the tool’s usefulness in evaluating opportunities for point sources to manage a portfolio of temperature compliance options. The latest version of the trading tool can be downloaded from http://or.water.usgs.gov/proj/will_temp/download/tools/trading_tool_v1p4.xls. Step 2: Survey of Credit Definition Methodologies. Surveyed candidate methodologies for defining temperature reduction credits that would result from wastewater reclamation or reuse and four ecological restoration actions in the Willamette Basin: flow augmentation, riparian shade restoration, floodplain restoration, and wetlands restoration. The survey focused on tools and protocols used by Clean Water Services as part of its temperature trading program for the Tualatin River that had already been applied and accepted by the Oregon Department of Environmental Quality, methodologies suggested by stakeholders, and approaches described in the literature. Clean Water Services’ program is the only formal temperature trading program in the country. SECTION 4 - TASK 2-CREDIT DEFINITION.DOC 4-3 CREDIT DEFINITION AND CURRENCY DEVELOPMENT (TASK 2) ⇒ Key decision: Consistent with the TMDL, kilocalories per day (kcal/day) will be the temperature currency for trading purposes in the Willamette marketplace. Step 3: Assessment of Credit Definition Methodologies. Assessed whether the existing analytical tools for credit definition are scientifically and mathematically sufficient for use in calculating temperature reduction credits in the Willamette Basin and, if so, how a crediting protocol could be formalized for the associated temperature reduction activity. Findings of Steps 2 and 3: As a result of work completed in support of Multi-Party Collaboration to Meet Thermal Clean Water Services program for Load Limits shade and flow, extensive efforts on the use of wetlands lead by the City of The cities of Albany and Millersburg plan to cooperate with Teledyne Wah Chang and Weyerhaeuser Albany, and reclamation and reuse Company to improve the water quality of the considered under USGS tools, Willamette River by creating an integrated wetland analytical tools are in place for defining treatment system. Using natural treatment processes, temperature credits in the Willamette. the proposed project will create and restore wetlands along the river and enhance wildlife habitat while The USGS heat trading tool described reducing the temperature of wastewater treatment effluent discharged to the river. in Step 1 provides a means of calculating temperature reductions As part of the planning for this thermal load trading from wastewater reclamation and project, it was determined that HeatSource could be reuse. In its program in the Tualatin used to model temperature reductions from evaporative and radiant cooling in constructed Basin, Clean Water Services set wetlands, and the actual temperature-reducing precedents for defining temperature effects of wetland construction or restoration can be credits from flow augmentation and measured in the field. CH2M HILL and Watershed riparian shade restoration, using the Sciences worked together to modify and calibrate the HeatSource model using monitoring data from HeatSource model to calculate credits another CH2M HILL constructed wetland project in from flow augmentation and the Willamette Valley. CH2M HILL then used the HeatSource’s Shadelator to calculate modified HeatSource model to predict effluent credits from riparian shade restoration. temperatures from the constructed wetland These analytical tools have received complexes. The excess thermal loads predicted from wetland effluent flows and temperatures were agency approval and support, and the evaluated against the waste load allocations for analysis in Steps 2 and 3 indicates that thermal load to determine whether the wetlands they can reasonably be applied to the could be used to meet the new permit requirements. Willamette River as long as certain The results of this project were vetted at wetlands constructed by the City of Albany (Smesrud et al. temporal and spatial constraints 2007) and at a pilot project at the Willow Lake specific to the Willamette are taken Pollution Control Facility (Salem-Keizer). into consideration. This significant investment by the City of Albany Developing a methodology for created sound methods for quantifying temperature quantifying temperature reductions credits from wetland systems. (For a more detailed description of this work see the March 2008 issue of generated from floodplain restoration Oregon Insider). that is scientifically and stakeholder approved continues to be difficult. Although a large amount of intellectual capital has been spent trying to understand the physical and ecological complexities of the relationships among floodplains, water temperature, fish viability and habitat conditions, more time and effort are needed. 4-4 SECTION 4 - TASK 2-CREDIT DEFINITION.DOC CREDIT DEFINITION AND CURRENCY DEVELOPMENT (TASK 2) Ongoing research at Oregon State University and the University of Oregon is exploring the concept of conducting floodplain restoration in a way that would provide “stepping stones” of cold-water refugia for salmonid species along the mainstem Willamette. This research could yield valid methods for calculating temperature credits created through floodplain reconnection and recharge of hyporheic zones. In addition, the Oregon Department of Environmental Quality has been investigating a Limits of Precision model developed by Cramer Fish Scientists that estimates the impact of water temperature on The TMDL for temperature regulates NPDES salmon productivity. This data-intensive model permittees on a very specific numeric incorporates information on current and standard. Even though the scientific evidence overwhelmingly demonstrates that potential habitat conditions and how they affect floodplain restoration has substantial fish density. Potential habitat conditions are temperature and habitat benefits for the determined by the model user and can represent cold-water-dependent species the TMDL is habitat conditions based on historical data or intended to protect, floodplain environments are complex and dynamic and they do not predicted habitat conditions created through lend themselves to measurement of precise restoration. Potential fish densities can be cause-and-effect relationships in determined by entering potential habitat kilocalories/day. As a result, it will take more characteristics using the Ecosystem Diagnosis technical work and policy deliberations to include floodplain restoration actions as and Treatment model developed by Mobrand. offsets to thermal load in the Willamette Theoretically, linking these two models could be temperature market. used to associate habitat changes with improvements in both water temperature and fish density; this could be grounds for calculating the temperature impact—and therefore credits—of floodplain restoration. Although the model has been used to characterize thermal impacts in the Clackamas River, it is still at an early stage of development and its applicability to larger systems needs to be explored. The Oregon State University/University of Oregon research and the model by Cramer Fish Scientists represent promising approaches to defining temperature credits from floodplain restoration, but additional work is needed to develop and validate a modeling and analytical framework that all parties can agree on. Although the Oregon Department of Environmental Quality supports development of a mechanism to calculate credits from floodplain restoration, currently the agency lacks the ability to allocate staff time for necessary modeling and internal investigation. The findings of Steps 2 and 3 are captured in Methods for Defining Temperature Offset Credits. ⇒ Key decision: At this stage, the Willamette marketplace will not include temperature reduction credits generated from floodplain restoration because consensus has not been reached on a methodology for defining credits; however, Oregon State University and the University of Oregon have obtained significant grant funding to explore this topic, and it is reasonable to expect that sound methodologies will be developed for defining temperature credits from floodplain restoration in the near future. Step 4: Gaps in Methodologies. Where existing tools are not sufficient to define temperature credits for a temperature reduction activity, developed guidance to focus resources on the research needed to support credit definition. SECTION 4 - TASK 2-CREDIT DEFINITIONV2.DOC 4-5 CREDIT DEFINITION AND CURRENCY DEVELOPMENT (TASK 2) As part of the activities of the Willamette River Watershed Targeted Watershed Grant Program, David W. Hulse (University of Oregon) and Stanley V. Gregory (Oregon State University) identified locations where floodplain restoration could provide needed cold- water refugia in the Willamette River. They also assembled a group of experts to identify the highest priority scientific questions that need to be answered to move forward with floodplain restoration as means of generating temperature credits for the marketplace. Hulse and Gregory’s results are presented in a research prospectus in Linking Cold-Water Refuges into a Biologically Effective Network in the Southern Willamette River Floodplain: Outlining Key Locations and Knowledge Gaps (Hulse and Gregory et al. 2007). Other potential issues identified during the evaluation of credit definition methodologies include ensuring that credits are generated during the same time period in which they are traded (i.e., during spawning, rearing, or migration); accounting for the fact that credits may not be needed during high flows; avoiding localized impacts of permitted upstream discharges that may occur, even if the effects of the discharge are offset at the point of maximum impact via purchase of credits; calculating temperature impacts in the mainstem if restoration occurs in tributaries; assessing the length of river being benefited by a trade (the USGS point-source trading tool does this); accounting for shifts in the point of maximum impact as a result of trades; and determining the feasibility, desirability, and technical aspects of flow augmentation from existing reservoirs. These issues are described in more detail in Methods for Defining Temperature Offset Credits. Step 5: Thermal Credit Calculator. Developed a thermal credit evaluation tool that allows users to quantify the thermal credits, in million kilocalories per day that would result from four types of restoration activities in the Willamette Basin: riparian shade restoration, wetland restoration, flow augmentation, and wastewater reclamation and reuse. Analytical tools and approaches that had been previously approved by the Oregon Department of Environmental Quality were the building blocks for the thermal credit evaluation tool. For example, methodologies for calculating thermal reductions resulting from flow augmentation and riparian shade restoration are based on approaches that Clean Water Services uses in its Tualatin River trading program. The Oregon Department of Environmental Quality’s approval of the technique for calculating credits from wetland restoration is embodied in an internal management directive. Result of Step 5: The result of Step 5 is the downloadable, Excel-based Willamette River Thermal Credit Calculator, which can calculate the credits that would be generated from specific riparian shading, wetland restoration, and flow augmentation projects in the Willamette Basin or as a result of wastewater reclamation and reuse by an individual point source. Credits can be calculated at a screening or detailed level. The screening-level analysis allows a user to provide some relatively simple inputs to determine whether a particular activity—and the expected scale of the activity—would generate credits in the range that would motivate the user to participate in the market. The detailed analysis requires more comprehensive external analyses (generally fairly sophisticated computer modeling using models accepted by the Oregon Department of Environmental quality) to develop the inputs to the tool, which then calculates credits. The detailed analysis is robust enough that the credits it calculates can be brought to the marketplace for approval and verification. 4-6 SECTION 4 - TASK 2-CREDIT DEFINITION.DOC CREDIT DEFINITION AND CURRENCY DEVELOPMENT (TASK 2) For a specific action, the credit calculator calculates the resulting kcal/day reduction averaged for an entire season. This was the precedent set by Clean Water Service’s Tualatin water quality trading program. In the Willamette, calculating credits as a seasonal average is helpful in accommodating different levels of demand throughout the year. (For some NPDES permittees, thermal load allocations in the TMDL vary from season to season, depending on salmonid life stages and habitat use; thus, their need for credits varies during the year.) The thermal credit calculator was developed for the Willamette Partnership to help guide participants in the marketplace through the process of defining temperature credits from various activities. This tool is not an Oregon Department of Environmental Quality product, and results from this tool do not, by themselves, constitute market-ready credits. The Willamette River Thermal Credit Calculator is available online at http://www.willamettepartnership.org/tools-templates. ⇒ Key decision: Credit adjustment ratios frequently are applied in ecosystem services markets to account for the time that some restoration projects take to achieve their full benefit, the risk of project failure, and various unknowns. For example, the Department of Environmental Quality’s Internal Management Directive requires that riparian shade credits have a 2:1 ratio, meaning that two kilocalories would need to be secured for every one kilocalorie of credit actually needed. Credit adjustment ratios are not included in the Willamette River Thermal Credit Calculator because the number of kilocalories per day that would be offset varies from project to project. A buyer of credits would need to purchase the appropriate number of kilocalorie offsets, not just a specific number of stream miles. Step 6: Site Assessment. Identified other types of ecological benefits and potential credit (besides temperature) that would be created from candidate restoration project sites in the Tualatin Basin and in the vicinity of Albany—i.e., other pollutant reductions, habitat, wetlands, or carbon sequestration. Parametrix completed two separate analyses as part of this project. The first was in the Tualatin Basin, where Parametrix applied a functions-based ecological uplift approach to restoration sites in the Tualatin Basin. The purpose of the work was to determine whether additional ecological and potentially credit values could be quantified from projects designed to generate temperature credits. Parametrix also used a functions-based approach to do a rapid assessment of six potential restoration sites near Albany, on the Calapooia and Santiam rivers. The sites had been identified by The Nature Conservancy for their conservation value. (See Step 4 of Chapter 5 for a more detailed description of this process.) Findings of Step 6: The sites evaluated have resources that could generate conservation- based revenue through the creation and sale of credits for a variety of markets, including temperature reduction, wetland restoration, floodplain restoration, Oregon chub conservation, restoration of ESA-listed plant species, and restoration of rare habitats (specifically, Oregon white oak woodlands). In applying a functions-based approach, it was clear that the Tualatin restoration projects contributed to enhanced wetland functions and salmonid habitat—benefits that stretch well beyond shade. These benefits were quantified in terms that could be communicated to SECTION 4 - TASK 2-CREDIT DEFINITION.DOC 4-7 CREDIT DEFINITION AND CURRENCY DEVELOPMENT (TASK 2) regulatory agencies and other stakeholders for (1) the purposes of demonstrating the benefits of trading; (2) tracking the overall performance of projects; and (3) informing future decisions about how to design restoration to maximize overall ecosystem enhancements. Step 7: Habitat Assessment Methodology. Reviewed a methodology to quantify the ecosystem services that a given site provides—under existing and restored conditions—and to express that as a single value. For this project, the Willamette Partnership sought an existing methodology for defining and calculating “ecological uplift” credits—a common currency that multiple types of ecosystem services credits (temperature reduction, wetlands habitat, carbon sequestration, etc.) could be translated into for use in comparing or exchanging credits. Findings of Step 7: Although several methodologies are currently being developed, the only established methodology available at the time this task was being performed is the Habitat Assessment Methodology (HAM), which was developed by Parametrix for the Oregon Department of Transportation for use in mitigation and conservation banking conducted as part of the agency’s state bridge delivery program. HAM quantifies a site’s existing natural resource value based on habitat type, structural conditions, and habitat elements, and it predicts the change in habitat value that would result from proposed habitat modifications. The foundation for HAM is the species and habitat associations documented in Wildlife-Habitat Relationships in Oregon and Washington (Johnson and O’Neil 2001). The methodology involves collecting field data, categorizing and mapping habitat types, querying the Interactive Biodiversity Information System (IBIS) database to determine the number and species that specific habitats support, and weighting results based on agency priorities and goals (such as watershed or species recovery goals). HAM calculates a single “habitat value” metric for a site that represents a comprehensive measure of the site’s ecosystem functions, but the methodology also tracks subsets of habitat value specific to regulated resources, such as wetlands, salmonids, and Oregon chub. HAM was developed in coordination with the U.S. Army Corps of Engineers, U.S. Fish and Wildlife Service, National Marine Fisheries Service, U.S. Environmental Protection Agency, Federal Highway Administration, Oregon Department of Fish and Wildlife, Oregon Department of Environmental Quality, and Oregon Department of State Lands. 4-8 SECTION 4 - TASK 2-CREDIT DEFINITION.DOC CREDIT DEFINITION AND CURRENCY DEVELOPMENT (TASK 2) ⇒ Key decision: The HAM methodology is not yet ready for inclusion in a marketplace. Significant questions remain about using the method in heavily regulated wetland and species mitigation markets. The Willamette Partnership conducted significant stakeholder outreach to explore perceptions of the method and identify needed refinements and a process to get regulatory approval for its use. The research conducted to evaluate a common currency as part of this EPA grant enabled the Willamette Partnership to submit a proposal and secure grant funding from the Natural Resources Conservation Service to develop an accounting system—based on ecosystem functions—to turn known ecosystem impacts and benefits into credits that can be traded. Developing an index of ecological improvement that might be applicable in a multi-credit marketplace is a key component of this grant. The grant will fund (1) development of a trusted and transparent system to measure and account for multiple types of ecosystem service credits for use within the Willamette Ecosystem Marketplace, (2) a pilot project to compare results from a multi-credit accounting system with results from current approaches, (3) collaboration with regulatory agencies to refine and authorize use of a multi-credit accounting system in the Willamette Ecosystem Marketplace, and (4) development of the tools that farmers, foresters, and other land managers will need to evaluate and participate in emerging ecosystem service markets, prioritize restoration actions when making land management decisions, and access payments for actions that enhance water quality, habitat, species, and potentially carbon sequestration. Step 8: Riparian Planting Protocols. Developed minimum revegetation requirements for shade restoration projects that are designed to generate temperature credits; developed recommended planting and maintenance procedures to guide riparian revegetation projects. Ecologically, not all shade is created equal. A hybrid poplar plantation and a diverse stand of native trees and shrubs might provide the same amount of shading and temperature reduction in the river, but their ecological outcomes are quite different. Because the primary goal of the Willamette marketplace is to restore the ecosystem of the Willamette Basin, protocols had to be established for riparian shade restoration to ensure that focus on a single parameter—temperature—would not result in one-dimensional projects that create shade but provide few other ecological benefits or—worse yet—cause other problems. The Willamette Partnership consulted with multiple restoration practitioners and Clean Water Services, which has years of experience with riparian shading projects, to determine the type of riparian plantings that would result in temperature benefits to the stream but also provide the other ecological benefits of a functioning riparian area. Clean Water Services also was able to offer specific, voluntary guidance on planting and maintenance procedures that contribute to long-term success of riparian shade restoration projects. The minimum requirements and voluntary guidance were developed specifically for use in the Willamette Basin. Results of Step 8: The riparian planting protocols have requirements related to the geographical source of plant materials and seeds, the amount of vegetation and type of plant community to be established, species diversity, the percentages of native species and shrubs versus trees, the flow requirements of the shaded stream, and the timeline for achieving the requirements. The voluntary guidance describes various recommendations related to site hydrology, soil cultivation, and weed control; planting materials and procedures; protection of plants from animal pests; and site maintenance. Together, the protocols and guidance are SECTION 4 - TASK 2-CREDIT DEFINITION.DOC 4-9 CREDIT DEFINITION AND CURRENCY DEVELOPMENT (TASK 2) valuable tools in ensuring the environmental performance measures of credit-generating shade restoration projects. Riparian planting protocols are available at http://www.willamettepartnership.org/tools- templates/draft_riparian_planting_protocols.pdf. Time Frame, Participants, and Resources The credit definition and currency development process lasted throughout the grant period, with the refinements to the USGS point-source trading tool and the environmental performance and implementation measures being completed last. The credit calculator was developed by the consulting team, which also evaluated the potential methodologies for defining credits. USGS created the point-source trading tool with the help of the Oregon Department of Environmental Quality and the U.S. Army Corps of Engineers. Consultants David Hulse and Stanley Gregory identified key data gaps regarding the use of floodplain restoration to generate temperature credits, and the Oregon Department of Transportation provided information on ecological uplift credits that, in theory, could serve as a common currency in a multi- credit market. Parametrix contributed an assessment of candidate restoration sites for their potential to create multiple ecosystem services credits. Information on appropriate riparian planting protocols was developed by the Practitioners Working Group and Clean Water Services. Key resources used to define temperature credits and explore other possible currencies in the Willamette Basin included the HeatSource river temperature model and its Shadelator component, the temperature and flow models used in the TMDL, Clean Water Services’ protocols for calculating the temperature benefits of riparian shade and flow augmentation, and data from Albany’s potential integrated wetlands restoration and enhancement project. What Credit Definition and Currency Development Revealed The credit definition and currency development process highlighted the need for current, reliable tools for defining temperature and other credits for the Willamette Ecosystem Marketplace, particularly credits generated from floodplain restoration. Floodplain restoration provides myriad ecological benefits, and incorporating a widely accepted, scientifically sound method of defining credits from floodplain restoration into the protocols for the Willamette marketplace could contribute meaningfully to ecological restoration in the basin. Again, the primary purpose of the Willamette marketplace is to facilitate restoration of the ecosystem. Even though it will take considerable effort to develop the scientific and technical tools needed to define credits from floodplain restoration, this effort is worthwhile because it is these credits that will motivate the investments needed to significantly improve ecosystem function. Time, money, and policy decisions now that will advance the science of calculating temperature credits from floodplain restoration could pay off in actual on-the-ground projects that start providing ecological benefits within a decade. The analytical tools developed during this task—the USGS point-source heat trading tool and the thermal credit calculator—are designed to be user friendly and are, in fact, easier to use than their component models. However, the credit calculator’s detailed analysis requires GIS software, 4-10 SECTION 4 - TASK 2-CREDIT DEFINITION.DOC CREDIT DEFINITION AND CURRENCY DEVELOPMENT (TASK 2) comprehensive external analyses, and some fairly sophisticated computer modeling to develop the inputs to the tool; developing these inputs most likely will need to be done by an experienced outside party. This situation illustrates the type of adjunct business opportunities an ecosystem marketplace can create. As the Willamette marketplace becomes established, private companies, nonprofit organizations, and others are expected to carve out their own niches in performing these types of analyses, doing the actual restoration, or both. From an ecological perspective, the Willamette River is in desperate need of increased flows and additional functioning floodplain, riparian, and wetland habitats. The process of defining temperature credits illustrated how tied the regulatory system is to numerical standards in defining ecological relationships and benefits, and how difficult it can be to describe desired habitats and ecological conditions in terms of a few specific metrics, such as water temperature. The limitations of a single parameter in describing ecosystem health reinforce the importance of developing an integrated multi-credit marketplace—one that encompasses a wide range of ecological conditions and functions and whose metrics relate more closely to the ultimate goals of species and habitat conservation and overall ecological uplift. Lessons Learned Create standards and protocols that meet your ecological needs. The many participants in an ecosystem marketplace have different processes, approaches, and motivations, not all of which are consistent with ecological restoration. Therefore, it is important to develop specific, carefully designed standards and protocols. These will guide marketplace participants toward actions that will help achieve ecological objectives, and not just satisfy the letter of the regulatory requirements. There is public skepticism about the emerging use of ecosystem service markets. Developing credit protocols that achieve greater environmental benefits than would otherwise be possible will be a key to public acceptance. If ecologically questionable or—worse—negative actions are credited as offsets in a marketplace, the public will lose trust and the conservation community and regulated community will lose the opportunity to use these powerful new tools to achieve our ecological goals. Understand your motivation in creating a marketplace and be clear and consistent in your message. Ecosystem marketplaces can appear complex, uncertain, and overwhelming. Communicating a consistent message to stakeholders is essential to building the relationships and trust needed to launch a successful project. By repeatedly communicating its intentions, the Willamette Partnership was able to garner support, turn skeptics around, and expand the network of potential market participants. Involve restoration practitioners early on. Restoration practitioners can provide specific information about the species composition, planting procedures, and maintenance measures needed for successful restoration projects. This information is useful in defining credits, identifying appropriate performance and implementation measures, and laying the groundwork for project verification protocols. The involvement of trusted practitioners also lends credibility to market development. Pay attention to how the TMDL or other regulations are written. Regulated parameters may not correspond very directly to the ecological goals that you (and others) are trying to achieve. If so, look for ways to expand the marketplace, revise policy, or advance scientific understanding in a way that creates stronger linkages. SECTION 4 - TASK 2-CREDIT DEFINITION.DOC 4-11 Section 5 Credit Portfolio SECTION 5 Temperature Credit Portfolio (Task 3) A credit portfolio is needed to help guide market participants to projects that create desired ecological outcomes, regulatory compliance, and monetary returns. The market appraisal shows there is substantial future projected demand and significant potential supply for temperature credits. Buyers, especially, will be considering a full range of options for compliance, including technology controls, point-to-point trading, and ecosystem market options to meet their obligations. Sellers will be weighing options about the types of activities that create credits and will be looking for places that are likely to yield the greatest returns on their investments. Third parties such as the Willamette Partnership would like to encourage investments in areas known to have significant conservation value. There is no way to completely control where investment in a marketplace happens, but under this task a variety of tools and methodologies were created that provide information about opportunities in priority conservation and restoration areas that will help marketplace participants make decisions that are right for them. Major Accomplishments • Temperature supply calculation and mapping. Confirmed that the potential supply of credits that could be generated from restoration projects in priority areas alone is adequate to meet the demand created by the TMDL; compiled data to show the locations where significant temperature credits could be generated from riparian shade restoration. • USGS heat trading tool. Contributed to development of a tool that quantifies and graphs the effects to river conditions from temperature credit trades between point sources in the Willamette Basin. The U.S. Geological Survey is poised to refine the tool so that it also enables users evaluate the use of temperature off-sets created through restoration projects, such as shade restoration, when drafting permit compliance strategies for temperature. • Credit quality rating system. Developed a credit quality rating system for temperature credits that can be used to distinguish ecologically high-value restoration projects in a fully functioning ecosystem marketplace. • Policy preferences. Worked with stakeholders to identify policy issues related to credit valuation that will influence buyers’ and sellers’ participation in the Willamette marketplace; recommended specific agency policies that would create incentives for participation and direct, but not limit, investments to areas with high conservation value. • Rapid assessment methodology. Developed a methodology for rapidly assessing a candidate restoration site’s habitat functions and characterizing the site’s potential to generate multiple types of restoration-related ecological credits for sale or trade in a multi-credt marketplace. • Albany site assessment. Applied a habitat-based rapid assessment methodology to six sites in the Albany area to evaluate their general ecological characteristics, restoration potential, credit potential, and preservation opportunities. SECTION 5 - TASK 3-PORTFOLIO.DOC 5-1 TEMPERATURE CREDIT PORTFOLIO (TASK 3) Developing the temperature credit portfolio involved determining whether restoration of riparian shade in the Willamette Basin would provide enough temperature reductions to achieve TMDL goals; identifying those locations where shade restoration would provide the greatest reductions; working with restoration practitioners, the Oregon Department of Environmental Quality, the U.S. Environmental Protection Agency, and various stakeholders to identify preferred public policies regarding the valuation of temperature reduction credits; and recommending policies that would encourage participation in the market and direct investment in restoration projects to high-priority locations in the Willamette Basin. Development of a quality rating system and a multi-credit site assessment methodology also were part of the process. In developing the temperature credit portfolio, the Willamette Partnership, its consultants, its partners, and various stakeholders performed the steps described below. Credit Portfolio Process Step 1: Temperature Supply Using Shadelator: Determined the temperature reduction potential of riparian shade restoration along the Willamette River and its major tributaries and whether this is enough to meet the thermal load reductions specified in the Willamette temperature TMDL. As described in Step 6 of the market appraisal, the Oregon Department of Environmental Quality used comprehensive vegetation and other data and the Shadelator component of the agency’s HeatSource river temperature model to calculate the solar energy that would be blocked at sites along the Willamette River and its major tributaries if riparian vegetation were restored. Reductions were calculated for 100-foot segments of river, color-coded, and mapped on aerial photos of river reaches. The resulting values represent specific amounts of temperature reduction that would result from restoration of riparian shade along the Willamette River and its major tributaries. Findings of Step 1: This analysis indicates that the potential supply of temperature credits from riparian shade restoration in priority areas that are also listed as temperature impaired on the state’s 303d list is likely well more than the projected 3 billion kcal/day demand created by the TMDL over 10 years. Moreover, the mapping shows where, at a basinwide level, substantial offset credits could be generated from riparian shade restoration, and the relative scale of potential reductions at specific sites. This information is useful in helping market participants understand where investments are needed. These assessments helped determine basinwide opportunities and priorities for a methodology developed in the Long Tom watershed described in Step 5 below. 5-2 SECTION 5 - TASK 3-PORTFOLIO.DOC TEMPERATURE CREDIT PORTFOLIO (TASK 3) ⇒ Adjunct work: OSU Shade Calculator. Independently of this targeted watershed grant, Oregon State University’s Department of Horticulture has developed a prototype shade calculator for the Willamette Basin with funding from the Natural Resources Conservation Service. This GIS-based tool allows individual landowners in the Willamette Basin to calculate the thermal load reduction that would be created through restoration of riparian shade on their property. The prototype was developed from the Oregon Department of Environmental Quality’s HeatSource model, which was adapted for a GIS platform and populated with existing hydrology, soil, vegetation, and landform data from the U.S. Geological Survey, Natural Resources Conservation Service, and Willamette River Basin Planning Atlas (Pacific Northwest Ecosystem Research Consortium 2004). Aerial photos also are included. To make the Shade Calculator accessible to potential sellers in the marketplace who do not have GIS software, Oregon State University developed a Google Maps interface for the tool. Landowners can use Google Maps to identify their property and delineate sections of stream for possible restoration. The tool compares current shading along that portion of stream to potential future shading if the area is restored. It then estimates the potential thermal load reduction, in kilocalories per day that would be created through riparian shade restoration on that property. The OSU Shade Calculator is in the process of being tested and reviewed by Willamette Basin landowners, after which the visual interface will be improved and various enhancements added. One of those enhancements will be estimates of the material and labor costs of shade restoration for individual properties. Because the data layers in the tool are tied to a national standard for stream data, it will be possible for the tool to link to other data sources that also are tied to streams, such as Oregon Department of Fish and Wildlife data on potential salmon habitat. It also may eventually be possible to connect the Shade Calculator with information about other ecosystem services, such as nutrient reduction. This work represents a giant leap forward in user interface tools available for market participants. The Willamette Partnership will work with OSU through the summer of 2008 as it tests the tool with landowners with the expectation that potential projects will be identified to register on the Ecosystem Credit Registry described in Section 6 of this report. Step 2: USGS Heat Trading Tool. Developed a point-source trading tool that quantifies the likely effects on river temperature of any heat trade between two point sources along the length of the Willamette River. This tool was developed by the U.S. Geological Survey (USGS) with support from the Willamette Partnership and the Oregon Association of Clean Water Agencies. Flow and temperature models that formed the basis of the Willamette temperature TMDL were used to determine a spatially indexed “heating signature” for each of the modeled point sources. Those signatures then were combined into a user-friendly, spreadsheet-based screening tool that allows a user to increase or decrease the heating signature of each source and thereby evaluate the effects of a wide range of potential point-source heat trades. The accuracy of the trading tool was tested by running the Willamette River flow and temperature models under several different hypothetical trading scenarios. SECTION 5 - TASK 3-PORTFOLIO.DOC 5-3 TEMPERATURE CREDIT PORTFOLIO (TASK 3) Result of Step 2: The USGS Willamette River Point-Source Heat-Trading Tool quantifies and graphs the likely effects of temperature credit trades between point sources. The tool simulates the temperature effects of trades assuming that the point source generating the temperature credit is doing so by reclaiming or reusing some or all of its wastewater, and thus reducing its discharge. The tool allows potential trading partners to visualize the expected temperature effects of any particular trade along the entire length of the river, and to predict how a trade would change the water temperature at the point of maximum impact for the entire river or for just a certain portion. Metrics calculated by the tool include the number of river miles cooled, the cumulative temperature effect at intervals along the river, the integrated cooling effect at different river reaches, and the difference from the allocated condition at specific point sources. The tool generates plots for the McKenzie and Willamette rivers, including the Coast Fork Willamette. Potential users of the trading tool include regulatory agencies and various point sources in the Willamette Basin. ⇒ Potential adjunct work: Heat trading tool refinements. At the time of this writing, the U.S. Geological Survey was poised to refine the heat trading tool so that permittees will be able to use it to also evaluate restoration projects as part of their compliance portfolio. With the refined heat source tool, potential credit buyers in the marketplace will be able to evaluate their compliance options by comparing the results of point-to-point trades side–by-side with the impacts of trades involving credits generated from restoration actions. The latest version of the trading tool can be downloaded from http://or.water.usgs.gov/proj/will_temp/download/tools/trading_tool_v1p4.xls. Step 2: Credit Rating System and Preliminary Issues. Developed a credit quality rating system for temperature credits that could be used to distinguish ecologically high-value restoration projects; identified other incentives that would encourage participation in the market in a way that maximizes ecological benefits. A Practitioners Working Group consisting of representatives from land trusts, soil and water conservation districts, watershed councils, environmental advocacy groups, conservation organizations, environmental consulting firms, the Oregon Department of Fish and Wildlife, the Oregon Department of Environmental Quality, the U.S. Fish and Wildlife Service, and the U.S. Environmental Protection Agency met to explore ways to create incentives that would encourage participation in the temperature market and completion of restoration projects that would result in the maximum ecological benefit. Findings of Step 2: The Practitioners Working Group identified structural and regulatory incentives that would encourage the generation of high-quality temperature credits in the Willamette marketplace. Regulatory incentives include trading ratios and trading areas (see Step 3). As an incentive that could potentially be built into the market structure, the group developed a multi-tiered credit quality rating system for temperature credits that would distinguish ecologically high-value restoration projects. Such a system could be used to encourage investment in the highest value projects, thus improving the quality of credits and reducing the risk of ecological failure of restoration projects conducted to generate credits. The Practitioners Working Group also described sources of risk and uncertainty in ecosystem marketplaces and identified various financial, legal, and procedural tools for managing risk that could be incorporated into the Willamette marketplace. Legal tools 5-4 SECTION 5 - TASK 3-PORTFOLIO.DOC TEMPERATURE CREDIT PORTFOLIO (TASK 3) include conservation easements, deed restrictions, and covenants; financial tools include enforcement funds, trust or endowment funds, revolving funds, irrevocable trusts, environmental performance bonds, escrow accounts, and letters of credit; and procedural tools include verification, certification, and monitoring and maintenance protocols, trading ratios, and assurance and insurance pools. Many of the structural characteristics identified by the Practitioners Working Group will be applicable to a fully functioning marketplace where transaction volumes are high and a wide range of credits are traded. Findings of the Practitioners Working Group are summarized in the Practitioners’ Working Group White Paper 2. Step 3: Preferred Policy. Worked with the U.S. Environmental Protection Agency, Oregon Department of Environmental Quality, and stakeholders to develop policy recommendations that would encourage and enable initial temperature markets to work efficiently to achieve ecological goals. The Willamette Partnership held numerous stakeholder meetings and worked with the Oregon Department of Environmental Quality and the U.S. Environmental Protection Agency to identify key policy issues associated with water temperature trading in the Willamette marketplace. Some of these policy issues relate to valuing temperature credits in the market. How the policy issues are resolved has a direct impact on the demand for credits, buyers’ and sellers’ incentives for participating in the market, and the extent to which restoration projects take place in high-priority locations. Findings of Step 3: Three policy issues emerged that relate directly to temperature credit trading: trading ratios, spatial and temporal discounting of temperature credits, and determination of service areas. The Willamette Partnership determined its policy preferences with respect to these and other policy issues (see the descriptions below) and is engaged in ongoing discussions with the Oregon Department of Environmental Quality about those preferences. Trading ratios. Agency-determined trading ratios have been used in other ecosystem services markets as a buffer against uncontrollable variables (such as a catastrophic storm) that might reduce the ecological benefit a restoration project performed to generate offset credits. For example, if a permittee needed 10 million kilocalories per day to meet its load obligations, an agency-determined trading ratio of 2:1 would require that 20 million kilocalories per day be secured. Translated into action on the ground, if 1 mile of restoration on average blocks about 10 million kilocalories per day, a permittee would need to secure 2 miles of restoration. This would mean that, on average, about twice the restoration would occur to buffer against uncertainty and risk. (This is just a hypothetical example. Actual kilocalorie off-sets vary with each restoration project). In water quality trading programs around the country, ratios have varied widely, from 1:1 to 4:1 (Guiling et. al. 2007). Setting a trading ratio too low can inadequately account for risk, but setting it too high can make trading too costly. By themselves trading ratios do not necessarily create demand for credits generated in high-priority restoration areas, which is an important objective of the Willamette marketplace. Investment in high-priority locations could be encouraged by using a sliding scale of trading ratios. For example credits generated in high-priority areas could be traded at 1.5:1, and ratios for credits generated elsewhere would be traded at 2:1. The success of this approach in directing investment to high-priority areas is not guaranteed. If prices for SECTION 5 - TASK 3-PORTFOLIO.DOC 5-5 TEMPERATURE CREDIT PORTFOLIO (TASK 3) “non-priority” credits are significantly lower than “priority” credits, the different trading ratios may not provide much incentive. Another policy option to ensure investment in high-priority locations is to require that a certain percentage of offset credits in a given purchase come from restoration projects in high-priority areas. (The required percentage could be tied to the amount of priority area within the particular trading area. For example, if 50 percent of all land in a trading area were identified as priorities, 50 percent of all credits purchased would need to come from those areas.) Unlike trading ratios, the percentage requirement influences portfolio composition, rather than the volume of credit demand. Although it is possible that both options could achieve the same results, the Willamette Partnership prefers the percentage requirement because only this approach would guarantee investment in priority areas regardless of market prices and conditions. Figure 5-1 Service Areas Map 5-6 SECTION 5 - TASK 3-PORTFOLIO.DOC TEMPERATURE CREDIT PORTFOLIO (TASK 3) Service areas. Service areas mark the geographic boundaries within which buyers and sellers of an ecosystem services credit can interact and are based on the service being performed. The Willamette temperature TMDL identifies three points of maximum impact, which help define three service areas for temperature offsets. It is the Willamette Partnership’s policy preference that water temperature credits generated anywhere in the watershed upstream of a point of maximum impact be available for use by buyers within or downstream of that service area; trading should not be limited to areas upstream of a specific buyer’s point of discharge. Such a system would create a nested pyramid of trading areas in which, for example, the City of Salem could buy credits from projects around Eugene, but the City of Eugene could not buy credits from projects in the Salem area because Salem is below the point of maximum impact to which Eugene is subject. Spatial and temporal discounting. Given that flowing water is subject to multiple cycles of heating and cooling, spatial and temporal discounting is sometimes used to account for the difference between the temperature benefit provided at the site of a restoration project and the temperature benefit at some point downstream from the restoration site. For example, if a mile of streamside shade were planted along a tributary stream, modelers would estimate the actual cooling effect of that action at a specific point in the river downstream, such as at an agency-determined point of maximum impact or a specific credit buyer’s point of discharge. The Willamette Partnership supports the precedent set in Clean Water Services’ point-to-non-point source trading program that a kcal/day produced by an ecological restoration or flow augmentation project is worth a kcal/day at the point of maximum impact, regardless of the distance between the credit generation site and the credit buyer’s physical location. Although the Willamette Partnership recognizes that spatial and temporal discounting may be appropriate when point sources are trading TMDL allocations amongst themselves, it is the Partnership’s view that applying spatial discounting to ecological restoration activities could discourage strategic actions that would provide substantial benefits to fish and wildlife habitat. Encouraging strategic investment in ecological restoration is one of the primary purposes of a point-to-non-point source trading program. ⇒ Key decision: At the time of this writing, the internal management directive that will guide temperature credit trading in the Willamette Basin was still being revised, but there appeared to be general agreement at the Oregon Department of Environmental Quality to implement the policies preferred by the Willamette Partnership and stakeholders who have worked on these issues. (An internal management directive is a form of policy guidance issued by the Oregon Department of Environmental Quality.) Step 4: Rapid Assessment Methodology and Albany Site Assessment. Revised and expanded the Oregon Department of Transportation’s Habitat Assessment Methodology to create a functions-based, rapid assessment methodology for use in evaluating individual restoration sites for their ability to generate multiple types of ecosystem credits. Parametrix applied the rapid assessment methodology at six sites near Albany. For this project, the Willamette Partnership sought an existing methodology that could be used to describe to identify the specific types and amounts of ecosystem services credits that could be generated at a particular site via different restoration activities. SECTION 5 - TASK 3-PORTFOLIO.DOC 5-7 TEMPERATURE CREDIT PORTFOLIO (TASK 3) Oregon Department of Transportation’s HAM Methodology. Several methodologies are currently being developed for quantifying the natural resource value of a specific site under current and restored conditions. However, the only established methodology available at the time this task was being performed is the Habitat Assessment Methodology (HAM), which was developed by Parametrix for the Oregon Department of Transportation for use in mitigation and conservation banking conducted as part of the agency’s state bridge delivery program. HAM quantifies a site’s existing natural resource value based on habitat type, structural conditions, and habitat elements, and it predicts the change in habitat value that would result from proposed habitat modifications. The foundation for HAM is the species and habitat associations documented in Wildlife-Habitat Relationships in Oregon and Washington (Johnson and O’Neil 2001). The methodology involves collecting field data, categorizing and mapping habitat types, querying the Interactive Biodiversity Information System (IBIS) database to determine the number and species that specific habitats support, and weighting results based on agency priorities and goals (such as watershed or species recovery goals). HAM calculates a single “habitat value” metric for a site that represents a comprehensive measure of the site’s ecosystem functions, but the methodology also tracks subsets of habitat value specific to regulated resources, such as wetlands, salmonids, and Oregon chub. HAM was developed in coordination with the U.S. Army Corps of Engineers, U.S. Fish and Wildlife Service, National Marine Fisheries Service, U.S. Environmental Protection Agency, Federal Highway Administration, Oregon Department of Fish and Wildlife, Oregon Department of Environmental Quality, and Oregon Department of State Lands. Rapid Assessment Methodology. Parametrix revised and expanded HAM to automate and simplify its analysis and to incorporate additional elements useful in identifying site-level ecosystem functions and services that could be included in a multi-credit marketplace. The resulting functions-based, rapid assessment methodology uses existing site data (GIS layers, aerial photographs, mapping, natural resource survey information, etc.), fieldwork, and analysis to characterize the potential for a specific site to generate different types of restoration-related credits that could be sold or traded in the marketplace. Albany Site Assessment. Parametrix applied the rapid assessment methodology at a suite of candidate restoration sites to characterize their potential to generate multiple types of restoration-related credits for sale or trade in a multi-credit marketplace. Six potential restoration sites that had been identified by The Nature Conservancy for their conservation or restoration value were evaluated. The sites are located near Albany, on the Calapooia and Santiam rivers. The sites were assessed for their general ecological characteristics, restoration potential, and preservation opportunities. Special attention was paid to each site’s potential to generate marketable credits through riparian shading and other habitat improvements; wetland enhancement, restoration, or creation; improved floodplain functions and connectivity; provision of habitat for salmon, Oregon chub, and threatened or endangered plant species, such as Nelson’s checkermallow; and provision of habitat for other species of interest, such as Oregon white oak woodlands. Constructability issues also were identified, and recommendations were developed regarding preservation or restoration options at each site to maximize potential future revenue from ecosystem services credits. Findings of Step 4: Many of the sites evaluated provide opportunities for wetland mitigation, stream temperature regulation, and restoration or preservation of key habitat 5-8 SECTION 5 - TASK 3-PORTFOLIO.DOC TEMPERATURE CREDIT PORTFOLIO (TASK 3) types. The most ecologically diverse site has large areas of key habitats, such as forested and emergent wetlands, backwater channels, riparian areas, floodplains, swales, an intermittent stream, and forested uplands. Another site has considerable habitat suitable for the endangered Oregon chub, and it is located adjacent to additional chub habitat. Overall, the restoration potential of the six sites is somewhat limited because of either small site size or constructability issues, particularly for riparian shade restoration. (Severely down- cut and eroded stream banks could require costly terracing and bioengineering.) However, investing in stream bank restoration that would create shade could also improve salmon habitat, floodplain function, and riparian habitat. It is possible that in a multi-credit marketplace, the various credits that would be generated from even a relatively expensive stream bank restoration project would still make the project financially rewarding. When considered individually, the six sites evaluated do not appear to be strong candidates for establishment of a multi-resource mitigation bank for regulated resources because the number of credits available is likely too low to offset the costs of the bank approval process. But there may be opportunities of scale if the properties are managed as a single restoration unit, rather than as individual sites. In addition, coordinating restoration actions with adjacent landowners would significantly increase the ecological value of restoration actions in this area and could lead to identification of sites where more passive restoration could be conducted and restoration benefits could be provided at lower expense. This would lower the cost of generating ecosystem services credits at the site and increase the profit margin for the seller. Step 5: Methodology for Identifying and Prioritizing Restoration Projects. Under contract with the City of Eugene, the Long Tom Watershed Council developed a methodology for identifying and prioritizing water quality improvements that can be applied throughout the Willamette Basin. As part of the City of Eugene’s TMDL options assessment, the Long Tom Watershed Council developed a process for identifying and prioritizing feasible temperature-reducing restoration projects in the Long Tom Basin. Technical assistance in developing and documenting the process was provided by landowners in the Long Tom River basin and representatives from the Oregon Department of Environmental Quality, U.S. Geological Survey, and Clean Water Services. Results of Step 5: Methodology. This step identified a series of techniques and methods for identifying and prioritizing feasible restoration projects that could be applied in the Willamette Basin to develop a basin-scale portfolio of restoration actions and benefits. While the data inputs used in the technical analysis were specific to the Long Tom Basin, the methods and technical framework could be implemented in other watersheds. Briefly, the process is as follows: 1. Identify the problem, priority restoration areas, and types of restoration projects that would mitigate the problem. 2. Develop timelines for restoration project implementation and when benefits would be achieved. SECTION 5 - TASK 3-PORTFOLIO.DOC 5-9 TEMPERATURE CREDIT PORTFOLIO (TASK 3) 3. Evaluate the feasibility of implementing each type of restoration project. 4. Quantify the potential benefits of restoration projects. 5. Develop a performance monitoring plan. 6. Conduct a stakeholder feasibility evaluation. The methodology is documented in Ecosystem Restoration in the Long Tom River Basin for Water Quality Improvement in the Willamette River: Preliminary Findings (Long Tom Watershed Council 2008), which provides recommendations regarding restoration project types and priority restoration areas in the Long Tom watershed as a method to accomplish water quality improvement in the Willamette River. Results of Step 5: Local application. The methodology was applied in the Long Tom basin, which was identified as a key opportunity area for temperature reduction by riparian shading restoration activities because the Long Tom River carries the distinction of being the most underperforming tributary for shade in the Willamette Basin. The Long Tom Watershed Council determined that restoration activities should be prioritized in the lower Long Tom because of the dramatic influence of Fern Ridge Reservoir on the temperature regime. Restoration activities in this area would not only decrease water temperature, but would also provide improvements to fish habitat and water quality. The following restoration project types were selected for temperature, water quality, flow, and habitat mitigation: • Riparian shading—to improve stream temperature, water quality, and habitat for riparian-dependent species, such as amphibians and songbirds • Instream impoundment—to improve stream temperature, dissolved oxygen, fish passage, and sediment transport • Cool water stream connectivity—to reduce stream temperature • Floodplain restoration and hydrologic reconnection—to increase off-channel and instream habitat and floodplain storage, reduce erosion, enhance the hydrologic regime, and potentially decrease water temperature The Long Tom Watershed Council determined that a combination of riparian planting, levee removal, historical channel reconnection, and bank sloping or terracing would provide multiple water quality and habitat benefits in the Long Tom River basin. These activities have different timelines for implementation and realized benefits. For example, the benefits of riparian planting could take 10 to 15 years to be realized, whereas floodplain and hydrologic reconnection benefits could take effect almost immediately. After evaluating the four restoration project types described above, the Long Tom Watershed Council determined that riparian restoration was the most viable restoration project type for meeting TMDL requirements because it lent itself to easy monitoring and quantification of benefits. However, multiple benefits would be achieved by all four types of 5-10 SECTION 5 - TASK 3-PORTFOLIO.DOC TEMPERATURE CREDIT PORTFOLIO (TASK 3) restoration actions and could be determined on a site-specific basis. The Long Tom Watershed Council and the Oregon Department of Water Quality used the HeatSource model to determine the potential thermal load reductions for selected reaches along the Long Tom River, and a riparian shading and bacteria reduction monitoring plan were developed to provide a framework for evaluating restoration project success. Lastly, the Long Tom Watershed Council contacted and interviewed landowners located in areas with high potential for creating riparian shade. Landowners were interviewed to gauge their level of acceptance, concerns, and goals regarding riparian shading restoration projects and market participation. The results of these interviews provided information that had not been revealed in the technical analysis and that offered an important perspective on riparian shading restoration project implementation in the Long Tom basin. A link to the final report will be made available in the Willamette Partnership’s Web site at http://www.willamettepartnership.org/publications/ecosystem-restoration-in-the-long-tom- river-basin-for-water-quality-improvement-in-the-willamette-river-preliminary-findings.pdf. Time Frame, Participants, and Resources Although development of the temperature credit portfolio was intertwined with the market appraisal and credit definition tasks, much of the work for the portfolio development occurred during the last half of the project. The site-level assessments near Albany were completed in the last year of the grant period, and the Oregon State University shade restoration tool and the most cogent statements of the Willamette Partnership’s policy preferences were developed shortly before the end of the grant period. The initial exploration of policy issues was led by the Practitioners Working Group, with follow-up by the Willamette Partnership. Parametrix did significant work to adapt the Oregon Department of Transportation’s Habitat Assessment Methodology for use in developing site-level portfolios, and the City of Albany paid for Parametrix to apply the methodology at the six candidate restoration sites. As described in the market appraisal, DEQ analyzed the volume and locations of potential temperature reductions from riparian shade restoration. Parametrix’s functions-based, rapid assessment methodology was a key resource in developing the site level, multi-credit portfolios, and this methodology grew out of the Oregon Department of Transportation’s Habitat Assessment Methodology. The Willamette River Basin Planning Atlas (Pacific Northwest Ecosystem Research Consortium 2002) provided essential data for use in DEQ’s Shadelator model, which calculated temperature reduction potential from shade restoration. What Development of the Temperature Credit Portfolio Revealed The original objectives for the temperature credit portfolio task assumed that a great deal of ecological and financial information related to the ecosystem marketplace could be quantified during the grant period, and that development of an integrated, multi-credit marketplace would be far enough along that the number and types of credits generated at specific sites could be calculated, along with the costs of the associated restoration projects and the approximate value of the credits in a prototype marketplace. This information could be used as the basis of a cost/benefit analysis to SECTION 5 - TASK 3-PORTFOLIO.DOC 5-11 TEMPERATURE CREDIT PORTFOLIO (TASK 3) guide investors. The objectives for Task 3 also assumed that a single optimal temperature credit portfolio could be developed for the Willamette Basin that, if pursued, would direct investment to the highest priority restoration areas and thus maximize environmental gain. Several obstacles emerged as the Willamette Partnership pursued these objectives, one being the difficulty of gaining consensus on the restoration priorities and opportunities that would represent an optimal portfolio for temperature credits across the Willamette Basin. Different agencies and conservation organizations in the basin have different ecological priorities. Although these stakeholders agreed that it was wise to invest strategically, the question of what should be included in an optimal portfolio, and where, is a highly subjective one. Questions challenging the underlying assumption that we need an “optimal portfolio” or that one was even possible hampered this effort. In a marketplace, goals and rules should be set and participants would determine their individual optimal portfolios. The idea of an “optimal” portfolio led to many questions about who would be able to play in the market—anyone, or only those people who could create projects with multiple values. For this reason, the portfolio portion of this project focused on development of information, tools, and methodologies that would enable participants to develop their own strategies to fit their specific situations. The portfolio development process demonstrated the limitations of current technical tools and methods; yet for a multi-credit marketplace to work, widely accepted methods for calculating multiple types of ecosystem services credits are desperately needed. We cannot attract investment in large-scale multi-parameter restoration in a market unless investors know the units they are to be measuring. In the Willamette Basin, temperature credits from restoration of riparian shading have been the easiest to quantify, and at this time, shade is the only type of restoration for which the basinwide potential can be calculated with confidence. This is so in part because the number of temperature credits that would be generated from other types of restoration—floodplain restoration, wetland restoration, and flow augmentation—rely on so many site-specific and quite variable conditions. Substantial additional technical work would be needed to calculate the total volume and location of temperature credits that could be generated basinwide from floodplain restoration, wetland restoration, and flow augmentation. But before going to this expense, the ultimate value of such an exercise should be carefully considered. Even without detailed information about potential credit supply from these types of restoration projects, we know that temperature reduction credits from shade restoration alone are more than adequate to offset the thermal load demand generated by the TMDL. Additional efforts related to these activities should focus on simplifying credit calculation procedures so we can get these additional actions started, rather than estimating total supply, especially related to floodplain restoration In response to the limitations of current technical tools and methods, the Willamette Partnership focused its portfolio development efforts on the type of activity where most activity is likely to occur to generate temperature credits for the marketplace: riparian shade restoration. The Partnership has been able to quantify the potential supply of temperature credits in the basin that could be created from shade, map the credits’ locations, and provide market participants with a variety of tools to help them structure their investments in shade restoration projects for maximum ecological benefit. At the basin level, decisions about where to invest in shade restoration projects can be informed by a new set of tools: the synthesis map developed for the market appraisal, DEQ’s Shadelator mapping and analysis, and, eventually, Oregon State University’s shade tool once it is fully developed. At the site level, temperature credits from riparian shade and other types of restoration can be quantified using the credit calculator described in Chapter 4. In addition, using the rapid 5-12 SECTION 5 - TASK 3-PORTFOLIO.DOC TEMPERATURE CREDIT PORTFOLIO (TASK 3) assessment techniques applied as part of this project at specific sites can help land managers evaluate their property’s ecological value and potential to generate a variety of types of ecosystem services credits that eventually could be sold in a multi-credit marketplace. This could encourage not just restoration to generate temperature credits, but conservation of resources for which there is not yet a market demand (such as pollinator habitat or oak woodlands) but that might generate credits that could be traded in the future. Lessons Learned Try to keep administrative complexity low initially and expand as market conditions require greater control. In exploring different policy options to direct investment to the highest priority restoration areas, the Practitioners Working Group developed a detailed, descriptive quality rating system for temperature credits. The rating system was too complicated for use in the fledgling Willamette temperature market, which is expected to have a small volume of transactions. To attract participants, ecosystem markets must have efficient mechanisms and procedures—ones that are easier for participants to use than traditional approaches to compliance. If you expect a large volume of market transactions, you have more leeway to use more complex options that could add ecological value. But in low-volume markets, the need for efficiency demands simpler approaches. Pay attention to the areas where most potential market participants will need the most help. It can take considerable time and technical work to develop the tools and methodologies needed to create a multi-credit marketplace, or even to accurately quantify a single type of credit that would be created from a desired suite of desired restoration actions. For the types of restoration actions considered for the temperature market, it is likely that riparian restoration will involve the largest number of projects and the most people who need help participating in markets. So it made sense to focus much of our technical effort toward that activity. Undertaking large-scale wetland restoration and floodplain restoration will require significant initial capital and professional expertise to undertake. Consequently, there are likely to be a limited number of people who initiate those actions, and they will likely be well financed and have access to considerable professional expertise. Focusing on the areas most in need allows you to continue to make progress and develop the foundation for a larger marketplace by accessing a larger number of potential participants. Pay attention to priority areas, but don’t exclude or minimize the value of restoration in areas that do not fall within priority area designations. Markets represent a great opportunity to leverage investments and direct them toward ecological priorities at a landscape scale. Market rules need to create incentives for restoration in priority areas, but they should not create penalties for taking restoration actions in areas that fall outside of priority areas. Markets need to balance the need to encourage strategic investment with the risk of sending the wrong message to landowners in non-priority areas that restoration on their land is not valued. SECTION 5 - TASK 3-PORTFOLIO.DOC 5-13 Section 6 Market Infrastructure (Task 4) SECTION 6 Market Infrastructure (Task 4) Ecosystem services markets have unique characteristics. Because ecosystem services markets differ from traditional commodity markets like wheat or corn, they require unique market infrastructure to ensure credible transactions. In traditional commodity markets, once a transaction has been completed the seller has no interest or responsibility for the product and the buyer has complete freedom to decide how and where to use the purchased product. Traditional commodities are well defined, steps for making a transaction are clear, and information is available to guide decisions. In contrast, ecosystem services markets are characterized by a mix of stakeholders who form long- term contractual relationships, transaction steps are minimally defined, and uncertainty levels are high. “Offset credits” are the units of trade. Offset credits can be measured in a variety ways, such as tons of carbon, acres of wetlands, or kilocalories per day. Unlike a commodity, an offset credit is derived from—and forever attached to—a specific project that must be managed and maintained over decades. This is so because an offset credit maintains its value only as long as the project that generated it continues to perform the specific ecological function for which the credit was purchased. In addition, ecosystem service markets trade on public goods governed by public goals. As a result, market infrastructure needs to ensure accountability and legitimacy, yet it must also be adaptable to the features—parameter, geography, and stakeholders—of specific local markets. Given the nature of ecosystem markets, it can be challenging to design new infrastructure that will support credible transactions of offset credits. Major Accomplishments • Market structure. Determined that a centralized market structure would provide the greatest opportunity to ensure transparency and credit integrity for a multi-credit marketplace. A centralized model would offer the greatest opportunity to leverage investment for ecological goals by enabling tracking and accounting of multiple types of ecosystem service credits and trades. • Centralized credit registry and exchange tracking platform. Developed a self-contained desktop application that functions as a centralized registry and exchange tracking platform for use in registering, certifying, banking, and tracking credits as they are generated, bought, and sold. • Templates. Developed a set of standardized templates for contractual agreements, certificates, protocols, and other documents that support transactions in the marketplace, to guide participants in transactions. For the Willamette marketplace, comprehending the unique characteristics of offset markets and necessary infrastructure to support them involved interpreting market appraisal results, evaluating different market structures for other trading programs, and working through tough issues of transparency, credibility, and efficiency with stakeholders. To make matters even more challenging, the Willamette Partnership, stakeholders, regulators, and the public were all thinking and learning SECTION 6 - TASK 4-INFRASTRUCTURE.DOC 6-1 MARKET INFRASTRUCTURE (TASK 4) together while at the same time working through the design and building process. In the end, though, the market infrastructure that was needed to support credible and transparent transactions was built. Developing the market infrastructure involved reviewing and evaluating different market models to determine the appropriate structure for the Willamette marketplace; creating a centralized credit registry and exchange system to register, certify, bank, and track credits; and developing the associated instructional templates to guide participants in transactions. In developing the market infrastructure, the Willamette Partnership, its consultants, its partners, and various stakeholders performed the steps described below. Market Infrastructure Development Process Step 1: Market Structure Analysis. Conducted the analyses needed to determine the appropriate structure for the Willamette marketplace. This involved reviewing existing trading programs, evaluating the feasibility of different market models in the Willamette Basin, selecting a market structure, and performing a gap analysis. The consulting team researched and reviewed existing U.S. ecosystem services credit trading programs for applicability to the Willamette marketplace. This research involved characterizing three types of marketplace structures—decentralized, facilitated, and centralized—in terms of their rules and policies, key functions, eligible and preferred projects, transactions, accounting, performance oversight, and resources. The consulting team also analyzed and summarized the elements, roles, operations, and governing regulatory frameworks from several existing credit trading programs: the Lower Boise River Trading Pilot project, Virginia Nutrient Credit Exchange, and Connecticut Nitrogen Control Program. This information was used by the Willamette Partnership Board and Steering Committee to determine which market model could most feasibly be implemented for a multi-credit trading program in the Willamette Basin. ⇒ Key decision: The Willamette Partnership Board and Steering Committee determined that a centralized market structure would fit best for the multi-credit trading program in the Willamette Basin. A centralized model would offer the greatest opportunity to leverage investment for ecological goals by enabling tracking and accounting of multiple types of ecosystem service credits and trades Existing infrastructure components in Oregon and the Willamette Basin were then analyzed, a strategy was created for developing the components needed for a centralized market infrastructure, and key gaps were identified. Findings of Step 1: It was determined that many key market elements already exist, but they are generally in a decentralized or situation-specific form. Therefore, they would need to be augmented to become more centralized so the informational, transactional, and resource efficiencies necessary to operate a basin-wide multi-credit marketplace could be achieved. Key gaps were identified related to the technical and scientific basis for defining credits, regulatory frameworks that drive demand, credit quality standards, transaction rules, and processes for bringing buyers and sellers together and completing deals. These gaps highlighted considerable uncertainties related to marketplace development. If they could not 6-2 SECTION 6 - TASK 4-INFRASTRUCTURE.DOC MARKET INFRASTRUCTURE (TASK 4) be resolved, potential buyers, sellers, and third parties would lack clear, easy, credible, and efficient ways of participating in the marketplace. Two technical memoranda emerged from Step 1: Market Framework and Centralized Exchange Platform. The Market Framework Importance of Infrastructure technical memorandum describes how 10 key When first presented, the concept of a fully market elements (performance targets, operational centralized exchange platform program rules and policy, relationships among was intriguing to the Willamette Partnership trading parties, information analysis and Board of Directors and Steering Committee, dissemination, cost basis and pricing, decision but also overwhelming. A full exchange platform would require development of a making, transactions, liability, resources, and robust and complex infrastructure that results) function in centralized, facilitated, and exceeded the organizational capacity in the decentralized markets. The technical basin and needs for existing markets; memorandum Centralized Exchange Platform however, the Centralized Exchange Platform technical memorandum helped stakeholders proposed the development of a state-endorsed fully appreciate—for the first time—the role centralized administrative and electronic that market infrastructure would play in marketplace for ecosystem-related credits; such maintaining an efficient and credible a structure would help existing, decentralized marketplace. market elements become more centralized. Step 2: Centralized Credit Registry and Exchange Tracking System. Determined the infrastructure components needed for the Willamette ecosystem marketplace; developed a centralized credit registry and exchange tracking platform so different types of ecosystem service credits could be registered, certified, banked, and tracked as they are generated, bought, and sold. In terms of infrastructure, a new ecosystem marketplace could require anything from just a few key components to an elaborate infrastructure along the lines of the New York Stock Exchange. The analysis in Step 1 showed that the components necessary for a fully operational centralized marketplace were beyond the current needs or capacity in the Willamette Basin, primarily because the expected volume of transactions would not be sufficient to support the type of robust infrastructure and staff required for a fully operational centralized marketplace. The costs to operate such a marketplace would be simply too high for the limited additional ecological gains such infrastructure would provide. ⇒ Key decision: It was determined that a centralized credit registry and exchange tracking platform was needed to provide both the information and the credibility required for a successful marketplace in the Willamette Basin. Such a system, which did not exist, could; (1) serve the initial transactions in the temperature market, and (2) lay the groundwork for eventual implementation of a fully functional Web- based system that could accommodate credit accounting and tracking across markets, jurisdictions, and regions. Result of Step 2: Step 2 resulted in a self-contained desktop application that functions as a centralized registry and exchange tracking platform, with a credit ledger and the accounting tools needed to register ecosystem service credits created through restoration projects and track them over time. The application has the following: SECTION 6 - TASK 4-INFRASTRUCTURE.DOC 6-3 MARKET INFRASTRUCTURE (TASK 4) • An administrator access point and accounting system to register, certify, verify, and bank ecosystem credits and track exchanges of credits • A searchable database that records and tracks information about specific projects, individual credits, and buyer and seller accounts • A reporting function that supports the sharing of compliance-based information between regulators responsible for permit enforcement and permittees who have purchased credits to offset environmental impacts The registry and exchange platform is intended to serve marketplace administrators (regulatory agencies, registry managers) and members (buyers, sellers, and verifiers). Currently, access and data management occur through a central administrator. A fully operational Web-based registry is envisioned that could be accessed directly by the several tiers of users: administrators (registry manager, regulatory agencies), members (sellers, buyers, and verifiers), and the interested public. ⇒ Key decision: In February of 2007, when it became clear that centralized infrastructure was needed, the Willamette Partnership Board of Directors voted unanimously to operate the infrastructure to serve initial transactions in the Willamette Ecosystem Marketplace. The Willamette Partnership has registered three projects on the Ecosystem Credit Registry and expects to register more in the coming months. The Partnership will operate the credit registry for buyers and sellers who voluntarily choose to use it. At the time of this writing, the Oregon Department of Environmental Quality appeared to support the use of a centralize credit registry, but had not adopted policy that would require it. The registry software is built in MS Access and a copy of an empty version is available for download at the Willamette Partnership’s “Tools and Templates” Web page: http://www.willamettepartnership.org/tools-templates Step 3: Standard Templates. Developed standard templates for contractual agreements, certificates, protocols, and other documents that support transactions in the marketplace, to guide participants in transactions. In creating the contracts and other documents needed for marketplace transactions, the Willamette Partnership consulted technical advisory groups and incorporated elements of existing agreements, contracts, and standards that had been developed for other credit trading programs or regulatory standards. Technical advisory groups included representatives of watershed groups, technical experts, legal experts, regulatory agencies, and municipalities. Current literature on marketplace contractual documents also was reviewed. Results of Step 3: The results of Step 3 were the development of standard documents for exchanging credits between buyers and sellers, registering credits in the credit registry, conducting third-party verification of newly generated credits, and addressing certain business aspects of credit verification, such as ensuring confidentiality. These templates are described below and are available at the Willamette Partnership’s “Tools and Templates” Web page http://www.willamettepartnership.org/tools-templates. 6-4 SECTION 6 - TASK 4-INFRASTRUCTURE.DOC MARKET INFRASTRUCTURE (TASK 4) Standard Agreement for Credit Registration. The Standard Agreement for Credit Registration is a template for describing credits that have been generated and are ready to be recorded in the registry. The standard agreement template guides users through information needed to register projects with credits and forms the basis of the relationship between a credit seller and the registrar. The agreement provides general information about the credits to be registered—including calculation methods, credit assurances, maintenance, monitoring and use—so that credits can be offered to prospective buyers. Standard Agreement for Credit Exchange. The Standard Agreement for Credit Exchange template was created to help buyers and sellers negotiate a contractually binding agreement for exchanging ownership of the credits. This template is essentially a checklist and overview document that provides the information needed to assure a potential buyer that the credits are real and meet regulatory standards and requirements. The agreement also provides general information about the credit to be exchanged, credit assurances, registration, maintenance, monitoring, compensation, and other information, such as the expiration of a credit offer. Standard Agreement for Credit Verification Services. Third-party verification of projects is one of the mechanisms used to ensure credit integrity and reduce risk in markets. The Standard Agreement for Credit Verification Services describes the tasks to be performed by the credit buyer or seller (the client) and the verifier. Under this agreement, the verifier audits the credits and associated documentation, procedures, processes, and plans submitted by the client to the verifier for compliance with applicable standards. These standards include credit generation practices, credit calculation methodologies, credit assurance protocols, maintenance requirements, and monitoring obligations. The agreement identifies the specific credits to be verified and the necessary components required for verification. It refers to guidance, standards, and other information specific to the types of credits being verified. Water Temperature Offset Verification Protocol. The Water Temperature Offset Verification Services Verification Protocol, provides guidance on the review and assessment of temperature credit Verification services will be an important projects. The protocol document provides part of any fully functional marketplace. The verification procedures and protocols background information on the process of developed under this process will be becoming an accredited verifier, steps to be adapted and refined when market completed by the verifier as part of the transactions begin occurring. The verification process, how to complete protocols and procedures developed for this project build heavily on other verification and certification, and situations that programs around the country. They might constitute a conflict of interest. The represent the structural framework appendixes include an overview of the needed for credible and transparent verification process, a verification checklist for transactions but have not yet been adopted by any regulatory authority. the verifier, and a verification opinion to document that the credits have been approved by the verifier. The protocol also provides an overview of the verifying process to ensure that credit generation information was gathered completely and accurately, proposed actions have been completed according to the credit generation schedule, appropriate monitoring plans are in place to ensure accurate reporting, and appropriate actions have been taken to verify the quantity of estimated credits. SECTION 6 - TASK 4-INFRASTRUCTURE.DOC 6-5 MARKET INFRASTRUCTURE (TASK 4) Verifier Accreditation Agreement, Conflict of Interest Code, and Confidential Business Information Guideline. These documents, which are supplements to the registry and exchange tracking platform, are intended to ensure third-party, objective verification and confidentiality of sensitive credit transaction information. They build from existing frameworks and guidelines. • The Verifier Accreditation Agreement functions as a regulatory-approved certificate of professional capabilities to perform verification services. Every individual verifier must meet the qualifications outlined in the accreditation agreement and become an accredited verifier before providing verification services to market participants. • The Conflict of Interest Code protects the integrity of the verification process and the quality of a credit owner’s offsets by identifying situations in which a verifier may be viewed as having an impaired ability to objectively review a potential participant’s estimated offsets, usually because of a pre-existing business or personal relationship. The accredited verifier must submit a conflict of interest form with a notice of Standard Agreement for Credit Verification Services to the registry. • The Confidential Business Information Guideline protects credit owners who may need to divulge sensitive information in the credit verification process but want the information to be kept confidential. The document is an agreement between the verifier and the marketplace participant. It provides guidelines for how confidentiality will be accomplished, while maintaining timely credit verification and transaction processes. Any information submitted in a conflict of interest form between a verifier and a credit owner is automatically kept confidential. Time Frame, Participants, and Resources The market infrastructure development process was initiated in the fall of 2006. This process is likely to continue as transactions occur and refinements are made to the centralized registry, templates, and verification protocols. The registry and exchange tracking system is operational and currently in use and functional for the temperature market in the Willamette Basin. The consulting team facilitated meetings with stakeholders throughout initial development of the centralized marketplace, documenting questions, comments, and decisions to inform the analysis conducted in the market framework memo and the prospectus/gap analysis. The consulting team also completed the credit exchange agreements and credit registration documents with the help of the advisory team, which included Clean Water Services, the Willamette Partnership, the City of Eugene, Long Tom Watershed Council, a private landowner and potential credit seller, and the City of Albany. Clean Water Services completed the Credit Verification Services Agreement and the Verifier Accreditation Agreement using templates provided by the California Climate Action Registry and International Organization for Standardization (ISO). Clean Water Services also developed the supplementary centralized exchange documents (Conflict of Interest, Water Temperature Credit Verification Protocol, and Confidential Business Information Guidelines) with review by staff from Oregon Department of Environmental Quality, Oregon Department of Water Resources, David Evans and Associates, Inc. and other Clean Water Services staff. Templates provided by the U.S. Environmental Protection Agency were also used to create these documents. 6-6 SECTION 6 - TASK 4-INFRASTRUCTURE.DOC MARKET INFRASTRUCTURE (TASK 4) Parametrix, working from specifications provided by the Willamette Partnership and Clean Water Services, built the self-contained desktop application that will function as the centralized registry. The Willamette Partnership, working with the Practitioners Working Group and the consulting team, developed water temperature credit protocols. The Willamette Partnership is continuing to work with the Oregon Department of Environmental Quality to clarify agency roles and responsibilities for credit registration and verification. Key resources used to develop market infrastructure documents included the California Climate Action Registry Certification Protocol and General Reporting Protocol, International Standards (ISO 14064-3, 14066, and 19011 – 2002(E)), U.S. Environmental Protection Agency Regulations on the Confidentiality of Business Information (see 40 CFR part 2), Oregon Department of Environmental Quality permit language (Section 1), and Oregon Department of Environmental Quality’s internal management directives. Information gathered from the Lower Boise River Trading Pilot project, Virginia Nutrient Credit Exchange, and Connecticut Nitrogen Control Program regarding market elements, roles, operations, and governing regulatory frameworks was useful in setting the stage for marketplace development. What Development of the Market Infrastructure Revealed The market infrastructure development process highlighted the immediate need for a centralized registry and exchange tracking system rather than development of a centralized marketplace. It was clear that market transparency and credibility were key factors to implementing a successful marketplace. The centralized registry and exchange tracking system is the information hub for buyers, sellers, regulators, and the public that ensures credits sold on a market are real, that they are not sold more than once, and that they are maintained and perform the services intended over time. While developing a centralized marketplace could eventually be necessary when other regional or local markets merge and transaction volumes are high, this level of infrastructure was not required, nor could it be supported by the expected initial transaction volume in the Willamette Basin. Market appraisal results revealed that there were potentially hundreds of sellers, but there are fewer than 10 buyers who will need temperature credits in the Willamette Basin in the short-term. Focusing efforts on the development of a centralized registry and exchange tracking system would allow anticipated restoration actions to be credibly documented and tracked over time. Credibility and integrity emerged as a key element for a successful marketplace and will likely become so for other markets emerging around the country. Lessons Learned Be aware of skepticism and be clear about credit quality and integrity. Markets for ecosystem services are new, are not well understood, and are mistrusted. People are becoming more familiar with ecosystem markets through increased media coverage of voluntary and anticipated regulatory greenhouse gas markets. To date, those markets have lacked clear standards and a centralized system to ensure credit quality. As a result, media have reported “bad-apple” examples where offset credits were purchased but the offset actions were not credible. Markets are an opportunity to improve the ecological effectiveness of planned regulation-driven investment. The public needs to be assured that the people building markets have the best interest of the public’s ecological resources in mind. SECTION 6 - TASK 4-INFRASTRUCTURE.DOC 6-7 MARKET INFRASTRUCTURE (TASK 4) Don’t start from scratch – use other infrastructure that has been developed. When the Willamette Partnership started this process there were no other entities working on similar programs. Now there are at least five separate programs around the county that could share infrastructure. The learning curve and costs of developing centralized market infrastructure are high. When possible, use existing infrastructure to minimize costs and increase standardization of programs. Set goals that are achievable and meaningful. Before setting extremely ambitious goals, make sure you have a diverse and inclusive understanding of the situation. There is always a natural learning and evolution that is born through actually going through the process, but be aware of what can be learned ahead of time and determine whether obtaining this knowledge would provide assurance to the process, help in the long run, or provide other benefits. Know the size of the market and what it means. Knowing current and projected quantities of potential buyers, sellers, and transactions will improve efficiency in developing a market infrastructure that (1) meets marketplace participants’ needs; and (2) is within the scope and geographic scale of the trading program. Understand resource capacities. Involving stakeholders and providing the necessary guidance for successful marketplace development requires time and resources. It is important to know what resources the stakeholder group has available, their level of commitment, and how that may affect development of the marketplace. Avoid designing market rules that reduce all risk but leave few resources to be invested in actual restoration. Involve regulatory agencies early on. Current regulatory structures are not designed to support quantification of multiple ecosystem services. Therefore, it is important for both market enthusiasts and regulatory staff to understand that regulations will need to be augmented to allow for ecosystem marketplace transactions. In addition, markets involve new roles for many stakeholders, including agencies. Third parties may be in a position to lead activities previously done by agencies, and vice versa. It is important to begin the discussion of roles and responsibilities early on. 6-8 SECTION 6 - TASK 4-INFRASTRUCTURE.DOC Section 7 Transaction Project and Regulatory Language Development (Task 5) SECTION 7 Transaction Project and Regulatory Language Development (Task 5) The policies, tools, and infrastructure to support transactions in the Willamette Ecosystem Marketplace are in place. The best way to test the new tools and infrastructure is to conduct a transaction to see if they work. As described in earlier chapters, challenges to the TMDL for temperature have postponed the implementation of the market driver in the Willamette temperature market. The sudden shift in market demand illustrated a long-held suspicion that focusing too narrowly on a single credit market has important limitations, including risks for potential participants and for the ecological goals we want to accomplish. Although the tools and infrastructure we developed under this grant will support the Willamette temperature market when demand is created, they are applicable to other markets, too. And we were able to demonstrate the value of the infrastructure by banking three restoration projects in the Tualatin Basin, which is subject to its own TMDL for temperature. Major Accomplishments • Identified and evaluated multiple potential restoration projects that could supply credits. Conducted an assessment of existing and planned restoration projects and conducted stakeholder outreach and site assessments to evaluate their potential as an initial transaction in the Willamette Ecosystem Marketplace. • Developed agency- and stakeholder-approved permit language to support trading when NPDES permits with temperature limits are issued. Worked with NPDES permittees, the Department of Environmental Quality, and other stakeholders to develop template permit language to support trading in NPDES permits. • Banked three riparian restoration projects in the Ecosystem Credit Registry that can be used in one of three potential temperature credit markets in Oregon. Registered three riparian restoration projects representing more than 37 million kilocalories per day using market infrastructure developed as part of this grant. Because of the large geographic scale and institutional breadth of the Willamette Ecosystem Marketplace, identifying a pilot transaction and developing regulatory language to support basinwide multi-credit trading required significant coordination, collaboration, and support from various stakeholders and project partners. At the beginning of the grant period, various types of restoration projects, coordinated by many different organizations, were under way and anticipated in the Willamette Basin. Because of the wide range of restoration efforts, existing restoration potential, and conservation opportunity maps and tools were used as a filter to select meaningful transaction project sites that would generate a SECTION 7 - TASK 5-TRANSACTION.DOC 7-1 TRANSACTION (TASK 5) portfolio of ecosystem service credits. Once these potential transaction project sites were selected, additional information was gathered from project supporters and technical experts to guide the scope and development of those sites. Although the refined selection process for the potential transaction sites took into consideration the scale of restoration and types of credits that would be generated by the restoration actions, the objective of the transaction project was still to facilitate the transaction of at least one thermal load credit through the Willamette Ecosystem Marketplace framework. For the exchange of credits to actually occur, many other requirements had to be met besides generating at least one thermal load credit through the transaction project. Many of the contractual and legal agreements required to support the centralized registry and exchange system were completed under Task 4. However, the actual NPDES permit language needed to authorize and facilitate temperature trading was completed under Task 5. For trading to work at the scale of the Willamette, it was important for NPDES permits to share common language and trading requirements. This process required working closely with the Oregon Department of Environmental Quality to evaluate existing permit language, identify gaps, and secure approval of template permit language for trading. Agency staff participated in meetings, provided guidance and support, and helped officially approve the final version of the permit language. In the transaction project and regulatory language development process, the Willamette Partnership, its consultants, its partners, and various stakeholders performed the steps described below. Transaction Project Development Process Step 1: Existing Restoration Projects Inventory. Identified (1) research that was under way to monitor and quantify ecosystem services, (2) opportunities for a “pilot transaction site,” and (3) academics and technical experts who could inform further development of the transaction project. Ongoing restoration projects in the Willamette Basin were surveyed and evaluated for their relevancy to development of the Willamette Ecosystem Marketplace. The information gathered on each restoration project included project activity and focus; partners and funding; and project location, scope, robustness, and goals. Among other things, the inventory process identified organizations, technical experts, and academics who were involved in highly relevant restoration projects. Some of these people were approached to determine their interest in participating in the development and selection of the pilot transaction project and site. Result of Step 1: The result of Step 1 was a matrix that identifies current and planned restoration projects with “high” relevancy that could potentially become a pilot transaction project the in the Willamette marketplace. It also identifies a key technical groups consisting of academics and technical experts who could serve as sources of technical information and scientific knowledge during development of the pilot transaction project. The Matrix of Current and Ongoing Research and Restoration in the Willamette Basin helped inform the selection of possible locations for the pilot transaction project, at a coarse scale. Step 2: Potential Transaction Sites. Identified potential sites for a pilot transaction in the Willamette marketplace and key factors that could affect the feasibility of a transaction project at those locations. 7-2 SECTION 7 - TASK 5-TRANSACTION.DOC TRANSACTION (TASK 5) Consultants and the key technical group Figure 7-1: Priority Restoration Areas – Willamette River Basin Planning Atlas identified in Step 1 met to review and evaluate data sources and spatial databases for use in helping select a transaction site. Possible sites for the pilot transaction were identified using information from the synthesis map created for the market appraisal (including temperature- impaired rivers and streams, according to the state’s 303d list) and finer scale data in the Willamette River Basin Planning Atlas (Pacific Northwest Ecosystem Research Consortium 2002) to identify sites where water temperatures exceed standards, conservation is a high priority for many organizations, and restoration potential also is high. The atlas incorporates economic and demographic constraints when rating 1-kilometer “slices” of the Willamette River and floodplain for their restoration potential. Another selection criterion that became important was the spatial extent of the potential transaction project site. The restoration project needed to be large-scale and be able to generate a portfolio of multiple types of ecosystem service credits. Findings of Step 2: Three potential transaction sites were identified that contained opportunities to reduce thermal load and enhance other ecosystem services: Green Island, the Long Tom, and a site near Albany. Green Island was identified as a potential pilot transaction site with an opportunity for fish habitat and wetland restoration, the Albany site offered opportunities for wetland restoration, and the Long Tom was a potential riparian restoration site. At a meeting of the Willamette Partnership Board of Directors and the consulting team, constraints and opportunities at each potential site were examined. Factors that were considered included the ecological opportunities of each site, how the credits that would be generated at the site would fit into the concept of an ecosystem services portfolio, resource constraints, political constraints, and other issues regarding initiating a transaction project. The Partnership determined that each of the three potential pilot transaction sites would need to be explored further so that the ecological and political constraints and opportunities of each potential site could be better understood. Consequently, consultants and project partners scheduled meetings and site visits with selected potential transaction project SECTION 7 - TASK 5-TRANSACTION.DOC 7-3 TRANSACTION (TASK 5) coordinators to gather more detailed information on how a transaction project could be implemented at the selected sites. Step 3: Investigation of Potential Transaction Project Sites. Investigated the suitability of the three potential transaction project sites through a site visit (at Green Island) and meetings, research, and discussions. Technical experts, academics, regulatory agencies, conservationists, and landowners conducted a site visit at Green Island to learn about landowner needs, conservationist needs, and geophysical and river system needs, and to evaluate the feasibility of launching a pilot transaction project. Green Island had been identified as providing opportunity for fish habitat and wetland restoration. In addition, meetings were held to explore the feasibility of the Albany and Long Tom sites as potential transaction project sites. The Albany meeting focused on understanding current constructed wetlands projects, temperature reduction, and water quality improvement potential. The Long Tom meeting focused on understanding current riparian shading projects and temperature reduction potential. Findings of Step 3: Green Island. The ecological restoration opportunities at Green Island were enormous. However, Green Island site managers had adopted a U.S. Fish and Wildlife Service restoration plan, and this plan did not include some of the dynamic processes of the river, such as hyporheic restoration and other ecosystem services that the Willamette Partnership was interested in pursuing for ecosystem credit portfolio development. The Partnership wanted to include additional restoration efforts in the adopted management plan that would provide a portfolio of a broader range of ecosystem credits. Because a federal management plan for Green Island had been approved for funding and was in the process of being implemented, potential credits generated through these restoration projects could not be traded in a marketplace. In addition, during initial discussions with federal managers there was tremendous resistance to exploring credit opportunities at Green Island. For these reasons the Willamette Partnership and its consultants did not pursue launching a transaction project at Green Island. Findings of Step 3: Albany site. The Albany site was identified as providing various ecosystem services related to water quality, such as biological oxygen demand, nutrient and temperature reduction, and flow improvements through wetland restoration and habitat benefits. The restoration project at the Albany site would need to be completed in two phases. When fully implemented, it will represent one of the largest restoration projects on the Willamette River and will generate significant ecological value and potentially multiple ecosystem credit types. However, the first phase of the project, would address only temperature, through constructed wetlands. The first phase of the Albany project was not of a scale that would be large enough to generate a portfolio of ecosystem service credits. But the first phase would substantially address the City of Albany’s temperature load limits. Thus, the Willamette Partnership decided to continue to work closely with the City of Albany as the project developed but to not pursue developing an initial transaction project at the site in the short term. 7-4 SECTION 7 - TASK 5-TRANSACTION.DOC TRANSACTION (TASK 5) Findings of Step 3: Long Tom. Long Tom was identified as an opportunity for providing temperature reduction through riparian shading restoration. TMDL data indicate that the Long Tom River is the most underperforming tributary for shade in the Willamette Basin. The difference between current and potential effective shade levels at the Long Tom is 32 percent (Long Tom Watershed Council 2008). Modeling suggests that shading the entire lower section of the Long Tom River, from Fern Ridge Reservoir down to the southern confluence at Norwood Island, could reduce the temperature of the river as much as 4° C. Therefore, there is significant thermal load reduction potential along the lower Long Tom River (Long Tom Watershed Council 2008). The Long Tom Watershed Council also has a strong and ongoing relationship with the City of Eugene—one of the largest potential buyers in the Willamette temperature market. The City of Eugene contracted with the Long Tom Watershed Council to investigate opportunities for restoration to meet thermal load obligations and was actively engaged and interested in ecosystem service credit generation. In March 2008, The Long Tom Watershed Council produced a report for the city of Eugene titled Ecosystem Restoration in the Long Tom River Basin for Water Quality Improvement in the Willamette River. The report documents the process of identifying restoration opportunities and assessing landowner concerns and interest in participation in an ecosystem marketplace. The Willamette Partnership determined that the Long Tom was a suitable site to launch a pilot transaction project. Step 4: Transaction Project Initiation. Created a transaction working group to address details of a transaction between the Metropolitan Wastewater Management Commission (Eugene-Springfield) and a land manager in the Long Tom watershed and drafted standard agreements for use in this and other transactions. The Willamette Partnership convened a transaction working group to develop standard agreement templates using the City of Eugene and a landowner in the Long Tom watershed as buyer and seller representatives. The group consisted of representatives from the cities of Eugene and Albany, the Long Tom Watershed Council, and a landowner in the Long Tom watershed. The group communicated regularly over several months to provide comments and suggestions on key credit trading documents. Results of Step 6: The transaction working group drafted the Standard Agreement for Credit Exchange and Standard Agreement for Credit Registration, which are suitable for use in a transaction involving temperature credits generated in the Long Tom. These documents were intended to support near-term credit transactions by outlining buyer and seller responsibilities in exchanging credits and credit owner and registrar responsibilities in registering credits. At the end of Step 4, a riparian shade restoration project in the Long Tom was fully documented and ready to be registered. SECTION 7 - TASK 5-TRANSACTION.DOC 7-5 TRANSACTION (TASK 5) ⇒ Key event: While the transaction working group was completing its work, The Metropolitan Wastewater Management Commission was still in the process of challenging the TMDL. As a result, the Long Tom transaction could not occur during this grant period. Until the uncertainty associated with future demand for temperature credits is resolved, it is unlikely that the Long Tom landowner will be willing to bear the expense of the riparian shade restoration project. Step 7: Transaction Coordination. Coordinated a banking transaction using the new Willamette Ecosystem Marketplace framework. As has been described in earlier chapters, multiple challenges to the regulatory driver for temperature credits in the Willamette Basin reduced the urgency of demand and created uncertainty for those who would be suppliers of credits. As a result, no permits with thermal load limits have been issued and no trading transactions can occur. The uncertainty about the level of demand for temperature credits that will ultimately exist when lawsuits are settled has eliminated speculative investment in credit banks in the same way as has occurred with other markets, such as wetlands. Clean Water Services operates an active temperature trading program internally for use in its own permits. Clean Water Services is subject to temperature TMDL for the Tualatin River that is separate from the TMDL in the Willamette. In the last 5 years, Clean Water Services has restored more than 30 miles of streams to off-set excess thermal load from four sewage treatment facilities. To date, Clean Water Services has managed registration and documentation of credits with internal systems geared to support regulatory compliance reporting. There are few, if any, other permittees in the Willamette Basin with the resources to develop and operate such a program internally in the way Clean Water Services has done. This very fact was one of the driving forces behind development of the Willamette Ecosystem Services Marketplace. The Willamette Partnership understood that if the ecological successes like those seen in the Tualatin were to be realized elsewhere, a new system would be needed that encouraged and enabled those with no regulatory responsibility to take restoration actions and bring the products—“credits”—to the market. Clean Water Services also sees the value in such a system to serve its own needs—registering credits that it has developed but not yet used against any permit obligation. While the regulatory driver in the Tualatin Basin is different, the need for credit registration and tracking is the same. Clean Water Services has committed to the first credit banking transaction using the new marketplace infrastructure. Results of Step 7: A June 27, 2008, letter stating Clean Water Services’ intent to register thermal load credits in the Ecosystem Credit Registry is being provided to the U.S. Environmental Protection Agency. In addition, a tour will be given to the Willamette Partnership’s EPA grants officer to demonstrate how three projects representing more than 2 miles of stream restoration and 38 million kcal/day of thermal load reduction are registered and tracked on the Ecosystem Credit Registry operated by the Willamette 7-6 SECTION 7 - TASK 5-TRANSACTION.DOC TRANSACTION (TASK 5) Partnership. Clean Water Services completed and submitted the Standard Agreement for Registration created under Task 4, and all information needed to populate the registry was included. This transaction represents a significant milestone for the Willamette Ecosystem Marketplace. Regulatory Language Development Process Step 1: Existing Permit Framework. Determined the types of restoration actions that could be incorporated into the existing NPDES permitting framework for thermal load trading and where additional research should be focused to further develop methods for quantifying thermal load reductions from restoration actions. The Willamette Partnership, academics, technical experts, regulatory agencies, consultants, and other professionals involved in the research and technical development of the Willamette marketplace met to discuss the existing NPDES permitting framework and additional research needs. Ongoing technical work in the Willamette Basin was summarized, and research needs were identified that would aid in quantifying thermal load reductions from different restoration actions. Results of Step 1: It was determined that mechanisms for calculating riparian shading, flow augmentation, and wetland restoration temperature reduction credits had been developed and could potentially be extrapolated to other types of restoration. However, mechanisms for calculating credits from the floodplain restoration would need to be developed so that they could be incorporated into the permitting framework. Step 2: Permit Language Development. Developed NPDES permit language that will allow temperature credit trading as a compliance option for NPDES permittees. A regulatory working group consisting of the Willamette Partnership, technical experts, and representatives of the Oregon Department of Environmental Quality, the U.S. Environmental Protection Agency, and municipalities met to discuss incorporating the marketplace concept into the NPDES permitting process. Draft permit language was developed using information from Clean Water Services’ watershed-based NPDES permit and other existing NPDES permits and provided to the regulatory working group for review. The Partnership and the Oregon Department of Environmental Quality identified gaps between the draft permit language and the DEQ regulatory framework, after which the regulatory working group identified issues related to the permit language that would need to be addressed and drafted permit language. Consultants incorporated review comments from the regulatory working group and prepared a second draft of the NPDES permit language for thermal load issues. This second draft was reviewed by a permit language review team that had representatives from municipalities and industry (the City of Eugene and Weyerhaeuser Company), the U.S. Environmental Protection Agency, and Defenders of Wildlife. Again, comments from the review team were incorporated into the draft permit language and the language was finalized. SECTION 7 - TASK 5-TRANSACTION.DOC 7-7 TRANSACTION (TASK 5) Result of Step 2: The result of Step 2 is the Final NPDES Permit Language for Thermal Load Issues document, which provides NPDES permit language to allow for trading of water quality credits in the Willamette Basin. ⇒ Adjunct Work: Oregon Department of Environmental Quality staff will continue to meet internally and externally to coordinate and set protocols and mechanisms to serve credit trading through the Willamette Ecosystem Marketplace. The Oregon Department of Environmental Quality Water Quality Trading Internal Management Directive (IMD) (January 2005) describes the legal and policy basis for trading in Oregon. The IMD lists a number of policies dealing with regulatory compliance, enforceability, public participation, protection of designated uses, antibacksliding, antidegradation, baselines, credit creation and duration, compliance and enforcement, program evaluation, U.S. Environmental Protection Agency oversight, and dissolution of credits. These authorizations and policy pronouncements establish a solid framework for trading but will need to be supplemented by a variety of mechanisms to fully implement a trading program that includes Clean Water Act pollutants. Most of these supplementary documents were produced under Task 4. Mechanisms identified for such development and adaptation include (1) NPDES Thermal Load Issues (completed), (2) development of the Internal Management Directive for Willamette Partnership/Oregon Department of Environmental Quality framework, and (3) legal elements required to implement the ecosystem marketplace (completed; see Task 4, Step 3). Timeframe, Participants, and Resources The regulatory language was finalized in May of 2008, but it has not yet been applied to a permit because of ongoing legal challenges at the Oregon Department of Environmental Quality. The transaction project is represented by credits that are banked in the Ecosystem Credit Registry managed by the Willamette Partnership. Ongoing work will refine Oregon Department of Environmental Quality’s internal management directive to appropriately outline regulatory responsibilities and roles in thermal credit trading processes in the Willamette Ecosystem Marketplace. The Willamette Partnership’s consultants, academics from Oregon State University and the University of Oregon, and other technical experts were involved in selecting and developing a transaction project site. Various other organizations, such as the U.S. Environmental Protection Agency, U.S. Fish and Wildlife Service, McKenzie River Trust, technical experts from CH2M HILL, the cities of Albany and Eugene, Wah Chang, Weyerhaeuser, and the Long Tom Watershed Council provided guidance throughout the selection process and helped to shed light on the political, ecological, and funding issues associated with the potential transaction sites. Maps and data layers used to select the potential transaction project sites came from The Nature Conservancy, the Willamette River Basin Planning Atlas (Pacific Northwest Ecosystem Research Consortium 2002), and the Oregon Department of Environmental Quality. Academics from Oregon State University and the University of Oregon provided input on other physical, hydrologic, geologic, and spatial features incorporated in the transaction project site selection process. The McKenzie River Trust, Oregon Department of Fish and Wildlife, the City of Albany, and the Long 7-8 SECTION 7 - TASK 5-TRANSACTION.DOC TRANSACTION (TASK 5) Tom Watershed Council provided restoration project information to the consultants and technical staff working on transaction project development. Consultants coordinated meetings with Oregon Department of Environmental Quality staff and incorporated all comments and changes suggested by them and the review team. The permit language review team was composed of representatives from the U.S. Environmental Protection Agency, Defenders of Wildlife, Weyerhaeuser, and the City of Eugene. Oregon Department of Environmental Quality staff provided integral feedback throughout development of the NPDES Permit Language for Thermal Load Issues. The language development process was aided in particular by Ranei Nomura, an Oregon Department of Environmental Quality employee, who was assigned specifically to work with the Willamette Partnership in coordinating, approving, and finalizing permit language development with the internal department staff. What the Transaction and Regulatory Language Development Process Revealed The Willamette River Basin Planning Atlas (Pacific Northwest Ecosystem Research Consortium 2002) and the synthesis map developed for the market appraisal provided extremely useful information about which areas in the basin were opportune for restoration and thus helped guide the selection and development of the transaction project. Reviewing ongoing and planned restoration projects and using the restoration potential and conservation opportunity area maps as screening tools revealed that, despite the quantity of ongoing and planned restoration projects in the Willamette Basin, the majority of these efforts did not represent an integrated, systems approach to holistic ecosystem restoration. Many of the planned projects were focused on one species, one habitat type, or one restoration action, or they were too small to provide an understanding of the multiple types of ecosystem services that could be generated from different restoration actions. This realization became important in the Willamette Partnership’s rationale for developing a marketplace and its efforts to further develop the synthesis map into a user-friendly and interactive tool to facilitate larger scale restoration across the basin in priority conservation opportunity areas. “Postage stamp” restoration projects will not achieve the level of ecological integrity necessary to create a sustainable future for the basin. There clearly is a growing need to match ecological opportunity areas with restoration actions and to facilitate basinwide restoration actions. Secure and sound drivers are fundamental to market success. The willingness of people to consider restoration actions in advance of impacts with the expectation of using or selling them later vanishes when drivers are uncertain. The importance of developing an integrated multi-credit market was confirmed when the demand driver for temperature was postponed. If an integrated ecosystem service market were operational and markets for other ecological values existed, people who could take restoration actions to participate in markets would be able weather the temporary loss of one market option, because several would be available to them. An integrated, multi-credit marketplace would have the effect of reducing risk for land managers and potentially lessening the dampening effect of a major regulatory driver being postponed. SECTION 7 - TASK 5-TRANSACTION.DOC 7-9 TRANSACTION (TASK 5) Lessons Learned Involve the regulatory agency early on. Consistent regulatory agency participation is essential throughout the policy augmentation process to ensure approval and an easy, fluid adoption of the altered regulatory language into the permitting process. While coordinating agency participation may seem like a daunting task, it is crucial if trading of credits is to be incorporated into the permitting framework. Make it real for stakeholders early. Identify candidate buyers and sellers early and complete a sample transaction, even if incomplete, as soon as possible. Much confusion about roles and perceptions about the complexity of the marketplace were eliminated once contract agreements started to be developed and interested parties talked through some of the details of a transaction between actual buyers and sellers of credits—even though the exercise was hypothetical. Use the tools you have. Restoration evaluation tools that had been previously developed for the basin became extremely useful in selecting meaningful transaction project sites. Leveraging the work of others saves resources, broadens support, and communicates a more collaborative and involved message to stakeholders. Allow yourself some options. The development and selection phase of a transaction project is challenging because of the amount of coordination among parties, the technical and scientific effort needed to validate the transaction project, and, sometimes, a lack of information about funding. Because of the level of effort required to orchestrate a transaction project, you must initiate conversations with potential transaction project partners early on in the process. It is extremely important to start broad and have multiple options for potential transactions, so that if the project that was originally envisioned does not pan out, you still have time to focus on another potential project site for the transaction. 7-10 SECTION 7 - TASK 5-TRANSACTION.DOC Section 8 Policy Considerations Specific to the Temperature Market SECTION 8 Policy Considerations Specific to the Temperature Market The amount and quality of conservation and restoration that is achieved in the Willamette Ecosystem Marketplace will depend greatly on regulatory agencies—particularly the Oregon Department of Environmental Quality. A water temperature credit program represents a significant opportunity to facilitate restoration of natural conditions that cool water in streams and create habitat for cold-water-dependent fish species—especially in rural parts of the Willamette Valley where regulatory controls are limited. Agency policies obviously play a key role in creating demand for ecosystem service credits that can be sold on a market. In the case of the Willamette, the temperature TMDL is the single largest driver of demand for temperature credits. It is doubtful that the Willamette Ecosystem Marketplace would have been initiated without the introduction of a restrictive TMDL. But agency choices influence much more than demand. The right policies, rules, and regulations can make it easier for people to participate in the marketplace, increase the ecological quality of credits generated and sold, instill confidence about the long-term integrity of the marketplace, and help marketplace organizers capitalize on the growing momentum to use market forces to address pressing environmental challenges. Throughout the process of developing the Willamette Ecosystem Marketplace, the Willamette Partnership has worked to identify and explore relevant policy issues that will help the marketplace succeed as a vehicle for effective ecological restoration. The process of developing the marketplace has illustrated the delicate balance that exists between supply and demand when a new market-based initiative is launched. In the Willamette marketplace, demand for temperature credits is created largely by the TMDL. Supply is made available once credit definition methodologies have been agreed upon, restoration protocols have been developed, marketplace infrastructure has been created, and an adequate number of actual restoration projects have been completed. In the early stages of the marketplace, supply will be partly a function of capacity and motivation—how quickly can the restoration sector complete projects that generate credits, and how certain is it that buyers will need or want the credits they produce? Development of supply and demand needs to be coordinated so supply is available within a reasonable amount of time after demand is created; otherwise, potential buyers will find other ways to meet their regulatory obligations. At the same time, regulatory drivers need to be firm enough to give suppliers confidence that demand is real. Also, knowledge and awareness of pending demand need to develop in a timely manner so there is adequate time to develop supply before obligations need to be met. Clearly, a lack of ready supply can hamstring early efforts at marketplace development. So, too, can elaborate or complicated marketplace procedures. To attract buyers and sellers, an ecosystem marketplace must be easier, faster, and less expensive to use than conventional options for permit compliance. This is especially true in a low-volume marketplace like the Willamette, which does not have the economies of scale that larger markets offer. Recognizing the challenges of small size and the need to balance supply and demand, the Willamette Partnership supports policies that speed development of supply, maximize marketplace efficiency, and support “early adopters,” meaning those who choose to engage in market trading early on. The SECTION 8 - POLICY CONSIDERATIONS.DOC 8-1 POLICY CONSIDERATIONS SPECIFIC TO THE TEMPERATURE MARKET Willamette Partnership has encouraged the Oregon Department of Environmental Quality to consider the following policy issues that will improve the ecological effectiveness, administrative efficiency, and credibility of marketplace activity for temperature credits in the Willamette. Policy recommendations include: • Set a baseline date. Allow restoration projects that meet minimum standards and were completed after the date the TMDL was adopted in September 2006 to be eligible to sell credits against a temperature TMDL obligation. The date the TMDL was signed represents the date that a cap on thermal load was officially established in the Willamette Basin. Enabling projects after that date will increase the early supply of credits. • Encourage credit “banking” to promote early actions. When a project is completed in advance of an impact, credits generated from that project can be held for use or sale at a later date. Such credits are called “banked” credits. Such projects are similar to a savings account or an investment that is expected to grow in value over time. Early actions are good for the environment and should be encouraged. It does not appear likely there will be a large demand for immediate temperature credits driven by Willamette temperature TMDL permit requirements. Allowing credit banking would encourage third parties to make significant investments in credit projects that they could sell to buyers who need them at a later date. • Encourage the use of a centralized credit registry. A centralized credit registry is the core of an ecosystem services marketplace. It provides the information needed to assure regulators, buyers, sellers, and the public that credits are valid. A registry must be transparent. The Willamette Partnership favors the use of a centralized credit registry operated by a third-party non-profit governed by a coalition of stakeholders who have an established interest in ensuring the integrity and quality of credits. • Encourage investment in priority areas. Scientists and stakeholders have worked for more than a decade to identify conservation and restoration priorities in the Willamette Basin. Markets represent an opportunity to increase investment into the places and activities most likely to improve conditions for the cold-water-dependent species the TMDL for temperature is intended to address. After considering a wide range of options, the Willamette Partnership supports the use of a percentage requirement to direct marketplace investment to high-priority areas. This would mean that, for a given permit, a certain percentage of the offset credits used would need to come from restoration projects in priority areas. (The required percentage could be tied to the amount of priority area within the particular trading area.) The benefit of this policy is that it would guarantee investment in priority areas, regardless of market prices and conditions. • Establish service areas. Service areas mark the geographic boundaries within which buyers and sellers of an ecosystem service credit can interact. Service areas are determined based on the service being performed. For temperature credits in the Willamette, three service areas should be established, defined by the three points of maximum impact identified in the TMDL. It is the Willamette Partnership’s preference that water temperature credits generated anywhere in the watershed upstream of a point of maximum impact be available for use by buyers within or downstream of that service area. Such a system would create a nested pyramid of trading areas in which, for example, the City of Salem could buy credits from projects around Eugene, but the city of Eugene could not buy credits from 8-2 SECTION 8 - POLICY CONSIDERATIONS.DOC POLICY CONSIDERATIONS SPECIFIC TO THE TEMPERATURE MARKET projects in the Salem area because Salem is below the point of maximum impact to which Eugene is subject. The Willamette Partnership does not support a policy that would limit trading to areas upstream of a specific buyer’s point of discharge. Such a policy would reduce the opportunity to leverage the resources of multiple buyers for large projects in strategic areas. • Do not discount credits for time and distance to points of maximum impact. Given that flowing water is subject to multiple cycles of heating and cooling, spatial and temporal discounting is sometimes used to account for the difference between the temperature benefit provided at the site of a restoration project and the temperature benefit at some point downstream from the restoration site. For example, if a mile of streamside shade were planted along a tributary stream, modelers would estimate the cooling effect of that action at a specific point in the river downstream, such as at an agency-determined point of maximum impact or a specific credit buyer’s point of discharge. The Willamette Partnership supports current DEQ policy that a kilocalorie per day produced by an ecological restoration or flow augmentation project is worth a kilocalorie per day, regardless of the distance between the credit generation site and the credit buyer’s physical location. Although the Willamette Partnership recognizes that spatial and temporal discounting may be appropriate when point sources are trading TMDL allocations amongst themselves, it is the Partnership’s view that applying spatial discounting to ecological restoration activities could discourage strategic actions that would provide substantial benefits to fish and wildlife habitat. The TMDL for temperature is driven by the needs of cold-water-dependent species that need more and better habitat at the right times of year. Encouraging strategic investment in ecological restoration is one of the primary purposes of a point-source to non- point-source trading program. At the time of this writing, the internal management directive that will guide temperature credit trading in the Willamette Basin was still being revised. SECTION 8 - POLICY CONSIDERATIONS.DOC 8-3 Section 9 Continuing the Ecosystem Marketplace SECTION 9 Continuing the Ecosystem Marketplace Significant financial investments in ecosystem conservation and restoration are needed to achieve a sustainable future in which healthy and resilient ecosystems are the foundation of healthy communities and economies. Ecosystem service markets can help, but to ensure that the Willamette Ecosystem Marketplace grows and is capable of improving ecological conditions at a scale that will make a difference, we need an integrated marketplace that trades in multiple credits driven by multiple drivers. One of the key lessons of this project is the limitation of single market drivers that have limited scope and scale and are subject to political and legal challenges. The future of ecosystem conservation and restoration will require us to achieve a higher degree of integration across ecosystem objectives than currently exists. Ecological and economic goals must become aligned in the marketplace so that they provide, the resources needed to finance restoration, drive new business opportunities, and achieve an economic and environmentally sustainable future. Strategies for moving forward to continue and expand the ecosystem marketplace need to focus on three core areas: • Supportive policies that encourage and enable markets to integrate and thrive • Development of a third-party organization to manage centralized market infrastructure and standards that ensure efficiency and credibility • Technically sound credit accounting protocols that define multiple credit types based on ecological functions Activities in these three core areas will not succeed if they are undertaken in isolation. The policies, infrastructure, and technical tools needed for an integrated ecosystem services marketplace to thrive must be mutually supportive and must be developed and implemented together. The strategies described in this section represent the next steps for bringing an integrated ecosystem services marketplace to fruition. An Integrated Ecosystem Services Marketplace Even with the landmark state and federal environmental laws of the last 30 years in place, our most fervent efforts at conservation and restoration are not keeping pace with ecological decline. We are falling behind, despite the best of intentions. Continued degradation of ecosystem health will have negative effects on our economies, resource base, and quality of life. Oregon is home to many significant innovations that use market-based programs to provide ecosystem services. For example, the Climate Trust, the Oregon Water Trust, the Deschutes River Conservancy, and Clean Water Services have been national leaders in using carbon and water markets to help achieve ecosystem goals. Leadership at the local and regional levels has been and continues to be strong and creative, and business and political leaders at the highest levels across the state are engaged in and informed about ecosystem service issues and tools. SECTION 9 - CONTINUING THE MARKETPLACE.DOC 9-1 CONTINUING THE ECOSYSTEM MARKETPLACE Early in the development of the Willamette Ecosystem Marketplace, it was clear that the policy, infrastructure, and technical innovations needed to ensure success of an integrated marketplace were of statewide and even regional significance, not bound by the geography of a watershed like the Willamette. The experience of developing the policies, tools, and infrastructure to support a multi- credit marketplace under the auspices of the Willamette Ecosystem Marketplace enabled us to see clearly that a fully integrated ecosystem marketplace will need to cross geographic, jurisdictional, and institutional boundaries. Why Is an Integrated Marketplace Needed? There are many reasons to create an integrated ecosystem marketplace, the most significant being that existing regulatory programs could realize greater ecological results than they currently do. As we have seen in the Willamette temperature market, a narrow regulatory focus on temperature limits our ability to address the full suite of habitat features needed by the species the regulation is intended to protect. As a result, temperature for fish may be improved, but critical habitat elements like gravel, food, and wood remain unchanged and will continue to degrade without other regulatory or market drivers to reverse the trend. Such a system is equivalent to attempting to grow a plant by spraying the roots with water but providing no soil or sunlight. An integrated ecosystem services marketplace would enable a variety people who are regulated by a variety of regulations that are enforced by a variety of regulatory agencies to pay for large-scale restoration actions that address a whole spectrum of ecological conditions. In an integrated ecosystem services marketplace, the policies, infrastructure, and tools would be in place to enable a person who needs only temperature credits to buy just the temperature benefits of a restoration project, while someone who needs habitat credits could buy the large wood and gravel recruitment portions of the project. Such a system would create incentives for larger and more ecologically holistic actions and would guard people who take voluntary restoration actions against the risk of week or fickle demand drivers. Existing markets address individual ecological elements like wetlands, water temperature, nitrogen, phosphorus, endangered species, and carbon. Each operates at a different scale and is governed by a unique set of laws and administrative rules. The effect of this approach is to discourage investors and landowners from participating in multiple markets. Although there may be a smattering of individual projects, it will be difficult to finance large significant restoration projects that provide multiple ecosystem values if it is not easy for land mangers to sell the services they have created. In an integrated ecosystem services marketplace, agencies would be able to coordinate programs more effectively so that landowners are not intimidated by the administrative complexity of participating in the market and transaction costs would not exceed the value of the credits generated. A marketplace is simply a location—real or virtual—where buyers, sellers, and intermediaries meet to exchange goods and services. Markets emerge where the buyer perceives that benefits exceed the costs of engaging in trade. Two types of costs predominate in most markets. One is the payment made to sellers to compensate them for providing the good or service. The other is payments to intermediaries or other costs such as time, processing, fees, and appraisals. The latter are called transaction costs. A fundamental requirement for markets to emerge is that there must be gains from trade for the buyer and seller, after adding up the costs to participate. Ecosystem services present a uniquely complex case in market development. With “products” such as reduced water pollution, restored aquatic habitat, and sequestered carbon, the purchase costs are 9-2 SECTION 9 - CONTINUING THE MARKETPLACE.DOC CONTINUING THE ECOSYSTEM MARKETPLACE probably the most studied and relatively well known element of the equation. At the same time, while many people have been convinced that ecosystem conservation and restoration provide important benefits, these benefits are difficult for any one group or individual in society to capture. As a result, the demand to buy these services has often seemed limited. Finally, the general economic principle that transaction costs in new areas of exchange will typically be high has been confirmed by initial experiences with market-based approaches in this field. Thus the emergence of an integrated marketplace will require clear financial and economic incentives. Stimulating market demand will be essential, as will efforts to keep transaction costs low and credibility high. Because government regulations and agencies will be central to stimulating demand, many of the strategies that need to be employed revolve around stimulating demand, minimizing transaction costs, and ensuring credibility. An ecosystem marketplace can be viewed as a broad umbrella covering the full suite of mechanisms that promote investment in our ecosystems. Currently we have a well-intentioned but ad-hoc set of programs, rules, initiatives, and pilots. There are a vast number of regulatory and non-regulatory (“voluntary”) programs that span a number of ecosystems and specific ecosystem goods and services. Creating a marketplace using a comprehensive and integrated approach involves finding and resolving the gaps and overlaps in existing initiatives and moving to more efficient strategies for stimulating demand and conducting transactions in the marketplace. Core Area: Supportive Policies that Encourage and Enable Markets to Integrate and Thrive It is important to acknowledge that over the last 30 years, landmark changes in public policy and new environmental laws have made progress addressing some of the most visible and egregious sources of environmental degradation. However, these laws have too often focused solely on specific impacts and individual species and habitats. In addition, legal requirements have typically steered efforts toward the mitigation of specific impacts at or near the site of impact, leading to a hodgepodge of small, localized efforts. Treating isolated problems fails to consider the overall health of our natural environment. While such efforts may reduce the impacts, they may not effectively cope with the cumulative nature of gradual erosion and degradation of our ecosystems. The future of ecosystem conservation and restoration will require us to achieve a higher degree of integration across ecosystem objectives. This will enable ecological and economic goals to become aligned in the marketplace, providing the needed resources to finance restoration and drive new business opportunities. Integration across services in a market must start with public policies to encourage and support the development and use of ecosystem service markets. In order to attract both buyers and sellers of ecosystem services, markets need to be accessible, transparent, and not overly burdened by administrative complexity. Agency policies, rules, and procedures need to balance precision and risk avoidance with effectiveness and cost. Special attention to reducing risk for early market participants may be necessary to launch marketplace initiatives and develop pilot projects. Agree on Ecosystem Goals In the Willamette Valley, different researchers and agencies have developed multiple conservation and restoration priority schemes. The Nature Conservancy and Willamette Partnership integrated these disparate schemes into a single synthesis map of conservation priorities and discovered, not SECTION 9 - CONTINUING THE MARKETPLACE.DOC 9-3 CONTINUING THE ECOSYSTEM MARKETPLACE surprisingly, there was substantial alignment. The synthesis map can be used to direct ecosystem marketplace investments in a much more strategic, ecologically viable manner. Adoption and use of a framework for developing priorities based on the Willamette and other experiences may assist other regions in undertaking similar efforts. A coordinating body is needed to work with stakeholder groups at different scales to use existing plans and information to select and agree upon priority ecosystems and sites. The Synthesis Map Working Group that has already been convened by the Nature Conservancy and the Willamette Partnership is a logical starting point for this coordinating body. Any effort to prioritize investments must be adaptive and dynamic. • Priority maps should be based on best available science (but will never be perfect). • Priority maps and policies should be dynamic and flexible enough to include new information and knowledge and to adapt to unintended consequences. • Policies should encourage and, where possible, reward the use of priority maps but should not imply that work happens only in priority areas. • Policies must avoid sending a message to landowners and managers that lands that do not fall within priority maps are not ecologically valuable. • Local priorities need to be included alongside state- or landscape-level priorities. Balance the Use of Outcome-based and Prescriptive Rules The prescriptive nature of many regulations can lead to a focus on fixing small, specific problems using predefined approaches and existing technologies. Such rules may fail to harness market forces and promote private-sector innovation. An alternative to a focus on narrow prescriptive measures is to clearly state the desired outcomes of regulations and the acceptable indicators of having achieved the outcomes. Specifying the outcome and leaving the path to achieving that outcome open spurs innovation. Although the Willamette temperature market will certainly create significant ecological improvements when fully implemented, the narrow focus of measurement criteria—kilocalories per day—proved a significant barrier to including floodplain restoration actions in the marketplace. Floodplain restoration is known to improve stream temperature regimes and provide significant habitat for cold-water-dependent species, but the dynamic nature of floodplain systems currently does not enable precise measurement of kilocalories per day. Still, not all ecosystem services are amenable to measurement and enforcement. There is little point in developing an outcome-based approach if the resulting rule will be unclear or lack “teeth.” The route to compliance needs to be clear. Identify opportunities to improve existing prescriptions and/or shift to outcome-based approaches. Floodplain restoration is the most logical place to start this work for integrating market activities. Floodplain restoration could generate significant offset credits for water quality, endangered species, and flood damage protection. Floodplain restoration activities would be relevant to the full suite of state and federal regulatory agencies involved in both driving demand through regulations and regulating actions for restoration. When developing outcome-based policies, the following need to be considered: • Outcomes need to be tracked against restoration goals, so that it is clear how individual actions and projects contribute to meaningful restoration at scale. 9-4 SECTION 9 - CONTINUING THE MARKETPLACE.DOC CONTINUING THE ECOSYSTEM MARKETPLACE • Outcomes need to be measurable and enforceable to be meaningful. • Straightforward surrogates for the outcome may be chosen as a second-best approach. • Whether rules are prescriptive or outcome-based, regular monitoring and evaluation of outcomes and actions is required. • Agencies may wish to certify third-party firms to carry out evaluations, particularly if similar outcomes or technologies are being evaluated in non-regulatory (voluntary) ecosystem markets. Encourage Adaptive Management and Risk-Taking The threat of third-party litigation makes agencies risk-averse, by training and experience. Risk aversion is a fundamental cause of prescriptive rule-making as agencies seek to limit the ability of those being regulated to deviate from a prescribed path for fear that the agency would then be culpable. This can lead to long and costly routes to regulatory approval and discourages the adoption of newer, outcome-based approaches. There are multiple of examples of programs where agency risk-taking has resulted in dramatically better results for the environment. Altering institutional incentives within agencies will be central to promoting a willingness to take risks, experiment with new approaches, and then learn and adjust as needed. This is a large and complicated task and not one to be taken lightly. Large-scale, multi-agency pilot projects should be used to test innovative approaches and encourage an agency culture of adaptive management. The Willamette Partnership will begin work in July 2008 with private and public partners to develop new ecosystem-based accounting approaches to credit calculation. The project represents an opportunity to develop a large-scale multi-agency pilot that will address multiple ecological values and potential credit types. The pilot would offer agencies an opportunity to explore ways to: • Provide for oversight but lighten the regulatory requirements so as to avoid litigation when testing out new and promising approaches. • Use internal management directives to provide staff with incentives to take risks and develop new effective internal procedures that achieve ecological goals. • Build safety margins (or trading ratios) into mitigation obligations to reduce risk. • Find ways for agencies to adopt adaptive management approaches. Integrate Agency Responses across Ecosystem Services The agency-by-agency and service-by-service nature of regulatory response leads to “silo” approaches and single-purpose markets, which are too thin to be economically viable and are likely to be ecologically ineffective if they simply facilitate many small, disconnected conservation projects. Instead, opportunities to bundle and stack credits and implement other incentive programs need to be explored so landowners can capitalize on a sufficient set of ecosystem services to warrant adoption of new land uses and practices. Complementary ecosystem services should be identified and opportunities assessed for integrated approaches to regulations and incentives, bearing in mind that integration is best achieved in a particular location where all the silos and levels of government come together. Developing SECTION 9 - CONTINUING THE MARKETPLACE.DOC 9-5 CONTINUING THE ECOSYSTEM MARKETPLACE approaches for agency integration could be accomplished through pilot projects tied to a large-scale multi-credit project, with multiple public and private funding sources and agency regulations. Core Area: Third-Party Organization to Manage Centralized Market Infrastructure and Standards That Ensure Efficiency and Credibility Worldwide, environmental regulations, improving science, and consumer demand is driving an explosion of ecosystem service markets. Carbon, water quality, habitat and species services are all actively traded in markets. In 2005, the Katoomba Group estimated that these respective markets will invest more than $1.7 billion per year in ecosystem protection and restoration by the year 2010, a four-fold increase over 2005 investments These predictions were validated as trading activity jumped significantly. In 2007, the value of trade in the voluntary carbon market grew by 240 percent to $331 million (Hamilton, Sjardin, Marcello, and Xu 2008). As of 2006, there were 48 water quality trading programs in North America (Guiling et al., 2007), 31 states with wetland mitigation banking (Wilkinson and Thompson, 2006), and 10 states with endangered species conservation banking (Fox and Nino Murcia, 2005). Ecosystem service trading programs have been established to improve water quality in Chesapeake Bay and reduce carbon emissions in Europe. Similar programs in Oregon are reducing water temperatures in the Tualatin River and offsetting carbon emissions from Oregon power plants. However, most of these markets trade individual ecosystem services and operate in limited geographic areas. This results in fragmented ecosystem investments with thin supply and demand streams that limit opportunities to capitalize on investment efficiencies and economies of scale. As these markets grow, they share common opportunities and challenges. Ecosystem credits can be traded like commodities, but they differ from commodities in terms of their complexity, both before and after the trade. Actions and technologies that create offset credits must meet specific and rigorous performance standards to be sold in ecosystem service markets, and it requires significant work to document and verify credit attributes and performance, both before a credit is sold and for many years—or even decades—afterwards. Because the basic value and credibility of an individual offset or mitigation credit depends on rigorous verification and ongoing monitoring of performance, a centralized credit registry is a necessity. The registry consists of two parts: an institution that inventories and accounts for all credits available and sold within a market by documenting their generation, ownership, and trade; and the resulting database of information. A credit registry must be transparent to regulators, the public, and market participants. In addition, it must be supported by user-friendly technology and backed by the financial resources necessary to protect against accounting errors. In order to track ecosystem credits and provide overall transparency and credibility to the market, credits need to be verified, certified, recorded, and tracked over time. The system has yet to be designed, but progress has been made by the Willamette Partnership in defining what it should look like. No Web-based infrastructure exists to accommodate multiple ecosystem services credit types across jurisdictional boundaries. And none has been created with an independent mission of accounting for and tracking credits over time to ensure transparency and quality. 9-6 SECTION 9 - CONTINUING THE MARKETPLACE.DOC CONTINUING THE ECOSYSTEM MARKETPLACE This limitation creates a unique opportunity for ecosystem market leaders. In Oregon, the Willamette Partnership, the Nature Conservancy, Defenders of Wildlife, Eco-Trust, Earth Advantage, Sustainable Northwest, the Climate Trust and others have begun to catalyze formation of a national Ecosystem Services Council to develop accounting and tracking systems, vet credit protocols, accredit third party verifiers, and oversee a credit registry and tracking system. Such a council should be a consortium of non-profit organizations with a common interest in ensuring that emerging ecosystem service credit markets are credible, efficient, and achieve the high- quality ecological improvements that are needed. The primary function of the national council would be to build and govern the centralized market infrastructure to support ecosystem service markets. Roles of the national body could include the following. Develop and Certify Measurement, Performance, and Verification Protocols For ecosystem service markets to operate efficiently, the validity of individual credits must be certain. Credits for various markets can be created in numerous ways. For example, to create stream temperature reduction credits, investors can plant streamside shade trees, restore wetlands, make technological upgrades, or take other actions. For credits to be exchanged in a market, buyers, sellers, regulators, and the public need to understand and agree to the measurement criteria, performance standards, and verification protocols for each credit-generating activity. A wide range of organizations are working to develop the criteria and performance standards needed to generate credits in both local markets and global markets. A national Ecosystem Services Council would provide a credible venue to convene local, regional, and global experts to establish standards for credit measurement, performance, and verification in global markets and procedures for local markets. Develop and Certify Credible Verification Entities for Each of the Markets Each market type will require credible experts to verify that credit performance standards and criteria are met. The credibility of credits in ecosystem markets depends on the integrity of the credit sold. Working with regulatory entities, local experts, and other stakeholders, the national council would train, certify, and monitor verification entities and audit procedures for ecosystem service markets. Develop and Manage a Centralized Ecosystem Credit Registry A database and accounting system is needed as to register, certify, bank, and track ecosystem credits. Parties generating credits need an efficient system to register credits and have them certified by a third party. Buyers, regulators, and the public need a way to ensure that the credits created and purchased are valid and performing the services intended and that an individual credit is not sold more than once. In a credit registry, all relevant information about a credit (origin, vintage, ownership, life expectancy, etc.) would be tracked and accounted for. The credit registry would function similarly to a bank in that it would serve as the repository of credits deposited by sellers and purchased by buyers. Credits deposited would be registered and held until they are certified and then made available for sale. The repository would maintain records of accounts and transactions. The system would produce selected reports about individual registry accounts and trading activities in formats to serve a variety of tracking and evaluation needs, including regulatory reporting requirements. The centralized system would help credit buyers and sellers find each other and facilitate efficient transactions through the use of pre-approved credit verification and certification procedures. It also would support and regulate credit standards that ensure the credibility of credits SECTION 9 - CONTINUING THE MARKETPLACE.DOC 9-7 CONTINUING THE ECOSYSTEM MARKETPLACE for the protection of the participants, especially those using credits as part of a regulatory or contractual compliance strategy. Manage Assurance Pools Needed to Buffer Against Failure of Mitigation and Offset Credits An assurance pool of credits is needed to protect against project failures and other market risks. The national council could manage a fund created as a percentage of total sales, or as insurance premium to invest in ecological restoration projects and conservation activities. The assurance pool would create a bank of credits that protect the public interest in the event of project failure in the market. The portfolio of assurance credits would be geographically and functionally equivalent to cover existing credits and transactions in the market. Foster Nationwide Coordination by Supporting Existing Efforts Work has already begun to develop such a National Ecosystem Services Council. In June 2008, a coalition of not-for-profit organizations with a common need for infrastructure and standards to support their local, regional, and national work on ecosystem markets developed a funding request to the Oregon Economic and Community Development Department to: • Develop a charter for the organization to formalize operating expectations and commitments and define a decision-making process. • Define its role and services. • Research and evaluate alternative organizational structures and evaluate the potential client base for the registry, develop protocols, test regulatory agency acceptance of a national organization and registry, and develop and explore potential revenue models to complete a proof of concept for the marketplace infrastructure and its operation. • Develop a stepwise strategy for registry development, including interim management. Dozens of new local market programs and initiatives are emerging throughout the United States. Action to coordinate efforts now will improve the chances that markets develop in credible ways that achieve ecological goals. If they do not, the public mistrust that will result from market failures or mistakes could limit markets’ long-term sustainability. Core Area: Technically Sound Credit Accounting Protocols That Define Multiple Credit Types Based on Ecological Functions A key component of an ecosystem marketplace is the technical capability to clearly identify and quantify relationships between development impacts and required mitigation or offsets. Developing the scientific and technical ability to develop, certify, and track such ecosystem service obligations and credits will be critical to the development of both supply and demand in an integrated marketplace. Technically sound and agency-approved credit accounting protocols are a critical step in making the full potential of an integrated ecosystem services marketplace a reality. We know that restoration actions produce multiple ecological services that are difficult, expensive, or impossible to replace once have been lost. As we have documented throughout this project, 9-8 SECTION 9 - CONTINUING THE MARKETPLACE.DOC CONTINUING THE ECOSYSTEM MARKETPLACE markets are emerging that attempt to assign values to these services, expanding the opportunities for land managers to capitalize on the investments they have made in sustainable landscapes and to generate revenue from larger, more comprehensive restoration. However, a credible ecologically based accounting system to turn ecosystem benefits into credits that can be traded is still missing. If we are to realize our vision of an integrated ecosystem services marketplace, technically sound methods to quantify multiple ecosystem credit types must be developed and receive regulatory approval for use. A system to account for impacts and credits must be open for anyone to look into and must be accepted by the public and private parties operating markets. Coordinate Efforts to Create Credit Calculating Methods Beginning in July 2008, the Willamette Partnership will begin a major effort with agency leaders and stakeholders to: • Obtain Oregon’s first multi-stakeholder agreement to use a shared accounting system to quantify impacts and credits to ecosystem services for application in ecosystem markets. • Lead a pilot project to demonstrate real environmental benefits and compare the results from this functions-based accounting system with the results from current approaches. Success in this effort will represent a significant milestone in development of an integrated ecosystem services marketplace and will support development of centralized market infrastructure. But other efforts at developing credit calculating methods are developing in other parts of the country as well. It will take concerted, intentional effort to ensure that credit calculating methods do not develop in ways that confuse market participants, regulators, and the public in different regions of the county. SECTION 9 - CONTINUING THE MARKETPLACE.DOC 9-9 Section 10 Lessons Learned SECTION 10 Lessons Learned Developing the Willamette Ecosystem Marketplace was a process that involved lots of hard work, technical and regulatory challenges, obstacles to effective communication and collaboration, and, as a result, seemingly endless opportunities to learn. Some of the lessons that emerged from the marketplace development process are listed in Sections 3 through 8 of this report in connection with specific project tasks. Larger scale lessons that apply to the entire process are presented in this section. This information is provided for the benefit of other entities who are considering developing an ecosystem marketplace to help smooth their path to success. Know whether you are ready. Before embarking on the process of developing an ecosystem marketplace, you need to have (1) clear ecological goals so you can design the marketplace to achieve them; (2) regulations or some other motivating factor in place that will drive demand for credits; (3) well-informed, fully engaged partners and stakeholders who not only will support the effort but who understand the basics of ecosystem markets; and (4) a neutral third party who can lead development of the marketplace—someone who is trusted by the environmental community, the regulated community, and regulatory agencies and does not have a financial or regulatory stake in market outcomes. The Willamette Partnership was clear and consistent about its ecological goals, but it experienced a setback when the TMDL that was driving demand for temperature credits was challenged by four of the largest potential buyers in the market. The sense of urgency that existed for the regulatory agencies and buyers—and therefore their demand for a marketplace solution—waned when implementation of the TMDL was postponed. This added to the Partnership’s workload. The organization had to simultaneously develop the marketplace, educate potential buyers and sellers about how they could benefit from a marketplace, and try to stimulate demand when the expected demand driver—the TMDL—lost steam. Having firm regulations and a business community that already understood ecosystem markets would have freed up time for the Willamette Partnership to perform other activities such as additional technical work, project coordination, or broader outreach and education. Consider carefully whether or not to take a collaborative or advocacy role. This is a strategic decision that affects the pace of marketplace development and the level of buy-in from regulatory agencies, the business community, and others. The Willamette Partnership took a collaborative, relationship-oriented approach in working with potential marketplace participants. This may have slowed down the process of developing the marketplace, but the Partnership now has strong relationships with regulatory staff and other active stakeholders that will be of benefit to the market for years. In some cases an advocacy approach might be a better choice, especially if speedier results are required and there is little to no confusion or uncertainty about the approach or needed outcomes. Harness the regulated community to push for regulatory changes. Current regulatory structures are not designed to support multi-credit trading systems, and regulatory agency staff tend to be overworked and risk averse. Thus, agencies need encouragement to develop policies, rules, and SECTION 10 - LESSONS LEARNED.DOC 10-1 LESSONS LEARNED regulations that allow ecosystem markets to work. This push must come from those who are most affected by agency regulations: regulated businesses and municipalities and watchdog groups who protect the public interest. Be sensible about your infrastructure needs. A new ecosystem marketplace could require anything from just a few key infrastructure components to an elaborate infrastructure along the lines of the New York Stock Exchange. To save money, time, and effort, be realistic about what you need and try to make use of already-existing marketplace components as much as possible. Otherwise, the prospect of creating a totally new, comprehensive marketplace infrastructure could be daunting (at best) or completely overwhelming (at worst). Get to scale. A small, single-parameter marketplace with few transactions is unlikely to drive ecosystem-scale restoration and may not be efficient enough to compete with traditional compliance approaches in terms of costs to marketplace participants. To be economically efficient and as ecologically effective as possible, an ecosystem marketplace must get to scale by expanding the number of participants, transactions, and types of credits generated and sold. An integrated, multi- credit marketplace allows a landowner to profit from a full-scale restoration project (because he or she can sell more types of credits or at least has a menu of choices), increases the volume of transactions, and widens the circle of people who have a stake in the marketplace’s long-term success. Even though you may be starting with just one type of credit in a small marketplace, plan to expand. This means working with regulatory agencies to align regulations more closely with the desired ecological outcomes, educating stakeholders about the many types of credits that could be part of the marketplace, and looking for opportunities to expand technical analyses to include many parameters and types of credits. Plan for extensive, consistent, and persistent education and outreach. Ecosystem markets cannot succeed if people do not understand what they are, how they work, and the ecological and financial advantages they offer. This is particularly true for the regulated community, which is who will ultimately decide to purchase ecosystem services credits—or not. The concept of ecosystem markets is new to most people, and they may need help understanding what it means to them. It is likely that education and outreach will need to be extensive, and continue throughout the marketplace development process; therefore, thorough education and outreach should be built into the project work plan. Fortunately, there are many venues for spreading the word. For example, existing professional organizations can help inform their constituents about the opportunities that markets represent for them. Stay engaged with stakeholders. It is important to maintain a conversation with stakeholders throughout the project, even when there is no significant news to share, and to follow up on stakeholder issues. There was great interest in a Willamette Ecosystem Marketplace early in the project, and many constituents were highly engaged; however, for various reasons, communication lapsed somewhat part way through. Without regular communication from the Willamette Partnership, the door was open for stakeholders to come up with their own explanations for what was happening on the project, and this took time and effort to correct. Open lines of communication builds the trust that all parties rely on when working through issues that inevitably arise. Balance technical work, communication, and process management. It takes time to work out the details needed to support a trade in an ecosystem marketplace, to communicate with 10-2 SECTION 10 - LESSONS LEARNED.DOC LESSONS LEARNED stakeholders and the public, and to manage the marketplace development process, particularly decision making. Yet these activities are essential, and time for them should be built into the project work plan. The work plan then needs to be followed so all parties know when and how to participate in the process; key outreach and education tasks that support the marketplace get accomplished; stakeholders stay informed; and there is still enough time to create a solid foundation for the marketplace and complete the first transaction. The Willamette Partnership focused on the technical aspects of marketplace creation and used informal project management and decision- making processes. A more balanced and methodical approach might have slowed the overall process, but it may also have enhanced stakeholders’ understanding, made decision making more open or transparent, or allowed time for other products to be developed. Keep your eye on your ultimate goal. Businesses, municipalities, individual landowners, and regulatory agencies have immediate needs and may not have the luxury of being able to think about how their participation in the marketplace will contribute to the long-term, large-scale goal of ecosystem restoration. It is important to help stakeholders meet their short-term needs using an ecosystem marketplace but also to keep framing the project as a long-term effort that eventually will pay dividends, both financially and ecologically. Maintaining this view broadens the discussion and the political space to make an ecosystem marketplace possible. Be willing to accept some imperfections. Developing an ecosystem marketplace that quantifies and translates ecosystem services into tradable units is a recent and innovative concept— one that still has embedded uncertainties and surprises. Ideally, market-based solutions would not be implemented until they were better understood and more fully developed. But at this point in the natural history of the Willamette Basin, time is of the essence. Large-scale restoration is desperately needed and cannot be postponed to the point that we know exactly how ecosystem markets will function. The Willamette Basin is an example of how important an ecosystem marketplace can be. Even if imperfect, ecosystem markets offer an opportunity to go beyond complying with regulation to achieve holistic, integrated restoration that reestablishes the ecological integrity of the ecosystem. It is not necessary to have every minute detail sorted out before you start capitalizing on these marketplace opportunities. There is time later for adjustments and refinements, once the marketplace starts providing its ecological and financial gains. One of the most frequently quoted statements throughout this whole project came from Stan Gregory on June 22, 2006, at a conference at Oregon State University. He said, “we could spend 10 years and $10 million to develop models that will predict the temperature benefits of floodplain restoration and at the end we would still just have a model. Or we could spend $10 million dollars to complete the restoration action now, and in 10 years we would have empirical data to confirm the results.” The wisdom of this statement resonates with stakeholders. Plan for the post-grant period. An ecosystem marketplace is a long-term endeavor that requires a financially sound business model and a designated party to manage the marketplace activities for years into the future. If marketplace development is funded through grants, you must plan ahead, organizationally and financially, for when grant funding ends. This could require careful thought about your organization’s long-term role in the marketplace and whether you need to build organizational capacity to manage or support marketplace activities in some way. Deciding early on who will administer the marketplace infrastructure in the future provides certainty to stakeholders SECTION 10 - LESSONS LEARNED.DOC 10-3 LESSONS LEARNED and reassures them that, although an ecosystem marketplace has its risks, it is a viable alternative to traditional compliance options. *** Creating an ecosystem marketplace is a large and complex process, and the Willamette Partnership made several missteps and wrong assumptions along the way that were challenging to recover from. The Willamette Partnership and the many stakeholders involved in the process were learning as the project progressed, and the continually increasing knowledge necessitated frequent adjustments in expectations. The organization struggled to bring the project to completion by facilitating a market transaction before the end of the 2 ½-year grant period. Nevertheless, even just the effort to develop the Willamette Ecosystem Marketplace has attracted a high level of interest from people outside the state. From the beginning of the project, it was believed that Oregon could become the national center for an ecosystem services “industry” that provides significant new business opportunities in the state in the form of consulting, verification, and other ancillary marketplace services. This is already happening. Businesses, utilities, governments, and non-profit organizations from around the country are already looking to the Willamette as a model of an integrated, multi- credit marketplace. For example, a group in the Chesapeake Bay working to create a “Bay Bank” is contracting with Oregon firms to build information technology to support the ecosystem marketplace they are forming, and British Columbia Hydro Power is contracting with other Oregon firms to help the utility implement a policy of no net loss of ecosystem services. These intellectual exports are the result of experience gained working on marketplace efforts in Oregon. Such business deals are likely to continue growing as Oregon works to quantify ecosystem services and translate them into tradable units. Perhaps the more important legacy of this project is that the Willamette Partnership’s efforts in the last 2 ½ years have changed the dialogue in Oregon about ecosystem markets and created a type of political and policy space where an integrated, multi-credit marketplace can become a reality. Oregon business and civic leaders, regulatory agency staff, and environmental organizations now know what an ecosystem marketplace is, how it should work, and what steps are needed to make it work. They also understand much better their own roles in a marketplace, and how their participation can not just improve their bottom line, but reverse the ecological degradation in the Willamette Basin. The Willamette Partnership looks forward to continuing to work with its partners and stakeholders to do just that. 10-4 SECTION 10 - LESSONS LEARNED.DOC Section 11 References SECTION 11 References California Climate Action Registry Certification Protocol and General Reporting Protocol, International Standards (ISO 14064-3, 14066, and 19011 – 2002(E)). Fox, J., and A. Nino-Murcia. 2005. “Status of Species Conservation Banking in the United States.” Conservation Biology, 19, 996–1007. Guiling, J., M. Selman, and E. Branosky. 2007. An Overview of Water Quality Trading. Washington, D.C: World Resources Institute. Hamilton, K., M. Sjardin, T. Marcello, and G. Xu. 2008. Forging a Frontier: State of the Voluntary Carbon Markets 2008. A report by Ecosystem Marketplace & New Carbon Finance. Hulse, David W. and Stanley Gregory. 2007. Linking Cold-Water Refuges into a Biologically Effective Network in the Southern Willamette River Floodplain: Outlining Key Locations and Knowledge Gaps. Prepared for: Daniel D. Heagerty, David Evans and Associates, Inc. May 31. Johnson, David H. and Thomas A. O’Neil, eds. 2001. Wildlife-Habitat Relationships in Oregon and Washington. Corvallis, Oregon: Oregon State University Press. Long Tom Watershed Council. 2008. Ecosystem Restoration in the Long Tom River Basin for Water Quality Improvement in the Willamette River: Preliminary Findings. Prepared for the City of Eugene. National Oceanic and Atmospheric Administration (NOAA), National Marine Fisheries Service. 2005. Critical Habitat Areas – Pacific Salmon and Steelhead Critical Habitat. Available online at: http://www.nmfs.noaa.gov/gis/data/critical.htm Oregon Department of Environmental Quality (DEQ) Permit language (section 1). Oregon Department of Environmental Quality (DEQ) Internal Management Directives (IMDs). Oregon Department of Fish and Wildlife (ODFW). 2006. Oregon Conservation Strategy. Available online at: www.dfw.state.or.us/conservationstrategy/index.asp Oregon Natural Heritage Information Center (ORNHIC). 2004. Rare, Threatened and Endangered Species of Oregon. Available online at: http://oregonstate.edu/ornhic/documents/2004_t&e_book.pdf SECTION 11 - REFERENCES.DOC 11-1 REFERENCES Pacific Northwest Ecosystem Research Consortium. 2002. Willamette River Basin Atlas: Trajectories of Environmental and Ecological Change. Edited by David Hulse, Stan Gregory, and Joan Baker. Corvallis, Oregon: Oregon State University Press. Smesrud, Jason, Matt Boyd, Brian Kasper, and Stephanie Eisner. 2007. An Energy Balance Model for Effluent Heat Reduction through Wetlands. Presented at a conference of the Pacific Northwest Clean Water Association. U.S. Environmental Protection Agency (EPA) Regulations on the Confidentiality of Business Information (see 40 CFR part 2). Wilkinson, J., and J. Thompson. 2006. 2005 Status Report on Compensatory Mitigation in the United States. Washington, DC: Environmental Law Institute. 11-2 SECTION 11 - REFERENCES.DOC Supporting Documents for Section 3 – Market Appraisal (Task 1) WA S H I N G TO N Hillsboro Portland Forest Grove Hazelwood Aloha Beaverton Gresham Milwaukie Tigard Oak Grove West Gladstone Tualatin Linn Oregon City Newberg McMinnville Woodburn Keizer Hayesville Salem Four Corners Weyerhaeuser Albany ¨ ¨ ¨¨ Albany Wah Chang ¨ ¨ Albany Corvallis Corvallis ¨ ¨¨ Evanite Lebanon Fort James Halsey ¨¨ ¨¨ Pope and Talbot Thermal Load Obligations Summer TMDL* Spawning TMDL Load to offset** Load to offset 3 5 ¨ ¨ 4-8 6 - 10 ¨ ¨ Santa Clara MWMC 9 - 27 11 - 101 ¨ ¨ ¨ ¨ Eugene Springfield 28 - 36 102 - 141 ¨ ¨ ¨ ¨ U of O Heat Plant 37 - 70 142 - 266 ¨ ¨ * Source names in bold **Units are in M/kcals/day Reference Layers Draft Willamette Synthesis Portfolio Willamette Valley Willamette Basin Cities (names in italics) Rivers Highways $ 0 10 20 Kilometers 0 10 20 Miles Increasing the pace, expanding the scope, and improving the effectiveness of conservation A PRIMER ON EXISTING AND EMERGING MARKETS FOR ENVIRONMENTAL OFF-SET CREDITS IN THE WILLAMETTE RIVER BASIN Wetlands mitigation banking Market driver Section 404 fill permits from the Clean Water Act, and Section 10 of the Rivers and Harbors Act Federal regulating US Army Corps of Engineers, US EPA agencies Oregon regulating Department of State Lands agencies Other involved US Fish and Wildlife Service, NOAA Fisheries, ODFW, and other agencies members of the mitigation banking review team Summary When a land developer fills or otherwise impacts a wetland they may buy offsets from a mitigation banker. The mitigation banker restores or creates an area of wetland (or multiple sites under an umbrella agreement) to generate credits. The number of credits generated by a restoration project is related to the area of wetland as well as the functional value of the wetland. In many instances the number of credits available for sale is less than the number of acres of restored. Further, a ratio is applied to the mitigation transaction typically in the range of one acre of impacted wetland to between one and three acres of restored wetland. Ratios increase to one to ten acres for wetland preservation projects that do not create or improve wetlands. A mitigation banker is responsible for establishing a wetland bank following financial and environmental guidelines before credits are released to the bank for subsequent sale. The Mitigation Banking Instrument which constitutes approval to build/preserve or enhance the wetland can take between 6 and 18 months to complete in some states, but can take considerably longer in some Army Corps districts. Mitigation is expected to take place before the impact on the wetland occurs, nonetheless credits are released to the bank sponsor over a period of a few years after the wetland is planned and authorized, and before 5 years of project monitoring concludes. In many instances up to 15 percent of the expected credits from a bank can be released before construction is complete. To secure the long-term success of the mitigation bank, a performance 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness bond and contingency security are required to cover construction and 5 year post construction monitoring of wetland quality and function. Long term management of the site must be guaranteed and endowed by the bank sponsor. Wetland mitigation credits must ensure that the wetland functions will be guaranteed to endure to perpetuity. The regulatory authority can exercise random audits and inspections of the compensation wetlands project (www.ecosystemmarketplace.net). US EPA his issued a new draft rule on compensatory mitigation that favors offsite mitigation and contains many elements favoring mitigation banking. The new rule will replace the existing EPA guidance issued in 1995. IN 2005, there were 31 states with active mitigation banks. From 1992 to 2005, the number of active banks grew from 46 to 330 banks (ELI 2005). More than 31% of all compensatory mitigation in the country is done by mitigation banks, representing one of the fastest growing ecosystem markets. The price of mitigation credits vary widely, ranging on the low end from $3,000-$15,000 per acre and on the high end from $60,000- $150,000 per acre (ELI 2005). OR buyers Dept. of Transportation, Public Works Projects- including shovel-ready industrial lands, major corporations, commercial and residential real-estate developers. State Lands has identified the following areas as needing bank sites: Clackamas County-northwestern segment; Multnomah County- western segment; Jackson County - Medford area; Roseburg area; The entire Oregon coast. OR sellers Farmers, private bankers, land trusts. There are currently more than 8 operational private banks in the Willamette Valley. OR potential High: already active with growing demand along I-5 corridor and Washington County. First streambank mitigation bank in approval in 2006. State Lands is exploring the option of building a state clearinghouse (similar to the NC Ecosystem Enhancement Program) for wetland mitigation credits tied to industrial site development. Endangered species conservation banking Market driver Section 7 (consultations) and Section 10 (incidental take) of the Endangered Species Act Federal regulating US Fish and Wildlife Service, National Marine Fisheries Service agencies Oregon regulating Not determined agencies Other involved Future members of the conservation banking review team. agencies Summary The US conservation banking market is a biodiversity offset system that allows for the sales and purchase of endangered species credits to offset 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness negative impacts to endangered species and their habitat. Banks are created by permanently protecting endangered species habitat on private land. Conservation banking was pioneered in the state of California and is becoming increasingly popular in other states since the passage of federal guideline of their establishment, use, and operation in 2003 (www.ecosystemmarketplace.net). A bank can be created in a number of different ways: (1) acquisition of existing habitat; (2) protection of existing habitat through conservation easements; (3) restoration or enhancements of disturbed habitat; (4) creation of new habitat in some situations; and (5) prescriptive management of habitats for specified biological characteristics. USFWS and NMFS are each responsible for conservation banking for their species. NMFS has approved a salmon bank in California, and USFWS has just approved the first two bank sites in Oregon for Oregon chub. USFWS is currently developing conservation banking policy for Oregon and initial public review drafts should be available for review in late 2006, early 2007. As of 2005, there were 76 properties in 10 states identified as conservation banks, 35 of which were under conservation banking agreements with the USFWS (Fox and Nino-Murcia 2005). Credit prices range from $3,000 to $125,000 per acre and 91% are breaking even or making money. On average, banking agreements took 2.18 years to establish, and there is still a lot of uncertainty surrounding the rules and practices for conservation banking. OR buyers Dept. of Transportation, Public Works Projects, major corporations, commercial and residential real-estate developers OR sellers Farmers, private bankers, land trusts OR potential Medium: USFWS has approved the first to conservation banks for OR chub for the Dept. of Transportation. There is still no formal process for conservation bank approval. There are no standards for anadromous fish banking. The recovery plans for the Willamette Basin species will enhance banking. There is also a need to authorize low impact incidental take permits as an additional driver of banking in OR. Water quality trading Market driver NPDES permits, TMDLs, and MS4 permits Federal regulating US EPA agencies Oregon regulating Dept. of Environmental Quality agencies 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness Other involved agencies Summary Most water quality markets are established to assist industrial and municipal waste water dischargers that must reduce the amount of pollutants they release to natural. Trading allows polluters with high costs of pollutant reduction to contract with other entities with lower cost of reduction to meet their pollutant reduction requirements. Credits can be purchased from other industrial dischargers that have lower cost for pollutant reduction or unregulated land-based pollutant sources such as farmers. In most cases the liability for reducing pollutant loading resides with the permitted discharger even after the trade has been approved. Bilateral contracting mechanisms may mitigate some of the risk in these transactions. Pollutant trading programs are most commonly established for water bodies that do not meet water quality standards. US EPA requires most states to develop pollutant control strategies, known as Total Maximum Daily Loads or TMDLs, for these impaired waters. A TMDL determines the daily, seasonal or annual maximum amount of a particular pollutant that a water body may receive and still meet the required pollutant limits for that water body. Once a TMDL is established regulators must tighten pollutant discharge restrictions to reduce pollutant loads. Pollutant trading programs are looked to as the way to minimize the cost of achieving water quality goals in these impaired waters (www.ecosystemmarketplace.net). In 2005, there 39 water quality trading programs around the country. Many of these are not actively trading due to lack of demand for credits. State water quality agencies and publicly operated treatement works play an important role in launched trading programs, but local coalitions have launched some of the most successful programs. Most programs trade in nutrients, but there are trading programs for temperature, heavy metals, total dissolved solids, selenium, sediment, and flow. Markets are set up as bilateral agreements, brokered trades, and clearinghouses. Trading ratios range from 3:1 to 1:1, with most point/point trades getting a 1:1 ration and most point/nonpoint trades a 2:1 ratio. The three biggest obstacles to trading are thin markets with little demand, no regulatory driver, and early problems with negotiation and conflict. OR buyers NPDES permit holders OR sellers POTWs, farmers OR potential High: already active in the Tualatin Basin with grant monies in place to expand temperature trading in the Willamette. There is a need to authorize trading for other constituents like phosphorous, dissolved oxygen, and 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness bacteria. Air quality trading Market driver Kyoto protocol, state emissions standards, federal acid rain programs Federal regulating US EPA, Dept. of Energy maintains a registry agencies Oregon regulating OR Dept. of Environmental Quality, OR Dept. of Energy agencies Other involved agencies Summary In 1997 Oregon became the first state in the nation to adopt legislation regulating greenhouse gases. The law requires new Oregon power plants (and other large energy facilities) to offset a significant portion of their carbon dioxide emissions. While emitters may choose to offset the emissions through their own investments, all of the regulated power plants to date have utilized the Oregon Climate Trust to achieve compliance. As of 2006, the Climate trust had invested $4 million in energy efficiency, renewable energy, sequestration, transportation efficiency, cogeneration, and material substitution projects. The three funding sequestration projects include forest on tribal lands in Washington, along the Deschutes River, and in Equador. Voluntary carbon trading schemes have also emerged in the United States. The Chicago Climate Exchange (CCX) is a pilot greenhouse gas (GHG) cap-and-trade program running from 2003 to 2006. The 24 Members of the CCX have made a voluntary, legally-binding commitment to reduce their emissions of greenhouse gases (CO2, CH4, N2O, PFCs, HFCs, SF6) by four percent below the average of their 1998-2001 emissions baseline by 2006 (www.ecosystemmarketplace.net). Many of the current offset projects come from Midwest agricultural soil carbon offsets. Other projects include forestry, agricultural methane, landfill methane, and renewable energy. Offsets have been purchased in Washington and California, but none in Oregon. Other air quality markets exist under EPA’s Acid Rain Program (1990), Clean Air Interstate Rule (2005), and Clean Air Mercury Rule (2005). State and regional programs such as the Regional Greenhouse Gas Initiative in the Northeast, Emissions Reduction Market System in Illinois, and a program in Houston have also grown. Currently, OR does not allow emissions trading for other emissions beyond those of new power plants. California is working on a climate change registry, and has recently developed an agreement to trade carbon credits with the British government. New standards shared by California, Oregon, and Washington could create new opportunities for greenhouse gas markets. 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness OR buyers Power utilities, businesses, private individual offsetters OR sellers Forest landowners, riparian forest restoration projects OR potential High: already active through the Oregon climate trust. The Chicago Climate Exchange has not bought any carbon from Oregon yet. There is a need to connect carbon markets with other ecosystem goals. Water supply trading Market driver Water quality goals under the Clean Water Act, Endangered Species Act, other water supply needs Federal regulating agencies Oregon regulating Dept. of Water Resources agencies Other involved agencies Summary Most water quantity trades have involved urban water users leasing water from agricultural water rights holders in the Western United States. California, the Columbia Basin, and the Great Lakes have increased trading for environmental purposes in recent years. Flows are also getting attention related to meeting water quality goals and stormwater discharge requirements. In many places, the property rights for water are established, but there is less experience in the legalities of transfers and environmental uses. The Deschutes Basin has seen some of the most active trading in water supply in an effort to restore natural flows. The Deschutes Water Alliance has created a Water Bank, which allows for temporary lease of unused water for instream flow, development of a groundwater mitigation bank, and water reserves. The Oregon Water Trust acquires, purchases, and develops agreement to provide water in-stream. Large portions of their funds come from Bonneville Power Administration. OR buyers POTWs, state agencies, municipal water suppliers, new farmers, environmental groups OR sellers Farmers, irrigation districts OR potential High: already active throughout the country. Trading for environmental purposes has been facilitated by the OR Water Trust. Property rights are already well established. There is a need to expand the drivers for environmental trading and to link water quantity more closely with water quality goals. Transferable development rights Market driver Local zoning 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness Federal regulating agencies Oregon regulating Local governments, Metro agencies Other involved agencies Summary Transferable development rights are a tool to make zoning rules more equitable and predictable. They separate the development rights from the land and other bundles of property rights. In a local comprehensive plan, areas are designated as “sending areas”, or those places where low density or conservation are desired. These areas are given tradable credits that they can sell to “receiving areas” where higher density development is demanded by the market or required by local government. Transferable development rights has its roots in New York City’s 1916 zoning law capping the height of buildings, but allowing skyscrapers to purchase air rights from adjacent open space. Some of the successful TDR programs include King County, WA, The Pinelands, New Jersey, Boulder County, Colorado, and Montgomery County, Maryland. As of 2005, the King County program had protected 143 square miles of land. In King County, a sending site might expect to receive between $10,000 and $24,500 for their development right. A sending site must be placed in a conservation easement before transfers can occur. The land must be unincorporated. Credits can be sold directly to buyers or a “TDR Bank” operated by the County to purchase high priority credits. The Bank was capitalized with $1.5 million from the County in 1999. Receiving sites can be: Unincorporated King County urban areas zoned R-4 through R-48, NB, CB, RB, or O; Incorporated cities where allowed by the local jurisdiction; Some rural areas zoned RA-2.5. A version of transferable development rights might be used in association with new lands coming into the urban growth boundary and with Goal 5 implementation. OR buyers Developers in high density areas OR sellers Landowners in low density areas OR potential Medium: already active in Washington, but is likely to run into obstacles in OR’s current land use planning environment. There is an opportunity to incorporate trading into the Big Look or at a smaller scale for the Bethany or Damascus UGB expansions. Renewable energy trading Market driver Large capital management firms wanting to “green” portfolios Federal regulating 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness agencies Oregon regulating agencies Other involved agencies Summary Large capital investment firms and energy companies purchase renewable energy credits from those providers to offset other investments. OR buyers OR sellers OR potential ? POTENTIAL MARKETS Green certification habitat markets Market driver Green certification requirements Federal regulating agencies Oregon regulating agencies Other involved agencies Summary Many of the green certification programs for food and timber products, such as Food Alliance and others, include provisions for fish and wildlife habitat as a condition for certifying products. There is interest and potential here for allowing farmers and foresters to purchase habitat offsets from banks or other farmers to meet certification requirements. OR buyers Farm and forest owners OR sellers Farmers, foresters, private bankers, land trusts OR potential Medium: Certification rules already ask for habitat, but there is no system in place for authorizing trading. Certification programs are supportive of the offset idea. Farmers are getting certified now based on current activities, so there may not be enough of an incentive to trade. Stormwater Trading Market driver Local regulations, MS4 permit, Clean Water Act Federal regulating US EPA agencies Oregon regulating Dept. of Environmental Quality agencies Other involved Municipal governments, special districts 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness agencies Summary The City of Portland is conducting a stormwater trading feasibility study. They cannot trade directly within the bounds of their MS4 permit. They are using a local ordinance focusing on flows as a driver for trade. The Portland program is also tied to its Combined Sewer Outflow issues. Trading might occur around impervious pavement, where a green street installation might create credits that could be traded to developers in the same watershed. OR buyers Cities, developers, and other stormwater dischargers OR sellers Private residences, farms, developers, cities OR potential Low: Even though Portland may be creating the first stormwater trading program, it may be unique to Portland. The regulatory drivers are not very clear and a lot of work with DEQ and EPA would need to be done to make room for trading. Tradable recreation permits Market driver Capped supply of recreation permits for fishing, hunting, and other activities Federal regulating agencies Oregon regulating agencies Other involved agencies Summary Could cap the number of permits and trade them. This runs counter to many current systems of a lottery, which keeps prices affordable. Could also involve a payment scheme that would pay private or public landowners to provide recreational opportunities. OR buyers Recreationists OR sellers Private landowners, public agencies OR potential Low: Given the political support for current lottery systems and the desire to keep fees for using public lands low, recreation permits are not highly feasible on public lands. However, there is more potential for private landowners looking to provide recreational opportunities, which would require coordination with state agencies who manage public land and wildlife resources. Natural resource damage assessments Market driver CERCLA, Oil Pollution Act, Clean Water Act Federal regulating US EPA, USDA, NOAA Fisheries, Dept of Defense, Dept. of Energy, 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness agencies Dept of Interior Oregon regulating Dept. of Fish and Wildlife, Dept. of Environmental Quality agencies Other involved Tribes agencies Summary Injuries to natural resources from oil spills or other pollutant releases are assessed, and appropriate restoration projects are identified in contemplation of negotiated settlements or legal actions (in rare cases) with potentially responsible parties. Recoveries, in cash or in-kind services, from the potentially responsible parties are then used to finance or implement the restoration of the injured resources, pursuant to a publicly reviewed restoration plan. The federal trustees listed above are responsible for managing damage assessment programs for the resources they manage. State and tribal trustees can also be designated. It is feasible that NRDA damages could be offset by the purchase of restoration credits, but there is limited ability to create credits in advance of spills. Federal trustees have talked about creating regional restoration plans, which could be designated from existing plans. DEQ maintains a database of contaminated sites, but it seems like the only feasible opportunities in the short term relate to the cleanup of the GASCO and T4 Slips at the Port of Portland. NOAA is the lead trustee on these projects. OR buyers Polluting corporations, government agencies OR sellers Farmers, foresters, private bankers, land trusts OR potential High: There is already a system in place to generate funding from potential buyers. Trustee agencies would just need to adopt the practice of buying credits rather than using in-lieu fees. This market could generate funding from Portland’s port facilities for upstream restoration projects. Flood hazard mitigation Market driver Flood insurance, others? Federal regulating US Army Corps of Engineers, FEMA agencies Oregon regulating agencies Other involved Local governments and flood management agencies agencies Summary FEMA requires flood insurance for those landowners located within the 100-yr floodplain. Several states have also limited growth in these 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness floodplains. New Jersey has a rule that says any new development in several flood-prone basins must have no net increase in peak flow runoff. Under the program they are allowed to buy fill credits. The fill credits were generated by using former gravel pits as flood hazard mitigation. The Community Rating System under FEMA’s National Flood Insurance Program can reduce premium payments for communities where flood hazard mitigation has been completed. OR buyers Developers OR sellers Park developers, private landowners OR potential ? Pollinator habitat Market driver Need for food crop pollination Federal regulating agencies Oregon regulating agencies Other involved agencies Summary Farmers spend millions of dollars annually to lease bees and other pollinators to support fruit, nut, and other crops reliant on pollination. The services provided by native pollinators have moved on as suitable habitat has also disappeared. It is feasible that farmers associations, conservation districts, fruit packing companies, or others could sponsor a voluntary market for purchasing pollinator habitat enhancement. Farmers with significant habitat and/or central locations could sell credits to their neighbors for the pollination services provided by insects on that habitat. OR buyers Farmers OR sellers Farmers, foresters, land trusts, other owners of habitat OR potential Unknown: There is clearly a link between pollinators and economic production for crops like fruit and nuts. There is not a mechanism in place to pay people for pollinator habitat, but it may not be hard to design. Many farmers know how much they spend to rent bees, which could indicate the potential market size for pollinator habitat. 105 High street se, Salem, Oregon 97301, 503.434.8033 Increasing the pace, expanding the scope, and improving the effectiveness of conservation UNDERSTANDING SUPPLY AND DEMAND FOR ENVIRONMENTAL OFF-SET CREDITS IN THE WILLAMETTE RIVER BASIN INTRODUCTION Assessing supply and demand for the potential Willamette Ecosystem Marketplace is challenging. Supply and demand work differently in ecosystem markets than in markets for other kinds of goods and services. Supply is driven by the existing natural resource base and the willingness of landowners to manage their lands to produce ecosystem services or leave a portion of the landscape to function naturally without interference. Demand is largely linked to rules and regulations requiring people who impact the environment to buy credits to offset those damages, but in some cases can emerge from voluntary action such as carbon offset demand or a chance for avoided costs such as the New York City water supply headwaters restoration example. There are many factors in ecosystem markets shaping supply and demand beyond the exchange value of ecosystem credits. These include transaction costs, uncertainty, ecosystem dynamics, and politics. With these factors in mind, the market appraisal explored supply and demand, investigating the initial buyers in the market for the Willamette Ecosystem Marketplace, what their drivers are, and where there is the most likely availability of credits for these stakeholders. Surveying supply We thoroughly assessed several options for to the best way to identify the priority restoration areas in the Willamette River Basin to assess supply of potential ecosystem credits. There have been a number of efforts to set priorities by different groups in the basin (The Nature Conservancy, Oregon Department of Fish and Wildlife, Oregon State Parks, and Oregon State University to name just a few). After meeting with The Nature Conservancy, Oregon State University, and the Institute for Natural Resources, it seemed there was consensus that the layers compiled by Oregon State University for the Willamette River Basin Planning Atlas (2004) and subsequent work provide the most comprehensive dataset for priority restoration areas. 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness We focused on providing a quick inventory based on this dataset of the potential supply of restoration areas in the Willamette River Basin. We initially focused on whether there is available supply to serve the very immediate need of municipalities responding to the temperature TMDL. We used the Atlas dataset to survey potential supply in the WRB. The Atlas includes those areas within the floodplain of the mainstem of the Willamette River, but does not include information about uplands, which have been taken into account by other prioritization efforts. It is our understanding that The Nature Conservancy is proceeding with work to compile priority restoration areas including those outside of the floodplain into a single synthesis map available for future phases of this project. The Atlas identifies all of the high, medium and low priority restoration areas in one kilometer increments (identified as slices) along the entire length of the Willamette River spanning the floodplain. The methodology for defining priority restoration areas is explained in detail in the Atlas and demonstrates these areas were selected based on the potential for maximizing biological, social, and economic interests. For quick identification, the high and medium priority slices were compiled in a spreadsheet. There are 65 kilometers of high priority restoration areas and 108 kilometers of medium priority restoration areas identified. The majority of high priority areas are upstream of the Salem/Keizer area and the majority of medium priority areas are downstream of Salem/Keizer Quantifying supply requires identifying restoration activities that would be applied to priority areas and what benefits these activities would generate relative to desired credits such as water temperature reduction (kilocalories), wetland creation (acres), habitat creation (acres), and carbon sequestration (tons of CO2) (See the simple diagram of this assessment of supply below). A matrix was created listing the five restoration actions identified by the Willamette Partnership and describing the general benefits that could be quantified when these actions are applied to priority restoration areas. 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness Green Island has been flagged for consideration as the potential location of Transaction #1 and falls within the high priority areas identified in the Atlas. Working with the McKenzie River Trust, information was gathered on current and future conditions. The ecosystem benefits potentially generated by the restoration activities identified for Green Island are being assessed relative to desired credits (e.g. water temperature reduction (kcal), wetland creation (acres), habitat creation (acres), flood control, carbon sequestration (tons of CO2), and air pollution reduction.) By testing this assessment of ecosystem benefits for a specific restoration site, we will be able to calibrate assessment tools and conduct a more comprehensive assessment of the potential supply of ecosystem credits in the basin. This will require a base set of assumptions about the future restored condition and applying the method quantifying benefits used for Green Island. Digging into demand In Oregon, and specifically the Willamette Basin, there are certain regulatory drivers generating demand for ecosystem credits and this demand is being met to varying degrees by market mechanisms already established: • Wetland and stream mitigation banking (very active) • Carbon emissions trading (active) • Renewable energy credits and green tags (active) • Water quality trading (one example) • Endangered species mitigation banking (one example) • Water supply trading (one example) The Partnership has developed a primer on each of these markets, which will be included in analysis of trading frameworks under Task 4. Overall, it seems that most potential ecosystem buyers need small increments of credits at irregular intervals. This fluctuation in demand can lead to mismatches with supply in new markets. Most buyers are looking to transfer regulatory liability and their demand is tied closely to their estimates of complying with regulations on their own. Demand in the Willamette River Basin is characterized below in terms of the regulatory drivers to which potential buyers are currently responding. 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness Significant Regulatory Drivers Demand for water quality credits to meet Clean Water Act standards is driven by newly established Total Maximum Daily Loads in Oregon for water quality parameters such as temperature, dissolved oxygen, bacteria, and more. To evaluate demand for water temperature reduction, the Partnership with its consultants evaluated the Final TMDL (Oregon DEQ, September 2006) in relation to the temperature wasteload allocations (WLAs) for point sources and load allocations (LAs) for nonpoint sources. These allocations are expected to serve as the baselines for thermal credit trading in the Willamette basin. This evaluation of the TMDL assists in understanding demand for thermal load credits, as well as supply that may be created for sources named in the TMDL that might achieve loadings below their assigned caps. Thus, this effort identifies, evaluates, and summarizes temperature related responsibilities outlined in the final TMDL as defined by assigned WLAs and LAs. Point Sources (WLAs) The key information associated with this TMDL evaluation is a spreadsheet summary of point source WLAs, their existing “excess” thermal loads (ETLs), and their thermal loads to offset (see Tables 1 through 4 below). The thermal load to offset for each point source is the calculated by subtracting the WLA from the ETL. A negative number indicates that offset credits might be available for trading. A positive values indicates that offset credits may need to be acquired via trading. Table 1 shows actual existing thermal loads for each point source as calculated and listed in the TMDL itself. Table 2 shows future anticipated ETLs for Albany, Corvallis and MWMC. Information on future loads was only readily available for these three point sources based on their petitions to DEQ for allocation of some of the reserve capacity. The WLAs are substantially different for the “a=0” case and “a>0” cases (“a” is an adjustment factor in the TMDL that is applied when the 7-day maximum river temperature exceeds the biological criteria but the 7-day mean river temperature does not). The adjustment factor reduces the WLAs, making them more stringent. The WLAs in Tables 3 and 4 (one with “a=0” and one with “a>0”) pertain when river flows are at or below the 7-day, 10-year flow low flow (7Q10) condition. Thus, this evaluation of possible offset credits needed or generated is based on critical low flows. Because the WLAs are river flow tiered (higher, less stringent WLAs at higher flows), the need to trade will largely be driven by the need to prepare to meet WLAs during lower flow conditions. Also note that the WLAs do not become substantially greater until very high river flows; thus this approach to identify likely debtors and creditors is appropriate. This evaluation indicates which point sources will likely need to reduce loads or acquire credits, and the magnitude of the reductions or credits needed (in units of million kilocalories per day [mill. kc/d]), based directly on methods and data in the final TMDL. In general, the analysis suggests that all the major point sources in the Upper Willamette reach (upstream of river mile 108) have ETLs that exceed WLAs and thus may have an interest in acquiring 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness thermal credits. Another way to think about this is that all the major point sources on the Upper Willamette will need to reduce or offset their loads, and those that are able to reduce loads more than required by their WLAs could generate credits for others. On the other hand, point sources in the middle and Lower Willamette reaches have ETLs at or below their WLAs. A more detailed evaluation of how point source trading might occur, including temporal and spatial considerations, is included in the TM for Subtask 2.2. Nonpoint Sources (LAs) Nonpoint sources for the Willamette TMDL consist of landowners where existing riparian shade is less than would be present under Natural Thermal Potential (NTP) shade conditions. For these nonpoint sources ODEQ simply calculated the LA based on river flow and an assumed portion of the Human Use Allowance (HUA). The lumped LA is shown in the TMDL figure below. DEQ’s expectation is that LAs will be met by each landowner by restoring or protecting riparian shade to meet effective shade targets. The opportunity and precedent in terms of supply and demand for thermal credit trading for riparian shade restoration has been established for the Tualatin Basin, and is described in the TM for Sub- Task 2.2. Major reservoirs in the basin that alter temperature conditions compared to NTP temperatures are also considered to be nonpoint sources. Reservoirs were not assigned LAs in thermal load units (for example, mill. kc/d), but instead in terms of temperature targets to meet downstream of the reservoir for each month, as shown in the TMDL figure below for the Corps reservoirs. How this might be translated into supply and demand, and how credits might be defined, is further discussed in the TM for Subtask 2.2. 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness TABLE 1 Summer Actual Current Thermal Loads, million kcal/day River Flow River T Effluent T Effluent Flow Point Source RM 7Q10, cfs Trc, C Tps, C Qps, cfs Actual ETL Small PSs 0-50 Siltronics 6.3 6290 20 24.7 1.55 18 Kellogg Cr 18.7 6290 20 23.3 10.36 84 Oak Lodge 20.1 6290 20 23.5 3.87 33 Tryon Cr 20.2 6290 20 21.8 9.59 42 Tri-City 25.5 5440 20 24.8 10.57 124 Blue Heron Paper 27.5 5440 20 32.2 16.24 485 West Linn Paper 27.7 5440 20 28.7 8.2 175 Wilsonville 39.0 5460 20 24.3 2.94 31 Newberg 49.7 5460 20 24.9 2.94 35 Sp Newsprint 49.8 5460 20 28.5 21.04 438 Small PSs 50-108 Salem 78.1 5630 18 23 46.72 572 Small PSs 108-186 Wah Chang 116.5 3980 18 29.1 4.8 130 Weyerhaeuser Albany 116.5 3980 18 30 13.3 391 Albany 119.0 3980 18 23.7 8.51 119 Corvallis 130.8 3670 18 22.9 11.29 135 Evanite 132.2 3670 18 25.7 0.93 18 Pope and Talbot 148.3 3670 18 28.5 18.1 465 Fort James Halsey 148.4 3670 18 30 6.19 182 MWMC 178.0 1310 18 22.7 36.82 423 U of O Heat Plant 181.7 1310 18 24.1 15.78 236 Spawning Actual Current ETLs Small PSs 50-108 Salem 78.1 6540 13 21 46.72 915 Small PSs 108-186 Wah Chang 116.5 4160 13 27.1 4.8 166 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness TABLE 1 Summer Actual Current Thermal Loads, million kcal/day River Flow River T Effluent T Effluent Flow Point Source RM 7Q10, cfs Trc, C Tps, C Qps, cfs Actual ETL Weyerhaeuser Albany 116.5 4160 13 28 13.3 488 Albany 119.0 4160 13 21.7 8.51 181 Corvallis 130.8 3810 13 20.9 11.29 218 Evanite 132.2 3810 13 23.7 0.93 24 Pope and Talbot 148.3 3810 13 26.5 18.1 598 Fort James Halsey 148.4 3810 13 28 6.19 227 MWMC 178.0 1340 13 20.7 36.82 694 U of O Heat Plant 181.7 1340 13 22.1 15.78 351 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness TABLE 2 Summer Actual Future ETLs, million kcal/day River Effluent Flow River T Effluent T Flow Actual Point Source RM 7Q10, cfs Trc, C Tps, C Qps, cfs ETL Small PSs 0-50 Siltronics 6.3 6290 20 Kellogg Cr 18.7 6290 20 Oak Lodge 20.1 6290 20 Tryon Cr 20.2 6290 20 Tri-City 25.5 5440 20 Blue Heron Paper 27.5 5440 20 West Linn Paper 27.7 5440 20 Wilsonville 39.0 5460 20 Newberg 49.7 5460 20 Sp Newsprint 49.8 5460 20 Small PSs 50-108 Salem 78.1 5630 18 Small PSs 108-186 Wah Chang 116.5 3980 18 Weyerhaeuser Albany 116.5 3980 18 Albany 119.0 3980 18 23.7 19.07 266 Corvallis 130.8 3670 18 22.9 26.43 317 Evanite 132.2 3670 18 Pope and Talbot 148.3 3670 18 Fort James Halsey 148.4 3670 18 MWMC 178.0 1310 18 22.7 91.45 1052 U of O Heat Plant 181.7 1310 18 Spawning Actual Future ETLs Small PSs 50-108 Salem 78.1 6540 13 Small PSs 108-186 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness TABLE 2 Summer Actual Future ETLs, million kcal/day River Effluent Flow River T Effluent T Flow Actual Point Source RM 7Q10, cfs Trc, C Tps, C Qps, cfs ETL Wah Chang 116.5 4160 13 Weyerhaeuser Albany 116.5 4160 13 Albany 119.0 4160 13 21.7 19.07 406 Corvallis 130.8 3810 13 20.9 26.43 511 Evanite 132.2 3810 13 Pope and Talbot 148.3 3810 13 Fort James Halsey 148.4 3810 13 MWMC 178.0 1340 13 20.7 91.45 1723 U of O Heat Plant 181.7 1340 13 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness TABLE 3 Current Conditions (a=0) Summer @7Q10 & a = 0 (mill. kc/d) Spawning @7Q10 & a = 0 (mill. kc/d) Actual Load to Point Source RM WLA ETL Offset WLA Actual ETL Load to Offset Small PSs 0-50 193 NA NA NA Siltronics 6.3 22 18 -4 NA NA NA Kellogg Cr 18.7 105 84 -21 NA NA NA Oak Lodge 20.1 42 33 -9 NA NA NA Tryon Cr 20.2 52 42 -10 NA NA NA Tri-City 25.5 156 124 -32 NA NA NA Blue Heron Paper 27.5 485 485 0 NA NA NA West Linn Paper 27.7 197 175 -22 NA NA NA Wilsonville 39.0 39 31 -8 NA NA NA Newberg 49.7 44 35 -9 NA NA NA Sp Newsprint 49.8 546 438 -108 NA NA NA Small PSs 50-108 95 216 Salem 78.1 714 572 -142 1372 915 -457 Small PSs 108-186 93 56 Wah Chang 116.5 111 130 19 93 166 73 Weyerhaeuser Albany 116.5 332 391 59 271 488 217 Albany 119.0 111 119 8 173 181 8 Corvallis 130.8 127 135 8 213 218 5 Evanite 132.2 15 18 3 14 24 10 Pope and Talbot 148.3 395 465 70 337 598 261 Fort James Halsey 148.4 155 182 27 126 227 101 MWMC 178.0 398 423 25 428 694 266 U of O Heat Plant 181.7 200 236 36 210 351 141 Future Conditions Small PSs 0-50 193 NA NA NA Siltronics 6.3 22 NA NA NA Kellogg Cr 18.7 105 NA NA NA 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness TABLE 3 Current Conditions (a=0) Summer @7Q10 & a = 0 (mill. kc/d) Spawning @7Q10 & a = 0 (mill. kc/d) Actual Load to Point Source RM WLA ETL Offset WLA Actual ETL Load to Offset Oak Lodge 20.1 42 NA NA NA Tryon Cr 20.2 52 NA NA NA Tri-City 25.5 156 NA NA NA Blue Heron Paper 27.5 485 NA NA NA West Linn Paper 27.7 197 NA NA NA Wilsonville 39.0 39 NA NA NA Newberg 49.7 44 NA NA NA Sp Newsprint 49.8 546 NA NA NA Small PSs 50-108 95 216 Salem 78.1 714 1372 Small PSs 108-186 93 56 Wah Chang 116.5 111 93 Weyerhaeuser Albany 116.5 332 271 Albany 119.0 111 266 155 173 406 233 Corvallis 130.8 127 317 190 213 511 298 Evanite 132.2 15 14 Pope and Talbot 148.3 395 337 Fort James Halsey 148.4 155 126 MWMC 178.0 398 1052 654 428 1723 1295 U of O Heat Plant 181.7 200 210 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness TABLE 4 Current Conditions (a>0) Summer @7Q10 & a > 0 (mill. Spawning @7Q10 & a > 0 (mill. kc/d) kc/d) Load to Load to Point Source RM WLA Actual ETL Offset WLA Actual ETL Offset Small PSs 0-50 193 NA NA NA Siltronics 6.3 20 18 -2 NA NA NA Kellogg Cr 18.7 98 84 -14 NA NA NA Oak Lodge 20.1 39 33 -6 NA NA NA Tryon Cr 20.2 49 42 -7 NA NA NA Tri-City 25.5 144 124 -20 NA NA NA Blue Heron Paper 27.5 485 485 0 NA NA NA West Linn Paper 27.7 197 175 -22 NA NA NA Wilsonville 39.0 36 31 -5 NA NA NA Newberg 49.7 40 35 -5 NA NA NA Sp Newsprint 49.8 503 438 -65 NA NA NA Small PSs 50-108 95 216 Salem 78.1 635 572 -63 1019 915 -104 Small PSs 108-186 97 56 Wah Chang 116.5 93 130 37 35 166 131 Weyerhaeuser Albany 116.5 277 391 114 101 488 387 Albany 119.0 95 119 24 105 181 76 Corvallis 130.8 108 135 27 129 218 89 Evanite 132.2 13 18 5 6 24 18 Pope and Talbot 148.3 331 465 134 126 598 472 Fort James Halsey 148.4 129 182 53 47 227 180 MWMC 178.0 339 423 84 159 694 535 U of O Heat Plant 181.7 167 236 69 78 351 273 Future Conditions Small PSs 0-50 193 NA NA NA Siltronics 6.3 20 NA NA NA Kellogg Cr 18.7 98 NA NA NA 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness TABLE 4 Current Conditions (a>0) Summer @7Q10 & a > 0 (mill. Spawning @7Q10 & a > 0 (mill. kc/d) kc/d) Load to Load to Point Source RM WLA Actual ETL Offset WLA Actual ETL Offset Oak Lodge 20.1 39 NA NA NA Tryon Cr 20.2 49 NA NA NA Tri-City 25.5 144 NA NA NA Blue Heron Paper 27.5 485 NA NA NA West Linn Paper 27.7 197 NA NA NA Wilsonville 39.0 36 NA NA NA Newberg 49.7 40 NA NA NA Sp Newsprint 49.8 503 NA NA NA Small PSs 50-108 95 216 Salem 78.1 635 1019 Small PSs 108-186 97 56 Wah Chang 116.5 93 35 Weyerhaeuser Albany 116.5 277 101 Albany 119.0 95 266 171 105 406 301 Corvallis 130.8 108 317 209 129 511 382 Evanite 132.2 13 6 Pope and Talbot 148.3 331 126 Fort James Halsey 148.4 129 47 MWMC 178.0 339 1052 713 159 1723 1564 U of O Heat Plant 181.7 167 78 Demand for wetland mitigation credits in Oregon is driven by various forms of development such as industrial site development, high density residential development, and public infrastructure projects, which are required by section 404 of Clean Water Act and State Removal-Fill Law to mitigate permanent impacts to wetlands. One tool being used to project demand is using the state Industrial Site Certification Program. The program, administered by Oregon Economic and Community Development Department, certifies sites as being “project ready” (i.e., able to initiate development within 180 days) once barriers to development have been substantially addressed. Site assessment for wetlands is a key element of the program. The current queue of industrial sites seeking state certification indicates that 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness the demand for wetland mitigation is generally, and will continue to be, concentrated along the I-5 corridor between Salem and Eugene, particularly around Corvallis, Albany, and Lebanon. The current queue of sites additionally suggests the northwestern segment of Clackamas County and the western segment of Multnomah County as areas with potentially high demand and limited supply. If all industrial sites currently in the certification queue within the Willamette Valley developed all delineated and estimated wetland areas within them, then approximately 1,700 acres of wetland impact would result. Cursory estimates from the regional Economic Revitalization Team suggest that after considering practicable impact avoidance and minimization options, the current queue of industrial certification sites may result in a total a potential mitigation demand of nearly 900 acres, concentrated largely in the Upper Willamette around Eugene, Lebanon, and Corvallis. A significant portion of this demand is for mitigation within the next five years, and primarily for palustrine emergent wetland. The Oregon Department of Transportation is in the process of estimating its potential demand over the next 5-7 years, and communities in the West Cascades Council of Governments are working to collect their anticipated need for mitigation credits. In the next few years, these three sources are likely to represent the largest consolidated demand for mitigation credits. Current demand for credits tends to come in small increments of less than 1 acre. Credit transactions need to be embodied within a removal/fill permit, so buyers are restricted from acquiring and holding additional credits. Credit prices range significantly across the valley based on land values. State Land’s current Payment to provide price is $60,000/acre of wetland impact, which reflects the average credit price in the state. This price is a ballpark figure for credit prices. Unconfirmed negotiation prices for the Foster Creek bank hover around $175,000. The prices in the Willamette valley range from $50,000 at the West Eugene Wetlands to $76,000 per acre at Frazier bank. Existing banks and banks in process are scheduled to generate 292 acres of wetland credits. Considering just the demand potentially generated from candidate industrial certification sites in the Valley, this suggests a shortfall of about 600 acre- credits. At an assumed average value of $60,000 per acre, this equates a total unmet demand value of $36 million. There are some significant policy changes on the horizon for wetland mitigation. The Economic Revitalization Team and cities are anxious to get quality mitigation in place quickly to facilitate industrial 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness development where there are unavoidable wetland impacts. One option the Economic Revitalization Team is exploring is a resale program similar to the North Carolina Ecosystem Enhancement program, where the state or other third party would buy credits and hold them in advance of demand from buyers. The desired outcome is to create a more stable (in terms of both quantity and price) and higher quality supply of wetland bank credits for projects of regional or statewide economic importance. New federal mitigation rules due out in the next year are also likely to increase demand for wetland mitigation credits. Emerging Sources of Demand Demand for carbon offset credits is emerging in Oregon. Growing out of the carbon dioxide emissions standards for new energy facilities as regulated by the Energy Facility Siting Council, the Climate Trust has purchased greenhouse gas emission offsets for new power plants. Although Oregon is not likely to see new power plants in the near future, demand for carbon offsets nationally is developing quickly. Regionally, California is leading with new legislation that includes trading. The Pacific Forest Trust has a program to buy forest carbon sequestration. The Climate Trust is actively seeking new sources of investment. The Governor convened The Carbon Allocation Task Force in August 2005 to develop a proposed cap-and-trade system and legislative proposal in time for the 2007 legislative session. They have put in a very rough placeholder that mimics some of the earlier markets in sulfur dioxide trading. Members of the Partnership have had little contact with members of this Task Force, but have talked preliminarily with the Climate Trust. Another source of funds for carbon credits may come from a proposal introduced for the 2007 legislative session by the Dept. of Forestry. The bill authorizes payments for ecosystem services, which may be targeted at carbon sequestration. Demand for endangered species habitat conservation credits is being generated by state and federal species listings under the Endangered Species Act (ESA). It is unclear how strong a driver this will be and how much investment in conservation banking is likely given limited reach of ESA regulations and fish and reluctance to accept trading to comply with ESA. Conservation banking broke into Oregon with the Dept. of Transportation’s banks for Oregon chub. The Oregon office of the US Fish and Wildlife Service is developing banking policy for the entire state that is due to be complete in the next year. On the anadromous fish side, National Marine Fisheries Service is still hesitant about trading, but they are closer to authorizing a salmon habitat accounting system under the Dept. of Transportation’s bridges program. Salmon banks have been formed in California. Demand for stormwater infiltration and treatment credits is looming on the horizon as growth of impervious area increases, regulation of municipalities and other entities to control quantity and quality of stormwater becomes more onerous, and costs to manage stormwater runoff increase. The City of Portland is exploring the feasibility of using a marketplace to more cost effectively meet stormwater compliance challenges. The OR Dept. of Transportation has convened a group to explore options for meeting regulatory requirements. The demand for stormwater offsets is likely to be very high, but there are institutional challenges to trading stormwater credits. 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness Implications The markets with open check books today are wetlands mitigation banking and hopefully, water quality trading. In terms of the demonstration project, the most marketable projects will be geared toward generating credits for these markets. “Reserve” areas or actions in the project could be held for carbon, species, or other credits, but the economic return will not be immediate. There may be specific opportunities to meet the ecosystem credit needs of a particular “client.” For example, the Port of Portland has a simultaneous need to mitigate for wetland impacts, species impacts, and natural resource damages. The Willamette Partnership could define a role there or not. The priority, policy-level dialogues that will shape market demand into the future and where the Partnership might be able to participate are the Governor’s Economic Revitalization Team, the Governor’s Carbon Allocation Task Force, and US Fish and Wildlife Service’s upcoming conservation banking policy. Partnership roles in each of these efforts could range from tracking progress, commenting on draft proposals, to actively shaping program designs. Each option requires commitment of staff time, but investing time now could reduce costs created by inconsistent structures and rules later on. Next Steps • Complete quantification of ecosystem benefits generated by restoration actions and apply method to other restoration priority areas to assess basin-wide supply • Get more detailed information on demand surrounding the area of selected demonstration projects • Complete work with the Dept. of Transportation, State Lands, and valley cities to get information on projected demand for wetland credits • Continue engaging US Fish and Wildlife Service on design of conservation banking program Trends to Track • Watch for other large “clients” like the Port of Portland • Get updates from the Carbon Allocation Task Force • Get updates from the City of Portland’s stormwater trading pilot • Track national policies on wetlands mitigation and carbon • Track developments in Washington state related to wetlands banking, conservation banking, and transferable development rights • Watch how new Farm Bill might impact trading 105 High street se, Salem, Oregon 97301, 503.434.8033 Supporting Documents for Section 4 – Credit Definition (Task 2) Increasing the pace, expanding the scope, and improving the effectiveness of conservation METHODS FOR DEFINING TEMPERATURE OFF-SETS CREDITS IN THE WILLAMETTE RIVER BASIN INTRODUCTION A significant body of work exists that documents methods to calculate kilocalorie reductions from various activities. This body includes the work conducted to support the CWS trading program, as well as ongoing efforts by Oregon State University (OSU), Oregon University (OU) and the United States Geological Survey (USGS). This report identifies and reviews relevant documents to prepare a “gap analysis” for kilocalorie credit methodologies, focusing on five potential sources of kilocalorie reduction: wastewater reclamation/reuse, flow augmentation, riparian shading, floodplain/hyporheic restoration, and wetlands discharge/restoration. This report assesses whether existing science and mathematical calculations are sufficient to propose these kilocalorie reduction measures for crediting and wasteload allocation (WLA) compliance purposes. Where one or more methods are sufficient for one or more actions, recommendations have been given for how to proceed with formalizing a crediting protocol within the overall framework. Where gaps exist, this report provides specific guidance (a “road map”) to focus resources on research needed to support this definition of kilo-calorie reductions. Methods for Defining Temperature Credits It is assumed that kilocalories per unit of time will be the basic temperature currency for trading purposes in the Willamette Basin. Formal temperature trading programs do not exist anywhere else in the country other than Oregon. The primary example of a temperature trading program in Oregon is that established for the Tualatin Basin, as formalized in the watershed NPDES permit issued for CWS. No other restoration projects and temperature Total Maximum Daily Loads (TMDLs) are completed or under way in Oregon in which temperature offsets or mitigation have been or are being considered. The CWS program and other examples are described where relevant in this TM. The ways in which the currency units can be defined for various actions is described in conceptual terms below. Wastewater Reclamation/Reuse WLAs in the Willamette TMDL for point sources are expressed in million kilocalories per day (mkcal/d). Reductions in thermal loads below the WLAs that are achieved by reclamation/reuse would generate credits that could be traded (subject to potential temporal and spatial constraints that might be included in a fully developed trading program). These temporal and spatial 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness considerations are applicable to other types of credit generating projects described below and thus a separate subsection is devoted to this topic later in this TM. USGS has recently developed a point source trading tool for the Willamette River for the Oregon Association of Clean Water Agencies (ACWA) and the Willamette Partnership. The tool provides a means by which potential trading partners can visualize the temperature effects of any particular trade along the entire length of the river. The tool also shows how much the temperature changes at the Point of Maximum Impact (POMI) as a result of any trade. Although not included in the tool at this point, this change of temperature can be translated in kilocalories per unit time based on the river flow at the POMI. This tool simulates temperature effects of trades assuming that the point source discharges creating credits are doing so by reclaiming/reusing some or all of their wastewater discharges. Flow Augmentation A precedent for defining flow augmentation temperature credit has been established for the Tualatin River by CWS. A river temperature model (Heat Source) was used to predict how much of a temperature change would occur at two critical locations just upstream of each of CWS’s advanced wastewater treatment facilities (AWTFs) as a result of CWS’s flow augmentation water released from Hagg Lake. July and August were determined to be the critical period for reconciling the thermal load to offset (in mkcal/d) with credits from flow augmentation. Attachment A is the summary sheet of CWS’s 2004 annual trading report which shows that the augmentation flow of 30 cubic feet per second (cfs) more than offset the excess load from the Durham AWTF and offset more than half of the excess load from the Rock Creek AWTF. The credits were calculated by multiplying the reduction in temperature in the river upstream of each AWTF by the seasonal river flow. A similar process could be used for the Willamette River, taking into consideration the unique temporal and spatial aspects of the Willamette. One issue unique to the Willamette TMDL is that reservoirs were not assigned load allocations (LAs) in thermal load units (for example, mkc/d), but instead in terms of temperature targets to meet downstream of the reservoir for each month. Thus, in order to generate credits, a reservoir owner would not only have to achieve cooler temperatures than those in the LA tables, but there also would have to be a technical translation of these temperatures into the kilocalorie currency. This assumes that DEQ and others would see temperatures lower than LAs as a desirable outcome. This may not be the case if the goal is for outflows to mimic Natural Thermal Potential (NTP) temperatures rather than simply be as cold as possible. The ramifications of this issue are further discussed in the “Data Gaps” and “Road Map” sections of this TM. Riparian Shade Restoration CWS also established a precedent for defining riparian shade restoration temperature credit for the Tualatin River. Shade credits are defined using DEQ’s shade model to predict the effective shade provided by a specific grouping of restoration plantings. These effective shade predictions were used (along with estimates of the stream surface area affected by the shade) to calculate how much of the summer solar insolation load would be blocked by the shade. Knowing the number of kilocalories per day per square foot of stream that would be blocked and the number of square feet of stream affected provides the number of kilocalories per day. Credits for a given planting year are defined as those that would occur when the vegetation reaches full maturity. 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness However, a ratio of 2:1 is used for offsetting current thermal loads from the AWTFs because it will take years before the vegetation reaches full maturity (in other words, 2 miles of vegetation has to be planted for every mile used for an offset credit). Attachments A and B show that the 5.5 miles of riparian planting credited in 2004 by CWS offset 30 mkcal/d of the excess load from the AWTFs for that first annual report. A similar process could be used for the Willamette River, although the unique temporal and spatial aspects of the Willamette would have to be taken into consideration. These aspects are further discussed in the “Spatial and Temporal Considerations of Importance for the Willamette River” section of this TM. Floodplain/Hyporheic Restoration The descriptions of the floodplain/hyporheic restoration processes in this paragraph were taken from Lancaster, et al. (2005).1 Floodplain restoration refers to reconnecting side channels in the floodplain that have been cut off from the mainstem. This allows periodic inundation of these side channels during higher river flow events in fall, winter and spring. This in turn leads to recharge of the hyporheic zone, which then allows cooler water to seep into the mainstem on a delayed basis during the lower flow, warmer summer months. The injection of warm wastewater into the hyporheic zone of the river is another form of restoration considered here. The gravels, sands and silt of the hyporheic zone would act as a heat exchange mechanism for the excess wastewater thermal loads. In addition, this type of discharge could lead to a delay in the movement of the wastewater so that the remaining thermal load might be delivered to the river during a less critical time. Other floodplain restoration measures could include selective removal of bank hardening structures to allow bank erosion, channel widening, and deposition of new gravel bars, which could then lead to higher hydraulic conductivity and greater hyporheic flows. Floodplain/hyporheic restoration also may occur in a fashion that would provide “stepping stones” of cold water refugia along the mainstem Willamette River. This is the subject of ongoing research at OSU and OU. Credits for floodplain/hyporheic restorations would likely be defined in a manner similar to flow augmentation in that the credits would be generated by knowledge of how a given project would change flows and temperatures temporally and spatially in the river. This would have to be established on a project-by-project basis. An agency and publicly accepted analytical framework such as computer modeling likely would be needed to predict the flow and temperature changes in the river as a result of a given project. This is because the temperature changes that would occur involve extensive technical complexity and may be difficult to measure in the field after the project is implemented. This is much like temperature trading between individual point sources where the effects of a trade might not be measurable in the field and thus the trade credits have to be established via river temperature modeling as was done for the TMDL and also by USGS for the temperature trading tool. The OSU study cited involved hypothetical situations, but suggests that development of analytical tools should be possible. These tools need further development and validation prior to 1 “Investigation of the Temperature Impact of Hyporheic Flow: Using Groundwater and Heat Flow Modeling and GIS Analyses to Evaluate Temperature Mitigation Strategies on the Willamette River, Oregon.” Oregon State University. December 2005. 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness their use in a regulatory process such as credit trading for TMDL compliance. This kind of research is ongoing at OSU and OU. The ramifications of this issue are further discussed in the “Data Gaps” and “Road Map” sections of this TM. Wetlands Discharge/Restoration Wetlands treatment systems can be designed, constructed, and operated to achieve cost-effective and efficient effluent cooling. Reductions in effluent temperature in such wetland systems occur through both passive evaporative and radiant cooling. This can be accomplished using a relatively large land area with shallow depths and dense emergent vegetation for shading. In some situations, restoration of wetlands can also provide cooling benefits much in the same way as described for floodplain/hyporheic restoration (increased and/or delayed seepage of water through cooler shallow groundwater system). The credit definition process for wetlands discharge/restoration would be similar to floodplain/hyporheic restoration in that credits would have to be established project-by-project in relation to how each would affect river flow and temperature on a temporal and spatial basis. For wetland treatment systems this could be done using a modeling framework that includes the wetland cooling mechanisms and the effects of the wetland discharge in the river. Heat Source has been used for temperature modeling for a potential wetland system being considered by the City of Albany (see Attachment C for illustrative results of thermal load reductions and associated river temperature benefits). In this example (which currently contemplates inclusion of Teledyne Wa Chang and Weyerhaueser as partners in the wetland cooling project), thermal models of 160 acres of constructed wetlands show evaporative and radiant cooling would significantly reduce temperatures, far exceeding the thermal reduction requirement in the TMDL, thus providing tradable credits. This cooling in wetlands is also something that could be directly measured in the field after the wetland system has been constructed or modified, much like temperature and thermal loads can be measured at the end-of-pipe for a point source discharge. Temporal and Spatial Considerations of Importance for the Willamette River The CWS temperature trading program provides a number of relevant and useable precedents for a Willamette program, as discussed above. There are, however, some temporal and spatial considerations that need to be resolved specifically for the Willamette. This is due in part to the larger geographic scope of the Willamette Basin compared to the Tualatin Basin. These temporal and spatial considerations are discussed below. Temporal Constraints One temporal constraint that would likely be imposed would be that the credits would have to be generated during the same time period in which they are traded. For the Willamette TMDL the relevant time period can span spawning, rearing, and migration periods for a variety of specific salmonids depending on location in the basin. One trading mechanism for addressing such temporal considerations for trades involving point sources is the variable permit limit concept developed for the Lower Boise River trading program. In that program, trade occurrence, certification and reporting are done monthly along with submittal of the Discharge Monitoring Reports. 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness Another temporal consideration relates to the fact that the WLAs for point sources in the Willamette TMDL are river flow tiered (less stringent WLAs as river flow increases). Thus, during higher river flow periods the WLAs are more achievable and trading may not be needed for compliance during these times. Again, a variable permit limit approach could potentially be used for trades involving point sources. This issue will necessitate a trading environment that accounts for the fact that trades may not be needed in all years; therefore, it may be in the interests of a point source to ensure access to credits that would be made available only during low-flow periods. Spatial Constraints One spatial consideration is related to the need to avoid localized impacts. Localized impact evaluations have to be conducted on a site-specific basis. The specific regulatory decision- making process to date related to localized impacts has not been developed. The Willamette point source trading tool developed by USGS for ACWA provides a means by which potential trading partners can visualize the temperature effects of any particular trade along the entire length of the river. The tool also shows how much the temperature changes at the POMI as a result of any trade. This change of temperature can be readily translated in kilocalories per unit time based on the river flow at the POMI Another spatial consideration relates to the location of the restoration activities. For example, how are credits defined relative to offsetting mainstem thermal loads if shade restoration occurs in a tributary rather than along the mainstem? In the Tualatin example, it is anticipated that most of the riparian shade that will be restored will be along tributaries. An explicit policy decision was made by DEQ that all such restoration should be directly creditable for thermal load offsets for the mainstem river without application of any kind of location ratio or penalty. A similar policy decision has not yet been made for the Willamette TMDL. Given the much larger geographic scope of the Willamette, another approach would be to model the effects of riparian restoration projects in the tributaries on the temperature of the tributary at its mouth. The benefits (credits) associated with this change in temperature at the mouth could then be run through a mainstem model (either the CE-QUAL-W2 models or with a trading tool similar to the USGS tool developed for point source trading on the mainstem) to determine the temporal and spatial benefits to the mainstem. Another spatial consideration is to assess the length of river being benefited by a trade (say in units of mkcal [or degrees Celsius] per river mile per day). This essentially would be an estimate of the area between the before and after trade plots of longitudinal temperature or heat load versus river mile. These calculations are included in the USGS point source trading tool. This, of course, would be a somewhat more complex trading currency and has not yet been used formally in Oregon for temperature trading. A similar concept, however, is currently being considered by DEQ for the Clackamas River. Even if not selected as the currency, consideration of the integrated benefit of magnitude and distance could be part of the decision-making framework for defining credits and/or determining or prioritizing allowable trades. One final spatial consideration relates to the fact that the TMDL separated the Willamette River mainstem into three distinct segments or reaches, with a POMI identified within each reach. The USGS trading tool, however, has revealed that temperature effects (e.g., cooling effects) from 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness trades in the upper reach can extend into the middle reach and even the lower reach in some cases. The trading tool also has revealed that the POMI can shift upstream or downstream as a result of trades. As a result, the Willamette trading program will need to be able to accommodate trades between the reaches and address the policy and technical aspects of shifting POMIs. Gap Analysis For the most part, the analytical tools needed to define temperature credits already exist; several of which have received agency approval/support. Examples include the CE-QUAL-W2 models for the Willamette mainstem and the Heat Source model for tributary shade restoration and wetland treatment projects. Although running the CE-QUAL-W2 models can be cumbersome, this should not be a major impediment to trading, especially if tools such as the Willamette point source trading tool developed by USGS can be extended or further developed to include mkcal/d calculations and to evaluate other types of trades (such as effects of tributary cooling on the mainstem). Although models are available for and have been applied to floodplain/hyporheic restoration, these models and methods have not yet been formally validated with real world projects, or adopted or deemed acceptable for regulatory decision-making such as trading to comply with TMDLs. This modeling framework will be needed for proposed restoration projects where it will be difficult to validate temperature benefits with post-implementation field data. Models will also be needed for planning purposes for floodplain/hyporheic projects to provide some assurance that costs will be justified by anticipated benefits. Important regulatory decisions will be needed for several key aspects of temperature trading. They are as follows: • Temporal considerations. The timing of and mechanisms for credit creation and trading need to be developed. It appears that the variable permit limit approach developed by EPA Region 10 for the Idaho trading framework might have merit for Willamette temperature trading involving one or more point sources and thus should be further explored. • Spatial considerations − Localized impacts. What decision criteria regarding localized impacts will define an acceptable trade? One simple approach would be to conclude that a trade is approvable as long as the temperature increase in the river at the POMI is not greater than under the TMDL allocated condition. This however may be an overly simplistic approach in several respects (for example, does not consider number of river miles benefited, possible error in the analyses, or if the increase would materially affect designated uses, etc.). Another approach would be for DEQ to retain discretionary judgment for approving trades on a case-by-case basis. This is how the localized impacts issue was resolved for the Lower Boise River trading program. − Tributary projects. How will restoration projects on tributary rivers and streams be handled with respect to offsetting thermal loads to the mainstem? Will the Tualatin approach be used (for example, regarding shading) or will changes to tributaries have to be modeled and input to the mainstem model(s) to be assessed in a similar fashion as point source discharges? 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness − Integration of magnitude and extent of trade effects. Could a currency that includes the length of river affected be developed and used? − Trades affecting other river reaches and shift POMIs. How will the trading program accommodate trades that affect other reaches and shift POMIs within a reach? • Flow augmentation from reservoirs. Flow augmentation from existing reservoirs in the basin could presumably only be generated if releases are cooler than the LAs in the TMDL. Assuming such cooler releases could be achieved, would that be a desirable outcome and potentially creditable under a trading program? • Other environmental benefits of restoration projects. Most of the restoration project types discussed in this TM will provide ancillary environmental benefits such as wildlife habitat benefits from wetlands and riparian vegetation. How will these benefits be considered within a temperature trading decision-making framework? Road Map The “road map” that should be followed to address the issues, gaps and unanswered questions identified above is as follows: • A modeling and analytical framework needs to be further developed, validated, and accepted for defining credits related to floodplain/hyporheic restoration projects. It is assumed this effort would be led by OU/OSU researchers with technical and regulatory input from DEQ and others. This effort would be beyond the scope of the consultant team’s Task Order 4, and likely will take substantial effort and time to complete. • A framework for credit trading involving one or more point source (such as variable permit limits should be developed). This would be included in Task Order 4, Subtask 2.4. • The USGS tool for Willamette point source trading should be further developed to include kcal/d calculations and to include other types of trades (such as effects of tributary cooling). The mechanisms for doing this will be included in Task Order 4, although any CE-QUAL- W2 model runs to further develop the tool would not be conducted by the consultant team. • The process for working through the technical and policy aspects of the numerous regulatory decisions regarding the key aspects of temperature trading, such as localized impacts, trades that affect other reaches and/or shift POMIs, tributary credits applied to the mainstem, how to integrate magnitude and extent of trade benefits, and how to consider other environmental benefits need to be initiated. Willamette Partnership recommendations to DEQ, and other interested parties such as ACWA, will be developed via Task 2 of TO 4. • Determinations regarding the feasibility, desirability, and technical aspects of flow augmentation from existing reservoirs need to be made by reservoir owners, DEQ and other agencies. These determinations are beyond the scope of TO 4, but relevant information that might be developed by others will be incorporated into Task 2 deliverables. 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness Attachment A CWS Example of Thermal Credits Associated with River Flow Augmentation 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness Attachment B CWS Example of Thermal Credits Associated with Riparian Shade Restoration 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness Attachment C Potential City of Albany Wetlands Cooling Project 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness 800 Current Conditions Allocation Excess Thermal Load (million kilocalories per day) 700 With Wetlands 600 500 400 300 200 100 0 105 High street se, Salem, Oregon 97301, 503.434.8033 Draft RIPARIAN PLANTING PROTOCOLS Last updated June 19, 2008. For questions, contact: David Primozich at Primozich@verizon.net. Introduction The Oregon Department of Environmental Quality (DEQ), working with other partners, established a precedent in Clean Water Services’ NPDES permit for defining temperature credits based on riparian restoration plantings on the Tualatin River. Shade credits are determined using Department of Environmental Quality’s (DEQ) Shade-O-Later model to predict the thermal benefit of increased shade provided by restoration plantings. Credits are defined as modeled temperature reductions measured in kcal/day that would be generated from restoration plantings at full maturity. Approach to Credit Generation for the Willamette River Basin The process used in the Tualatin River thermal credit program can be modified for application in the Willamette basin. The Willamette TMDL developed and used various modeling tools for evaluating riparian shade, including the Heat Source model for some of the tributaries, and the CE-QUAL-W2 model for several major tributaries downstream of the Corps reservoirs. These models can be used to evaluate the benefits of increased riparian shade for other tributary and river reaches. Both the spreadsheet developed by Clean Water Services for its annual thermal credit verification and reporting to DEQ and the DEQ-approved program for the Tualatin River have been adapted for use within the Willamette basin. The Willamette Partnership-developed credit calculator includes screening and detailed evaluations of thermal credits applicable to wetlands, riparian shade, wastewater reuse, and flow augmentation types or restoration activities. This document provides 1) minimum riparian revegetation requirements for projects to be eligible to generate credits, and 2) voluntary guidance and recommendations for successful riparian revegetation based on Clean Water Services’ early experience with thermal credits, but with modifications for to the broader Willamette basin. Minimum Riparian Revegetation Requirements To generate credits1: 1. All plant materials must come from Willamette Valley seed sources below 1,500 feet 1 These items are in other places in the Willamette temp protocol, but shouldn’t be forgotten. In order to qualify, projects must 1) be able to generate credits to offset thermal load within NPDES permits under the Willamette Temperature TMDL, and 2) maintain the viability of projects credits for the required life of the credit.. PAGE 1 OF 4 2. Plantings must be based on appropriate plant community determined by local reference site 3. The site must support a minimum of 1,600 stems per acre (average) at project year five 4. The site must have no more than 20 percent non-native cover (average) at project year five 5. The site may have no fewer than five woody species and no single species may represent more than 50 percent of the woody plants at project year five 6. Neither trees nor shrubs shall represent less than 20 percent of the total stems per acre at project year five 7. The stream connected to the site must have perennial flow Monitoring reports describing progress toward these eligibility criteria shall be submitted to the Ecosystem Credit Registry registry on an annual basis. If annual reports indicate that a site is unlikely to meet year five performance standards, the credit seller shall make efforts to improve site conditions. If those efforts are made in good faith, but performance standards are still not met, the seller will have the option of 1) substituting credits from another appropriate site, 2) purchasing credits from the insurance pool, or 3) negotiating another agreement between the buyer, seller, DEQ, and any other relevant parties2. 2 This does not imply that the negotiations are an alternative to other options or that they will necessarily be successful. FORM ABCD INITIALS: BUYER_______ / SELLER_______ VERSION: DRAFT RIPARIAN PLANTING PROTOCOLS.DOC PAGE 2 OF 4 Elements of a successful riparian shade restoration project Woody Plant Density Recommendations Although woody plant stem densities vary widely among Willamette Valley plant communities, the recommended range from Tualatin Basin projects is between 2,000 and 2,600 stems per acre. Formulae for calculating densities are as follows: tree stems = square footage of planting area x 0.01 shrub stems = square footage of planting area x 0.05 These formulae are intended to be used as a guide and stem density should be modified to reflect site conditions and target community types. Considerations for Establishing Native Riparian Plant Communities Site Conditions Hydrology a. Consider the frequency and duration of water inundation. Divide the planting area into hydrologic zones based on elevation. Most sites include one or more of the following planting zones with respect to hydrology during the growing season: Wet - standing or flowing water/nearly constant saturation; anaerobic soils Moist - periodically saturated; anaerobic and/or aerobic soils Dry - infrequent inundation/saturation, if any; aerobic soils Soils a. Unless soils are heavily compacted, tilling and disking disturb soils and are generally unnecessary for successful revegetation b. Rocky fill or heavily disturbed soil may be removed and replaced with native soil to create appropriate conditions for planting3 Weeds and Site Context a. Consider site preparation and future maintenance needs in light of characteristics of current vegetation b. Consider the current and potential influences of areas surrounding site and select boundaries and all-season access points that facilitate maintenance Plant Materials and Planting a. One to two-year old bare root seedlings yield excellent results at most sites.4 Containerized plants may be used, but practitioners report higher costs and inconsistent results with containerized stock b. Cuttings from native Salix, Cornus, Spiraea and Lonicera shrubs can effectively supplement bare root plantings, especially on steep streambanks c. Native grass and forb seed can help with erosion and weed control. Small- stature native grasses are recommended to prevent excessive competition with planted trees and shrubs for moisture and sunlight 3 Contact your local SWCD for more information about appropriate soil sources. 4 See www.plantnative.org for a listing of local Oregon nurseries FORM ABCD INITIALS: BUYER_______ / SELLER_______ VERSION: DRAFT RIPARIAN PLANTING PROTOCOLS.DOC PAGE 3 OF 4 d. Bare root seedlings should be protected from freezing and drying during lifting, transport and planting e. Planting in curved rows at regular spacing intervals can facilitate maintenance f. Planting season with bare root plants typically lasts from late January to mid- March. Fall and spring plantings are also possible if using containerized stock g. Plan to inter-plant at approximately 25 percent of original planting numbers in project year two Plant protection a. Consider potential for herbivory by beaver, nutria, deer, elk and voles b. Before using plastic plant protectors and bamboo stakes, consider potential for loss due to flooding and to vandalism along trails c. In grassy areas, consider spring ring spray for vole protection and moisture conservation. Voles will not likely girdle plants unless they are under the cover of grass. d. In areas with beaver activity, be prepared to replant Maintenance a. Visit site regularly b. Minimum maintenance on most sites includes one spring ring spray, one summer mow or cut and one fall spot spray. c. The need for irrigation can usually be avoided in a typical summer with proper plant selection and placement and good grass control (e.g., moisture conservation ring spray) around plants. A 25 percent inter-plant of lost plants in project year two is often more cost-effective than irrigation. FORM ABCD INITIALS: BUYER_______ / SELLER_______ VERSION: DRAFT RIPARIAN PLANTING PROTOCOLS.DOC PAGE 4 OF 4 Supporting Documents for Section 5 – Credit Portfolio (Task 3) Ecosystem Restoration in the Long Tom River Basin for Water Quality Improvement in the Willamette River Preliminary Findings Prepared by Long Tom Watershed Council Dana Erickson, Cindy Thieman Prepared for City of Eugene Project P07‐02 March 2008 Acknowledgements The following people provided informal technical assistance during this project. A description of their assistance is provided. Their names here do not connote their review of the final product. • York Johnson, DEQ – Used Shadelator to calculate thermal reduction potential for the Long Tom River. • Ryan Michie, DEQ – Provided clarification of Shadelator results and calculations. • Stuart Rounds, USGS – Assisted in estimating potential temperature influence of Bear and Ferguson Creeks on the lower Long Tom River. • Kendra Morgan, Clean Water Services - Met with LTWC staff to review field assessment and mapping protocols for determining shade credit values. • Raj Kapur, Clean Water Services – Discussed use of Shadelator for showing credit value from planting projects. Provided average values from CWS experience for shade credit per unit stream length. • Peter Guillozet, Clean Water Services – Provided monitoring protocols and estimates for project implementation. • Landowners in the Long Tom River basin. Citation: Long Tom Watershed Council. Ecosystem Restoration in the Long Tom River Basin for Water Quality Improvement in the Willamette River. 2008. 2 Table of Contents Introduction ................................................................................................................................... 4 Background .................................................................................................................................... 4 Priority Area Determination .......................................................................................................... 5 Restoration project types for temperature mitigation and other benefits ............................... 6 Riparian Planting ........................................................................................................................ 6 Instream Impoundment Removal................................................................................................ 6 Connection to cool water sources ............................................................................................... 7 Floodplain restoration and hydrologic reconnection .................................................................. 7 Multiple Benefits from Shading.................................................................................................. 7 Implementation timelines for different project types.................................................................. 8 Viability of Project Types for TMDL Implementation Options................................................. 9 Riparian Shading of the Lower Long Tom River ........................................................................ 10 Methods..................................................................................................................................... 10 Figure 1. Sample map of Shadelator Results ......................................................................... 12 Findings..................................................................................................................................... 13 Table 4. Potential thermal load reductions for selected reaches, lower Long Tom River .. 14 Elements of a performance monitoring plan for riparian shading and bacteria reduction .... 15 Considerations in contracting with landowners for shade production.................................... 15 Methods..................................................................................................................................... 16 Questions................................................................................................................................... 16 Findings..................................................................................................................................... 16 Credit calculations ................................................................................................................ 17 Contract payment amounts ................................................................................................... 17 Minimum Contract Value ..................................................................................................... 17 Uncertainty or “Hassle” factor.............................................................................................. 17 Permission to access land...................................................................................................... 17 Upfront payment ................................................................................................................... 18 Contract signing bonus or value addition ............................................................................. 18 Explaining the system ........................................................................................................... 18 Landowner Involvement in BMP activity ............................................................................ 18 Contract Development .......................................................................................................... 19 Floodplain Easements ........................................................................................................... 20 Project Relationship to Marketplace Activities.......................................................................... 20 Credit Calculations................................................................................................................ 20 Watershed Council Roles...................................................................................................... 20 Conclusions .................................................................................................................................. 21 References ................................................................................................................................... 23 Appendices................................................................................................................................... 24 Appendix A: Long Tom Watershed Sub-basins ....................................................................... 25 Appendix B: Areas for further investigation ............................................................................ 26 Appendix C: Outreach to Landowners ..................................................................................... 27 List of Attachments ..................................................................................................................... 33 3 Introduction The goal of this project was to produce materials that support the City’s TMDL options assessment, under compilation through March of 2008. This report gives some preliminary answers with regard to project types and priority areas when considering ecosystem restoration activities in the Long Tom Watershed as a method to accomplish water quality improvement in the Willamette River. Specific detail is provided with regard to shading the Long Tom River to achieve temperature reduction. Areas of potential further investigation are noted throughout the report and summarized in Appendix B. Background In the Willamette Basin, there is considerable movement toward creating markets for ecosystem services. Multiple complementary investigations are occurring and technical and system experts are addressing each of the components necessary to create a marketplace for the trade of many types of credits. Chief among them are water quality credits. Demand for water quality credits to meet Clean Water Act standards is driven by newly established Total Maximum Daily Loads in Oregon for water quality parameters such as temperature, dissolved oxygen, bacteria, and more. In general, the analysis suggests that all the major point sources in the Upper Willamette reach (upstream of river mile 108) have excess thermal loads that exceed waste load allocations and thus may have an interest in acquiring thermal credits. (Willamette Partnership, 2008) One example of this is a municipality like the City of Eugene needing to offset the thermal loading from treated wastewater discharges to the Willamette River. A typical solution to reducing the thermal impact would be to build a large cooling plant. However, the simplest version of another option would be to pay landowners in surrounding watersheds to plant trees to produce shading over the longer term that cool streams. This alternative approach invests in natural systems and, coupled with a high quality organizational framework to identify, value and track investment as well as return, and a sound technical approach, it has great potential. This project explores the potential for ecosystem restoration in the Long Tom River basin to improve water quality in the Willamette River. The primary emphasis was assessing potential reduction from solar loading by implementing riparian shading, and landowner interest in participating in this activity in a marketplace framework. The Long Tom River was chosen because it is the most underperforming for shade in the Willamette Basin. The difference between current and potential effective shade levels is 32%1 1 Figure 1.48 in the TMDL appendix reports the McKenzie River in sections at 14.2% and 32.8% respectively for the lower and upper river. The 32.8% number, which would be slightly higher than the Long Tom River, is an artifact of calculation (Ryan Michie, DEQ, pers. comm.). 4 (ODEQ, 2006, p.C-139). Based on long-term average flows, the Long Tom River contributes on average 5.5% of the flow of the average Willamette River at Albany (A. Donner, USACE, pers. comm.). Modeling suggests that shading the entire lower section of the Long Tom River, from Fern Ridge Reservoir down to the southern confluence at Norwood Island, could reduce the temperature of the river as much as 4° C. Therefore, there is significant thermal load reduction potential along the lower Long Tom River. Priority Area Determination To gain the maximum Willamette River temperature reductions from Long Tom Watershed restoration projects, it is recommended that restoration activities be focused in the lower Long Tom, Bear and Ferguson Creek sub-watersheds. (The map in Appendix A delineates the ten sub-watersheds in the Long Tom Basin.) The primary reason for this is the influence of Fern Ridge Reservoir. Fern Ridge is very large and shallow, which leads to long hydraulic residence time. Any temperature reductions gained from restoration projects upstream of Fern Ridge would be negated once the water entered the reservoir (Stuart Rounds, USGS, pers. comm.). Another advantage of restoration in this priority area, particularly on the Long Tom River downstream of Monroe, is improving winter rearing habitat for juvenile Spring Chinook and fluvial cutthroat trout that migrate between the Long Tom and Willamette Rivers (Gary Galovich, ODFW, pers. comm.). Also, Bear and Ferguson Creek have the highest E. coli concentrations in the rural portion of the Long Tom Watershed (Thieman, 2007). Thus, projects that increased shade and excluded livestock from streams in these sub- watersheds would achieve both stream temperature and bacteria reduction requirements. In late summer, Ferguson and Bear Creek contribute approximately 4 and 6 cfs, respectively, to the lower Long Tom River. From early June through mid to late September, 7-day average maximum daily temperatures in Bear Creek are above the state standard of 17.8° C, ranging from 20° – 23° C. Ferguson Creek temperatures are somewhat cooler and drop down again earlier, with maximum daily temperatures ranging from 18° – 22° C from early July to early September (Long Tom Watershed Council, unpublished flow & temperature data). If temperatures in both these streams could be reduced to meet the state standard of 17.8° C, this could cool the lower Long Tom by as much as 0.5° C.2 Developing a Shadealator model or other method for identifying high 2 “Back of the envelope” calculation shown below is for the lower Long Tom and Bear Creek at typical late summer flows and temperature, with the exception that Bear Creek is assumed to be 17.8° C for the purpose of estimating its temperature impact on the lower Long Tom if Bear Creek were to meet the state temperature standard. Formula (QLTa * TempLTa) + (QBC * TempBC)/ (QLTa + QBC) = Temp LTb Where, Q= flow, Temp= water temperature, BC= Bear Cr., LTa= Lower Long Tom above Bear Cr., LTb= Lower Long Tom below Bear Cr. Calculation (74 cfs * 22° C)+(5.8 cfs * 17.8° C)/(74 cfs +5.8 cfs)= 21.7° C 5 priority shading areas for Bear and Ferguson Creek would be an important step in developing shade credits within these sub-watersheds. Although not a priority sub-watershed for reducing temperatures in the Willamette River, Coyote Creek is also underperforming for shade; current effective shade is 22.8% less than system potential. With relation to the Ecosystem Marketplace, there is discussion that any restoration activity above the “point of maximum impact” on the Willamette River would count for credit, regardless of its location. If this is the case, Coyote Creek might also be considered a priority area for developing shade credits with multiple benefits in the Long Tom Watershed. With respect to achieving multiple benefits this is an important addition as Coyote Creek is a high priority sub-watershed for restoration due to the extensive amount of natural habitat remaining. Restoration project types for temperature mitigation and other benefits Riparian Planting Increasing shade through riparian planting has been shown both in practice (Derek Godwin, OSU Extension, unpublished data and Cindy Ricks-Meyers, S. Coast WS Council, unpublished data) and theory to significantly reduce stream temperature and increase dissolved oxygen. On cropland, enhancement of riparian areas also has the potential to reduce nutrient and sediment contributions to local rivers and streams (see: www.deq.state.mi.us/documents/deq-swq-nps-gw.pdf, www.extension.iastate.edu/Publications/PM1507.pdf) Instream Impoundment Removal A promising mechanism to improve stream temperature and dissolved oxygen is removal of certain instream impoundments. The Long Tom River’s impoundments consist of three check dams installed to control grade on the channel. One of the dams is also elevated in the summer by the Junction City Water Control District to provide irrigation water to adjacent farms. Smaller impoundments are scattered across the Ferguson, Bear and Coyote Creek sub-watersheds. These typically have been put in for irrigation or aesthetic purposes. Temperature monitoring data at an impoundment on Jordan Creek, a tributary of the Coyote Creek sub-watershed, suggest that some impoundments significantly raise stream temperature. This impoundment slows stream velocity and creates a broad shallow pool behind it. Coupled with no shade, this has led to a significant temperature impact. In this instance, maximum daily water temperatures were as much as 8° C higher immediately downstream of the impoundment (Thieman, 2007). It would be worthwhile to investigate other impoundments located on the valley floor that have no shade and create wide shallow pools to see if this temperature influence is seen elsewhere. 6 Connection to cool water sources Connecting streams to cool water sources, such as springs, might also create cooling. Evaluating this potential would require research into specific project methodology in addition to an evaluation of sub-surface flow patterns in the Long Tom Watershed. Other possible sources of cold water augmentation are existing impoundments in the headwaters of Bear, Ferguson, and Coyote Creek. Many are on private forestland and maintained for fire safety. These may contrast to impoundments on the valley floor in their width to depth ratio and existing shade. If these impoundments are stratified, it is possible that cool water could be pulled from the bottom, much like summertime reservoir releases are regulated in the Cascades3. This would require temperature profile monitoring and an evaluation of technical feasibility to determine if this is a viable option. Related to both removing impoundments and connecting to cool water sources, the Long Tom Watershed Council (LTWC) is conducting a Fish Barrier Assessment in 2008. This project will identify and map instream impoundments in selected sub-watersheds. Temperature monitoring of some of these impoundments may be possible. Floodplain restoration and hydrologic reconnection Improving river-floodplain interaction, via levee removal or setback, bank terracing, and historic channel reconnection, provides a number of potential environmental benefits. Levee removal or setback would increase off-channel and instream habitat, reduce erosion, and increase floodplain storage. Stream terracing increases off-channel habitat during high flows and, similar to levee setbacks and historic channel reconnection, promotes sediment deposition by creating areas of slower velocity. Historic channel reconnection would also improve stream habitat and reduce erosion, and in some locations may reduce stream temperatures if increased shading and groundwater interaction occurred. Hyporheic flow occurs where coarse gravel dominated soils exist along a river. Hulse et al. (2007) have identified many such locations along the Willamette River where floodplain restoration could have significant temperature benefits. Investigations into the temperature impact of hyporheic flow are ongoing (Lancaster et al., 2005; Willamette Partnership, 2008). Many of these locations are adjacent to the Long Tom Watershed and are within LTWC’s extended service area on the west side of the Willamette River. Decreasing stream temperatures by increasing hyporheic flow is not likely along the lower portions of the Long Tom, Bear, or Ferguson Creek, because this type of flow does not occur in the tight, clay soils found on the valley floor in the Long Tom Watershed. Multiple Benefits from Shading Where riparian shading is being used to reduce stream temperatures, other water quality benefits may also be realized. For example, one could prioritize riparian planting for 3 In some of these situations it is a higher ecological priority to remove them for fish passage. 7 sites where erosion is a problem. If the soil contains mercury, arsenic, or other toxics, this action will also reduce the mobilization of these pollutants into the waterway. Another way to achieve multiple benefits is to add management actions on the site where riparian planting is occurring, such as fencing to exclude livestock to reduce E. coli and bank erosion. Riparian planting projects that are combined with levee removal, historic channel reconnection, and bank sloping or terracing can add multiple water quality and habitat benefits. Table 1 summarizes the potential benefits realized by each project type. Table. 1 Summary of Restoration Actions & Benefits Project Type Benefit Riparian planting Decreased stream temperature; increased dissolved oxygen; increased bank stability, which leads to decreased turbidity/suspended solids & delivery of soil bound pollutants, such as mercury, to stream; increased habitat for riparian dependent species such as song birds and amphibians Fencing for livestock Increased bank stability, which leads to decreased exclusion/control turbidity/suspended solids & delivery of soil bound pollutants, such as mercury, to stream; decreased delivery of livestock waste to stream, which leads to reduction in bacteria and nutrient pollution Small dam removal Decreased stream temperature; increased dissolved oxygen; improved fish passage; restoration of normal sediment transport regime Floodplain and hydrologic Decreased stream temperature; increased dissolved reconnection (Levee removal, oxygen; increased floodplain storage; increased off- historic channel reconnection, channel and instream habitat and complexity; bank terracing) restoration of hydrologic regime; decreased bed and stream bank erosion Cold water augmentation Decreased stream temperature; increased dissolved oxygen Implementation timelines for different project types The specific stages to consider when estimating implementation timelines are site selection, outreach, contract development, funding, permitting, implementation, maintenance, benefit realization, monitoring and reporting. Pre-implementation stages are subject to many unknowns such that only the implementation period timelines are presented in Tables 2 and 3. Implementation timelines could also be affected by the total number of projects in an area. For example, if a large number of restoration sites become available at the same time, the availability of plant material and contractors may slow the process until sufficient capacity is developed to meet the demand. On the other hand, implementing many similar projects within a close time frame could make those projects collectively more efficient in competing for and utilizing contractor and staff attention. 8 Table 2. Project Implementation Timelines and Benefits (excludes pre‐ implementation requirements) Project Type Implementation Period Benefit Realized Riparian planting 1 – 2 years to plant trees. 10-15 years 5 years full - see Table 3 Fencing for livestock 6 - 12 months Immediate exclusion/control Small dam removal 1-2 years Immediate Floodplain and hydrologic 1-2 years Immediate reconnection (Levee removal, historic channel reconnection, bank terracing) Cold water augmentation 1-2 years Immediate Table 3. Timeline for Implementing Riparian Shading Projects4 Year 1 Site preparation, plant materials, planting, maintenance, program operations, project management and administration Year 2 Plant materials, inter-planting, maintenance, program operations, project management and administration Year 3 Maintenance, monitoring, project management and administration Year 4 Maintenance, monitoring, project management and administration Year 5 Maintenance, monitoring, project management and administration Viability of Project Types for TMDL Implementation Options TMDL implementation includes BMP work on parameters that are more challenging to measure, such as bacteria, and specific targets for more measurable parameters such as temperature. For those with a quantifiable target, two steps are necessary before project types can be considered viable for offsetting TMDL requirements. First, there must be a 4 See also Clean Water Services Thermal Credit Cost Summary 2007 (updated 1/08), attached. 9 formula relating a measurable unit for the project type (e.g. acres of floodplain restored) to a unit of the anticipated benefit (e.g. kCal reduction). Second, there must be a calculation of how many units of the restored feature are needed to provide the desired amount of benefit. Riparian shading is the restoration project type receiving significant attention at this time for temperature mitigation. Investigations by DEQ and other professionals in the field are providing spatially explicit information on current and potential shade, and formulas to convert shade potential into heat load reduction. In anticipation of the abovementioned formula becoming available for the Willamette Basin, LTWC conducted a survey of potential sites for riparian restoration. The methods and findings from this project are described in the following sections. Riparian Shading of the Lower Long Tom River Within the priority area, the lower Long Tom River from Fern Ridge Dam to the southern confluence at Norwood Island carries the most flow and therefore the greatest potential for reduced thermal load to the Willamette River. In addition, the lower Long Tom is the only sub-watershed within the priority area that has Shadealator model results.5 The modeling results allowed LTWC to identify sections of the river that would yield the greatest temperature reductions if shaded on both sides to maximum natural or system potential (potential effective shade). Maximum natural potential for all riparian areas in the Willamette Valley was determined by a group comprised of DEQ, The Nature Conservancy, and Oregon Department of Fish & Wildlife. This group used historic vegetation information (circa 1850s) to determine appropriate plant community and structure for riparian areas in the Valley (Pamela Wright, DEQ, pers. comm.). For example, in some areas the historic riparian plant community was prairie, so maximum natural potential would not include canopy forming trees. In other locations, floodplain forest created a complete or partial canopy over streams and rivers. The latter example is the case for the historic riparian vegetation of the lower Long Tom River (Thieman, 2000). Methods Products from the lower Long Tom River Shadealator model include current and system potential shade, and solar load reduction potential for each 100-foot segment of the river. In addition, DEQ developed a GIS shape file with each segment represented as a colored dot indicating the relative potential to reduce solar loading through riparian shading.6 Red indicates the greatest potential for reduction and is associated with segments that have little or no existing riparian vegetation. Green indicates the least potential reduction and is associated with well developed riparian areas. 5 Note: In the Long Tom Watershed above Fern Ridge Reservoir, Coyote Cr. and Amazon Cr. also have Shadealator results. 6 This was provided by York Johnson, DEQ (see Acknowledgements for details) 10 Maps were created combining potential solar load reduction with land ownership and 2005 aerial photos (see Figure 1 for a sample map). This allowed identification of relatively longer reaches having the greatest potential for reduction, as listed in Table 4. Fewer landowners per reach would likely mean fewer contracts, management and administrative costs. Thus, reaches with one or a few landowners that are relatively long (2,000 – 10,000 feet) and have high solar load reduction potential (e.g., mostly red and orange dots) would likely yield the greatest reduction per dollar invested. Table 4 displays these selected reaches and converts the reduction potential into kilocalories (kCal) per day, which is the unit currently applicable in permit and trading discussions7. In addition to current vegetation, the aspect, bank height, streambed substrate and wetted width of the channel segment also influence the potential effect of new shade. For example, a channel running east-west would receive the greatest benefit from maximum shade on its southern banks. Also, the lower the bank height and narrower the wetted width, the more effective shading will be. This explains some of the variation in potential reduction of solar loading for segments that appear to have similar existing riparian vegetation. 7 Shadelator results are output in Langleys/day, which are converted to kCal/day with the following equation: Kcal/day = (Langley/day) x .001 x (surface area cm2) 11 Figure 1. Sample map of Shadelator Results. Note: Landowner names have been removed for privacy. 12 Findings Potential solar load reduction ranged from approximately 17 million kCal/day for a 2,000’ segment to 189 million kCal/day for a 9,600’ segment (see Table 4). These results must be tempered with several facts. First, DEQ’s Shadealator calculations are based on aerial photo interpretation calibrated with field verification at publicly accessible points along the river and as such should be considered estimates that guide the selection of potential priority areas and where outreach should occur. The calculation of actual shade credits will be based on field measurements only. Second, DEQ’s model assumes that both sides of the river are shaded to their maximum natural potential. In reality, one may not be able to shade both sides if there is differing land ownership. Also, other factors, such as aspect or bank height, may indicate that shading one side may achieve a majority of the potential overall benefit. Third, maximum theoretical shade may not be practically achievable on the lower section of the Long Tom River managed by the Army Corps of Engineers because this channel is currently required to be maintained for flood control, which at this time means the planting zone extends down the stream bank but stops short of the summer water level8. For comparison, Clean Water Services (CWS) has found that their solar load reduction, based on field measurement calculations, ranges from 100,000 – 500,000 Kcal/day/100’ segment. For a 2,000’ reach segment, their aggregate amount would range from 2 million to 10 million Kcal/day compared to the 17 million Kcal/day above. Given the planting limitations on the lower Long Tom River, the range of CWS values are probably closer to what would realistically be achieved. Additional field visits and calculations are necessary steps before any final prioritization among sites occurs. If the sites were being considered for shade production in association with a credit value, a standard field form recognized by the Marketplace, would be essential. 8 The Army Corps of Engineers is currently evaluating how to address planting projects within its flowage easement along the Long Tom River as the presence of trees and shrubs will change the way maintenance is conducted. 13 Table 4. Potential thermal load reductions for selected reaches on the lower Long Tom River FID RM S RM N Linear West side East side Kcal/day Kcal/day/linear end end feet landowner(s) landowner(s) ft. 48-129 22.784 21.231 8200 1 2 105,990,703 12,926 3 4 5 6(BLM) 7 8 9 131 - 21.193 20.814 2000 10 11 17,322,828 8,661 151 167 - 20.511 19.508 5300 12 11 59,673,408 11,259 219 13 14 15 251 - 18.902 18.239 3500 16 16 41,822,434 11,949 286 17 287- 18.22 17.917 1600 18 19 16,340,905 10,213 303 20 21 371- 16.61 16.08 2800 22 22 36,174,397 12,919 399 404- 15.985 15.606 2000 23 24 19,082,643 9,541 424 25 25 448- 15.133 14.659 2500 26 27 31,114,422 12,446 473 527 - 13.636 13.277 1900 28 29 31,651,323 16,659 546 29 547 - 13.258 12.746 2700 30 30 49,266,826 18,247 573 577 - 12.67 11.78 4700 28 31 78,212,724 16,641 624 32 625 - 11.761 10.833 4900 28 33 63,477,730 12,955 673 674 - 10.814 8.6742 11300 34 34 152,651,465 13,509 786 1145- 1.8182 0.00 9600 35 36 188,874,862 19,674 1241 36 37 38 39 36 14 Elements of a performance monitoring plan for riparian shading and bacteria reduction CWS monitors shade credit performance by measuring density of live shrubs/trees and shade (densitometer readings) in randomly selected plots throughout the riparian planting areas. Final survivorship densities of >15,25 stems/acre is considered an indicator of successful riparian restoration. CWS staff also establish photo points, estimate invasive species cover, and make general observations about the condition of the restoration area for each site. Please see the complete CWS protocol attached to this report. In addition to the CWS implementation monitoring methods described above, LTWC recommends instream temperature monitoring at a sub-set of riparian restoration sites. Continuous temperature monitoring should occur from June 1 – October 15 immediately upstream and downstream of selected planting sites and at an appropriate number of control sites. Sites in the Bear and Ferguson sub-watersheds would be good candidates because the smaller stream sizes makes temperature probe placement and retrieval more successful, and the ability to detect temperature changes over time is more likely due to lower stream flows. Evaluation of E. coli concentration reductions from livestock exclusion projects is more difficult due to the variable nature of bacteria concentrations in streams. One possible approach is to implement monthly long-term monitoring at the mouths of targeted streams within the Bear and Ferguson Creek sub-watersheds. For example, Owens and Jones Creek, within the Bear Creek sub-watershed, have several years of prior collected E. coli data and they have some of the highest concentrations in the Long Tom Watershed. Once projects were implemented, post-project bacteria data could be collected for 2 to 3 years and then compared to pre-project data using Seasonal Kendall and T-test statistics. Considerations in contracting with landowners for shade production When considering restoration of lands in private ownership, the interest and understanding of those owners is essential. Producing benefits quantified by credits for trade, banking, or sale is familiar to some people from examples of wetland banking in the region however very few have participated and know sufficient detail. The task for this project was to assess the willingness of landowners to contract and provide ecosystem services, shade in this case, and to outline the features of a contract for the sale of credits. 15 Methods Relatively longer reaches with high solar load reduction potential and a single landowner (on one side) were prioritized for outreach. Ten landowners were identified and seven were successfully contacted. Six agreed to a conversation and five of these conversations happened on site. The interviews were conducted during December 2007 and January 2008 by Dana Erickson and Cindy Thieman, both staff of the Long Tom Watershed Council. Background and potential Q&A information was developed but not used as script. The questions listed below were posed. Please see Appendix C for further methods and specific answers. Questions 1. Would you consider putting your riparian area into plantings to shade the river? Would being compensated for that "crop", such as an annual payment, increase your interest? 2. If the conditions were satisfactory would you be interested in a contract for "growing" shade for 10-20 years? [interested here in entering contract and lengths of term] 3. How might you come up with an amount for the "per acre" payment for the riparian area that piques your interest? What is an approximate range for that amount? 4. What is a "good average" net profit for the range of crops you grow? 5. Is there a base contract amount and/or length that would be important to make entering into the business relationship worthwhile? 6. Are there any potential requirements from your end to make an arrangement / business transaction worth your while? 7. How soon would you be willing to make a sale? 8. Overall, how do you view a transaction like this? 9. Do you have any concerns/ideas/questions we can think about as we work on this project, or get back to you about? One landowner participated in contract development with a team working for Willamette Partnership. This team was comprised of specialists from David Evans and Associates and CH2MHill, Willamette Partnership, Long Tom Watershed Council staff and board member, and City of Eugene staff. The latest version of that contract available at the time of this report is included in the Attachments and some of the primary issues discussed from a landowner perspective are included with interview responses below. Findings All the landowners represent medium to large-scale agricultural operations in the lower Long Tom River basin, ranging from 1,000 to over 2,500 acres. All are owner-operated “family farms”. The following is a summary of the responses. For individual responses, please see the appendix. There was a certain amount of philosophizing during the discussions. Some of that may be informative in preparing for additional outreach and is also captured in the appendix. 16 Credit calculations Although the buyers will be interested in their cost per kcal, it will be useful when dealing with landowners to use units that are not far removed logically from acres, and to make calculation methods transparent. It is unclear where the notion of a credit fits into this equation. There is also a concern in valuing any credits or transactions per kcal as the heat load calculations may vary. The need is strong for expressing the transaction, especially the payment and cost calculations, in units that property owners are familiar with or that are well-connected with the land and product being sold. Contract payment amounts Landowners differed in whether they viewed the program as a business venture or as a reasonable way to fund a beneficial project. If payment is considered, the gross payment amounts, and subsequent net profit, must compare equivalently or favorably to a crop net profit in an average year. The more complicated the overall contract or relationship the more important the balance leaning toward the favorable side will be. This is true even after acknowledging that the riparian land acreage may not otherwise be put into production mostly because the property owner would prefer the land sit ready for an unknown and perhaps larger return than tie it up for small returns. Specific payment amounts varied widely, $350 – $1,600, and would depend on whether or not the ground was in production. Minimum Contract Value The total contract value must be worth the up-front cost of establishing a new venture, especially as the venture is not repeatable multiple times (e.g. property owners own a finite acreage). Cost would include: time, energy, materials, effect on work crews (hours needed/activities) and compatibility with other land management activities of the seller, and perhaps other considerations. The annual payment must also reach a worthwhile minimum; the number discussed for the annual payment values seemed to fall consistently in the $1,000 – $1,500 per year range. Uncertainty or “Hassle” factor There will be a factor in the valuation of the transaction from the landowner’s perspective that makes it worth their while to engage in any business relationship. In the types of transactions being considered here overcoming the hassle factor will be more “costly” as the transaction becomes more complex or increases in uncertainty or includes entities with unknown or changing representatives and decision-makers (e.g. a contract including a government entity that also requires monitoring access by that entity). This may be overcome with a first contract value addition or signing bonus. Permission to access land This cannot be open-ended but once per year for monitoring purposes is accepted as reasonable if the entity is less known or a government entity. There are also quarterly 17 monitoring needs in the first 5-year period (or until the vegetation is “free-to-grow”). Third-party contracts for this, perhaps an entity or person known or otherwise trusted by both parties, would likely be seen as the most reasonable from the perspective of the contract parties and the conservation community. Upfront payment It is unclear how important an up-front payment will be. In the crop industry, initial payments are unusual –conversely, a significant cost outlay is required. From a project quality control perspective some parts of the upfront payment may be best tied to the most major aspect(s) of implementation production (e.g. vegetation planted). Contract signing bonus or value addition If contract signing bonuses were considered for an initial period when program implementation begins, there would be more incentive to participate. Conversely, there would likely be program “bugs” to work out and it may be more effective to have less participants as bugs are being worked out. A signing bonus could also be given to each property owner for their first contract. This could occur between buyer and seller, as part of or independent from the written contract. Explaining the system There is a finite set of agricultural landowners with property appropriate for achieving riparian establishment for shade production that affects temperature, especially when considering those that have influence over large acreages. In the agricultural community word travels fast and reputation, whether program or personal, is a critical element to any business relationship. A fair amount of outreach and marketing time could be built into the initial period of the program to show adaptive management in addressing concerns, problems, sense of fairness, and new opportunities. That outreach could be conducted by buyers, marketplace representatives, or some other agent. Landowner Involvement in BMP activity 9 Landowner involvement interest ranges from installing the BMP to conducting the routine maintenance. In this sample, only one landowner was interested in the installing the planting. Most others would consider conducting the maintenance. Where the landowners was interested in conducting the maintenance it was because they are accustomed to being involved in all aspects of running their land and operation – studying the soil and planning for crops, managing rotations, fixing machines, negotiating business. 9 In the interviews, the planting activity was not referred to as a best management practice. Various interview methodologies suggest that inferring value in a question may affect the integrity of the answer so these types of references were omitted. 18 During installation, the quality of the planting directly affects survival. The initial cost investment for installation is relatively large and early failure creates a significant setback in production. Costs for maintenance include getting water to trees, costs to spray back competing vegetation, costs to guard against browse, and possible crews to do some of the work. Replanting should also be addressed. From a quality-control perspective, the landowners conducing the maintenance is not as risky as the initial planting. To be determined within the contract is who installs the BMP (seller, buyer-approved party, certified party/contractor) and to be determined within the marketplace system would be who sets the criteria for that decision, or the criteria for who qualifies as an approved party. It is recommended that if the landowner wants to implement the BMP themselves, they obtain some certification. Some quality control attention to maintenance would also be beneficial, whether that be in the form of certification or maintenance criteria and reporting. Contract Development One council staff and one board member, who is also a landowner in the priority area, participated in the development of the Credit Exchange Agreement by the Willamette Partnership. Specific comments not incorporated in that process or referred to above are described below. In addition, Clean Water Services has developed multiple contracts that may be available as examples. Performance Bond Because the success in achieving the outcomes intended by the contracted arrangement are entirely dependent on the quality of initial planting and the survival of those plantings, a performance bond seems important, if not essential. Annual Monitoring There was willingness to see the annual payment tied to a successful monitoring report. Protection Clauses/ Limited Liability There is a need to have opt-out or relief clauses due to circumstances beyond landowner control - e.g. beaver or blow-down. Landowners were willing to re- establish the BMP however questioned how that cost would be addressed and how many times a seller would have to replant after those occurrences. Pooled performance bonds are an option here. Questions also arose concerning transferability if land ownership were to change. There was also a potential desire to opt-out if the contract payment were to decline over multiple years as diminishing returns would not be a continued incentive. This might be balanced with the finding that all landowners in this sample except one did not see any reason to remove a riparian area once it was established. The sole reason was due to putting a crop back on valuable ground. 19 Floodplain Easements An option for further investigation is site reconnaissance and landowner outreach for multiple benefit work. For floodplain restoration in particular, the management of water emerges as very important to the landowner we spoke with that was familiar with the work of Hulse and Gregory referenced in this report. Although he said he would be open to a floodplain lease, removing water rapidly was essential to avoid crop damage. Specific discussions would enable the evaluation of these opportunities for achieving or maximizing the ecological benefit from flooding. Project Relationship to Marketplace Activities Credit Calculations The first “draft” credit calculator under development for the Willamette Partnership was not available to us before the preparation of this report. Field-testing this for results is an area of further investigation. Watershed Council Roles It is not clear at this time what role, if any, the Long Tom Watershed Council would play in the Ecosystem Marketplace. Options include: outreach to landowners about the marketplace as a restoration funding mechanism, brokering for landowners if they request that assistance in selling credits, aggregating certain landowner-sellers and offering credits for sale on their behalf, field-verifying credits offered for sale, implementing restoration work, stewarding implemented projects, monitoring and reporting on implemented projects. LTWC may elect one, multiple, none, or varying roles in the future. LTWC recognizes that some roles may be mutually exclusive. For watershed councils considering involvement in the marketplace, the key is to relate the activity to the council’s mission and goals, and to make sure the activities chosen fit with the work patterns and skills of the council. For example, assisting a landowner in bringing credits to sale could be compared with obtaining a restoration grant for project work on a landowner’s property. Aggregating sellers could be compared with multi- landowner restoration projects that are grant funded. Much as a grant proposal is prepared, where projects components are assigned costs for the grantor and match from the landowner, a sale could be prepared that reflects the same costs and willingness of the landowner(s) to participate materially in the work. Another role that watershed councils may be well suited for is field-verifying credits as the orientation is quality-control and this fits well with the public-service and conservation focus of most councils, as well as their non-profit structure. The role of implementing restoration work is also well-suited however if the nature of the work is straightforward and repetitive it is perhaps better delivered by professional crews. The related tasks of stewarding, monitoring and reporting are another excellent role for councils for two reasons. First, these activities involve ongoing contact with landowners and thus the opportunity to discuss ongoing learning and other project potentials. Second, monitoring and reporting could build on 20 and relate to councils’ monitoring of watershed conditions and whether or not projects are achieving stated objectives. Conclusions Producing cooler temperatures in the Willamette River through restoration actions on its major tributaries is not only possible, many sites would likely provide multiple benefits. The priority area for restoration in the Long Tom Watershed is the lower Long Tom River below Fern Ridge Reservoir as well as Ferguson Creek, Bear Creek and perhaps Coyote Creek. Priority project types would include riparian shading, removing instream impoundments, connecting to cool water sources, and floodplain restoration and hydrologic reconnection. Multiple benefits would be achievable in many cases; this would be determined on a site specific basis and result from the inherent properties of the site or by adding project types. The most feasible actions to implement rapidly from an outreach, technical and credit- equation standpoint are riparian shading projects. However, if all project types had the same on-the-ground start date, the solar load reduction resulting from shading would take longer to produce than the thermal load reduction or cooling from most other project types. The Long Tom River has the most flow in the priority area and it is estimated that shading its entire length below the dam would contribute 4° C cooler water to the Willamette. According to the Shadelator and Heat Source modeling, 17 million kilocalories of thermal reduction could be gained per 2,000 feet in the reaches with higher potential, although based on experience with shade production by Clean Waters Services in the Tualatin Basin we estimate numbers at half that amount to be more realistic. Performance monitoring should include BMP implementation (e.g. survivorship) and shade production (e.g. densitometer) as well as consequences for the targeted parameter (e.g. instream temperature). The quality of projects would need to be insured somehow; quality control is critical in attaining a high percentage success in shade production especially. Follow-through in monitoring is essential in meeting temperature reduction objectives, and those of other parameters, as is applying adaptive management or reprioritization as needed. Landowners in high priority areas were found to be willing to contract for shade production. All understood the broader concepts of trading and the marketplace. Some saw the contracts as a business relationship only; others as continuing conservation/restoration that’s the “right thing to do”. At least one was interested in discussing floodplain easements. Answers were given to questions regarding duration and value of contracts, involvement and responsibilities around planting and maintenance, and their concerns and ideas regarding uncertainty and risk. LTWC roles in facilitating trades or participating in the marketplace are not set at this time and many possibilities exist for all watershed councils and their partners. 21 If the goal is to produce thermal cooling in part through restoration on private lands, and if it is agreed that in the future it is likely that many other benefits – bacteria, carbon, etc. – would be gained from restoration action on private lands, then there is merit to building participation in this marketplace system from private land owners as soon as possible, regardless of what project types it leads to. At the same time, caution might be best taken in terms of initial contracts for these exchanges, allowing for some subtle but important elements in landowner philosophy toward restoration and land stewardship, the public dollars being used and the public benefits provided. Care would also need to be taken with project types that are less straightforward by incorporating adaptive management principles, to maintain the credibility of matching actions on private lands to offsetting pollution sources. Considering that the need for ecosystem restoration – water quality and habitat for fish and wildlife – currently and historically outstrips the funding available for the projects that achieve it, the possibility of a marketplace system is promising. The fact that funds from polluting impacts would be injected back into the very ecosystems under stress from the impacts appeals to common sense and would satisfy practitioners and the public alike if the methodologies were shown to be technically sound. Finally, it should be noted that investing in restoration and conservation in a large watershed area surrounding a key river, e.g. the tributaries of the Willamette River, versus large single projects on the key river proper that would produce cooling directly at the specific measured point, may contribute more significantly to building long-term ecosystem resilience. 22 References Hulse, David W., Allan Branscomb, Chris Enright, Stanley V. Gregory, Randy Wildman. 2007. Linking cold-water refuges into a biologically effective network in the southern Willamette River floodplain: outlining key locations and knowledge gaps. Unpublished report. Note: This report available at willamettepartnership.org/publications/MarketplacePubs/ Lancaster, Stephen, Roy Haggerty, and Stan Gregory. 2005. Investigation of the temperature impact of hyporheic flow: Using groundwater and heat flow modeling and GIS analyses to evaluate temperature mitigation strategies on the Willamette River, Oregon. Corvallis: OSU, 104 pp. Oregon Department of Environmental Quality (ODEQ). 2006. Willamette Basin Total Maximum Daily Load. Thieman, Cindy. 2000. Long Tom Watershed Assessment. Oregon: Long Tom Watershed Council. Thieman, Cindy. 2007. Stream Health and Water Quality in the Long Tom Watershed. Oregon: Long Tom Watershed Council. Willamette Partnership. 2008. Beyond compliance: transforming the way we manage, regulate, restore and sustain ecosystems by building the Willamette Ecosystem Marketplace. Unpublished report; updated continuously; hyperlink: willamettepartnership.org/publications/MarketplacePubs/Chronology%203.12.pdf 23 Appendices A. Long Tom Watershed Sub-basins B. Areas for further investigation C. Outreach to landowners 24 Appendix A: Long Tom Watershed Sub-basins 25 Appendix B: Areas for further investigation In no particular order, the following additional research or outreach work could be undertaken by the Long Tom Watershed Council or other entities. • Investigate potential for cooling in Bear and Ferguson Creek by collecting field data to run the Shadelator and Heat Source models, and analyzing the results. • Investigate potential for cooling in Coyote Creek by analyzing Shadelator results. • Monitor temperature of instream impoundments to determine the heat load impact of ponded water. Also create temperature profile of water column in deeper ponds to determine if potential cool water sources exist in lower strata. • Estimate the “real credit value” from a package of projects using newly released credit calculator (included as Attachment) and field work with landowners willing to contract for shade production. • Determine potential and create priority area maps for other project types: floodplain/wetland restoration, channel reconnection, reconnection of cool water sources, impoundment removal. o For the latter two, use data resulting from 2008 Fish Barrier Assessment to display and describe areas where instream impoundments exist in priority sub- watersheds (most likely Ferguson and Bear Creek). o Additional options are to conduct landowner outreach regarding these project types, and/or to conduct research on this topic in terms of implementation, utility and effect, and how results could be confidently measured/credited. o For connection to cool water sources, research sub-surface flow patterns. • Site reconnaissance for multiple-benefit work in priority watersheds. • Continue outreach and survey work with Long Tom River landowners regarding trading. Develop program materials for other entities. o Alternative: Develop materials and conduct outreach with Willamette Partnership or other partners. • Implementation and Fund-leveraging Mechanisms: Describe programs that could be used to leverage or add to credit dollars in achieving restoration for shade. Additionally or alternatively, design local version of CWS’ ECREP with local SWCDs as they are willing and capable. Work with locally-active land trusts and/or SWCD to address need for easements where this is a gap. 26 Appendix C: Outreach to Landowners Phone script We would like to talk with large landowners on the Long Tom that would be interested in receiving a rental payment for growing shad trees along the river. We’re working with a team to explore the potential for setting this system up. Would you have time for me to come out and show you some maps that estimate potential shade, explain more and see what you think? Background Preparation regarding marketplace and trading Background In the Willamette Basin, there is some movement around creating markets for "ecosystem services". One example of this is a municipality like the City of Eugene needing to offset the thermal loading from treated wastewater discharges into the Willamette River. The standard solution is to build a large cooling plant. An option being considered is to pay landowners in surrounding watersheds to plant trees to cool the streams with shading over the longer term. Planting riparian areas could have many other benefits such as providing habitat, and buffering bacteria and nutrients from streams. A transaction where the City could "buy" this service from surrounding landowners would take place in an "ecosystem marketplace". The service would be valued and sold in terms of "credits". Credits would be calculated based on area planted and certain aspects of the site. For our Council this type of project fits with our mission of improving water quality and riparian habitat with voluntary means and local action. LTWC roles in the marketplace might include assisting landowners in preparing/offering credits for sale, doing the restoration (tree planting), verifying aspects of the sale transaction in the field, or monitoring the health of the plantings and production of credits over time. Right now we're in the exploratory stage of this project. We are participating in discussions with the lead entity (the Willamette Partnership) so that if a marketplace is developed it is realistic and works for the people that we work with. We also want to make sure that the restoration is well-done, that the objectives of water quality are met over time, and that the marketplace doesn't create disincentives for conservation or set it back (although that may happen temporarily). [Could start below and give background in response to questions] We'd [also] like to know how interested people in this watershed would be in participating in an ecosystem marketplace. Landowners would be able to restore riparian areas and sell the credits for the shade potential they produce. This potential can be calculated for every stretch of stream, although there is no approved formula yet. [Show photo and how sample calculations work] 27 What's involved is planting an area, watering/replanting until establishment is successful, maintaining the plantings, and monitoring. That's the standard procedure for riparian restoration. To sell the shade potential generated, there would be a contract, a verification procedure, and monitoring visits over time arranged with the seller. Potential Q&A Topics Who are the parties involved? The parties involved would likely vary. In the basic scenario the landowner would offer the credits directly to the Buyer by showing the calculation for the amount of credits with a map and/ or aerial photo, a planting and monitoring plan. A Planting Contractor would be chosen (Council? Independent? Landowner?*). A Monitoring Entity would be identified (Council? Independent?). A Verifier would come and ensure the credit offering was "good," likely with a site visit (Council? Independent?). A contract would be drawn to address payments, responsibility, and liability. The transaction would be registered with the Marketplace Registry**. A Certifier (DEQ) would make sure any regulatory concerns had been properly addressed. *There may be some kind of certification required for planting contractors. **The registry may be the pathway to offer the credits for sale initially. A few variations: Landowners may not want to work directly with buyers. They could use a broker. The Council might choose to assist in this role much the same way as we assist in writing restoration grant applications for landowners' projects and providing the technical assistance, permitting, reporting, restoration and monitoring work, etc. Large buyers (e.g. a City, or the combined cities in Metro Wastewater) need large volumes of credits and may not want to work directly with that many landowners. They may look for credits that are coming from brokers or aggregators. Landowners could use brokers, or perhaps choose to aggregate their credits into a larger offering from a group of landowners. The details of this idea are at least one step removed from the first transactions and would probably involve creativity on behalf of the sellers once the marketplace is up and running. Timing of process The development of this Marketplace system was being accelerated due to the need of some large cities and corporations to meet specific heat load reduction requirements in the Willamette. The DEQ just relaxed the timeline to meet those requirements from immediately to a 5- 10 year window. Some entities are still planning to use the marketplace option much sooner because there would have to be a significant number of credits in place to meet the requirements in 5 years. So the development of possible riparian projects is still very much a current effort. 28 Landowner responses Questions 1. Would you consider putting your riparian area into plantings to shade the river? Would being compensated for that "crop", such as an annual payment, increase your interest? 2. If the conditions were satisfactory would you be interested in a contract for "growing" shade for 10-20 years? [interested here in entering contract and lengths of term] 3. How might you come up with an amount for the "per acre" payment for the riparian area that piques your interest? What is an approximate range for that amount? 4. What is a "good average" net profit for the range of crops you grow? 5. Is there a base contract amount and/or length that would be important to make entering into the business relationship worthwhile? 6. Are there any potential requirements from your end to make an arrangement / business transaction worth your while? 7. How soon would you be willing to make a sale? 8. Overall, how do you view a transaction like this? 9. Do you have any concerns/ideas/questions we can think about as we work on this project, or get back to you about? Responses UT 1. Interested? Yes. Hassle factor bonus and initial signing bonus would help willingness to enter relationship. 2. Contract? Yes. 3. Payment? Going rate. $350/acre plus costs. 4. Amount? $350-450/acre 5. Base amount and length? 10 years with extension option. $1,500 minimum. 6. Requirements? No public access. Pump sites maintained (access and erosion- prevention). 7. How soon? Anytime is fine. 8. Overall? Would be interested in doing plantings, performing maintenance. 9. Other? TH 1. Interested? As long as trees don’t compromise bank stability. Evaluation of erosion for a planting reach – make sure toe of slope is stable. Species selection matters. Reed canarygrass a concern. 2. Contract? See response for #5. 3. Payment? Would do it “for free” – agrees with goal of water trempaerature reduction and improved bank stability. 4. Amount? N/A 5. Base amount and length? 10 years at a time. 6. Requirements? Access to pump site 29 7. How soon? Right away would be possible. 8. Overall? “City” might be getting off easy; perhaps better to deal with problem at source. 9. Other? None. Discussed issues regarding adjacent conservation area owned by state park. SE 1. Interested? Yes. 2. Contract? Yes. 3. Payment? Yes. Not sure how this would be calculated. 4. Amount? N/A for ranching/grazing 5. Base amount and length? $1,000 minimum. 10-15 years. 6. Requirements? Someone else in charge of tree establishment and maintenance. No public access. Can’t interfere with adjacent farming activities. Would need to include fencing to exclude livestock along portions of the riparian area (no access to river necessary for livestock). 7. How soon? No time restriction. 8. Overall? Would approach it from a business standpoint, not an altruistic perspective. 9. Other? None. Attractive that part of the maintenance contract may include weed control in the riparian area as this is a nuisance. CB 1. Interested? Open to planting but most of his frontage is already forested – the part that’s not is heavily rip-rapped. 2. Contract? See response for #5. 3. Payment? 4. Amount? 5. Base amount and length? $1,000 would be worth it. 6. Requirements? No public access. Plantings would need to be on river side of access “road”. 7. How soon? 8. Overall? Likes riparian vegetation (prefers that ACE not remove willow on his stretch.) 9. Other? High erosion on outside bends in this area. HC 1. Interested? Yes, would consider it. 2. Contract? See response for #5. 3. Payment? Not essential. (This seemed polite deference instead of a real answer) 4. Amount? Whatever going rate is. Without knowing this he said $50-$100/acre rental payment. 5. Base amount and length? $1,500 minimum would probably be about right. 20 years would be a good contract length. 6. Requirements? Someone else would need to establish trees and control weeds. Contractor needs to contact landowners before going out. No public access. Can’t interfere with farming operation in anyway, but doesn’t expect it would. 30 7. How soon? 8. Overall? 9. Other? FI 1. Interested? Would consider it. Won’t give up food production. 2. Contract? Preferred, yes. No problem contracting with government entity. What if it’s blown out. Would need assurances or limited liability. 3. Payment? Depends on crop and varies. Range net profit on grass: $600-700, vegetables: $500-$600, wheat: $1600 today but current high-end of market projection is $2500 4. Amount? Would have to compare to potential value of tying the land up. 5. Base amount and length? $1,500 per year. 6. Requirements? No public access. Need pump sites. Someone else do the planting. Aggregating landowners/sites seems a good idea. Species would need to be selected that would not create problems in the field, e.g. no cottonwoods. Ash, maple, pine, cedar are fine. Alder is ok. 7. How soon? Anytime. If taking crop out it would require delay for end of rotation. 8. Overall? Interested in floodplain leases although expect tight water management. It’s a bitter pill to deal with water quality and riparian requirements/issues. The marketplace idea/compensation would take some of the bite out of it. 9. Other? Erosion is a problem in some places. Can that be addressed? Further Discussion of Landowner Interest and Willingness in Credit/Shade Production Property owner Philosophies Property owner philosophies regarding this kind of effort will vary tremendously. For some, questions will come up that can be addressed by giving perspective for the effort, and framing it within a system. For example, the notion of a natural system of cooling water and keeping it cool appealed to a sense of reasonableness and common sense. Then there are specific philosophies, for example, some property owners will consider any connection with a government entity a “deal-killer”. Some will resist being part of any “program”. Where dilemmas occur between values, the common sense aspects of using a natural system to offset pollution seems to carry the most weight. Outreach and marketing, or the “sale” of the program to the property owner/seller, needs to include working answers to the philosophical questions. Fairness Productive Land and Public Dollars In the Agricultural community there is a strong set of ideas about how productive land should be used, and a related set of strong ideas about how each operation/farm is making its living. In the case of public dollars being used for 31 program implementation and allocation, there will be judgments made by some on the people that accept those funds. There are competing principles held by different people, and sometimes the same people (e.g. land needs to be used in productive agriculture, land needs to pay its fair share of taxes - contrasted with – landowners should be able to do what they want with their land). With this mentality a person using his land for a for-profit dumping ground would be accepted whereas a person selling his as an easement or accepting government funds for conservation/restoration activity is not acceptable. This also conflicts with the values most in the rural community hold in terms of stewardship of the land for the next generation. Urban-Rural issues There is a struggle with the idea that an urban center pollutes excessively and the rural properties have to make up the difference. When compensated, this is more palatable from a “fair-share” perspective, and perhaps also because, practically it helps to conserve rural areas, but there is still a strong set of ideas in the agricultural communities around “doing the right thing”. One working answer to this that is useful in outreach (or sales moments), is to outline the continuing work by each urban center to reduce their pollution and behavior, even as they also pay to offset the results of it. Conservation In keeping with the concern about doing the right thing by the land, and the reputation of the program’s effect in the community (both local geographical community and larger agricultural community), there is a strong need to provide compensation for existing conservation. One idea is an annual payment for riparian areas conserved, and DEQ credit for that given to also meet permit conditions (perhaps a certain percentage of credits/kcals have to be and can be met by this). Another idea is a riparian tax credit, or OWEB funding. The important component may be the link to actions recognized by DEQ. In this example, if a polluter is required to address temperature, and the river increases in temperature, from any cause, the updated TMDL will increase the allocation of units to each entity. Since preventative action in this case might be a tragedy of the commons case, perhaps the conservation credits have an added bonus of reducing a future load allocation, and/or applying additional credits to meet that load allocation if it comes to pass. This is not necessarily the responsibility of the marketplace system but it is in its zone of influence. The marketplace could match its rules (e.g. no contracts granted on riparian areas that have lost significant vegetation in the preceding 5 years, or since year 2006) to whatever incentives exist (e.g. grant-funded and private-funded conservation easements) for the desired conservation status to achieve a sense of fairness. Alternatively, the marketplace implementers/dependents/proponents could evaluate the limitations to the marketplace system if those other systems do not function well. 32 List of Attachments The following attachments were provided with the hardcopy and CD of this report. • 10 8.5” x 11” Maps of Shadelator Results • Clean Water Services Monitoring Protocol • Clean Water Services Thermal Credit Cost Summary 2007 (updated 1/08) • Draft Contracts for Credit Exchange and Credit Registration (not produced by LTWC, consult Willamette Partnership) • Draft Map of Willamette streams that Shadelator results are available for, courtesy Pamela Wright, DEQ • CD only: Draft Credit Calculator (not produced by LTWC, consult Willamette Partnership) • CD only: Excel spreadsheet - Summary Shadealator Results, Current and Potential Solar Load per 100-foot segment (DEQ) • 2’ x 3’ contiguous map of Shadelator results (not included in CD) 33 Supporting Documents for Section 6 – Market Infrastructure (Task 4) MEMORANDUM DATE: October 18, 2006 TO: David Primozich and Charlie Logue FROM: Lisa Bacon SUBJECT: Market Framework, TM#1, Task 4, TO 1 PROJECT: Willamette Partnership PROJECT NO: MWVC00000001 COPIES: Dan Heagerty, James Ollerenshaw, Terry Buchholz, Kim Seymour INTRODUCTION This technical memorandum covers these aspects of a market framework for trading: • A set of 10 elements that represent key functions, features, or arrangements; • Alternative ways to structure each element providing a menu from which an overall trading program might be assembled; • Examples of existing and distinctly different market models; and • Aspects of market administration including tracking, oversight and evaluation. For the Willamette Basin a uniquely tailored model will be required in order to address both regulated and non-regulated ecosystem services. The Willamette Model will likely begin with a market system and institutional infrastructure that addresses short term needs and opportunities that intentionally evolves into a different program structure for the long term. This TM was developed ahead of the September 27th Board meeting for the purpose of orienting the project team to the major market elements and different models. Selected information from this TM was modified, added to, and incorporated into the PowerPoint presentation given to the Board at the meeting. The section of that PowerPoint presentation devoted to market framework (slides # 35 – 72) is provided as Attachment A to this TM. As a stand along document, this TM is submitted in partial fulfillment of the deliverables for TO #1, Task 4. Alone, and together with documents developed by Bobby Cochran of Clean Water Services, it satisfies in part the required deliverables identified in the Willamette Partnership’s Work Plan for EPA (need to cross map). Comments from the Board members are documented in the meeting notes under separate cover. Further refinement and elaboration of market elements and models will be presented in a separate TM. In reviewing the elements and models presented here, consideration should be given to the needs and preferences for each of the elements. This may lead to one of the generalized 2100 SW River Parkway Portland Oregon 97201 Phone: 503.223.6663 Facsimile: 503.223.2701 models, or examples presented here. There can be overlap between the models and the trading program could have elements of more than one. Hybrids are possible and can be effective—but caution should be taken against creating an unwieldy ineffective Frankenstein model with too much mixing of ill-matched parts. MARKET ELEMENTS The market framework for credit trading can be described using these key elements: • Performance Targets • Program Rules and Policies • Relationships among Trading Parties • Information Analysis and Dissemination • Cost Basis and Pricing • Decision-making • Transactions • Liability • Resources • Results Market Elements General Characterizations The individual elements can generally be described using three characterizations: • Centralized • Facilitated • Decentralized Collectively, individual elements will often—but not always—exhibit a predominant characteristic. The predominant characteristic of the elements will determine the market model in effect. The following walks through the 10 elements introduced earlier. First, the element is generally described. Then, the element is described how it may appear if • Centralized, • Facilitated, or 06 - Market Framework.doc Page 2 of 30 . • Decentralized The element can be the same on the selling and buying side of the market—e.g., Facilitated for both buyers and sellers. The element also can be different for sellers and buyers, e.g., centralized for buyers, but decentralized for sellers Performance Targets With few if any exceptions, overall performance targets are established by state or local regulatory agencies. For Point Sources: • Aggregate wasteload allocations for point source category or categories • Individual WLAs • “Voluntary” caps or reductions For Nonpoint Sources: • Depends on the type of nonpoint source • Method for memorializing targets as load allocations varies by source category, state, and locality Centralized − Market manager or regulator sets all individual and collective targets − Depending on program rules, some reallocations are trades, other changes involve redoing WLAs and/or LAs − Example: Connecticut set a TMDL and individual WLAs with annual step downs to meet a 2014 target. Facilitated − Regulator sets aggregate targets and may or may not specify individual allocations − Trading parties have some discretion to reallocate targets among themselves − Whether reallocation is a “trade” depends on program rules − Example: The Virginia Program authorizes two types of trading, one of which involved selling or buying CREDITS Decentralized − Regulator sets individual targets 06 - Market Framework.doc Page 3 of 30 . − Parties rely on trades, or other agreements (contracts, MOUs) to reallocate responsibilities − Example: The Virginia Program authorizes two types of trading, one of which involves selling or buying ALLOCATIONS Information Analysis and Dissemination Trading programs rely on a range of analyses to demonstrate potential, provide the basis for program development, and support implementation. Key areas include: • Quantification and sourcing of demand for and supply of credits • Compliance costs, credit cost-effectiveness, and pricing structures • Pre- and post-trade loading and water quality analysis • Transactions, including financial aspects and results A range of options exists for: • Who conducts the analysis • Who keeps the results and records • Who shares the information and how • Who can gain restricted or unrestricted access to summary or raw data Centralized − Market Manager conducts or contracts most analyses—may also consolidate trader- or stakeholder-provided information − Key information generally readily available (some things may be in summary or aggregated form if necessary) − Market Manager takes lead, but maybe not exclusive role in dissemination − Example: Following a WERF-sponsored study, Nitrogen Credit Trading in the Long Island Sound Watershed (2000), Connecticut DEP conducted the analysis necessary to establish the point-point trading program for nitrogen. DEP is responsible for disseminating ongoing information about the program on its web-site and in annual reports. Facilitated 06 - Market Framework.doc Page 4 of 30 . − Participants generally conduct some or all of their own analyses and provide to the Facilitator for consolidation and integration − Analysis may appear centralized, but it is controlled by participants rather than third-party − Dissemination may be coordinated through a single “portal” but not dictated by Facilitator − Example: The Virginia Nutrient Credit Exchange Association issued a survey to its members to collect up-to-date cost data for a trading optimization model and has developed an informational brochure about the program. Decentralized − Trading and other parties conduct and provide their own information/analyses − Participant or third-party may consolidate − Third-parties may conduct additional analyses and disseminate information independently, or as a fee-based service to program participants − Example: In a system like Pennsylvania is contemplating, where it plans to use an electronic nutrient reduction registry and web-based systems to publicize trading opportunities such as offers to buy and sell, information will be available in a central location, but parties will need to conduct their own analysis with respect to the whether a credit is a good value for the proposed price. Cost Basis and Pricing The cost of a credit and its price are two different things. The cost basis is the total of the separate cost elements that are eligible for consideration in the pricing scheme, including for example: • Capital • Operation and Maintenance • Monitoring and Reporting The price is the amount paid per credit, which may be: • Set by rule or formula • Negotiated • Established through market bidding Depending on program rules, cost and price may be closely related, or relatively independent. 06 - Market Framework.doc Page 5 of 30 . Centralized − Market Manager sets cost basis and rules for calculating prices − Prices may be fixed for a period of time, or may vary if cost basis changes over time − Administrative costs may be included in credit price or added on top as a fee or surcharge − Example: Connecticut DEP sets nitrogen credit prices annually, based on an established formula that considers eligible costs. Nitrogen credit prices ranged from $1.65/lb to $2.50/lb over the 2000 to 2006 period. Facilitated − Participants have discretion to set their own prices − Potential traders and other stakeholders may collaborate or cooperate on agreeing on the cost basis and pricing scheme − In some point-point trading models, money has not yet changed hands despite collective actions toward cap compliance − Example: Trading Associations, such as those in place in North Carolina and Virginia, can generally establish prices for point source credits according to their own internal rules. In these cases, the State may establish prices for selected types of nonpoint source generated credits. In Virginia’s point-point nutrient trading program, credit prices may vary by Basin. Decentralized − Rules for cost basis may or may not exist, but would be published if pre-set − Decentralized markets tend to be price-driven as buyers and sellers make decisions based on price and don’t necessarily need cost information − Prices may be managed in some way, or may be allowed to fluctuate according to market forces − Example: Prices may or may not be public in a decentralized system. Trading contracts in the Lower Boise River Program are not submitted to the State or made available for public review. State credit registries, such as those contemplated by Michigan and Pennsylvania, would make offered prices public. Transactions Trading transactions include: • Identifying prospective partners • Consummating the trade between the partners 06 - Market Framework.doc Page 6 of 30 . • Recording the trade for regulators and/or public per program requirements This element in different models is distinguished by the degree of contact trading partners have with each other. Centralized − Trading partners have little to no contact − Directions or “offers” to buy or sell credits are collected or consolidated in a central clearinghouse − Transactions may involve matching offers to each other, or may involve pooled transactions with no explicit matching − Example: In the Connecticut program, the State buys and sells all credits. Available credits are pooled and redistributed to buyers through the state’s clearinghouse function, under oversight of the Nitrogen Credit Advisory Board. The state’s 79 POTWs do not trade directly with each other, but through the state-run program. Facilitated − Trading partners have some degree of contact with each other − This contact may be managed or facilitated by a broker or middleman − The degree of contact will depend on whether the trade goes entirely through the broker (little contact), or if the facilitator’s function is only to match partners (more contact) − Example: The Virginia Nutrient Credit Exchange expects to conduct some, or perhaps all, point-point trades for its members through the Exchange. Various Excel- based tools are being developed to facilitate trading among Exchange members. Decentralized − Trading partners usually have direct contact − It would be possible to have a decentralized system where parties could be represented by agents − Decentralized transactions involve discrete bi-lateral (or conceivably multi-lateral) deals − Example: The Lower Boise River Trading Pilot is set up such that buyers and sellers need to have direct contact to identify prospects and consummate trades. Buyers will be point sources and Sellers will be irrigation districts or other landowners with creditable BMPs. 06 - Market Framework.doc Page 7 of 30 . Resources Financial resources are needed to: • Develop the program • Implement the trades • Oversee the program Funding for these three general categories can come from different parties. Programs differ in the degree to which they are self-sufficient or subsidized in some aspect. Some functions and activities are more practically and efficiently funded from a central or pooled source. Others are better funded at an individual or trade level . Centralized − Program developed and implemented predominantly through Market Manager’s funding − Market Manager may or may not levy general or transaction-based fees on participants, depending on program purpose and available funding sources − Example: A WERF-funded study, Nitrogen Credit Trading in the Long Island Sound Watershed (2000), produced the basic analysis showing that a point-point trading program would be feasible and cost-effective. The Connecticut DEP funded subsequent activities associated with developing and implementing the program. Facilitated − Program development likely sponsored by state or facilitator − Eligible traders contribute to program set up and shared administrative costs through member fees and/or jointly secured third party funding − Transaction-based fees usually not sufficient to fully support ongoing implementation − Example: Legislation creating the Virginia Nutrient Credit Exchange Association was developed with funding from the Virginia Association of Municipal Wastewater Agencies and the Virginia Manufacturers Association. The legislature has provided grant funding to the Exchange for its first years of operation. Decentralized − Program development may be partly supported by state or other third party − Active and potential traders likely contribute significant amount for program set up and implementation − Ongoing costs may be paid by market entry fee and/or trade-based fees 06 - Market Framework.doc Page 8 of 30 − Example: The Lower Boise River Trading Pilot was developed with a combination of dischargers’, state, and EPA funding. As the program progresses, participants will have to fund their own participation, including paying credit certification and inspection fees. Program Rules and Policies As with performance targets, overarching program rules and policies are most typically set by state regulatory agencies within the context of the NPDES program, a TMDL program, or trading policy. The specificity or generality of these characterizes the range of centralization or decentralization. Centralized − Market manager or regulator sets all rules and policies − Participants may have input through stakeholder-based, regulatory, or administrative processes − Example: Connecticut established its point-point trading program for POTWs through state legislation and a general permit. Facilitated − Regulator sets statewide or watershed-specific framework − Watershed stakeholders and/or traders establish more specific rules and procedures governing relationships and trades among themselves − Example: The Virginia Legislature authorized a nutrient trading program through legislation and established some basic operating rules and principles. The Virginia Nutrient Credit Exchange Association has the authority to establish trading policies and protocols for its members. Decentralized − Regulator may provide only general guidance, or none at all − Watershed-specific trading programs proposed on an individual basis for state approval − Parties rely on multi-lateral or bi-lateral agreements to establish trading rules and policies − Example: In the Lower Boise River Trading Pilot, private contracts define individual trades, subject to state guidelines. Relationships Among Trading Parties 06 - Market Framework.doc Page 9 of 30 . Buyers and sellers can have different positions vis a vis their potential partners and with other buyers/sellers: • Collaborative—proactively working together to reach most strategic, cost-effective program for all • Cooperative—working together on selected program elements, but perhaps not all • Independent—making decisions without consultation or consideration of other parties, but in a neutral way • Competitive—occasional or frequent behavior to “beat” other parties to credits, market share, or on pricing Centralized − Collaborative or cooperative for most aspects of the program, from development to implementation − Because there is a market manager, trading partners may have limited interaction, and may appear to act independently − Example: Connecticut’s POTWs have no direct interaction with respect to trades. All trades are executed through the DEP-issued “invoices” showing payments due the state from buyers (red) and payments due the sellers from DEP (green). This process is overseen by the Nitrogen Credit Advisory Board, which provides the participants with a voice in the overall process. Facilitated − Collaborative or cooperative for most aspects of the program, from development to implementation − Collaborative or cooperative with respect to decision-making about who is a seller and who is a buyer − Example: Members of the Virginia Nutrient Credit Exchange Association are working together to establish the compliance schedule and necessary trades to meet Basin-level nutrient loading caps. Decentralized − May be cooperative with respect to program development and/or oversight − Independent to competitive with respect to information and transactions − Example: Both the Michigan Trading Rules and the Pennsylvania Trading Policy contemplate that buyers and sellers will find each other and interact through a state- sponsored electronic registry. 06 - Market Framework.doc Page 10 of 30 . Decision-making This element relates to who decides who will sell and who will buy, and to what degree those decisions are: • Mandatory • Dictated but with some voluntary or “opt-out” option • Made jointly • Made cooperatively • Made independently Centralized − Trade decisions generally mandated or dictated − Participants may not be able to opt-out, once in − Example: In Connecticut’s program, POTWs' decisions to upgrade or not (and be a seller or a buyer) are “voluntary”, but the state issues SRF funding according to relative cost-effectiveness. Facilitated − Trade decisions collaboratively or cooperatively made—at a minimum with consultation − Ability to “opt-out” may be limited to certain times at beginning and end of an established period − Example: When the Maryland Association of Municipal Wastewater Agencies was considering various options, a closed market was favored, where entry and exit was limited to specific windows, and trading decisions made cooperatively under four Basin “bubbles”. Decentralized − Trade decisions made independently − Pre-notification or consultation may or may not exist − At a minimum, decisions will be posted for participants, regulators, and/or public after the fact, subject to program requirements 06 - Market Framework.doc Page 11 of 30 . − Example: In the Lower Boise River Trading Pilot, and in programs contemplated by Michigan and Pennsylvania, buying and selling are completely voluntary, and traders should generally be acting independently within the buyer and seller groups, similar to a stock or commodity market. Liability Without specific agreements or mechanisms to implement another scheme, point source buyers are liable for the validity and performance of credits used for compliance purposes. Sellers’ liability will be established in: • The NPDES permit for point sources • Other policies or program documents for nonpoint sources As more trading programs come on line, other arrangements may gain favor such as: • Joint or shared liability for selected actions • Third-party accepting some/all liability Centralized − The Market Manager assumes liability for one or both sides of the transaction − Buyers are protected if credits purchased according to rules − Sellers are subject to oversight and enforcement by Market Manager or a fourth- party for invalid or failed credits − Example: The point-nonpoint nitrogen credit trading option for the Tar Pamlico Trading Association involved purchasing credits from the State by making payments to the agricultural cost share program. The purchaser’s obligation is then satisfied and he has no future liability with respect to the performance of the cost-share funded BMP. Facilitated − Buyers are individually or collectively liable, depending on whether trading is conducted under individual permits or a watershed permit − Facilitator, or another third party (the state, contractor, insurer) develop and help implement mechanisms to protect buyers − Example: Members of the Neuse River Compliance Association are jointly responsible for meeting their aggregate nitrogen cap and individually responsible for their own WLAs. 06 - Market Framework.doc Page 12 of 30 . Decentralized − Buyer retains liability in its NPDES permit, so far as state regulators are concerned − Buyers and sellers enter into contracts or other agreements that define seller’s liability, assurances, and buyer’s recourse for purposeful or accidental credit deficiencies − Example: Point sources purchasing BMP-generated credits in the Lower Boise River Trading Pilot are liable for the performance of those BMPs through their NPDES permits. Buyers enter into contracts with sellers to establish the seller’s liability and remedies for nonperformance. Results Results can be measured along several metrics: • Water quality improvement or maintenance within the trading area • Attainment of aggregate or group targets • Compliance with individual WLAs and LAs • Administrative performance of the trading program or project The entity responsible for delivering on the different results categories will be determined by the market structure. Centralized − As Market Manager has great control over information and decisions, overall environmental and program performance will be measured at its feet − Individual participants will still have responsibilities for delivering credits and otherwise following program rules − Example: Connecticut’s nitrogen credit trading program is largely judged by DEP’s ability to manage the state’s SRF program to fund upgrades cost-effectively so that collectively the 79 POTWs stay under the loading cap and meet the 2014 goal. Credit sellers and credit buyers still have individual performance responsibilities. To date, DEP and the POTWs are more than meeting their nitrogen reduction goal. Facilitated − Results will be measured at collective or individual levels as established by the program framework − The Facilitator’s performances as a consolidator and/or broker also will be evaluated by participants and stakeholders 06 - Market Framework.doc Page 13 of 30 . − Example: Where point sources form Associations to facilitate point-point trading, compliance is first measured against the collective loading cap. Individual performance is important because the net result depends on the proper balance of credit and debits. Usually, it is only when the cap is breached, that compliance is measured at individual WLAs. Decentralized − Performance is measured at the individual level per the contracts and agreements put in place − Regulators will look closely at Buyers to evaluate compliance with trading baselines inclusive of credits and delivered benefits of those credits − Buyers will evaluate seller’s performance per delivery agreement − Example: In the Lower Boise River Trading Pilot, EPA will measure point source compliance with individual WLAs by looking at its loadings and any credits. Buyers evaluate BMPs generating their credits by direct measurement or estimation, as provided by the trading guidelines, with the help of third party inspectors. (Note that Idaho does not have NPDES delegation so EPA is the permitting authority.) Selecting the Right Features Important factors in determining which elements and model features are right for a given application include: • Number of dischargers/sources • Number of potential sellers versus buyers • Geographic layout of the watershed and the sources • Relationships between and among potential traders • Relationship between potential traders and state regulatory agencies • Magnitude of required reductions • Potential availability of credits • Number and frequency of anticipated trading transactions • Transaction costs faced by buyers and sellers • Resources needed to set up and maintain the trading system • Market oversight requirements 06 - Market Framework.doc Page 14 of 30 . MARKET MODELS Market models are made up of or reflect the following: • Market elements from which they are assembled • The primary market model manifested • The broader trading framework for which they are designed and in which they exist To date, trading programs involving multiple buyers and sellers mostly fall into one of three general models: • Third-Party Managed or Directed (Centralized) • Trader Associations (Facilitated) • Free Market-like (Decentralized) A fourth model describes markets limited to one buyer with one or more sellers: • Single Buyer Offset Programs - Centralized on the buying side, variable on the selling side This TM describes these four models as they have appeared to date in water quality credit trading programs. Additionally, a fifth model was examined specifically for application in the Willamette Basin that has heretofore not yet been seen in the water quality credit arena: a model we call the “Trust.” Features of our “trust” model were described and documented in a separate TM, provided as Attachment B to this TM. For the Board meeting, as seen in Attachment A, four different model specifications were presented that are related to, but don’t map identically to the four presented in this TM. The four models presented at the Board meeting are: Credit Clearinghouse; Market Facilitator; Market Manager, Market Maker. Managed Trading Key Features: • First, watershed goals are set and schedules for achieving interim and final goals are determined • Analysis of source-control measures for largest reductions, cost-effectiveness, and ability to implement quickly is carried out • The best sequence and timing for upgrades is determined 06 - Market Framework.doc Page 15 of 30 . • Initial upgrades that will produce reductions greater than needed to meet interim goals are chosen • If state grant funding is available, award priority is based on optimization results • Non-upgraded facilities must purchase credits from upgraded facilities • Additional upgrades are added as needed to comply with goals • Not all facilities may need to be upgraded Examples: • The foremost (and so far only) example of this type of program is the Connecticut Long Island Sound Nitrogen Trading Program Benefits: • Holistic planning approach taken for point sources • Upgrades selected based on water-quality benefit • Most cost-effective upgrades done first • Not all plants have to upgrade • Lower overall cost Trading Association Key Features: • Mass-load limits or goals based on achieving water-quality standards or TMDL wasteload allocations are calculated for the existing point source dischargers in a watershed • The dischargers form a trading association and the state agrees to allow the members (or “co-permittees”) to aggregate their individual allocations into a single association allocation • The association is free to meet the allocation in any manner it sees fit • The trading association signs an agreement with the state through which the association becomes the entity responsible for compliance with the allocation • Membership in the association is voluntary; any WWTP not joining the association would be responsible for complying with its individual wasteload allocation 06 - Market Framework.doc Page 16 of 30 . • Membership in a trading association should not disqualify a WWTP from state cost- share grants if a cost-share program exists; nor should it make it ineligible for low- interest SRF loans from the state • The ability to acquire nonpoint source credits can be made available to the association if the state has developed a point-nonpoint source trading program Examples: • Tar Pamlico Trading Association (nitrogen) • Neuse River Compliance Association (nitrogen) • Virginia Nutrient Credit Exchange Association (nitrogen and phosphorus) • Program proposed by Maryland Association of Municipal Wastewater Agencies in 2004 (nitrogen and phosphorus) • Program being considered by Bay Area Clean Water Association (mercury) Benefits: • Association has freedom and flexibility in deciding how to meet its allocation • Most cost-effective upgrades done first • Not all plants have to upgrade • Lower overall cost • Possibly faster compliance Market-Like Trading Key Features: • Dischargers in a watershed are given mass-load limits or goals based on achieving water-quality standards or TMDL wasteload and load allocations • The dischargers could meet their individual limits or goals either by reducing their own discharged loads or by buying credits from other dischargers or sources, either point or nonpoint • The buyers and sellers of credits would operate in a market-like environment. They would seek each other out, negotiate terms of the transaction and prices, and hold each other accountable for compliance with the trade agreement or contract • The market would operate within general rules established by the state 06 - Market Framework.doc Page 17 of 30 . • Buyers and sellers would be free to execute whatever sales and arrangements they desire, as long as they comply with the regulatory requirements established by the state for the trading program Examples: Programs envisioned by: • Michigan Trading Rules • Pennsylvania’s proposed nutrient trading program • Lower Boise River Trading Pilot Benefits: • Most free-market like form of trading • Market forces may: − Encourage creativity and greater pollutant reductions − Enhance the attractiveness of trading − Lower the overall cost • As with the other forms of trading: − Not all plants have to upgrade − Possibly faster compliance Small Scale Offset Programs Key Features: • Offset programs are defined here as programs where a discharger is required to take some action in return for increasing its discharged load or for not decreasing it to comply with a new wasteload allocation • There have been a number of small-scale offset programs to date • Because of their variety, they are difficult to categorize Examples: • Rahr Malting Company NPDES permit, MN (CBOD5) • Wayland Business Center NPDES permit, MA (phosphorus) • Clean Water Services Watershed Permit, OR (temperature and dissolved oxygen) 06 - Market Framework.doc Page 18 of 30 . • Sacramento Regional County Sanitation District’s potential mercury offset program, CA Benefits: • Can be tailored to unique needs and opportunity of the single buyer • Can be implemented through a single NDPES permit • New statewide policies or programs not necessary • If first trading project in state or region, can serve as pilot demonstration for others • Can be geared around a single credit source, or multiple sites/sellers Selecting the Right Features Important factors in determining which elements and model features are right for a given situation include: • Number of dischargers/sources • Number of potential sellers versus buyers • Geographic layout of the watershed and the sources • Relationships between and among potential traders • Relationship between potential traders and state regulatory agencies • Magnitude of required reductions • Potential availability of credits • Number and frequency of anticipated trading transactions • Transaction costs faced by buyers and sellers • Resources needed to set up and maintain the trading system • Market oversight requirements There are multiple approaches to structuring a market. Options range from simple to complex. Stakeholders must examine market elements and features of models and evaluate the relative costs and benefits of alternative approaches. From that analysis, they can select those that work best for a given watershed and choose an overall approach appropriate for their situation and preferences. 06 - Market Framework.doc Page 19 of 30 . MARKET ADMINISTRATION The next three sections move beyond the elements and the whole of a market framework and focus on key activities associated with executing trades and implementing a trading program. A trade is usually not a trade until it is documented and verified—for programs with multiple transactions periodic reconciliations also are necessary. Implementation involves three categories of core administrative and oversight activities: • Tracking • Oversight • Evaluation Tracking Tracking activities include identifying, documenting, recording, and publicizing (as applicable) the following: • General trading opportunities • Credit generation • Credit use • Trade transactions • Other items and post-trade activities General Opportunities Some programs elect to document trading opportunities at a conceptual or general level. Such identifications may be: − the result of studies that supported development of the trading option − post-implementation attempts to incentivize and support the market Examples of general opportunities: − Lists of potentially interested parties from stakeholder meetings − Feasibility study results − Eligible credit-generating options in polices or rules − GIS maps of land use and BMP priority areas − “ISO” postings on a registry 06 - Market Framework.doc Page 20 of 30 . Credit Generation Subject to rules for generating credits, their existence, availability, and any limitations must be documented and recorded. Point source-generated credits at a minimum are usually identified in Discharge Monitoring Reports (DMRs). Nonpoint source- generated credits can be identified in trading-specific mechanisms, or in documentation for the program through which a credit is generated. Examples of important credit generation information: − Name, address of generator − Location of technology, project, or action creating credit − Description of how credits were generated − Trading baseline for credit generator − Duration, life, or other temporal attribute of credits − Any O&M activities − Monitoring data, ongoing requirements − Verification, certification, and/or inspection confirmations Credit Use Using credits to meet trading baselines for compliance purposes, or other uses (e.g., retirement) must be documented and recorded, per applicable rules. Point sources using credits toward their WLAs at a minimum must usually identify such use in their DMRs. Additional tracking of credit use can be done in trading-specific mechanisms that may or may not specifically identify the seller, or in documentation for the credit source or seller. Examples of important credit use information: − Name, address of user − Location of technology, project, or action using created credit − Trading baseline for credit generator − Amount/number of credits used − Net pollutant load, or load reductions (load – credits = net) − Any responsibilities user has for credit validation or certification − Any liabilities user has for credit performance − Performance bond or other insurance mechanism Trade Transactions As illustrated in the credit generation and use examples, trade transactions can be executed: 06 - Market Framework.doc Page 21 of 30 . • By the process involved in using a credit without any subsequent action • By the act of using a credit with some additional action At a minimum, the trade transaction must: • Debit the seller’s account • Credit the buyer’s account Examples of trade transaction activities: − Reflecting credit sales and purchases in NPDES permits − Removing sold or retired credits from the available pool − Reconciling net results of credits generated and used under a pooled or bubble program − Matching sales to purchases in whole or partial “lots” − Providing reports of net results for the compliance period − “Registering” credit transactions − Validating/certifying credit transactions For point sources, the method a state uses to handle trading in NPDES permits, determines the specific form a trading transaction will take, based on EPA policy: In some cases, specific trades may be identified in NPDES permits, including requirements related to the control of nonpoint sources where appropriate. EPA also supports several flexible approaches for incorporating provisions for trading into NPDES permits: − general conditions in a permit that authorize trading and describe appropriate conditions and restrictions for trading to occur, − the use of variable permit limits that may be adjusted up or down based on the quantity of credits generated or used; and/or, − the use of alternate permit limits or conditions that establish restrictions on the amount of a point source's pollution reduction obligation that may be achieved by the use of credits if trading occurs. EPA does not expect that an NPDES permit would need to be modified to incorporate an individual trade if that permit contains authorization and provisions for trading to occur and the public was given notice and an opportunity to comment and/or attend a public hearing at the time the permit was issued. For point sources, EPA also identifies watershed or general permits as an option in which to track trade transactions: 06 - Market Framework.doc Page 22 of 30 . EPA also encourages the use of watershed general permits, where appropriate, to establish pollutant-specific limitations for a group of sources in the same or similar categories to achieve net pollutant reductions or water quality goals through trading. Other Items and Post-Trade Activities Independent of any oversight or evaluation processes, trade-related items and activities beyond credit generation, use, and transactions may be documented and recorded. These may include additional or ancillary documentation that must be submitted or provided for review. These also may include O&M or monitoring reports that document ongoing credit performance or use. Examples of other items and post-trade activities: − Copies of contracts or trade agreements − Information about credit costs and/or prices − Documentation for programs under which BMPs are created − Facility O&M manuals and procedures − Discharge monitoring reports specific to trading − BMP efficiency reports − Stream-side monitoring specific to credit creation − Other monitoring or modeling Tracking Wrap Up Important factors in determining which approaches are right for a given situation are similar to those considered when developing a market framework: • Number of dischargers/sources, potential sellers versus buyers • Geographic layout of the watershed and the sources • Number and frequency of anticipated trading transactions • Communication needs between and among potential traders • Reporting mechanisms for traders to regulatory agencies • Transaction costs for buyers, sellers, and others • Resources needed to set up and maintain the trading system • Market oversight and evaluation requirements Oversight 06 - Market Framework.doc Page 23 of 30 . For individual trades, oversight activities include the following which may be conducted by traders, state regulatory agencies, and/or third parties as established under the program: • Credit certification and/or verification - including sellers’ compliance with trading baselines • Trade reconciliation - including buyers’ compliance with trading baselines • Protecting designated uses - including anti-degradation policies • Conformance with other applicable rules, policies, contractual responsibilities • Enforcement for non-compliance and non-conformance For an overall project or program (if applicable), oversight activities will involve these same areas at an aggregate level. Credit Certification/Verification As described under “Tracking”, rules and procedures are established for generating credits. The oversight function ensures that those rules are followed through one or more of several mechanisms: • Requirement for general documentation • Proof of generation (pictures, monitoring reports) • Signature certifications • Document audits • Site inspections Examples of credit attributes subject to oversight: − Name/eligibility of generator − Location − Type − Seller’s Baseline − Life/duration/generation period − Credit calculation methods − Application of trading ratios (if required) − Longevity − Agreements and contracts (if applicable and if required) 06 - Market Framework.doc Page 24 of 30 . For point source generated credits, most programs require NPDES dischargers to certify/verify credit through monthly Discharge Monitoring Reports (DMRs). DMRs for trading programs may: • Not need to be modified • May be modified • May be accompanied by supplementary documentation DMRs are signed by the dischargers representative. Trade Reconciliation Reconciliation involves matching credit demand to supply for a specified compliance period. Buyers who are not meeting their baselines without credits must have a sufficient number for the period to attain compliance. Credit sales and purchases may be reconciled in two ways: • Matched 1 to 1, with buyer-seller pairs specifically identifiable • Pooled and redistributed, such that buyer-seller pairs are not specifically identifiable Examples of reconciliation periods: − Annual − Seasonal − Monthly − Daily Conformance with Other Requirements Parties’ continuing eligibility to participate in trading can depend on meeting requirements beyond those specific to trading baselines, credit generation, and use: • NPDES permit requirements, general or specific to trading • BMP cost-share program requirements • Contractual agreements between trading parties • Intergovernmental Agreements between traders and regulatory agencies • Voluntary commitments to stakeholders 06 - Market Framework.doc Page 25 of 30 . Examples of other requirements subject to oversight: − Special Plans − Mapping priority BMP areas − Stakeholder involvement activities − Audits and inspections − Electronic filings − Compliance with regulatory requirements for non-traded parameters − Maintenance of financial obligations Compliance and Enforcement Trading programs must establish the following: • What constitutes compliance for the Buyer • What happens if credits aren’t “good” − to the Buyer − to the Seller • What remedies and “back-ups” are available − Who invokes them − How are they invoked Examples of compliance and enforcement mechanisms: − NPDES permit language − Agreements between buyers and sellers − Forms, certifications, and implied agreements for nonpoint sources participating in state-sponsored programs − Performance bonding and insurance tools − “Last Resort” pool of ready credits Oversight Wrap Up Important factors in determining which approaches are right for a given situation are similar to those considered when developing a market framework : • Number of dischargers/sources, potential sellers versus buyers • Geographic layout of the watershed and the sources • Number and frequency of anticipated trading transactions 06 - Market Framework.doc Page 26 of 30 . • Communication needs between and among potential traders • Reporting mechanisms for traders to regulatory agencies • Transaction costs for buyers, sellers, and others • Resources needed to set up and maintain the trading system • Market oversight and evaluation requirements Evaluation The section covers these evaluation activities: • Individual trades • Several trades • A program • Environmental results • Economic benefits • Other performance measures • Overall success Evaluation activities involve periodic, retrospective assessments of (and sometimes future projections of) performance against goals and requirements: • For individual trades • For the project (may include several trades) • For the program (may include many trades) Evaluations will generally be expected or required to address: • Environmental results • Economic benefits • Overall project or program (as applicable) Other performance or success measures might address: • Compliance with administrative or policy requirements • Traders’ satisfaction with program rules and mechanisms 06 - Market Framework.doc Page 27 of 30 . • Meeting stakeholders’ expectations for information dissemination • Integration of trading with other watershed programs Program Objectives and Benefits It is important to establish clear and wherever possible quantifiable objectives for a trading program at the outset. There may be some that are more important than others, so any priority order also should be reflected. EPA Policy examples of benefit objectives for trading: − Early reductions and progress towards TMDLs − Reduced TMDL implementation cost − Economic incentives for voluntary pollution reductions − Reduced compliance costs − Offsetting of new or increased discharges − Long-term improvement (retirement of credits) − Multiple environmental benefits Ancillary Objectives and Benefits Many programs will set a narrow objective to meet or do better than a performance metric for a single parameter. For example, achieve specified load reductions or maintain loadings below a cap. Through the course of trading, it may be possible— accidentally or on purpose—to achieve other benefits. These benefits, sometimes called “ancillary” to trading, can be desirable and important to overall watershed health. Ancillary benefits may or may not have a market value. Where they are sought or occur, they should be included in any evaluation of trades or a trading program. Examples of ancillary benefit objectives for trading: − Control for targeted pollutant reduces other pollutants − BMPs for nutrients provide erosion control and habitat − Stream and wetlands restorations provide erosion control and habitat − Tree and shrub plantings for temperature credits provide carbon sequestration Environmental Results Three tests can be applied to environmental results for individual trades and for overall programs. By most policy definitions and regulatory standards, success (and often compliance) depends on passing these two: 06 - Market Framework.doc Page 28 of 30 . • First, do no harm—this relates to the antidegradation requirements discussed in the Oversight section • Second, attain results at least equivalent to non-trading case In some situations, by prescription or good luck, success also means passing this test as well: • Third, attain results superior to non-trading case Equivalency means that an individual trade, set of trades, or trading program produces environmental benefits equal to the benchmark, inclusive of: • Trading ratios • Margins of safety • Other risk management techniques Environmental performance of individual trades or overall program is best measured by looking at: • Load reduction or other benefit provided at credit generation site • Lack of adverse impacts at the credit use site • Benefits and/or lack of impacts upstream of, downstream of, or in-between the credit generation and use sites, as applicable Results should be measured against absolute metrics and/or ranges of expected values. Examples of environmental metrics for credit trading: − Mass load reduction compared to baselines − Mass loads avoided compared to projected − Local water quality improvements − parameter concentrations − turbidity − plant communities − living resources − Linear measures for stream-related BMPs − Area measures for land-based BMPs 06 - Market Framework.doc Page 29 of 30 . Economic Benefits As with environmental results, economic benefits of trading should be measured against the proper benchmark(s), which will be determined by the objectives of the project or program. Look at cost-effectiveness and/or cost-savings of the trading option versus: • Non-trading base case • Expected trading case Economic benefits can be measured at several levels: • Unit cost effectiveness • Single trade (multiple units) • Series or package of trades • Annual cumulative results • Programmatic comparison over multiple years (e.g., permit cycle, longer period) Economic metric(s) should be selected that make the most sense for a given situation. Evaluation Wrap Up Important factors in determining which approaches are right for a given situation are similar to those considered when developing a market framework: • Number of dischargers/sources, potential sellers versus buyers • Geographic layout of the watershed and the sources • Number and frequency of anticipated trading transactions • Communication needs between and among potential traders • Reporting mechanisms for traders to regulatory agencies • Transaction costs for buyers, sellers, and others • Resources needed to set up and maintain the trading system • Market oversight and evaluation requirements Attachments: A: Market Excerpt from Willamette Partnership 09/27/06 Board Meeting PowerPoint B: Outline of “Trust” Model 06 - Market Framework.doc Page 30 of 30 . Increasing the pace, expanding the scope, and improving the effectiveness of conservation A CENTRALIZED EXCHANGE PLATFORM FOR TRADING IN THE WILLAMETTE ECOSYSTEM MARKETPLACE INTRODUCTION This technical memorandum presents the Draft Market Framework recommended for consideration by the Willamette Partnership. This draft framework introduces the summary results of a gap analysis that, together with feedback received on previous presentations of alternative market elements and market models, informed the development of the recommended centralized framework. GAP ANALYSIS OF MARKET FRAMEWORK ELEMENTS The primary finding of the gap analysis on key market elements is that there are numerous gaps that must be addressed to develop and support the envisioned Willamette Ecosystem Marketplace: • A few elements exist in a form immediately applicable and available to the Willamette Ecosystem Marketplace; • Other elements exist by way of example or analogy and must be tailored and adapted for use in the Willamette Basin; • Some critical gaps can be filled by assembling existing building blocks, which in their current form are insufficient without modification or augmentation; and • Other critical gaps can only be filled with new advancements in science, policy, or technological tools. A secondary finding—but an important one which bears on how the gaps are best addressed— is that where elements or building blocks exist they are generally in a decentralized or situation-specific form. An evaluation of alternative options for various market elements characterized them on a spectrum from decentralized to centralized in nature (see Market Framework, TM#1, Task 4, TO 1, October 18, 2006). A subsequent presentation and discussion with the Willamette Partnership Board presented examples and aspects of market models reflecting different degrees of decentralization and centralization, including clearinghouse functions, facilitation services, credit brokering, and market making(see PowerPoint presentation from September 27, 2006, Slides 35-71). The result of these evaluations and discussions was a general consensus and direction from the Board that many of the elements would need to be implemented in a centralized fashion in order to achieve the informational, transactional, and resource efficiencies assumed necessary 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness to successfully launch and operate a multiple credit market serving the entire Basin. Thus, to the extent market elements already exist in whole or in part, but are decentralized, a gap exists until they can be centralized or duplicated with some degree of consistency or standardization across the marketplace. The market elements, including key regulatory components, discussed below, are based on previously presented configurations of the elements, but have been defined and organized specifically for this analysis so as to best represent the existing capabilities and key gaps identified. A narrative summary of the gap analysis conducted follows this list. • Legal, Regulatory, and Policy Authorizations • Credit Baselines • Trading Areas and Trading Ratios • Credit Calculations • Credit Generation: Certification, Verification, Registration • Credit Market Information: Notification of Offers to Buy and Sell, Cost-Basis and Pricing • Reporting and Tracking Transactions • Credit Project Monitoring and Re-Certification • Market-Level Reporting and Evaluation • Public Outreach and Education Legal, Regulatory, and Policy Authorizations The Oregon Department of Environmental Quality Water Quality Trading Internal Management Directive (IMD) (January 2005) describes the legal and policy basis for trading in Oregon. “DEQ is using its broad authority under state law to incorporate provisions for trading through various mechanisms. These include provisions for incorporating trading into permits and establishing provisions for trading in TMDLs or watershed plans. These provisions may incorporate or be supplemented by private contracts between sources or third-party contracts where the third party provides an indemnification or enforcement function.” The IMD lists a number of policies dealing with: Regulatory Compliance, Enforceability, Public Participation, Protection of Designated Uses, Antibacksliding, Antidegradation, Baselines, Credit Creation and Duration, Compliance and Enforcement, Program Evaluation, EPA Oversight, and Dissolution of Credits. These authorizations and policy pronouncements establish a solid framework for trading but will need to be supplemented by a variety of mechanisms to fully implement a trading program that includes Clean Water Act (CWA) pollutants. Mechanisms already identified for such development and adaptation include: • Develop DEQ Permit Language / Standard Schedule template; • Evaluate General vs. Individual permit framework; 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness • Develop MOA for WP/DEQ framework; and • Develop the legal elements needed to implement ecosystem marketplace. Where other ecosystem credits are involved, the cognizant regulatory entity may need to make a policy statement regarding the creditability and procedures for trading credits related to wetlands, floodplain, and habitat benefits. Some discussions have occurred among Partnership representatives and agencies with jurisdiction over these areas, including the Department of State Lands, NMFS, and some informal statements have been made, but something more formal may be needed to guide market participants. Credit Baselines Credit baselines are the level of responsibility a discharger or landowner must fulfill, with respect to pollutant load reductions or other environmental improvements, before additional benefits are generally creditable. For CWA constituents, the IMD specifies the baselines as follows: • Point sources—permitted effluent limitation or TMDL WLA; and • Nonpoint sources—the level of pollutant load associated with existing land uses and management practices that comply with applicable state or local regulations. These general guidelines have been converted into quantitative estimates of potential kilocalorie supply and demand for selected sources. An assessment of potential demand and supply in other potential credit markets involving wetlands, habitat, and carbon offsets, and habitat was prepared with some degree of quantitative estimates (carbon offset projects may be important in the Willamette Ecosystem Marketplace because they could generate other types of credits beyond carbon sequestration, including for example pollutant load reduction and habitat enhancements, depending on the type of project implemented.). Agencies with jurisdiction over these types of credits have not specified baselines for trading purposes. It is assumed these credit baselines could be developed from existing policy, but that additional analysis and or negotiations will be needed to establish baselines for other credits. Trading Areas and Trading Ratios The IMD specifies that trading partners be located in the same watershed, as defined by a TMDL, watershed management plan, or other DEQ-approved designation. The IMD also states that “the use of greater than 1:1 trading ratios is appropriate between point and nonpoint sources.” For example, Clean Water Services temperature credit program employs a ratio of 2:1 (two kilocalories reduced through shade plantings count for one kilocalorie of credit). Some additional technical work and discussions involving key regulatory agencies will be needed to refine application of this policy, including preferences or limitations on directions of credit trades, treatment of subwatersheds, and whether trading ratios may be needed or desired to address differences in equivalency between benefits at the credit use versus credit 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness generation location. The Partnership’s work program will address some of these needs for demonstration purposes and will provide recommendations for addressing trading areas and ratios beyond the demonstrations. Credit Calculations The IMD provides detailed information on calculating thermal credits generated by riparian shading. It also provides some information on flow augmentation credits, and nonpoint source BMP credits for nutrients. The CWS NPDES Watershed permit and supporting documents provide information on point source to point source ammonia and BOD credit calculations for the Tualatin River. The Partnership’s technical work program will develop additional information regarding these and other types of credits using available science. It is expected that some data gaps will exist that will need to be addressed before guidance for credit calculations covering the full complement of ecosystem credits would be available. Credit Generation: Certification, Verification, Registration There is currently no system in place for certification, verification, or registration of CWA- related credits. Wetlands, carbon, and endangered species mitigation programs involve different types of procedures and levels of detail to document mitigation credits within those programs. Thus, processes and rules are needed to govern CWA-related credits within a multi-credit market. With respect to other types of credits, it is assumed existing rules in those programs would serve as a starting point for certification, verification, and registration within a Willamette Ecosystem Marketplace, but that additional work may be needed to ensure consistency as appropriate across credit types. The Partnership has proposed a conceptual approach to filling this gap, but additional further work would be needed to implement the recommendations. Credit Market Information: Notification of Offers to Buy and Sell, Cost-Basis and Pricing There is currently no centralized location for this type of information for most types of credits being considered for the Willamette Ecosystem Marketplace. This is true for CWA constituents, wetlands opportunities, and habitat projects. To date, market information, including offers to generate, bank, or trade credits and terms of the deal (e.g., price, number of credits, etc.) has been exchanged ad hoc, bi-laterally between parties, or multi-laterally, with various types of third parties facilitating the development and exchange of information. With respect to carbon-related credits, which can generate other types of benefits of interest to the Willamette Ecosystem Marketplace, The Climate Trust, the Chicago Climate Exchange, and a number of other national and regional brokerages offer somewhat centralized sources of information, but collectively they do exhibit gaps and overlaps in coverage. There are some consolidated sources of information for these types of credits, but it appears that no one source is complete, gaps exist, as do overlaps in coverage. 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness The only CWA trades authorized in Oregon have been the internal BOD and ammonia trading for the CWS wastewater plants, and the CWS riparian thermal load trading program. Neither of these programs have required the development of credit cost-basis and pricing. Reporting and Tracking Transactions For CWA-related credits a reporting and tracking system has not yet been developed. The CWS NPDES Watershed permit requires an annual report summarizing the results of its credit trading activities for the previous year, including: (a) Identification of Trading Baselines; (b) Summary of Actual Loads Discharged; (c) Summary of Credit Trades, including credits used to meet baselines, as well as credits generated, purchased, or held but not applied to baseline compliance; (d) Environmental Benefits Summary, describing how the credit trades supported watershed management objectives; and (e) Efficiency Summary, describing how the credit trades supported cost effective and timely watershed management. Existing programs covering other types of credits, such as those related to wetlands, carbon, and habitat, each have different systems for documenting and recording individual mitigation or trading transactions. As with other market elements, there is no centralized or consolidated reporting and tracking system that incorporates some standardized methods and approaches, as applicable, across the potential credit types. Credit Project Monitoring and Re-Certification There is currently no system or standardized set of requirements in place in Oregon governing monitoring projects that generate water quality credits, or to specify a process to periodically re-certify credits (re-certification, for example, might involve inspecting a BMP every year to confirm that it is still in place, being properly operated and maintained, and generating the type and level of credits its owner has banked, offered, or sold. Existing programs covering other types of credits each have different sets of requirement, some of which are more comprehensive than others. Market-Level Reporting and Evaluation Market-level reporting and evaluation would focus on the cumulative activity and benefits of a specific type of credit across all transactions, and also on the cumulative activity and benefits of all transactions across credit type. There is currently no such market-level system in place in Oregon for water quality credits. Existing programs covering other types of credits each have different processes and provide varying levels of detail about market-level results, as distinct from results for individual transactions, or particular participants. 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness Public Outreach and Education With respect to water quality credit trading, the IMD makes a strong statement about outreach and education at various stages in program development and implementation: “DEQ supports public participation throughout the development of water quality trading programs. Stakeholder involvement is necessary for program effectiveness and credibility. To insure adequate opportunity for public participation, permits incorporating trades should be considered to fall into Category IV under OAR 340- 045-0027. As trading becomes more familiar to the public, permits incorporating trading may be deemed to fall into [different categories for the purposes of considering appropriate outreach and education needs.] Complex trades such as those involving multiple sources or trades that are precedent-setting should be developed with an advisory process. As trading is authorized in permits and trading plans are submitted to DEQ, these plans will be made available for public review and comment. In the interest of keeping stakeholders informed about trading in Oregon, DEQ intends to maintain a web page with a designated contact person, current trading policy and information on trading activity in Oregon.” Programs involving wetlands mitigation, carbon, and habitat, for example, each have varying degrees of outreach and education, and utilize some traditional and program-specific mechanisms. Outside of the Partnership’s overall program, and the Partnership’s demonstration program, there is currently no one consolidated outreach and education effort for the Willamette Ecosystem Marketplace. Gap Analysis Summary The gap analysis shows that there are many needs and challenges in getting started to create the marketplace, including: • Technical and scientific gaps; • No dependable regulatory framework; • No credit standards, no transaction rules; • Questions about how buyers and sellers find each other; • No clear process and procedures completing deals; and • No automatic monopoly with respect to who can easily be the first to provide the range of needed market services. 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness The potential options for marketplace creations would be to either leave the status quo of an unorganized marketplace, develop a marketplace through decentralized approaches or develop a centralized market. Based on discussions with the Willamette Partnership Board of Directors and the project team’s consideration of the options, including successful examples in water quality credit trading and other environmental credit markets, a market framework with predominantly centralized features is recommended for further consideration, as described in the next section of this TM. 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness FILLING THE GAPS: A CENTRALIZED MARKET FRAMEWORK—“WILLAMEX” Rationale The gap analysis showed that no one entity in the Willamette Basin has an existing or immediate monopoly on the potential ecosystem marketplace. The prospect of many separate markets—either by watershed and/or credit type—seems economically inefficient and fraught with the potential for many different sets of potentially inconsistent rule systems. To have immediate and long-lasting relevancy and influence over the envisioned market-based approach to restoration and capture the economies of scale and market consistencies that a centralized marketplace can offer, something unique must be offered to bring people to the central marketplace. There are many elements that make a market, and many players that have role and an opportunity to help develop and implement it. Success requires a significant coordination and collaboration effort—and without a unifying feature that can serve as the cornerstone, the effort could be unsustainable and fail. The cornerstone for a central Marketplace can be laid by offering a state-endorsed, regulator-approved, and trader-accepted set of recognized credit standards and the mechanisms to facilitate deals efficiently, cost- effectively, and with certainty in credit quality. Introduction to the “WILLAMEX”, “WILLBR”, AND “WILLMA” Concept1 “WillamEx” would be the state-endorsed centralized administrative and electronic marketplace for ecosystem-related credits in the Willamette River Basin. WillamEx would provide a registry and trading system for pollutant reductions and other environmental improvements in pre-approved, standardized exchange units, including kilocalories, wetland functions, and habitat types. WillamEx would be self-regulated according to operating rules and policies that would be developed in collaboration with its Founding Members and state agencies with regulatory authority over the environmental performance of participants in WillamEx. Within the Basin, various entities face regulatory requirements or take voluntary actions to improve the health of the ecosystem. WillamEx platforms would provide the means to document benefits created and track net progress toward specified Basin-wide restoration targets. The goals of WillamEx would be to: • Help credit buyers and sellers find each other and facilitate efficient exchanges through the use of pre-approved credit verification and certification procedures; • Create financial incentives for voluntary restoration actions by translating environmental benefits into a bankable and tradable commodity with monetary value; 1 This section presents essentially the same information and recommendations as were presented in the “Preliminary Draft Prospectus for the Willamette Ecosystem Bank and Exchange” (a seven page document delivered on December 11, 2006). Selected language was modified, including specifically the grammatical tenses, to make this presentation more suitable for a Technical Memorandum. Additionally, graphic representations of the overall market and elements thereof that were developed for th th the PowerPoint presentations to the Board and the Steering Committee (December 13 and 14 , 2006, respectively) are included in this TM, but were not yet developed when the Preliminary Draft Prospectus was first delivered and circulated. The terms WillamEx, WillBR, and WillMA were “Googled” with no meaningful results. If these or other terms are ultimately used, a trademark search would need to be performed to develop and register sufficiently unique names. 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness • Establish, support, and regulate credit standards that ensure credibility of the commodities for the protection of the participants, especially those using credits as part of a regulatory or contractual compliance strategy; and • Help educate the public about the restoration needs in the Willamette River Basin and the opportunities for beneficial action. Banking and Trading WillamEx would have two major platforms—The Registry and The Marketplace, as depicted in Exhibit 1. Exhibit 1. Example WillamEx Platforms WillBR Bank & Registry WillMa Marketplace Credit Documents Bids & Market Data Generation Offers Data Verification Exchange Bi- and Multi- Cleared Lateral Data Base Matched Trades Certification Settlement ? Member N or Y Provisional Accounts Credits & Debits Member Verification Credit Finalize Net Accounts Invoicing Attributes Account Positions The Willamette Bank and Registry—WillBR could be a secure web-site2 and database system that would be the official repository of ecosystem credits created and purchased by WillamEx Account Holders, also referred to as Members. Members generating credits would deposit them in their WillamEx registry account by following the credit calculation, documentation, and verification procedures in the WillamEx Rules (to be developed) specific to the type of credit(s) being deposited. A “hold” would be placed on the credits until they are certified by WillamEx through an audit procedure carried out by WillamEx staff or its technical consultants. Upon certification, the hold would be removed and the credits would be available for trading. Members purchasing credits through WillamEx would deposit them in their registry account after they have been processed by The Marketplace. Key information would be attached to the credits when they are placed in the registry, including as applicable 2 It would be optimal to have a web-based registry, but this will be dependent on funding. 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness minimum asking price, and “vintage” (i.e., the period over which the benefit represented is live and during which the credit is tradable). The Willamette Marketplace—WillMa could be an internet-accessible3 database system that matches [automatically or allows administrators to] requests for and offers of credits and would be used to execute trades among WillBR account holders. WillMa would display and track a range of market data, subject to any confidentiality provisions in the WillamEx Rules, including credit prices (transactions, average, high, low, closing for reporting period), trade sizes, total volume, and vintage. WillMa could support several types of exchanges: • Exchange-Cleared trades would be anonymous to the trading partners and within the transaction reports, except to WillMa administrators and system auditors. Members would submit bids and offers which would be matched based on price, vintage, and time priority. Buyers’ credits and sellers’ debits would be recorded in their WillBR accounts, but would not be connected to each other. • Bi- or Multilateral Exchanges would involve one or more members that have agreed to a specific set of negotiated terms and conditions with respect to price, quantity, vintage, etc. and submit the request to WillMa for processing. • Trades between Members and non-members could be considered, subject to rules that would be needed to qualify non-member credit buyers and sellers. WillMa would process all transactions, including verifying credit attributes in WillBR prior to trade settlement, making provisional credits and debits to buyers’ and sellers’ WillBR accounts pending settlement, producing invoices for buyers to secure settlement, and finalizing net account positions in WillBR post-settlement. These processes are summarized in Exhibit 2 for WillBR and in Exhibit 3 for WillMa. Exhibit 2. Summary of WillBR Processes Credit Documents ← Members generate credits and prepare proof Data Generation Verification ← Credits are verified per rules ← And entered in registry Data Base ← WillamEx grants or denies certification per rules Certification ← Denied credits return to verification or ? Member N or Y documentation Accounts Member Credit 3 It would be optimal to Accountsinternet accessible database, but this will be dependent on funding. Attributes have an 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness ← Certified credits deposited into Member accounts Exhibit 3. Summary of WillMa Processes Bids & Market ← Certified credits may offered on the Offers Data market ← Members submit bids Exchange Bi- and Multi- Cleared Lateral ← Anonymous or negotiated trades supported Member Accounts Matched Trades ← Bids & offers matched based on key Settlement Provisional attributes Credits & Debits ← Trades processed for settlement Verification Finalize Net Invoicing Account Positions ← Accounts reconciled Reporting WillamEx could be configured to generate a number of pre-specified reports and support additional queries by Members and WillamEx administrators, as described below. • Individual Members: Selected reports about individual member’s registry accounts and trading activities could be automatically generated or requested from the WillBR and WillMa databases. These could follow pre-set or custom formats to serve member’s own tracking and evaluation needs, or conform to regulatory submittal requirements. • Marketplace Collective: As part of its agreements with participating regulatory agencies, WillamEx and its members could agree to compile and report certain consolidated summaries of banking and trading activities to support their oversight responsibilities with a balance between transparency and confidentiality of market participation. These reports could be negotiated with the regulatory agencies and would be described in attachments to the Member Agreement. Becoming a member of WillamEx would secure the necessary permissions to provide individual data in summary format. 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness • WillamEx, WillBR, and WillMa Management and Auditing—WillamEx staff and its technical consultants could generate and review a variety of reports to ensure the integrity of its operations, perform QA/QC and oversight functions, and to understand how it can best serve its members. The information contained in these reports would be confidential, subject to the terms and conditions of the Member Agreement and WillamEx Rules. Additionally, WillamEx could publish various materials for the benefit of its Members, Willamette River Basin stakeholders, and other interested parties and make them publicly available following pre-release to Members, including for example: an Annual Report, a Quarterly Newsletter, and Monthly Summaries. Credit Verification and Certification Members would be responsible for verifying credits submitted to the Registry subject to the applicable published rules which would have been negotiated by regulatory agencies and other authorities. Members must follow these pre-approved methods and approaches for calculating and documenting credits. By following these verification procedures, Members could self- verify using an independent verifier accredited by WillamEx. If these procedures are not followed and an accredited verifier not used, Members would need to submit proof that the relevant cognizant regulatory agency or other authority accepts the proposed credits as real and valid and has granted direct regulatory certification. This certification route may not be encouraged or supported by WillamEx, except on a case-by-case basis, for example when the credit proposal is not adequately covered by the pre-established guidelines or is otherwise uniquely complex. WillamEx Founding Members, in cooperation with selected regulatory agencies, could establish a Credit Verifier training and accreditation process. This process would be described in a document such as a WillamEx Credit Verification Handbook. A list of accredited verifiers could be obtained by contacting WillamEx staff or visiting the WillamEx website. Upon the deposit of duly verified credits into the Registry, WillamEx staff or its technical consultants would certify the credits by performing an audit of the verification documentation. This audit process would be developed in collaboration with regulatory agencies and would be carried out in accordance with Credit Certification Rules that would be developed. Most types of credits would require periodic re-verification and re-certification. The specific period and requirements would generally be specific to the credit type, and possibly also the type or location of the project or activity generating the credit. For example, periodic field inspections, modeling analysis, and/or environmental monitoring may be required or advised. Members could consult a document such as a Credit Verification Handbook and Credit Certification Rules for details. The locations in the WillamEx process graphic that support credit verification and certification are highlighted in orange in Exhibit 4. Exhibit 4. Credit Verification and Certification Process Locations WillBR Bank & Registry WillMa Marketplace Credit Documents Bids & Market Data 97301, 503.434.8033 105 High street se, Salem, OregonData Generation Offers Verification Exchange Bi- and Multi- Cleared Lateral Data Base Willamette Partnership Pace, Scope, Effectiveness Credit Recruitment WillamEx, or one of its founding members could maintain a GIS-based system of priority locations and pre-screened project opportunities. Additionally, some members of the WillamEx who have historically maintained lists and descriptions of potentially creditable projects may make these available on their websites, or upon request. Members could consult these sources for credit opportunities and would be encouraged to visit WillMa and periodic WillamEx publications to identify unmet credit demand. Members of WillamEx, its Board of Directors, or its staff could from time to time identify priority credit creation opportunities that the marketplace has not sufficiently incentivized. Such identifications would follow WillamEx’s Credit Recruitment Policy, for example. To the extent that WillamEx takes a financial position or other type of interest in a project that generates credits eligible for banking only or exchange, such position would be disclosed to Members according to WillamEx Rules. Public Outreach and Education WillamEx should be committed to ensuring that Members, potential members, watershed stakeholders, and the general public understands the challenges facing Willamette Basin restoration efforts and the opportunities to participate in meeting those challenges offered in this credit marketplace, as well as through other means. WillamEx could issue a range of periodic publications designed to support this goal, and host special forums and seminars. Additionally, WillamEx Members could offer a wide range of ways to learn more about Willamette restoration needs and initiatives and opportunities to get involved. A list of past and upcoming outreach and education events could be posted on the WillamEx website, on selected Members’ websites, and could be available from staff upon request. 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness Relationship with Cognizant Regulatory Agencies To support the creation and implementation of the Willamette Ecosystem Bank & Exchange, WillamEx Founding Members would negotiated credit standards, verification protocols, and certification procedures, supported by a range of additional guidance, to facilitate and enable the efficient and credible exchange of ecosystem-based credits. These negotiated agreements would be memorialized in a document like a Memoranda of Understanding signed by the WillamEx Board of Directors and the Directors of the participating regulatory agencies, natural resource agencies, and other authorities. This relationship would provide members with a pre-approved credit verification and certification process that signatory agencies could accept without further documentation. This relationship would also provide members with pre-approved reporting forms, standardized data queries, and customizable reports members could get in a variety of formats (e.g., PDF, Word, Excel) that they could include in submissions to their cognizant regulator, or readily modify. Selected regulatory agencies might join WillamEx as Founding Members, or as regular members, hold Board of Director positions, and might open Registry Accounts in their agency’s name. This level of participation in WillamEx would exemplify the partnerships that make this ecosystem marketplace possible and successful. These relationships would not convey to WillamEx any direct environmental or regulatory authority over its members or participants except as detailed in its member agreements, rules, policies, handbooks, and other guidances. Membership and participation in the Registry and the Exchange would not be substitutes for fulfilling regulatory requirements as specified in permits, ordinances, and other compliance documents, except as provided for said mechanisms. Members would need to take individual action to comply with requirements for performance, documentation, and reporting. In selected pre-established situations, WillamEx could generate or issue selected reports on a Member’s behalf and may transmit this information to a Member’s cognizant regulatory authority. In these transactions, WillamEx would not act as a responsible party, co-permittee, or in any other manner that would invoke liability for the environmental performance of its Members. Member Services WillamEx staff and its technical consultants could offer a limited set of services to its members, as would be outlined in the Membership Agreement. WillamEx could also maintain a roster of pre-qualified organizations and individuals that it deems have the necessary expertise and knowledge of the WillamEx rules and policies to provide assistance in the areas in which they have been pre-qualified. The set of services that could be provided by WillamEx staff, its technical consultants, and approved providers is briefly described below. A document, such as a WillamEx Services Handbook, could provide additional information. 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness • Technical—including individual credit portfolio analysis and investment strategies, site planning, engineering, credit estimations, cost and financial analyses, modeling, sampling, monitoring, and performance assessments. • Regulatory—including permitting support, language development, negotiations, and compliance assessment assistance. • Legal—including regulatory-related legal analyses, risk assessments, contract development, negotiations, and preparation and submittal of legal filings. • Facilitation and Negotiation—including supporting credit project siting and development, credit sales or use, stakeholder participation, public involvement, and bi- or multi-lateral deal-making. • Outreach and Education—including identification of recommended opportunities and mechanisms, preparation of collateral materials, logistical and other support for meetings, seminars, and other forums and media events. • Credit Package Submittals—bundled services that could include all or some of the above listed services, with objective of preparing the required documents to register credits. • Credit Verification—separate from the above services, performing the specific verification function, according to established procedures, to register verified credits that pass the certification audit. Member Benefits, Ecosystem Benefits WillamEx members could save time and money when they choose to employ credit banking or trading as part of their regulatory compliance strategy or as part of their financial investment and/or environmental stewardship strategy. Members would know that regulatory agencies would accept WillamEx-cleared credits. Critical access to credit market information would help buyers and sellers quickly find each other and provide one-stop shopping when multiple trading partners are needed to secure or place credits. Convenient tracking and reporting tools would provide members with easy ways to evaluate their own positions and satisfy any reporting requirement with minimal or no administrative effort. Members would also have ready access to WillamEx staff, technical consultants, other members, and pre-qualified service providers for assistance with difficult to find or hard to place credits, or other needs. WillamEx would provide its members with an opportunity to meet their regulatory or voluntary restoration goals more quickly and more cost-effectively and offer the chance to direct projects and activities to priority needs and locations. Cleaner water and land-based improvements will provide the watershed’s humans, fauna, and flora with an ecosystem that can expand and sustain the environmental and economic benefits it delivers. STEPS TO CREATE THE WILLAMETTE ECOSYSTEM BANK & EXCHANGE The Willamette Partnership and other parties willing to invest in WillamEx to secure the watershed’s targeted potential would need to follow a series of minimum steps—11 are 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness suggested below. Some of these could occur in parallel, but there would necessarily be some sequencing or iteration prior to launching WillamEx. 1. Agreement in Principle with Regulatory Agencies and Other Authorities Recommendation The proposal for WillamEx would be shared and discussed with entities whose support is critical to the formation and implementation of the WillamEx. After an opportunity for review, comment, and revisions, the proposal would be converted into language for a Memoranda of Understanding, or other such document on which signatures secure the commitments sought. Current Status (December 2006) − Discussions with DEQ have been started regarding credit definitions and permitting issues. − Informational meetings have been held with other key agencies, including: Department of State Lands, US Fish and Wildlife Service, NFWF, US Geological Survey, and, US Environmental Protection Agency. − The Market Proponent would need to initiate a formal process to get agreements with these stakeholders. 2. Confirmation of Sufficient Member Participation Recommendation Further and specific analysis would be performed beyond the EPA grant-funded market appraisal to survey prospective members’ interest in this opportunity and willingness to join and participate in the WillamEx. Surveys, focus groups, and additional Round Tables are a few approaches. Current Status (December 2006) − The Willamette Partnership’s market appraisal identified categories of demand and priority locations, e.g., kcals and wetlands. − Some formal and informal interviews were conducted as part of the appraisal and ongoing outreach efforts. − There would need more quantification of market demand and specific discussions regarding the WillamEx concept with prospective participants. 3. Chartering a WillamEx Recommendation Political and legal discussions would be launched to identify, evaluate, and select the best corporate structure for the proposed organization, considering incorporation options available under Oregon statutes, authorities of existing organizations, and the desirability or need for special legislative chartering and institutional endorsement mechanisms. Current Status (December 2006) 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness − Different operational models have been identified. − Some discussions have been held about whether a new organization is needed to perform some market functions, or whether an existing organization can take on these responsibilities. − Political and legal discussions and an options evaluation would need to be launched to develop a more detailed recommendation. 4. Credit Standards Recommendation Procedures and protocols for estimating, calculating, modeling, documenting, monitoring, and evaluating credit creation and performance would be developed, negotiated with cognizant regulatory agencies, and published in an easy to understand and use format. Current Status (December 2006) − Kilocalorie crediting and debiting method is being documented using Clean Water Services methods and guidance. − Other credit definitions under development as part of the EPA grant-funded project. − Some technical and scientific gaps will still exist after the scoped work is complete. − Market proponents would need to develop specific proposals, get approval, and prepare guidances. 5. Verification Standards Recommendation Procedures and protocols by which proposed credits are independently verified, including training and accreditation of pre-approved verifiers would be developed, negotiated with cognizant regulatory agencies, and issued. The verification program supported by the WillamEx, its members, or other entities would be supported at a level such that a sufficient supply and diversity of approved verifiers exists to serve this function. Current Status (December 2006) − Some of these recommendations would be met if the Credit Standards recommendations are carried out, as verification is about auditing the standards. − Stakeholders would still need to establish auditing process and line up auditors. 6. Certification Standards Recommendation Procedures and protocols by which the WillamEx (its staff or technical consultants) review and audit submissions to the credit registry would be developed, negotiated with cognizant regulatory agencies, and issued. 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness Current Status (December 2006) − Much of this guidance could be drawn directly from credit standards and verification standards, recommended under other steps: certification audits the verification and makes a credit real, bankable, and tradable − Stakeholders would still need to develop standards, get endorsement, and put them in place. 7. Initial Marketplace Architecture Recommendation Alternative manual, electronic, and web-based platforms available to create and deliver WillamEx, WillBR, and WillMA would be identified and evaluated along key criteria, including ease of use, time to readiness, cost to develop, functionality and access, and resources needed to operate and maintain. Options for providing immediate basic services that allow future scalings and expansions to match market demand and evolution would be preferred. Current Status (December 2006) − The Partnership’s project team has documented some different examples in Market Framework deliverables submitted to date. − The Marketplace creation task in the EPA grant-funded project provides for further evaluation of options and development of a prototype. − Following these evaluations, market proponents would need to select the preferred architecture, draft a blueprint, and build it. 8. Accrediting Verifiers and Pre-Qualifying Other Service Providers Recommendation As soon as verification standards are approved, WillamEx and its members could launch an effort to recruit and accredit qualified verifiers. A separate qualification process could be developed and implemented to identify and pre-approve a range of firms, non-profit organizations, and individuals to create a roster members can consult for assistance in participating in WillamEx. Current Status (December 2006) − Some of the verifier accreditation recommendations overlap with Steps 4 and 5. − Prospective candidates could be involved in standards development. − The Partnership is already familiar with consultant roster process, and other agencies and organizations potentially supporting the marketplace also have experience with contractor and consultant qualification and selection procedures. − The accreditation process could be coordinated with efforts for outreach, education, and member recruitment. 9. Rules and Policies 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness Recommendation A range of rules and policies would be developed to govern membership, WillamEx operations, participation in the Registry and Exchange, expected roles and responsibilities, and binding commitments. The types of rules and policies envisioned were outlined in the above description of the WillamEx concept. Current Status (December 2006) − Some ingredients for this step are included in other steps. − Actions needed to complete this step would necessarily follow completion of previous steps. 10. Business Plan—Business Model and Funding Mechanisms Recommendation Consistent with the type of corporation selected, a business plan for the new organization or addition to an existing organization would describe its governance model (roles, responsibilities, and liabilities of Board, staff, and consultant positions), identify expected expenses, and demonstrate how its expenses will be covered by fixed or variable revenues. Due diligence of this plan should be performed to provide confidence that the WillamEx is capable of launching and maintaining its promised operations and services. Current Status (December 2006) − Some discussions about alternative business models and funding sources have already occurred and more are planned. − The market proponents would still need to develop a formal plan and get endorsement from key participants and stakeholders. 11. State/Regulatory Approvals, Enablers, Endorsements, Anointments Recommendation As decided and agreed to in the previous steps, the formal legal and other mechanisms to convey upon WillamEx the necessary authority to incorporate and operate according to the set of governing agreements, rules, and policies would be drafted, negotiated, and duly executed. Current Status (December 2006) − Many of the building blocks would come out of the other steps. NEXT STEPS As stated in the introduction to this TM, the analyses, concepts, and recommendations regarding the missing pieces needed to develop a Willamette Ecosystem Marketplace and how those pieces might be developed have been presented to the Willamette Partnership’s Board of Directors and the EPA grant-funded project Steering Committee in various forms, including the previously referenced TM, PowerPoint presentations, and Preliminary Prospectus for 105 High street se, Salem, Oregon 97301, 503.434.8033 Willamette Partnership Pace, Scope, Effectiveness WillamEx. The Board and the Steering Committee are considering these recommendations and will provide feedback and further direction to the Partnership’s Project Manager and project team which will be incorporated into subsequent activities and carried out by Partnership staff and its consultants under the EPA workplan for the Willamette Ecosystem Marketplace project. Upon the Partnership’s acceptance of the marketplace framework, as proposed or as may be modified, a second gap analysis in the form of a an assessment of the capabilities and willingness of selected cognizant regulatory agencies, other state institutions, watershed-based groups, other stakeholders, and potential market participants to fulfill specific roles and responsibilities as relates to creating and implementing the marketplace. This assessment will be used to refine and expand the detail of the proposed market framework and suggested evolutionary path, solidify recommended roles and responsibilities, and prepare an estimate of the financial and staffing resources needed and available to implement the proposed framework. 105 High street se, Salem, Oregon 97301, 503.434.8033 Ecosystem Credit Registry STANDARD AGREEMENT1 FOR CREDIT REGISTRATION Last updated June 19, 2008. For questions, contact: David Primozich at Primozich@verizon.net. 1. THIS AGREEMENT IS MADE ON , by and between (“CREDIT OWNER”) and the Willamette Partnership as operator of the Ecosystem Credit Registry (“REGISTRAR”).2 The CREDIT OWNER is registering the credits described herein for the following uses—check all that apply (See also Section 6 of this Agreement): Banking3 General Listing for Sale4 Private Placement5 The REGISTRAR is recognized as a/an: Independent Credit Broker Affiliated Credit Broker, with approvals to broker credit transactions on the following Credit Registry(ies) and/or Exchange(s): Credit Registry Other: 2. DESCRIPTION OF CREDITS TO BE REGISTERED A. Credit Attributes General and Legal Location of Site: The subject credits are generated from activities, projects, and/or facilities at the following location(s): State, County, City Watershed (USGS 3rd, 4th, 5th, and 6th field HUC) Legal Location Description and Stream name (if present) Longitude Latitude Map: A map of the area(s) used to generate the CREDITS is attached as Exhibit is not attached If map not attached, the reason is . FORM ABCD INITIALS: CREDIT OWNER _______/ REGISTRAR _______ VERSION: STANDARD_AGREEMENT_FOR_CREDIT_REGISTRATION.DOC PAGE 1 OF 9 Type and Quantity: 6 Spatial Accounting Quantity Type9 Completion Other Information Unit7 Tool8 Per Unit Date Time The subject credits were / were not calculated using the following APPROVED METHOD(S):10 A. Shade-a-Lator Approved by Oregon Department of Environmental Quality Formatted: Bullets and Numbering B. Heat Source Approved by Oregon Department of Environmental Quality C. Approved by D. Approved by The credit calculation method(s) used is/are generally summarized as follows: Additional documentation is attached as Exhibit / is not attached.11 Accounting Tool Outputs: A copy of the accounting tool output used to generate CREDITS is attached as Exhibit is not attached If map not attached, the reason is . Areas Targeted for Improvement:12 Some/all of the credits are are not generated from areas that have been identified as areas in need of improvement, or areas which have greater potential for overall ecological benefit. Credits from these areas are identified below: Spatial Unit Target Area Name As deemed important by:13 Site and Credit Source(s) Description:14 The site-specific conditions and activities that will generate the subject credits are summarized as follows (provide narrative or summary table):15 B. Additional Narrative Description of Credits to be Exchanged16 If desired or necessary, provide a narrative description of the credit attributes identified above and/or additional explanatory or supplemental information deemed relevant: 3. CREDIT ASSURANCES17 FORM ABCD INITIALS: CREDIT OWNER_______ / REGISTRAR_______ VERSION: STANDARD_AGREEMENT_FOR_CREDIT_REGISTRATION.DOC PAGE 2 OF 9 A. Credit Source Property Owner Regarding ownership of the property(ies) and/or facility(ies) generating the credits to be exchanged, the CREDIT OWNER: Is full and sole owner Formatted: Bullets and Numbering Is co-owner with the following party(ies) in the noted proportions: Formatted: Bullets and Numbering Has no ownership rights except to the credits per the following arrangements and agreements—describe and provide attachments as deemed necessary: Other: Regarding access to the property(ies) and or facility(ies) generating the credits to be exchanged the CREDIT OWNER: Has full unlimited access Formatted: Bullets and Numbering Has limited access as follows: Formatted: Bullets and Numbering Has access by permission and/or owner escort as follows: Other: Proofs of ownership and access: A copy of ownership and access rights (e.g. contract, easement, deeds, etc…) is attached as Exhibit is not attached If map not attached, the reason is . B. Enforceability of this Agreement The parties understand that this agreement, if accepted in writing by the CREDIT OWNER and REGISTRAR, constitutes a legally binding contract which will be interpreted in accordance with the laws of the State of Oregon. C. Credit Verification18 19 20 The subject credits have been verified, in whole or in part. The subject credits have not been verified, in whole or in part. If not verified, verification is Underway Pending Not Initiated. Verification information is provided below consistent with the credit verification status: • Verifier Name: • Verification Date: • Verifier Accreditation Number: • Verification Protocol/Methodology: • Quantity or Identification/Lot/Serial Number of Credits not verified: All credits being exchanged are verified of were not verified for the following reason(s): • Verification Documentation is attached as Exhibit available by upon request FORM ABCD INITIALS: CREDIT OWNER_______ / REGISTRAR_______ VERSION: STANDARD_AGREEMENT_FOR_CREDIT_REGISTRATION.DOC PAGE 3 OF 9 D. Financial Plan for Maintenance of Credits21 22 The CREDIT OWNER and/or OTHER PARTY will be responsible for directly or otherwise funding and arranging the following items as marked and described: 23 Credit Maintenance Credit Other Party Not Required Other Information Responsibilities Owner (Identify) Monthly general maintenance Annual inspection Quarterly monitoring Verification Certification Liability Insurance Performance Bond Escrowed maintenance fees Registration filing fees 4. CREDIT MAINTENANCE24 The CREDIT OWNER and/or OTHER PARTY:25 will maintain the activities, practices, property, and/or facilities as necessary to maintain the credits to be exchanged as described in Section 2, per the terms and conditions of Section 3. The CREDIT OWNER and/or OTHER PARTY: will maintain the credits themselves/with their own personnel. The CREDIT OWNER and/or OTHER PARTY: will contract credit maintenance to . Credit maintenance will generally consist of the following (refer to Maintenance Plan, populate table as applicable, and/or provide a narrative description): 26 Type of When Performed Frequency Other Relevant Information Maintenance Narrative description as desired/required: A more detailed Credit Maintenance Plan is: Attached to this Agreement as Exhibit Available upon Request Not required Formatted: Bullets and Numbering 5. CREDIT MONITORING The CREDIT OWNER and/or OTHER PARTY: will monitor the performance of the activities, practices, property, and/or facilities in generating the credits to be exchanged as described in Section 2, per the terms and conditions of Section 3. The CREDIT OWNER and/or OTHER PARTY: will monitor the credits themselves/with their own personnel. FORM ABCD INITIALS: CREDIT OWNER_______ / REGISTRAR_______ VERSION: STANDARD_AGREEMENT_FOR_CREDIT_REGISTRATION.DOC PAGE 4 OF 9 The CREDIT OWNER and/or OTHER PARTY: will contract credit monitoring to . Credit monitoring will generally consist of the following (refer to Monitoring Plan, populate table as applicable, and/or provide a narrative description):27 Type of Performance Frequency Method Reporting Monitoring Objective Narrative description as desired/required (if the monitoring focuses on specific performance requirements they may be included here): A more detailed Credit Monitoring Plan is: Attached to this Agreement as Exhibit Available upon Request Not required 6. CREDIT USE A. Banking The CREDIT OWNER registers the following credits for the purpose of banking the credits in the following REGISTRAR account(s): Credits to be Banked (describe by credit serial number, or other method, include a table as/if needed) CREDIT OWNER Account # Other Account: Account Owner Name Account # This registration expires on at am/pm, or expires upon written notification to the Registrar with ________days notice. B. General Listing for Sale The CREDIT OWNER offers the following credits for sale, in the following increments at the following prices:28 Credit Amount Price Per Credit/Serial Number Will Accept other Price Offers? All Credits, Any Amount $ per credit Yes No Minimum Lot Size of $ per Lot ( $ per credit) Yes No Maximum Lot Size of $ per Lot ( $ per credit) Yes No This offer to sell expires on at am/pm, or expires upon written notification to the Registrar with days notice. Pricing schedule does not conform to this table—see Exhibit . Offer to sell expiration schedule does not conform to this table—see Exhibit . FORM ABCD INITIALS: CREDIT OWNER_______ / REGISTRAR_______ VERSION: STANDARD_AGREEMENT_FOR_CREDIT_REGISTRATION.DOC PAGE 5 OF 9 C. Private Placement The CREDIT OWNER registers the following credits in an offer/offers to sell that is/are exclusive / not exclusive29 to the following parties, in the following increments, at the following prices:30 Credit Amount Prospective Buyer(s) Price Per Credit/Lot Will Accept check if prices Confidential Competing Offers? All Credits $ per credit/ total deal Yes No Lot A, Size of $ per Lot ( $ per credit) Yes No Lot B, Size of $ per Lot ( $ per credit) Yes No $ per Lot ( $ per credit) Lot C, Size of Yes No $ per Lot ( $ per credit) Etc. Yes No 7. COMPENSATION The compensation terms are Public and detailed below, or Confidential. 31 For registration services, the CREDIT OWNER shall pay the REGISTRAR: A flat fee of for the credits described in this agreement A per credit fee of , for a total of A variable fee as follows ,for a total of 32 No fee A commission collectible only at the time of credit sale, in the amount of , and/or percent of the sales price Other: In addition, the CREDIT OWNER shall pay the REGISTRAR the other fees for filing, transactions, etc. as listed in Section 3.D (the Financial Plan for Credit Maintenance). 8. OTHER TERMS: RESERVED 9. SIGNATURES AND ATTACHMENTS The terms and conditions of this Agreement, including all attachments, must be used as a basis for registering credits for the purposes described herein, including if applicable for offering the credits to prospective buyers, and, unless amended in writing, contain the final and entire agreement between the parties hereto. The parties shall not be bound by any terms, conditions, oral statements, warranties, or representations not herein contained. Seen and agreed and receipt of a signed copy of this Agreement is hereby acknowledged: CREDIT OWNER #1 date CREDIT OWNER #2 date REGISTRAR REGISTRAR’S REPRESENTATIVE date List of Attachments and Exhibits33 FORM ABCD INITIALS: CREDIT OWNER_______ / REGISTRAR_______ VERSION: STANDARD_AGREEMENT_FOR_CREDIT_REGISTRATION.DOC PAGE 6 OF 9 • A • B • C • D • E • F FORM ABCD INITIALS: CREDIT OWNER_______ / REGISTRAR_______ VERSION: STANDARD_AGREEMENT_FOR_CREDIT_REGISTRATION.DOC PAGE 7 OF 9 ENDNOTES 1 This is the official Third Draft—Annotated Version: 06/19/08. This version has been revised to consistent with the Standard Agreement for Credit Exchange, Third Draft—Annotated Version: 06/19/08. The annotations are a combination of clues to readers/users and notes/placeholders recommended by the Drafting Group. 2 This section addresses DEQ 9-27-07 permit language, 1.g.i(1). 3 E.g., for conservation or regulatory offset purposes. 4 E.g., willingness to consider all offers. 5 E.g., registered for sale, but only to specified party(ies). 6 This table is provided as an example only. It should be adjusted and modified as necessary for the circumstance, based on the preferences of the document signatories and the applicable credit calculation guidance. 7 The spatial unit is a name identifier for the area tied to a credit quantity. 8 This addresses DEQ 9-27-07 permit language, 1.g.i(4), and is intended to be a summary of the methodology utilized to calculate the quantity of credits and specific units of credits generated. Note that specific units generated will be in Section A above. Please consult applicable credit calculation methods and guidance for more information. Note that temporal elements/aspects will be covered as appropriate/required by the applicable guidance. 9 Examples include: temperature; habitat; wetlands; and carbon/GHG. 10 The approved methods have not yet been specified, so this section is necessarily generic. 11 Attaching additional information may be under the discretion of the signatories, or may be required by the Registrar. Please consult applicable guidance. 12 Addresses DEQ 9-27-07 permit language, 1.d .i i. It is in the Exchange Agreement; it may not be necessary here. 13 For temperature credits, consult the TMDL CITATION, and related documents, as well as ____________________. For other types of credits, refer to guidance provided by the cognizant regulatory agency, local/regional government, and/or non-governmental entity. 14 Addresses DEQ 9-27-07 permit language, 1.g.i(3). It is in the Exchange Agreement; it may not be necessary here. 15 Per DEQ permit language, section 1.g.i.(3) : for riparian shade restoration plans, plant selection and planting densities appropriate for site-specific soil conditions must be included; for flow augmentation plans, source and period of augmentation water must be included. 16 If additional information about the environmental benefits of credits beyond the specific credit is desired, it could be placed here. 17 This section addresses DEQ 9-27-07 permit language, 1.e.iii(3). 18 It is possible that credits could be registered if verification has not been completed. However, it is noted that the presumption and policy preference is that a Registry will not accept credits into its system without their being verified per the Registry’s and/or cognizant regulatory agency protocols. 19 Per the Drafting Group’s decision, the Certification section has been deleted. 20 A/some Registries/Registrars may choose to not accept unverified credits. 21 Addresses DEQ 9-27-07 permit language, 1.g.i(5). 22 The presumption is that the credits have been created, i.e., implemented, so no one should care about money already spent, but should only be interested in how the credits are maintained and preserved— unless they were funded with a loan. This is why this section differs from that in the Exchange document in that pre-credit creation items are omitted from the example table. 23 These are examples of items that may be applicable. The list should be modified as necessary to support the transaction. 24 Addresses DEQ 9-27-07 permit language, 1.e.iii(4) and 1.g.1.(6). 25 Here and elsewhere, the OTHER PARTY could be the Owner’s agent, the Registrar or Registrar’s agent, or a third party under contract to either the Owner or Registry. FORM ABCD INITIALS: CREDIT OWNER_______ / REGISTRAR_______ VERSION: STANDARD_AGREEMENT_FOR_CREDIT_REGISTRATION.DOC PAGE 8 OF 9 26 The Drafting Group discussed whether detail here was appropriate or necessary. It was decided to leave the opportunity to summarize, but allow the signatories to refer to an attached Maintenance Plan, if one is required. There was also a discussion about the difference between maintenance activities and results/performance, and which was more appropriate to focus on. Given the apparent requirement in DEQ permit language for a description of maintenance activities, this section is kept. A general reference to performance measures has been added to the next section on monitoring, so as to capture that option and sentiment. 27 Needs to show actions to ensure that the activities generating the credits are functioning as intended per DEQ 9-27-07 permit language, 1.e.iii(5) and 1.g.1.(7). 28 This table is provided as an example—it may be modified or replaced as needed or specified by applicable Registry guidance. 29 It would not be exclusive if some of the credits were not privately placed under A or B above. 30 Note that prices for private placement may not be public, and if not would be so excluded. 31 It is presumed that for any public entities, this information will be public; however it was noted that private parties may have the option and desire to keep cost/price information confidential. 32 May be needed in cases where registering multiple credit serial numbers for different uses. 33 List as required and/or desired. FORM ABCD INITIALS: CREDIT OWNER_______ / REGISTRAR_______ VERSION: STANDARD_AGREEMENT_FOR_CREDIT_REGISTRATION.DOC PAGE 9 OF 9 Ecosystem Credit Registry CREDIT REPORT Last updated June 19, 2008. For questions, contact: David Primozich at Primozich@verizon.net. 1. THIS AGREEMENT IS MADE ON __________________________________, by and between ____________________________________________________________ (“BUYER”) and _______________________________________________________________________(“SELLER”).1 This is a financial transaction and an exchange of credit ownership: The BUYER agrees to buy from SELLER and the SELLER agrees to sell to BUYER the CREDITS described in Section 2. This is NOT a financial transaction, but IS an exchange of ownership: The BUYER agrees to receive from SELLER and the SELLER agrees to convey to BUYER the CREDITS described in Section 2.2 2. DESCRIPTION OF CREDITS TO BE EXCHANGED A. Credit Attributes General and Legal Location of Site:3 The subject credits are generated from activities, projects, and/or facilities at the following location(s): State, County, City Watershed (USGS 3rd, 4th, 5th, and 6th field HUC) Legal Location Description and Stream name (if present) Map:4 A map of the area(s) used to generate the CREDITS is attached as Exhibit ____ is not attached If map not attached, the reason is____________________. Type and Quantity:5 6 Spatial Accounting Quantity Type9 Completion Other Information Unit7 Tool8 Per Unit Date Time The subject credits were / were not calculated using the following APPROVED METHOD(S):10 A. _____________________________Approved by_____________________________ FORM ABCD INITIALS: BUYER _______/ SELLER _______ VERSION: STANDARD_AGREEMENT_FOR_CREDIT_EXCHANGE.DOC PAGE 1 OF 10 B. _____________________________ Approved by_____________________________ C. _____________________________ Approved by_____________________________ D. _____________________________ Approved by_____________________________ The credit calculation method(s) used is/are generally summarized as follows: _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ Additional documentation is attached as Exhibit_______/ is not attached.11 Areas Targeted for Improvement:12 Some/all of the credits are are not generated from areas that have been identified as areas in need of improvement, or areas which have greater potential for overall ecological benefit. Credits from these areas are identified below: Spatial Unit Area As deemed important by:13 Site and Credit Source(s) Description:14 The site-specific conditions and activities that will generate the subject credits are summarized as follows (provide narrative or summary table):15 _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ C. Additional Narrative Description of Credits to be Exchanged16 If desired or necessary, provide a narrative description of the credit attributes identified above and/or additional explanatory or supplemental information deemed relevant: _____________________________________________________________________________________ _____________________________________________________________________________________ 3. CREDIT ASSURANCES17 A. Credit Source Property Owner Regarding ownership of the property(ies) and/or facility(ies) generating the credits to be exchanged, the SELLER: Is full and sole owner Is co-owner with the following party(ies) in the noted proportions: _________________________________________________________________________________ Has no ownership rights except to the credits per the following arrangements and agreements—describe and provide attachments as deemed necessary:.________________________________________________________________________ Other____________________________________________________________________________ FORM ABCD INITIALS: BUYER_______ / SELLER_______ VERSION: STANDARD_AGREEMENT_FOR_CREDIT_EXCHANGE.DOC PAGE 2 OF 10 Regarding access to the property(ies) and or facility(ies) generating the credits to be exchanged the SELLER: Has full unlimited access Has limited access as follows:______________________________________________________ Has access by permission and/or owner escort as follows: _____________________________ Other:____________________________________________________________________________ B. Enforceability of this Agreement The parties understand that this offer, if accepted in writing by SELLER and delivered to BUYER, constitutes a legally binding contract which will be interpreted in accordance with the laws of the State of Oregon. FORM ABCD INITIALS: BUYER_______ / SELLER_______ VERSION: STANDARD_AGREEMENT_FOR_CREDIT_EXCHANGE.DOC PAGE 3 OF 10 C. Credit Verification18 19 The subject credits have been verified by the BUYER SELLER, in whole or in part. The subject credits have not been verified, in whole or in part. If not verified, verification is the responsibility of the BUYER SELLER, and verification is Underway Pending Not Initiated. Verification information is provided below consistent with the credit verification status: • Verifier Name _____________________________________________________ • Verification Date _________________________________________________ • Verifier Accreditation Number_____________________________________________ • Verification Protocol/Methodology____________________________________________ • Quantity or Identification/Lot/Serial Number of Credits not verified: All credits being exchanged are verified ___________________________of_________were not verified for the following reason(s) ____________________________________________________________________________ • Verification Documentation is attached as Exhibit_____ available by upon request D. Registration (check all that apply):20 The SELLER has registered the subject credits with the following Registry(ies) ______________________________________________Date of Registration_________________. Registration documentation is attached as Exhibit ____/ available upon request. The SELLER has not registered the subject credits. This agreement is contingent on the SELLER registering the credits by __________________. The BUYER is responsible for registering the credits as necessary and desirable. E. Financial Plan for Implementation and Post-Exchange Maintenance of Credits21 The BUYER and/or SELLER will be responsible for directly or otherwise funding and arranging the following items as marked and described: 22 Credit Implementation & Buyer Seller Not Required Other Information Maintenance Responsibilities Land Acquisition Planning & Design BMP Installation Monthly general maintenance Annual inspection Quarterly monitoring Verification Certification Liability Insurance Performance Bond Escrowed maintenance fees Registration filing fees Exchange fees FORM ABCD INITIALS: BUYER_______ / SELLER_______ VERSION: STANDARD_AGREEMENT_FOR_CREDIT_EXCHANGE.DOC PAGE 4 OF 10 4. CREDIT MAINTENANCE23 The BUYER and/or SELLER will maintain the activities, practices, property, and/or facilities as necessary to maintain the credits to be exchanged as described in Section 2, per the terms and conditions of Section 3. The BUYER and/or SELLER will maintain the credits themselves/with their own personnel. The BUYER and/or SELLER will contract credit maintenance to _________________. Credit maintenance will generally consist of the following (refer to Maintenance Plan, populate table as applicable, and/or provide a narrative description): 24 Type of When Performed Frequency Other Relevant Information Maintenance Narrative description as desired/required: _____________________________________________________________________________________ _____________________________________________________________________________ A more detailed Credit Maintenance Plan is: Attached to this Agreement as Exhibit _______ Available upon Request Not required 5. CREDIT MONITORING The BUYER and/or SELLER will monitor the performance of the activities, practices, property, and/or facilities in generating the credits to be exchanged as described in Section 2, per the terms and conditions of Section 3. The BUYER and/or SELLER will monitor the credits themselves/with their own personnel. The BUYER and/or SELLER will contract credit monitoring to ____________________. Credit monitoring will generally consist of the following (refer to Monitoring Plan, populate table as applicable, and/or provide a narrative description):25 Type of Performance Frequency Method Reporting Monitoring Objective Narrative description as desired/required (if the monitoring focuses on specific performance requirements they may be included here): _____________________________________________________________________________________ _____________________________________________________________________________ A more detailed Credit Monitoring Plan is: Attached to this Agreement as Exhibit_____ Available upon Request Not required FORM ABCD INITIALS: BUYER_______ / SELLER_______ VERSION: STANDARD_AGREEMENT_FOR_CREDIT_EXCHANGE.DOC PAGE 5 OF 10 6. CONTINGENCIES A. This exchange agreement is contingent on the following: 26 Item# Item Desc Buyer Seller Delivery Objection Resolution Responsible Responsible Deadline Deadline Deadline 1 Site inspection 2 Verification 3 Certification 4 Document A______ 5 Document B______ 6 Financial report Credit purchase 7 deposit etc B. Buyer’s Objections 1. The Buyer may make any reasonable objections to any information, data, or condition arising from the deliverables listed in Paragraph A above by submitting the objections in writing to SELLER no later than the applicable Objection Deadline. Any objections must be accompanied by a copy or documentation of the item(s). If SELLER is responsible for ordering or otherwise arranging for delivery of an item, and if BUYER does not receive that item by the Delivery Deadline, BUYER and SELLER may agree to extend the Objection Deadline and Resolution Deadline or BUYER may terminate this Agreement. If BUYER is responsible for ordering or otherwise arranging for delivery of an item, and fails to do so in a timely manner, BUYER may not use the failure to receive the deliverable as cause to terminate this Agreement.27 28 2. Upon objection, BUYER can request that SELLER cure the objection(s) or BUYER can terminate this Agreement. If no written objection is delivered to SELLER by the Objection Deadline, the contingency shall be deemed removed. C. Resolution.29 If BUYER makes specific objections and requests SELLER to cure, BUYER and SELLER may negotiate resolution. If the objections are not resolved by the Resolution Deadline, this Agreement is terminated. D. Cost of Cures. SELLER agrees to complete or pay for any cures with respect to any objections made by BUYER as a result of the deliverable items, at an aggregate cost not to exceed ______________________. If the cost to cure the objections exceeds this amount, such excess costs may be negotiated and if not agreement is reached, this Agreement shall terminate. E. Refund of Credit Deposit. If this Agreement is terminated pursuant to this section, the Credit Deposit shall be refunded to the BUYER.30 F. Reasonable Access; Damages. SELLER agrees to provide reasonable access to BUYER and any party participating in delivering the contingency items. The party responsible for the contingency item is responsible for and shall pay for any damages which occur to the CREDITS or the credit property as a result of delivering the contingency items. FORM ABCD INITIALS: BUYER_______ / SELLER_______ VERSION: STANDARD_AGREEMENT_FOR_CREDIT_EXCHANGE.DOC PAGE 6 OF 10 7. COMPENSATION The compensation terms are Public and detailed below, or Confidential31 and specified under separate cover. A. Total Compensation $_____________________and/or other ______________________. B. Compensation due at Settlement: $_____________and/or other___________________. C. Compensation Schedule if Total not due at Settlement: Installment #32 For Credit Lot/Serial # Amount Due by D. Credit Exchange Deposit. BUYER will deliver $___________and/or _______________ Credit Deposit in the form of check cash note other dated ______________, to be escrowed with ________________upon mutual acceptance of this Agreement by the BUYER and SELLER. The Credit Deposit will be applied to the Compensation due the SELLER upon Settlement Date. 8. OTHER TERMS A. Expiration of Offer. This offer will expire unless acceptance is delivered in writing to BUYER on or before _________________at __________________am/pm Pacific Time. If not accepted, this offer can be withdrawn at any time before the expiration date. B. Maintenance. SELLER agrees that until SELLER gives possession of the CREDITS to the BUYER, the CREDITS, will be in the same condition as the Date of Acceptance, unless otherwise specified in this Agreement. C. Pre-Settlement Credit Site Inspection. BUYER shall have the right to inspect the credit generation site(s) within 2 days prior to Settlement for the limited purpose of permitting BUYER to determine that the credits are in the same condition as on the Date of Acceptance, reasonable depreciation excepted and that all agreed upon Resolutions have been completed. D. Risk of Credit Diminution and Loss. Prior to Settlement Date, risk of credit diminution or loss (“loss”) caused by virtue of acts of God, war, riot, labor unrest, terrorism, natural disaster, failure of basic infrastructure, or other calamity will be on the SELLER. In the event of loss, BUYER will have the option (to be exercised by written notice to SELLER within # days of receipt of notice of loss) of canceling this Agreement and receiving back the Credit Deposit or settling and receiving assignment of SELLER’s portion of the insurance proceeds, if any, at Settlement Date. If BUYER fails to timely notify SELLER of BUYER’s election, BUYER will be deemed to have elected to settle. E. Agreement Counterparts. This Agreement may be executed in one or more counterparts, each of which is deemed to be an original and all of which will together constitute one and the same instrument. F. Credit Deposit Dispute. RESERVED G. Default. RESERVED H. Disclaimer; Limitation of Liability. RESERVED I-Y RESERVED Z. Definitions RESERVED FORM ABCD INITIALS: BUYER_______ / SELLER_______ VERSION: STANDARD_AGREEMENT_FOR_CREDIT_EXCHANGE.DOC PAGE 7 OF 10 9. SIGNATURES AND ATTACHMENTS This Agreement together with any of the following attachments and any exhibits referred to in this Agreement contains the entire agreement of the parties and supersedes all prior agreements or representations with respect to the Credits which are not expressly set forth herein. This Agreement may be modified or canceled only by a written Amendment signed and dated by both parties. The parties shall not be bound by any terms, conditions, oral statements, warranties, or representations not herein contained. List of Attachments and Exhibits33 • A • B • C • D • E • F • G OFFER BY BUYER: BUYER acknowledges that BUYER has read the entire Exchange Agreement and understands the provisions thereof. BUYER #1 SIGNATURE___________________________________Offer Date___________ BUYER #2 SIGNATURE___________________________________Offer Date___________ BUYER name printed, address, contact information: RESPONSE BY SELLER: SELLER acknowledges that SELLER has read the entire Exchange Agreement and understands the provisions thereof. SELLER (select one) ACCEPTS this Offer and agrees to exchange the credits for the compensation and on the terms and conditions specified in this agreement. COUNTEROFFERS this Offer in whole or in part as described under separate submission or marked revision to this document REJECTS this Offer SELLER #1 SIGNATURE___________________________________Offer Date___________ SELLER #2 SIGNATURE___________________________________Offer Date___________ SELLER name printed, address, contact information: FORM ABCD INITIALS: BUYER_______ / SELLER_______ VERSION: STANDARD_AGREEMENT_FOR_CREDIT_EXCHANGE.DOC PAGE 8 OF 10 ENDNOTES 1 This section addresses DEQ 9-27-07 permit language, 1.g.i(1). 2 This option is provided because in some programs it has come up that some entities cannot conduct certain types of financial transactions, this could allow the same document to be used for those cases. 3 This section addresses DEQ 9-27-07 permit language, 1.g.i(2). It is in the Exchange Agreement; it may not be necessary here. 4 This section addresses DEQ 9-27-07 permit language, 1.g.i(2). It is in the Exchange Agreement; it may not be necessary here. 5 Addresses DEQ permit language section 1.g.i.(4). 6 This table is provided as an example only. It should be adjusted and modified as necessary for the circumstance, based on the preferences of the document signatories and the applicable credit calculation guidance. 7 This allows differentiation/specification between/among different groups of credits of the same type, or different types of credits. 8 This addresses DEQ 9-27-07 permit language, 1.g.i(4), and is intended to be a summary of the methodology utilized to calculate the quantity of credits and specific units of credits generated. Note that specific units generated will be in Section A above. Please consult applicable credit calculation methods and guidance for more information. Note that temporal elements/aspects will be covered as appropriate/required by the applicable guidance. 9 Examples include: temperature; habitat; wetlands; and carbon/GHG. 10 The approved methods have not yet been specified, so this section is necessarily generic. 11 Attaching additional information may be under the discretion of the signatories, or may be required by the Registrar. Please consult applicable guidance. 12 Addresses DEQ 9-27-07 permit language, 1.d .i i. It is in the Exchange Agreement; it may not be necessary here. 13 For temperature credits, consult the TMDL CITATION, and related documents, as well as ____________________. For other types of credits, refer to guidance provided by the cognizant regulatory agency, local/regional government, and/or non-governmental entity. 14 Addresses DEQ 9-27-07 permit language, 1.g.i(3). It is in the Exchange Agreement; it may not be necessary here. 15 Per DEQ permit language, section 1.g.i.(3) : for riparian shade restoration plans, plant selection and planting densities appropriate for site-specific soil conditions must be included; for flow augmentation plans, source and period of augmentation water must be included. 16 If additional information about the environmental benefits of credits beyond the specific credit is desired, it could be placed here. 17 This section addresses DEQ 9-27-07 permit language, 1.e.iii(3). 18 It is assumed a transaction can occur if the credits are not verified. However, it is noted that the presumption and policy preference is that a Registry will not accept credits into its system without their being verified per the Registry’s and/or cognizant regulatory agency protocols. 19 Per the Drafting Group’s decision, the Certification section has been deleted. 20 Placeholder for comment about Registration and possible reference to Document B. 21 Addresses DEQ 9-27-07 permit language, 1.g.i(5). 22 These are examples of items that may be applicable. The list should be modified as necessary to support the transaction. 23 Addresses DEQ 9-27-07 permit language, 1.e.iii(4) and 1.g.1.(6). 24 The Drafting Group discussed whether detail here was appropriate or necessary. It was decided to leave the opportunity to summarize, but allow the signatories to refer to an attached Maintenance Plan, if one is required. There was also a discussion about the difference between maintenance activities and results/performance, and which was more appropriate to focus on. Given the apparent requirement in DEQ permit language for a description of maintenance activities, this section is kept. A general reference FORM ABCD INITIALS: BUYER_______ / SELLER_______ VERSION: STANDARD_AGREEMENT_FOR_CREDIT_EXCHANGE.DOC PAGE 9 OF 10 to performance measures has been added to the next section on monitoring, so as to capture that option and sentiment. 25 Needs to show actions to ensure that the activities generating the credits are functioning as intended per DEQ 9-27-07 permit language, 1.e.iii(5) and 1.g.1.(7). 26 These will be negotiated between the buyer and seller. Examples are provided but should be modified by the signatories as needed and desired. 27 Alternative language has been proposed for a failure to deliver, no decision was made so this notation is provided for consideration by subsequent legal review: Failure by Seller to deliver on any contingency as provided herein, within the timeframe denoted, shall negate this Agreement unless both parties agree in writing to an extension of said deadline(s). Failure by Buyer to deliver on any contingency as provided herein, within the timeframe denoted, may not be used by Buyer as cause to terminate this Agreement. However, Seller may elect whether to terminate this Agreement or provide an extension of deadline. Any extension of deadline granted by Seller shall be provided to Buyer in writing no later than _______days following the expiration of said deadline. 28 Alternative language has been proposed for Buyer’s Approval of Contingencies, no decision was made so this notation is provided for consideration by subsequent legal review: Buyer has the number of days stipulated in Section 6A above to approve any information, data, or condition arising from the deliverables listed in Section 6A. Any objection by Buyer to said deliverables must be accompanied by documentation to support the objection(s) and be submitted to Seller in writing no later than the applicable Objection Deadline, or the contingency shall be deemed removed. 29 An outstanding question remains as to whether this section is necessary or redundant to the purpose of the contingency section. One proposed rewrite is as follows: Seller agrees to complete or pay for any cures, with respect to any objections made by Buyer as a result of the deliverable items, at an aggregate cost not to exceed $_____________. If the cost to cure the objections exceeds this amount, parties may negotiate responsibility for this excess cost or, if unable to come to a resolution, terminate this Agreement. This is similar to the language in 6.D. 30 Sections 6.B – E address DEQ 9-27-07 permit language, 1.g.i(8). 31 It is presumed that for any public entities, this information will be public; however it was noted that private parties may have the option and desire to keep cost/price information confidential. 32 This table is provided as an example of additional detail that might be desired. 33 List as required and/or desired. FORM ABCD INITIALS: BUYER_______ / SELLER_______ VERSION: STANDARD_AGREEMENT_FOR_CREDIT_EXCHANGE.DOC PAGE 10 OF 10 Ecosystem Credit Registry VERIFIER SERVICES AGREEMENT Last updated June 19, 2008. For questions, contact: David Primozich at Primozich@verizon.net. 1. THIS AGREEMENT IS MADE ON __________________________________, by and between ____________________________________________________________ (“CLIENT”) and (“CREDIT VERIFIER”). 2. CONFLICT OF INTEREST FORM The CLIENT and the VERIFIER have completed a Conflict of Interest Form. The Conflict of Interest Form has been submitted to the ____________________1 and is Underway Pending Approved. The CLIENT and the VERIFIER have not completed a Conflict of Interest Form. 3. DESCRIPTION OF SERVICES TO BE PROVIDED BY THE VERIFIER TO THE CLIENT A. Scope of the Verification Process The VERIFIER will audit the physical credits and associated documentation, procedures, processes, and plans submitted by the CLIENT to the VERIFIER for compliance with applicable standards, including as applicable but not limited to: credit generation practices, credit calculation methodologies, credit assurance protocols, maintenance requirements, and monitoring obligations. The attached Scope of Verification Services identifies the specific credits and associated elements that are submitted and required for verification. This Scope of Services also references the applicable guidances, standards, and other requirements applicable to the type(s) of credits being verified as promulgated by entities with registry, regulatory, or other oversight authorities or interest in the subject credits. The attached Scope of Services specifies the format and content of the Verification Report required by the CLIENT to support credit registration and/or credit exchange transaction(s). B. Documentation and Confirmation of Approved Verifier Status The VERIFIER ____________________ hereby validates that they are qualified and have been officially accredited to perform the verification procedures as described by ____________________2 Accreditation number ________. (Refer to attached Verifier Accreditation Agreement for further information) 1 Registry(ies) and/or DEQ 2 Registry(ies), DEQ, and or Verifier Accreditor FORM ABCD VERSION: STANDARD_AGREEMENT_FOR_CREDIT_VERIFICATION_SERVICES.DOC PAGE 1 OF 7 C. Verification Standard The VERIFIER must verify the CLIENT’s credits according to the Verification Protocol developed by the cognizant authority(ies) with oversight jurisdiction over the subject credits , as specified in the Scope of Services. D. Non-disclosure Terms The CLIENT has confidential business information that they would like to protect. This information may be required to complete the verification process, therefore, the VERIFIER will follow the protocol outlined in the Confidential Business Information Guidelines3 in order to ensure CLIENT confidentiality. The CLIENT does not have confidential business information. Therefore the VERIFIER is not obligated to follow the specific confidentiality methods in the Confidential Business Information Guidelines4. E. Performance Schedule If the VERIFIER is provided all required information from the CLIENT, the verification process will occur within days. The following verification processes will occur • Data Interpretation business days • Monitoring business days • Verification Report business days • Additional Monitoring business days Verification Report Submittal business days F. Addressing Non-Conformances, Errors, and Omissions If the VERIFIER identifies non-conformances with applicable credit protocols (including but not limited to credit generation guidance, calculation methodologies, mapping protocols, and related credit attributes, descriptors, or documentation), as may include misstatements, errors or omissions during the audit process, the CLIENT may address these non-conformances and submit the credits to the VERIFIER for re-auditing. If the CLIENT elects to resubmit, additional fees will apply, as detailed in Section , for a complete re-auditing or an updated verification report, as applicable to the type and scope of non-conformances identified. To retain independence, the CLIENT understands the VERIFIER will not be involved in addressing the non-conformances. Under this agreement the CLIENT does/ does not have the option to terminate this agreement and engage the VERIFIER under a separate contract to assist with addressing the non-conformances. If this option is elected, the CLIENT will engage the services of another VERIFIER to re-audit the credits. 3 Currently this document exists in draft form, and will be finalized as a guideline. 4 Currently this document exists in draft form, and will be finalized as a guideline. FORM ABCD VERSION: STANDARD_AGREEMENT_FOR_CREDIT_VERIFICATION_SERVICES.DOC PAGE 2 OF 7 G. Obligations of VERIFIER Representations and Warranties a. VERIFIER’s Representations and Warranties. VERIFIER represents to CLIENT that (1) VERIFIER has the power and authority to enter into and perform this Service Agreement, (2) this Agreement, when executed and delivered shall be a valid and binding obligation of VERIFIER, enforceable in accordance with its terms, (3) the Work under this Agreement will be performed in accordance with the professional standards of skill and care ordinarily exercised by members of that profession under similar conditions and circumstances, (4) VERIFIER shall, at all times during the term of this Agreement be duly licensed to perform the Work, and if there is no licensing requirement for the profession or work, be duly qualified and professionally competent. b. Representations and Warranties cumulative. The representations and warranties set forth in this section are in addition to, and not in lieu of, any other representations and warranties provided. 4. DESCRIPTION OF SERVICES TO BE PROVIDED BY THE CLIENT TO THE VERIFIER A. Site Access According to the Credit Verification Protocol, a minimum of one site visit is required to complete the verification process. Subsequent visits may be necessary depending on the type of credit to be verified and magnitude of the proposed project. Granting access to the site is the sole responsibility of the CLIENT and is required by Oregon State law. Details regarding the date and frequency of site visits are further outlined in the attached Scope of Services. Regarding access to the property(ies) and or facility(ies) generating the credits to be verified the VERIFIER or approved monitor: Has full unlimited access Has limited access as follows:______________________________________________________ Has access by permission and/or owner escort as follows: ________________________________________________ Other:____________________________________________________________________________ B. Documentation and Data Requirements The CLIENT will provide all documents necessary for the verification process, as stipulated in the Scope of Services, to the VERIFIER within days of signing this contract. The VERIFIER will reasonably rely upon the accuracy, timelines, and completeness of the information provided by the CLIENT. All documents will be transferred in the following manner: Hard copies via mail Electronic copies via email, CD, or jump drive Electronic copies posted on a list serve, ftp site, or _______________ FORM ABCD VERSION: STANDARD_AGREEMENT_FOR_CREDIT_VERIFICATION_SERVICES.DOC PAGE 3 OF 7 The CLIENT certifies that all information and data given to the verifier is accurate to the best of the CLIENT’s knowledge. C. Changes to Scope The CLIENT may make or approve changes within the general Scope of Credit Verification Services in this Agreement. If such changes affect the VERIFIER’s cost of or time required for performance of the services, an equitable adjustment will be made through an amendment to this Agreement. D. Obligations of CLIENT Payment a. While interim payments will be made in accordance with “Exhibit A”5, payments are contingent upon delivery of the specified work products completed in accordance with the terms of the Agreement, including the statement of Work in “Exhibit A” 6. b. The VERIFIER shall be responsible for all federal or state taxes applicable to compensation or payments paid to VERIFIER under this Agreement and Scope, unless VERIFIER is subject to backup withholding, CLIENT will not withhold from such compensation or payments any amount(s) to cover the VERIFIER’s federal or state tax obligations. VERIFIER is not eligible for any social security, unemployment insurance or workers’ compensation benefits from compensation or payments paid to VERIFIER under this Agreement and Scope, except as a self employed individual. Timely Review The CLIENT will examine the VERIFIER’s studies, reports, sketches, drawings, specifications, proposals, and other documents; obtain advice of an attorney, insurance counselor, accountant, auditor, bond and financial advisors, and other consultants as the CLIENT deems appropriate; and render in writing decisions required by the CLIENT in a timely manner. Prompt Notice The CLIENT will give prompt written notice to the VERIFIER whenever the CLIENT observes or becomes aware of any development that affects the scope or timing of VERIFIER's Services, or of any defect in the work of VERIFIER. Indemnity a. Claims for Other than Professional Liability. VERIFIER shall defend, save and hold harmless the CLIENT, its elected officials, officers, agents and employees from all claims, suits or actions of whatsoever nature, including intentional acts resulting from or arising out of the activities of VERIFIER or its subcontractors, agents or employees under this agreement. b. Claims for Professional Liability. VERIFIER shall defend, save and hold harmless the CLIENT, its elected officials, officers, agents and employees from all claims, suits or actions arising out of the professional negligent acts, errors or omissions of VERIFIER or its 5 Currently, “Exhibit A” does not exist but would be developed as a supplement to the contract. 6 Currently, “Exhibit A” does not exist but would be developed as a supplement to the contract. FORM ABCD VERSION: STANDARD_AGREEMENT_FOR_CREDIT_VERIFICATION_SERVICES.DOC PAGE 4 OF 7 subcontractors and subcontractors, agents or employees in performance of professional services under this agreement. c. CLIENT’s Actions. This section does not include indemnification by VERIFIER of the CLIENT for the CLIENT's activities, whether related to the contract or otherwise. Insurance Contractor shall provide insurance as indicated on “Exhibit B” 7, attached hereto and by this reference made a part hereof. Records Maintenance; Access VERIFIER shall maintain all fiscal records relating to this Agreement in accordance with generally accepted accounting principles. In addition, VERIFIER shall maintain any other records pertinent to this Agreement in such a manner as to clearly document VERIFIER's performance. VERIFIER acknowledges and agrees that the CLIENT and the federal government and their duly authorized representatives shall have access to such fiscal records and other books, documents, papers, plans and writings of VERIFIER that are pertinent to this Agreement to perform examinations and audits and make excerpts and transcripts. VERIFIER shall retain and keep accessible all such fiscal records, books, documents, papers, plans, and writings for a minimum of six (6) years, or such longer period as may be required by applicable law, following final payment and termination of this Agreement, or until the conclusion of any audit, controversy or litigation arising out of or related to this Agreement, whichever date is later. 5. GENERAL LEGAL PROVISIONS Authorization to Proceed Execution of this Agreement by CLIENT will be authorization for VERIFIER to proceed with the work, unless otherwise provided for in this Agreement. No Third Party Beneficiaries VERIFIER and CLIENT are the only parties to this Agreement and are the only parties entitled to enforce its terms. Nothing in this Agreement gives, is intended to give, or shall be construed to give or provide any benefit or right, whether directly, indirectly or otherwise, to third persons unless such third persons are individually identified by name herein and expressly described as intended beneficiaries of the terms of this Agreement. Ownership of Work Product a. All work product of VERIFIER that results from this Agreement (the “Work Product”) is the exclusive property of CLIENT. VERIFIER forever waives any and all rights relating to the Work Product, including without limitation, any and all rights arising under 17 USC §106A or any other rights of identification of authorship or rights of approval, restriction or limitation on use or subsequent modifications. 7 Currently, “Exhibit B” does not exist but would be developed as a supplement to the contract. FORM ABCD VERSION: STANDARD_AGREEMENT_FOR_CREDIT_VERIFICATION_SERVICES.DOC PAGE 5 OF 7 b. In the event the CLIENT alters the work products in any manner, or uses them for a purpose or project other than that specifically identified and intended by this Agreement without written verification or adaptation by the VERIFIER as appropriate, such alteration or use will be at the CLIENT’s sole risk, and VERIFIER shall be released, indemnified and held harmless by CLIENT, to the extent permitted by applicable Oregon law, including, but not limited to constitutional debt limitation provisions and the Oregon Tort Claims Act. c. The VERIFIER, despite other conditions of this provision, shall have the right to utilize the work product on its brochures or other literature that it may utilize for its sales and, in addition, unless specifically otherwise exempted, the VERIFIER may use standard line drawings, specifications and calculations on other, unrelated projects. Force Majeure Neither CLIENT nor VERIFIER shall be held responsible for delay or default caused by fire, riot, acts of God, or war where such cause was beyond the reasonable control of CLIENT or VERIFIER, respectively. VERIFIER shall, however, make all reasonable efforts to remove or eliminate such a cause of delay or default and shall, upon the cessation of the cause, diligently pursue performance of its obligations under this Agreement. Suspension, Delay, or Interruption of Work CLIENT may suspend, delay, or interrupt the Services of VERIFIER for the convenience of CLIENT. In such event, VERIFIER's contract price and schedule shall be equitably adjusted. Termination This Agreement may be terminated for convenience on 30 days' written notice, or for cause if either party fails substantially to perform through no fault of the other and does not commence correction of such nonperformance within 5 days of written notice and diligently complete the correction thereafter. On termination, VERIFIER will be paid for all authorized services performed up to the termination date plus termination expenses, such as, but not limited to, reassignment of personnel, subcontract termination costs, and related closeout costs. Litigation Assistance The Scope of the Credit Verification Services does not include costs of the VERIFIER for required or requested assistance in support, prepare, document, bring, defend, or assist in litigation undertaken or defended by the CLIENT. All such services required or requested of the VERIFIER by the CLIENT, except for suits or claims between the parties to this Services Agreement, will be reimbursed as mutually agreed. Dispute Resolution In the case of irreconcilable differences between the CLIENT and the VERIFIER, the CLIENT and/or the VERIFIER may submit their documented dispute to the ____________________ 8 8 Registry and/or DEQ Dispute Resolution Committee FORM ABCD VERSION: STANDARD_AGREEMENT_FOR_CREDIT_VERIFICATION_SERVICES.DOC PAGE 6 OF 7 6. SIGNATURES AND ATTACHMENTS This Agreement together with any of the following attachments and any exhibits referred to in this Agreement contains the entire agreement of the parties and supersedes all prior agreements or representations with respect to the Credits which are not expressly set forth herein. This Agreement may be modified or canceled only by a written Amendment signed and dated by both parties. The parties shall not be bound by any terms, conditions, oral statements, warranties, or representations not herein contained. List of Attachments and Exhibits VERIFIER and CLIENT acknowledge that they have read the entire Verification Services Agreement and understand the provisions thereof. _________________________________ date ____/____/___ _________________________________ date ____/____/____ FORM ABCD VERSION: STANDARD_AGREEMENT_FOR_CREDIT_VERIFICATION_SERVICES.DOC PAGE 7 OF 7 Ecosystem Credit Registry Willamette Thermal Load Credit Verification Protocol Draft Version June 24, 2008 Table of Contents Key Terms.......................................................................................................................... 3 Part I: Introduction .......................................................................................................... 4 Overview ........................................................................................................................ 4 Who has to verify? ........................................................................................................ 4 Protocol Questions and Adaptive Management ......................................................... 5 Principles of Verification .............................................Error! Bookmark not defined. Verification Process Overview ..................................................................................... 5 Part II. Definition of accredited verifiers and process for becoming accredited ....... 7 Becoming an Accredited Verifier ................................................................................ 7 Conflict of Interest ........................................................................................................ 7 Part III: Conducting verification .................................................................................... 9 Dispute Resolution ...................................................................................................... 10 Batch Certification .......................................................Error! Bookmark not defined. Part IV: Completing the verification process............................................................... 11 Annex 1. Overview of Verification Process .................................................................. 13 Annex 2. Verification Checklists ................................................................................... 14 Annex 3: Verification Report ......................................................................................... 15 Key Terms Baseline Data against which to measure temperature reductions over time, usually the project conditions in a base year before credit actions began. Conflict of Interest A situation in which, because of other activities or relationships with other persons or organizations, a person or firm is unable or potentially unable to render an impartial verification opinion of a Credit Owner’s estimated credits. Standard Agreement for Credit A report submitted to the Registry by a Registration (“Credit Report”) Credit Owner that provides an estimate of the quantity of credits generated from a project. The estimate is submitted with supporting documentation. Client Either a Credit Owner or a Buyer who participates in the Registry Buyer A likely buyer of credits. Credit Owner An individual or organization proposing a credit project for verification and entry into the registry. Registry The electronic platform used to submit and track information related to estimated credits, verification, and credits available for sale. Verification activities Activities undertaken during third-party verification that include reviewing a Credit Owner’s estimated credits, verifying the accuracy of measurement, and submitting a Verification Report to the Registry. Ecosystem Credit Registry The governing body responsible for credit generation protocols, verification protocols, registration of credits, and other market activities. Part I: Introduction Overview The Thermal Load Credit Verification Protocol1 is meant to provide standardized guidance on the review and assessment of thermal load credit projects (riparian shade, flow augmentation, and treatment wetlands) to meet the objectives of the Willamette Temperature Total Maximum Daily Load. The protocol is designed for those who are doing the verification, but the guidance will also be useful for other market Clients. To become a Registry-approved third-party verifier, an individual2 must successfully complete an application and be approved to become an accredited verifier. Third party verification is defined as an independent expert assessment of the accuracy and conformity of a Credit Owner’s Credit Report with agreed upon criteria. The purpose of verification is to provide confidence to Registry Clients that credits represent a faithful, true, and fair account of thermal load credit benefits- free of material misstatements and conforming with the Registry’s accounting and credit generation standards. To do this, information should be complete (project eligibility, baseline information, proposed actions, credit calculations, and protections of credit quality), consistent (comparable data over time), accurate (findings should be repeatable), and transparent. The protocol is organized into six parts: Part I: Introduction Part II: Definition of accredited verifiers and process for becoming accredited Part III: Conducting verification Part IV: Completing the verification process Part V: Annexes Who benefits from verification? Reporting and verifying thermal load discharges into the Willamette River are the responsibilities of point sources dischargers holding a National Pollutant Discharge Elimination System (NPDES) permit and the Oregon Department of Environmental Quality. Reporting and verifying thermal load credit generating projects used to offset those discharges ultimately remains the responsibility of those same permit holders. This protocol provides a standardized verification process by which the Registry, its accredited verifiers, and Credit Owners assist the permittee in reporting and reviewing water quality credit performance. 1 This protocol is modeled onThe Climate Registry’s draft verification protocol, which in turn is consistent with ISO 14064-3 and forthcoming ISO 14066 standards on greenhouse gas verification 2 Under special circumstances, an organization might become accredited as a verifier subject to review by the Registry The quantity of thermal load credits generated by a given project is calculated using the Registry’s set of Credit Generation Protocols. Verification is required for listing thermal load credits on the Registry, but is not a requirement to produce credits traded outside of the Registry. This protocol provides direction on how a verifier should review and verify a project’s calculations of thermal load credits. All verifiers should be familiar with Credit Generation Protocols. These protocols are available at the Registry’s website: www.willamettepartnership.org. If you have difficulty accessing any of the documents, please call 503-434-8033. Protocol Questions and Adaptive Management The Registry’s credit generation and verification protocols are designed to work together. If there is a conflict between any of the documents, or if you have questions, please contact the Registry at: 503-434-8033. Protocols and the science and information behind them can always be improved. The Registry welcomes feedback and ideas on improving protocols. Comments can be submitted online at: www.willamettepartnership.org. Verification Process Overview Monitoring and reporting on thermal load project/credit performance occurs at least annually and is primarily the responsibility of the Credit Owner. Verification is conducted by individuals who have been accredited by the Registry and occurs on different cycles for different credit types as follows: • Riparian shade: Full verification in years 1, 5, 10, and 203, and streamlined review of annual monitoring reports in other years. • Flow augmentation: Full verification in year 1, and streamlined review of annual monitoring reports following release of water for that year. • Treatment wetlands: Full verification in years 1, 5, 10, and 20, and streamlined review of annual monitoring reports in other years. The goal of verification is to confirm: 1. Credit generation protocols were followed completely and accurately 2. Proposed actions have been completed per the Credit Report 3. Appropriate monitoring and maintenance plans are in place to ensure longevity of credits 4. Verify the quantity of estimated thermal load credits For a credit to be verifiable, the Credit Report must be free of material misstatements. A material misstatement must be declared if the reported credit generation information does not appropriately describe project conditions and differs greatly from the verifier’s 3 These years were chosen to match the permit cycle used for issuing NPDES permits every five years. Full verification in years 5 and 10 are designed to provide potential information to Buyers and to Oregon DEQ for use in drafting future permits. assessment of that same information. To be verifiable, a verifier’s estimates of credit quantity must be within 15% of information proposed by the Credit Owner. The Registry recognizes that there is inherent uncertainty involved in field data collection. The 15% standard is meant to capture differences in reporting uncertainty, stemming from sampling and calculation differences. If the difference in estimates is greater than 15%, the difference is material, and the verifier must use best professional judgement in determining the quantity of credits to verify. Once successful verification is complete, the verifier submits their Verification Report to the Registry, which is attached to the credit records. Part II. Definition of accredited verifiers and process for becoming accredited Becoming an Accredited Verifier Verifiers must be accredited by the Registry before they are eligible to conduct verification activities on behalf of Registry Clients. The Registry will accredit verifiers that are qualified to review one or more types of thermal load credit generation protocols. A verifier is an individual that has demonstrated their ability to assess thermal load credits. They must also demonstrate the means to accept financial liability4 for verification activities undertaken for a Registry Client. This liability will be determined in the Verification Services Agreement signed between the verifier and the Client. The Registry will release a Request for Applications (RFA) annually or as needed to allow interested verifiers to apply for Registry accreditation. Interested verifiers must complete the following steps: 1. Submit an application in response to the Registry’s RFA. 2. Receive notice from the Registry that the application has been approved. 3. Attend a Registry Verification Training Session (held approximately two months following the Registry’s notification of acceptance from its RFA). 4. Keep the Registry informed of any changes affecting the accreditation (e.g. potential conflicts of interest) Accreditations are effective for 5 years from the time they are issued. After the 5 years has expired, verifiers must re-apply for renewal by responding to the RFA in the year their accreditation will expire. Conflict of Interest The independence of verification is important. Verifiers acting on behalf of the Registry must work in a credible, independent, nondiscriminatory, and transparent manner, complying with applicable state and federal law. This includes disclosing any pre- existing relationships between the Credit Owner or Buyer and the verifier. Verifiers must provide a Notice of Verification and Conflict of Interest Form to the Registry at least 10 business days before verification activities can proceed. As an added protection, a verifier can only provide verification services to a Registry Client for a period up to five years. If a verifier violates these conditions, the Registry at its discretion, may disqualify an accredited verifier for a period of up to five years. See the Registry’s Conflict of Interest Code for full detail. The Oregon Department of Environmental Quality5 may send representatives to accompany verifiers in the course of verification activities for primarily for but not limited to information and educational purposes. In the very rare instance when a Credit 4 This is meant to cover standard liability coverage of consultants. This does not imply that verifiers bear additional liability under credit protocols beyond what is in current Federal, Oregon, and local statutes. 5 Other representatives may accompany verifiers at the discretion of the Credit Owner. Owner may request that information resulting from these visits be kept confidential, the state agency and Registry will consider the request to the limited extent authorized by ORS 468.095(2)governing state confidentiality and EPA's Regulations on the Confidentiality of Business Information (see 40 CFR Part 2). Part III: Conducting verification The primary goals of verification are to ensure a Credit Owner’s Credit Report and Monitoring Reports meet the required level of accuracy. This does not include re- collecting data. Verification looks to see that data collection methodologies are consistent with the Credit Generation Protocols, actions are implemented as planned, and all the contracts are in place to ensure protection, maintenance, and monitoring of those credits. The Registry currently recognizes riparian shade, flow augmentation, treatment wetlands, and water reclamation/reuse as credit projects. See Annex 1 for detailed explanation of verification process. All steps must be completed by the verifier to submit their report to the Registry. The schedules below outline the minimum frequency and requirements for verification. A Credit Owner or a contract between Credit Owner and credit purchaser can require more frequent verification or additional steps. To meet the Registry’s conflict of interest policies, one verifier would be able to complete verifications in years 1-5 for shade, flow, and wetlands. Following that verification cycle, a new verifier must be chosen in year 6 for the next cycle. Under normal circumstances, verification activities should occur as follows: Riparian Shade Year Activities 1 Review credit generation information Confirm planting is complete Confirm contracts are in place for protection, maintenance, monitoring 2-4 Streamlined review of annual monitoring reports 5 Visit site to confirm data in annual monitoring reports 6-9 Streamlined review of annual monitoring reports 10 Visit site to confirm data in annual monitoring reports 11-19 Streamlined review of annual monitoring reports 20 Visit site to confirm final performance report and submit credit retirement report to the Registry Flow Augmentation Year Activities 1 Confirm quantity of flow released over contracted time period Confirm protection of that water to contracted point Proceeding Streamlined review of annual monitoring reports every year flow is years augmented Treatment Wetland Year Activities 1 Review credit generation information Confirm design and construction is complete Confirm planting is complete Confirm contracts are in place for protection, maintenance, monitoring 2-4 Review of annual monitoring reports for vegetation and hydrology 5 Visit site to confirm data in annual monitoring reports 6-9 Streamlined review of annual monitoring reports 10 Visit site to confirm data in annual monitoring reports 11-19 Streamlined review of annual monitoring reports 20 Visit site to confirm final performance report and submit credit retirement report to the Registry Credit Owners will have already collected and entered their data into the Registry’s system. Once a verifier has been selected, the verifier will have access to this information to use. Verifiers will also need to enter their reports into the Registry’s system. In reviewing annual Monitoring Reports on years where site visits are not required, verifiers must complete a cursory check of reported information to ensure the Credit Owner has not overlooked an event that significantly impacts the status of their temperature credits. Credit Owners need to report any significant changes that might affect their credits (tree removals, significant natural disturbances, ownership change, etc.) These reports may also contain optional information beyond what is required (e.g. biodiversity benefits, additional protections, etc.). This data is optional and does not require verification. Dispute Resolution There may be instances where a verifier and a Client cannot agree on the findings in a Verification Report. In such instances, both parties can request the Registry Dispute Resolution Committee (composed of PEOPLE) to come to a unanimous, binding decision. Both the verifier and the Client will pay an equal filing fee to submit their case to the committee. As part of every Verification agreement, both the verifier and the Client will need to sign agreeing to this Dispute Resolution Policy. Part IV: Completing the verification process There are a number of core verification activities needed for all credit types. Table 1 contains the verification elements: Table 1: Verification Process Review Credit Owner and project eligibility 1. Can the sponsor demonstrate ownership 2. Review contracts, land ownership, of the proposed credits? easements, etc. 1. Is the project in the Willamette Basin 2. Review site location map and geographic and appropriate? boundaries of the project 3. Confirm project has met the minimum requirements described in the credit generation protocol 1. Does the project provide additional 2. Review proof the project is not fully benefits? funded by public dollars dedicated to restoration 3. Review proof that trees have not been recently cleared, water rights are valid, and wetlands do not currently exist Year 1 activities 1. Verifier validates Credit Report 2. Review supporting documentation submitted to the Registry (Verifier must (current conditions data, sampling discuss with the Credit Owner how the points, data inputs into credit generation baseline was selected and measured, calculations, model outputs, contracts, how sampling points were selected, and etc.) the methods used to estimate credits) 3. Confirm completion of appropriate implementation steps (planning docs, invoices, photos, etc.) 4. Conduct site visit 5. Revise credit estimates as necessary based on verifier feedback Year 2-4 1. Verifier reviews annual monitoring 2. Review supporting documentation (data reports in the Registry sheets, model outputs, contracts, etc.) 3. Conduct site visit if needed Once these core verification activities are completed, the verifier can complete a Verification Report that contains a summary which will be available to the public, an opinion on the credit estimates, and a log of activities and findings. This report needs to be submitted to the Registry’s system. Annual reports will need sign-off from verifiers for projects to remain in the Registry. The Registry will consider the Verification Report and before certifying credits and accepting the project into the Registry. Table 2 describes the certification process. Table 2: Certification Process Task Date Completed Project Credit Report is complete and submitted to Registry Credit Report is verified (Verification Report are submitted to the Registry) Annual reports are submitted and verified Verified credits are certified by the Registry and made available for sale Annex 1. Overview of Verification Process 1. Credit Owner and/or Buyer selects Verifier: Clients contact one or more of Registry-accredited verifiers to discuss verification activities. Clients select a verifier and begin to negotiate agreement terms. 2. Verifier and Client finalize Agreement and send Notice to Registry: When the verifier and Client finalize a Verification Agreement, they must submit a Verification Notice to the Registry. The Notice must be submitted 10 business days prior to beginning verification activities, and must include a Conflict of Interest Form from the verifier to establish the likelihood of a conflict of interest between the parties is low. 3. Verifier conducts verification activities: Verifier follows the guidance in the verification protocol to evaluate Credit Owner’s Credit Report. 4. Verifier prepares Verification Report for Client: Verifier prepares a detailed summary of the verification activities for the Client. This includes a draft opinion for Client’s review. 5. Verifier and Client discuss Verification Report: Verifier meets with Client to discuss Verification Report. 6. Verifier submits final Verification Report to the Registry: Once authorized by a Client, a Verifier completes the Verification Report Form on the Registry. 7. Registry completes reporting process: Registry reviews the Verification Report and evaluates Credit Owner’s Credit Report. Once accepted into the Registry, the credit will be available for sale and a project summary available to the public. *Steps 2-7 are completed for years 2-4 of a Verification Cycle as well. Annex 2. Verification Notice and Conflict of Interest Form Ecosystem Credit Registry VERIFICATION NOTICE & CONFLICT OF INTEREST FORM Last updated June 19, 2008. For questions, contact: David Primozich at Primozich@verizon.net. Date: Credit Owner Name: Company/Agency: Title: Telephone: Email: Mailing address: Seller account number: Verifier Name: Company/Agency: Title: Telephone: Email: Mailing address: Verifier accreditation number: Valid until: The parties listed above have entered into a verification services agreement to verify the following credits at these sites:__________________________________ Serial # Quantity Type Service area 1 2 To the best of my knowledge, I (printed name) attest that the information provided in support of this conflict of interest form is true and complete and that I have complied with the Registry’s current Conflict of Interest Code. _______________ _______________ Date Verifier signature Based on the information provided in the following pages, we believe our risk of Conflict of Interest for verification of the following site(s) is: High Medium Low For Registry purposes only: Date received: Date application found to be complete: Annex 3: Verification Report Ecosystem Credit Registry VERIFICATION REPORT Last updated June 19, 2008. For questions, contact: David Primozich at Primozich@verizon.net. Verification Opinion Name of Verifier_____________________ This is to verify that CREDIT OWNER has been reviewed for the DATE reporting year, and has been verified according to the Ecosystem Credit Registry’s Temperature Credit Verification Protocol against the standards set forth in the Registry’s Credit Generation Protocol. Verification Opinion: Serial # Credit Credits Credits Type Vesting Service Report verified unable Date area Quantity without to verify qualification 1 2 3 Base Year: Attestation: _______________ __________________ Verifier Date Authorization: I CREDIT OWNER NAME authorize the above named verifier to submit an electronic version of this Verification Report to the Ecosystem Credit Registry. __________________ ___________________ Credit Owner Date Verification Log Preparing for Verification Date Achieved Bid on a verification agreement * Negotiate agreement with Client * Submit Notice and Conflict of Interest Form to Registry Conduct kick-off meeting with Client * Plan verification activities * Determining Eligability Task Completed Project completed a pre-screening * Project is in the Willamette Basin Project meets minimum requirements Initiated in year 2006 or later Project is an eligable type Project conforms with applicable laws Project is additional Disclosure of public matching funds Determining Credit Quantity Task Completed Description of baseline conditions Description of activity and dates completed Sampling methodology Credit calculation methodology Determining Adequate Maintenance Task Completed Contracts in place to protect activities for required times and geographies Monitoring plans in place Contracts in place for maintenance for required times and geographies Completing Verification Task Completed Prepare detailed Verification Report for Client * Conduct meeting with Client to discuss report * Submit Report to the Registry Submit Report to Client for their records *Optional fields Ecosystem Credit Registry VERIFIER ACCREDITATION AGREEMENT Last updated June 19, 2008. For questions, contact: David Primozich at Primozich@verizon.net. This documents that the verifier has met minimum requirements, as promulgated by the Ecosystem Credit Registry (Registry), for relevant professional experience: a. The verifier has completed the Registry sponsored verification training workshop, Verifier Accreditation Program, and is approved to verify credit types: Riparian Shade Flow augmentation Wetlands discharge/restoration Floodplain/hyporheic restoration Wastewater reclamation/ b. The verifier’s contracts with participants for verification services will include or reference the Verification Protocol approved by the Registry c. The verifier has the ability to monitor the proposed project to ensure compliance with the Verification Protocol set by the Registry d. The verifier has in place a standardized quality assurance/ quality control (QA/QC) plan that is consistent with the guidance/requirements for such plans issued by the Registry e. The verifier has completed an education sufficient to acquire the knowledge and skills as described in International Standards1. f. The verifier has adequate technical, professional work experience to meet the requirements described in the Verifier Protocol. By accepting this accreditation, I, agree to verify credits at a minimum to the Registry’s Verification and Credit Generation Protocols determined by the Registry on . The regulatory agency and the Registry bestow this Verifier Accreditation upon ________________ to verify ecosystem service credits in the State of Oregon. This Verifier Accreditation Agreement is valid for a period of three years and thus expires on ___/___/___. 1 ISO 2002. First edition 2002-10-01. International Standard 19011. Guidelines for quality and or environmental management systems auditing. Reference Number ISO 19011:2002(E). SIGNATURES This Agreement together with any of the following attachments and any exhibits referred to in this Agreement contains the entire accreditation of the verifier. This Agreement may be modified or canceled only by a written Amendment signed and dated by both the verifier and Registry. The parties shall not be bound by any terms, conditions, oral statements, warranties, or representations not herein contained. VERIFIER REGISTRY Name _____________________ ________________________ Company/Agency _____________________ Address _____________________ ________________________ _____________________ ________________________ Phone Number _____________________ ________________________ Verifier Number _____________________ Verifier Signature ____________________ ___/___/___ Accreditor Signature ___________________ ___/___/___ Ecosystem Credit Registry Conflict of Interest Code Draft Version June 24, 2008 Overview This document describes the conflict of interest code for the Ecosystem Credit Registry (Registry), with particular focus on conflicts between Registry clients and verifiers. After becoming an accredited verifier and as an agreement is reached between a verifier and client, the verifier must submit a Conflict of Interest Form with a Notice of Verification Services to the Registry. The purpose of this form is to protect the integrity of the verification process and the quality of a Credit Owner’s offsets by identifying and avoiding situations in which a verifier may be viewed as having an impaired ability to objectively review a potential participant’s estimated offsets, usually from a pre-existing business or personal relationship. If there is low risk of a conflict of interest, the verifier can initiate verification activities. If the risk of conflict of interest is substantial, a verifier can either abandon the proposed agreement or work with the Registry to identify measures to alleviate conflict of interest risk areas, or appeal the decision. The Registry will periodically audit Conflict of Interest Forms. An approved verifier may perform Registry-related verification services for a client for up to five consecutive reporting years. A complete conflict of interest form is needed the first year of an agreement. In years 2-5, the verifier does not need to submit forms unless changes occur in organization, staffing, business practices or relationship with the client from previous years. Policy Complex relationships may exist between a verifier and a client. Thus it may be difficult to make an obvious judgment regarding potential conflict of interest. For the Registry, a conflict of interest is a situation in which a verifier has competing professional and/or personal interests that could impede their ability to objectively review and evaluate a Credit Owner’s estimated offsets. A conflict of interest could also involve a situation where the appearance of impropriety could undermine confidence in the verifier’s ability to assess the estimated offsets. The Registry will use objective criteria and professional judgment to formulate conflict of interest opinions and will work with all interested parties to resolve problem areas. If the Registry determines a conflict might exist, it will request the verifier demonstrate how it can be avoided, eliminated, or otherwise mitigated. As necessary, the Registry may request additional information to assist in making this determination. Factors for evaluating potential conflict of interest include the nature of past and present relationships, prior and existing service commitments, magnitude of financial relationships, and the sensitivity of proposed work. Cause for automatic determination of conflict of interest • A verification body and client share any management • Preparation of a Credit Owner’s Credit Report. A verifier is prohibited from consulting on or preparing any part of a Credit Owner’s Credit Report, regardless of the point in time that that may have occurred. The verifier must declare all of its previous, existing, and planned involvement with a Credit Owner’s credit monitoring, accounting, and reporting activities. • A financial stake in credits being sold from the project. A verifier is prohibited from having any financial stake in the quantity of credits sold from a project. A verifier is also prohibited from providing verification services to any client who provided more than 3% of the verifier’s annual revenue in any year over the prior 3 years. • Duration of verification relationship. Verifiers can only provide services to a client for five consecutive reporting years. After this cycle, the client must contract with a different verifier. The original verifier cannot provide services to that client for a three year off-cycle period. Potentially conflicting services The following list of services may cause a conflict of interest. The list is not exhaustive, nor do these services automatically constitute a conflict of interest. • Designing or developing credit information systems • Developing credit calculation methodologies • Designing projects to explicitly create credit • Brokering, advising, or assisting in any way in ecosystem markets • Preparing or producing credit-related manuals for the participant • Legal and expert services unrelated to Registry verification Appeal process If a verifier receives a notice of conflict of interest from the Registry, it can mitigate its conflict or appeal the notice. A mitigation plan must be submitted to the Registry for review and at minimum include: Demonstration that any conflicted individuals have been removed or insulated from the project; Explanation of any changes to organizational structure or verification team; Other circumstances that specifically address conflicts. A verifier can also appeal a notice of conflict of interest to the Registry Dispute Resolution Committee. The committee is made up of PEOPLE. All information will be kept confidential. It will determine a final answer by majority vote and their decision will be binding. Rescission of Accreditation If the verifier is found to have intentionally violated the conflict of interest code, the Registry reserves the right to rescind a verifier’s accreditation for any appropriate period of time. Ecosystem Credit Registry VERIFICATION NOTICE & CONFLICT OF INTEREST FORM Last updated June 19, 2008. For questions, contact: David Primozich at Primozich@verizon.net. Date: Credit Owner Name: Company/Agency: Title: Telephone: Email: Mailing address: Seller account number: Verifier Name: Company/Agency: Title: Telephone: Email: Mailing address: Verifier accreditation number: Valid until: The parties listed above have entered into a verification services agreement to verify the following credits at these sites:__________________________________ Serial # Quantity Type Service area 1 2 To the best of my knowledge, I (printed name) attest that the information provided in support of this conflict of interest form is true and complete and that I have complied with the Registry’s current Conflict of Interest Code. _______________ _______________ Date Verifier signature Based on the information provided in the following pages, we believe our risk of Conflict of Interest for verification of the following site(s) is: High Medium Low For Registry purposes only: Date received: Date application found to be complete: Ecosystem Credit Registry Confidential Business Information Guideline Draft Version June 24, 2008 Overview In the course of a participant providing information to the Ecosystem Credit Registry (Registry) or in verification of projects, there may be information that needs to be kept confidential. An essential goal of the Registry is to promote transparency, but the Registry also respects the need for privacy. This guideline documents which information might be considered confidential and the process for marking it as confidential. The guidance draws heavily from EPA's Regulations on the Confidentiality of Business Information (see 40 CFR Part 2). Automatically confidential information Each Credit Owner must submit contact information to the Registry as part of a request to verify credits. Much of that contact information (e.g. phone, email, etc…) will be kept confidential by the Registry. The Credit Owner’s organizational and lead contact identity is not automatically kept confidential. Any information submitted in a conflict of interest form between a verifier and a Credit Owner is automatically kept confidential. All other information must be claimed confidential. Policy for claiming confidential information Restrictions on public disclosure are acceptable only where compelling reasons to protect confidential business information are provided and where these reasons clearly outweigh the public interest. These reasons must be submitted as a claim of confidentiality. 1. Asserting a Claim Information claimed as confidential must be clearly marked by boxing, circling or underlining in all submitted forms and reports. All pages containing such information should also be marked "CONFIDENTIAL." Care should be taken to ensure that these markings do not obscure the submission's text. 2. Sanitized Copy Two versions must be filed of any hard copy documents submitted to the Registry containing information claimed as confidential. One copy should be complete, with the information being claimed as confidential marked in the manner described above. The other copy should have all of the information claimed as confidential excised. This version will be placed in the Registry’s Public Files. See 43 Federal Register, page 1113, titled, "X. Confidentiality Claims," March 16, 1978 for EPA views. 3. Substantiating claims of Confidentiality Detailed written responses to the following questions must be provided to substantiate your confidentiality claim(s). Your responses should be as specific as possible, with examples as appropriate, and should provide substantiation arguments for all types of information (e.g., landowner contact information, sales, prices, etc…) you claim as confidential. The Registry must receive a response to these questions within twenty (20) business days of your receipt of this mailing. Substantiation questions: 1. Is your company asserting this confidential business information (CBI) claim on its own behalf? If the answer is no, please provide company name, address and telephone number of entity asserting claim. 2. For what period do you assert your claim(s) of confidentiality? If the claim is to extend until a certain event or point in time, please indicate that event or time period. Explain why such information should remain confidential until such point. 3. Has the information that you are claiming as confidential been disclosed to any other governmental agency, or to this Registry at any other time? Identify the Agency to which the information was disclosed and provide the date and circumstances of the same. Was the disclosure accompanied by a claim of confidentiality? If yes, attach a copy of said document reflecting the confidentiality agreement. 4. Briefly describe any physical or procedural restrictions within your company relating to the use and storage of the information you are claiming CBI. 5. If anyone outside your company has access to any of the information claimed CBI, are they restricted by confidentiality agreement(s). If so, explain the content of the agreement(s). 6. Does the information claimed as confidential appear or is it referred to in any of the following: a. Advertising or promotional material; b. Professional or trade publications; or c. Any other media or publications available to the public or to your competitors. If you answered yes to any of the above, indicate where the information appears, include copies, and explain why it should nonetheless be treated as confidential. 7. Has another organization or court made any confidentiality determination regarding information associated with this claim? If so, provide copies of such determinations. 8. Describe the substantial harmful effects that would result if the CBI information is made available to the public? In your answer, explain the causal relationship between disclosure and any resulting substantial harmful effects. Consider in your answer such constraints as privacy, capital and marketing cost, specialized technical expertise, or unusual circumstances. Address each piece of information claimed CBI separately. Supporting Documents for Section 7 – Transaction (Task 5) Current Research on the Willamette Basin Project/Activity Focus Project Partners/Participants/Funding Relevancy to Project Primary Person in Charge hi/med/lo comments information sources Federal Species Protection Oregon chub recovery plan ODOT, USFS, ODFW, OSU, USACE, ODPR, med Anne Badgley? USFWS The recovery plan is designed to bring OR chub off of the ES list with http://ecos.fws.gov/docs/recovery_plan USFWS the intention of managing existing sites, eliminating non-native s/1998/980903b.pdf competitors, reintroduction, and public education and outreach. In the WRB they have worked on: Gray Creek Drainage (William L. Finley National Wildlife Refuge), South/Dunlin/Wood Duck Pond area of Ankeny National Wildlife Refuge) and preliminary discussions have been initiated with private landowners in the N. Santiam River drainage to protect OR chub habitat in Gray Slough. Total estimated cost: $1,732,000 Draft bull trout recovery plan med The recovery plan has the same objectives as above. There is strong http://www.fws.gov/pacific/bulltrout/colk data behind the study (10 yrs monitoring data). They plan to la/recovery/chapters/Chapter_2/C2_Str implement: watershed assessments, monitor sediment, modify ategy_for_Recovery.pdf roads/trails, agricultural monitoring, water quality regulations - encourage rapid implementation of the TMDL, Klamath Bull Trout Working Group developed a water quality monitoring plan to improve stream flow, eliminate barriers, increase fish passage, restore riparian areas, dam operation, and control of non-native fish. Pg. 51-56 (Implementation Schedule Chapter (http://www.fws.gov/pacific/bulltrout/colkla/recovery/chapters/Chapter_ 7/C7_Implementation_Schedule.pdf)) has more specific restoration actions with responsible parties, but no geographical link. Willamette-Lower Columbia Salmon ESA Executive Committee, NMFS, and ODFW hi Recovery plan: (1) inventorying all ongoing state, tribal, local, and Patty Dornbusch - NMFS, ODFW, NOAA & ESA http://www.nwr.noaa.gov/Salmon- Recovery Process Federal conservation plans and planning efforts, as well as all existing Recovery-Planning/Recovery- Habitat Conservation Plans and 4(d) rule components in each Domains/Willamette-Lower- planning area; (2) evaluating these existing conservation plans and Columbia/upload/W-LC-Strategy.pdf ---- efforts to assess how well they address identified factors for decline http://www.nwfsc.noaa.gov/trt/overview. and limiting factors, and the extent to which they collectively achieve cfm#recgoals the identified recovery goals; (3) identifying and evaluating any additional or alternative measures necessary for achieving the identified recovery goals; (4) prioritizing the required recovery measures and identifying the entity or entities responsible for implementing them; and (5) estimating the costs and time needed to carry out the identified recovery measures. Defenders of Wildlife Ecosystem Searching for opps to leverage ESA Species Banks, ? Sara Vickerman, Defenders of Wildlife Marketplace etc. (need to check with Sara on whether this is moving forward) Federal Columbia River Power System USACE, BPA, BIA, BLM, BOR, EPA, USFWS, hi Federal Columbia River Power Systems & Biological Opinion & RPAs USFS Basin wide Salmon Strategy State Species Protection ODFW Native Fish Conservation Policy ODFW med Holly Michaels (?) Main goals of protecting ecological communities, conserving genetic http://www.dfw.state.or.us/ODFWhtml/I resources, taking advantage of productive capacity of natural habitats, nfoCntrFish/NFCP_091203.pdf ---- and planning responsible hatcheries ODFW Wildlife Diversity Plan and ODFW med Holly Michaels GIS map information: Program http://nrimp.dfw.state.or.us/nrimp/defau lt.aspx?pn=data resources --- inventory of state and federal fish and wildlife plans and programs: http://www.nwcouncil.org/fw/subbasinpl anning/willamette/plan/App%20L_State %20Fed%20Inv.pdf Current Research on the Willamette Basin Project/Activity Focus Project Partners/Participants/Funding Relevancy to Project Primary Person in Charge hi/med/lo comments information sources ODFW Subbasin-specific Salmon and NW Power Planning Council hi ODFW Most of the data they used to create their plan is based on the NW map info: Steelhead Production Plans Research Consortium (Hulse and Gregory Data U of O/OSU). http://www.nwcouncil.org/fw/subbasinpl Recommended conservation themes: deal with the dams—change anning/willamette/plan/App%20R_PCA- flow regimes and establish fish passage, fix culverts and diversions to CROA%20maps.pdf ---- general plan: allow fish passage, focus on valley and foothills wildlife, restore http://www.nwcouncil.org/fw/subbasinpl lowland riparian areas, restore low-cost, high-return areas of the anning/willamette/plan/ Willamette River floodplain, let the river cool itself by seeping through streamside gravels, alcoves, and islands, ensure that all priority themes above are taken up and supported in an organized way at the local level. ODFW Subbasin-specific Fish ODFW med ODFW Management Plans ODFW Fisheries Management ODFW med ODFW Evaluation Plans ODFW Hatchery and Genetic 6 HGMPs: Clackamas River Winter Steelhead med ODFW Management Plans Program, McKenzie River Spring Chinook, North and South Santiam River Spring Chinook program, North and South Santiam River Summer Steelhead program, Willamette Basin Rainbow Trout program, Fish Passage local, state, and federal agencies coordinated by hi ODFW ODFW ODFW Willamette Mitigation Program hi ODFW Corps of Engineers Willamette Basin hi USACE Reservoir Project Management Water Quality NPDES program industries with large pollutant loads, toxic discharge, hi NPDES large domestic waste treatment facilities Stormwater Management Keizer, Turner, Springfield, Coburg, Corvallis, med NPDES - CWA Philomath, and Adair Village communities Combined Sewer Overflow correction Portland and Corvallis med DEQ Total Maximum Daily Loads Tualatin Subbasin hi DEQ Agricultural Water Quality Management med DEQ - ODA - Mike Powers (?) They have several different plans they have developed based on http://oregon.gov/ODA/NRD/docs/pdf/pl Plans location. The major objectives for the plan are: education, resource ans/wlmtmid_04_pln.pdf management, funding, and evaluation. The prevention and control measures are temperature and bacteria. Historical Channel Maps OSU, EPA, PNW, ERC hi Stan Gregory Temperature Data being collected in OSU hi Stan Gregory - Stan to prepare river 2006 temperature maps? Temperature Data collected in 2005 OSU, CSTNS, ODEQ, NSF? hi Stan Gregory - Stan to prepare river temperature maps? Portland Harbor Superfund Clean Up lo DEQ - EPA Floodplain Restoration Priorities EPA Star hi Stan Gregory and David Hulse, University of Oregon Quantify temperature reduction through NSF hi Steven Lancaster and Roy Haggardy, http://www.deq.state.or.us/WQ/wqtradi hyporheic zone University of Oregon ng/docs/hyporheicreport.pdf Using Market Forces to Implement EPA hi Dan Vizzini and Jim Middaugh, City of Sustainable Stormwater Management Portland Interagency Flow Management Work USACE hi USACE and TNC Group (Sustainable Rivers) ACWA Review of NPDES Users ACWA hi Stuart Rounds, USGS Current Research on the Willamette Basin Project/Activity Focus Project Partners/Participants/Funding Relevancy to Project Primary Person in Charge hi/med/lo comments information sources State and Federal Refuge Complex/Greenway Tualatin River and the Wapato Refuges Green Island Restoration/Refuge Studies USFWS, MRT med Joe Moll, MRT & Jim Hout USFWS Riparian Vegetation Cover OSU hi Stan Gregory Wood Abundance OSU hi Stan Gregory State Wildlife Management Areas med USACE Willamette Greenway Willamette Greenway Advisory Committee hi Oregon Parks and Recreation Dept. Multi-Purpose Programs Affecting System Northwest Forest Plan/Aquatic Forest Service hi subscription needed: Conservation Strategy http://www.blackwell- synergy.com/doi/abs/10.1111/j.1523- 1739.2006.00380.x?cookieSet=1&jour nalCode=cbi --- final EIS: http://www.reo.gov/library/acs/final- seis/1final_eis.pdf Oregon Forest Practices Act Department of Forestry hi Farm Bill landowner incentives programs NRCS med NRCS the 2002 act authorizes $50 million for the Klamath Basin in Oregon http://www.biodiversitypartners.org/ince and California. ntives/programfed.shtml Oregon Plan for Salmon and Watersheds- hi WRI WRI Oregon Watershed Enhancement OWEB - and watershed councils/SWCD's med/hi WC, SWCD or other grant lead Board's Grant Program Shovel-ready "Industrial Lands" - OECDD/DSL hi Lynn Beaton/DSL; Gabrielle___/OECDD Wetland Mitigation Demand River Channel Data and Restoration OSU, STAR hi Stan Gregory FEMA Floodplains OSU, EPA, PNW, ERC hi Stan Gregory Flood History Maps OSU, EPA, PNW, ERC hi Stan Gregory Willamette Flow Management Project TNC Willamette Basin Collaborative Modeling IWR Appropriation Matt Rea, Corps of Engineers Ecosystem Economics Model for NWPCC Grant Dan Heagerty, DEA Willamette Basin Restoration and Conservation Willamette Marketplace Collaborative NFWF Grant David Primozich, Willamette Partnership Stakeholder Involvement Willamette River Basin Planning Atlas EPA et al hi Stan Gregory and David Hulse, University (Alternative Futures Study) of Oregon Local Conservation Efforts Local Governments hi Watershed Councils and Soil and Water ORS med SWCDs Conservation Districts Other on-going efforts Governor's Willamette Initiative Need to find out who is in charge and what they are doing now Governor's staff Watershed Councils OWEB - Need to identify projects or activities that are relevant Council Coordinators Institutional Modeling of Willamette Basin PSU hi Stephan Brown, PSU Ecosystem Marketplace Contribution to Market Appraisal Task 1 hi Bobby Cochran, CWS Willamette Basin Land Cover and Steve Palasky Economic Use (almost done?) University of Minnesota hi Clackamas River Floodplain Restoration med/hi John_____/PGE PGE WATER QUALITY TRADING PERMIT LANGUAGE FINAL DRAFT (9-27-07) 1. Water Quality Credit Trading in the Willamette Basin a. Authorization of Thermal Load Credit Trading The permittee is authorized to utilize water quality credit trading to assist in compliance with thermal load permit requirements as follows: i. The permittee’s credit trading activities may not cause a net increase of thermal load or impair instream beneficial uses. In addition, the credit trading activities must be designed to reduce or offset thermal loads, improve instream temperatures, and/or improve or restore conditions for salmonids in the Willamette Basin (see condition 1.f below). ii. The permittee must develop and implement a credit trading program that meets the requirements in conditions 1.c to 1.h below. b. Authorization of Additional Parameters The permittee may request authorization from the Department to utilize water quality credit trading for parameters other than thermal load. This request must be consistent with the requirements in conditions 1.c to 1.e, 1.g, and 1.h below. c. Public Review and Department Approval of Permittee’s Credit Trading Program i. The permittee must submit its proposal for a credit trading program to the Department for review and approval. ii. The Department will provide an opportunity for a 30-day public review and comment period on the proposed credit trading program prior to approving or denying the proposal. iii. The permittee must submit any program amendment that changes the scope or direction of the program to the Department for public review and Department approval as described in (ii) above. Department approval and public review is not required for individual trading agreements provided the agreements are consistent with the overall scope of the credit trading program. d. Credit Trading Program Components At a minimum, the permittee’s program proposal must: i. Describe the planned credit trading activities, including the quantity of credits to be generated by these activities, methodology utilized to calculate the quantity of credits, and specific units of credits generated. ii. Target areas that are in need of improvement. The permittee should focus on areas that have greater potential for overall ecological benefit. iii. Include interim goals by which the success of the program will be measured. For example, tree planting goals for each year. These goals are not subject to enforcement action by the Department. e. General Provisions for Credit Trading i. Obtaining credits. (1) The permittee may obtain credits through contractual trading agreements with land or water conservation organizations, government agencies, private parties, or marketplace exchanges, or through activities performed by the permittee itself. (2) Trading agreements must be developed according to condition 1.g below and made available to the Department within 30 days of request. ii. Selling credits. The permittee may sell credits to a third party if the credits are not needed to comply with waste discharge limitations in Schedule A. iii. Validity of credits. Credits are valid if the following requirements are met: (1) Credits must be generated from activities that are not already required by statute or rule. (2) Credits must be generated prior to or during the period they are applied to the permittee’s waste discharge limitations in Schedule A except as provided in condition 1.f.iv below. (3) Assurances exist to ensure that credits are generated and will be maintained. (4) Maintenance plans are developed for the life of the credits. (5) Monitoring plans are developed and implemented for the activities generating credits to ensure that these activities are functioning as intended. (6) See condition 1.f below for additional requirements for thermal load credits. iv. Use of credit. The permittee may use credits to comply with its waste discharge limitations in Schedule A for as long as the pollution control, best management practice, or other environmental improvement project is functioning as expected. f. Provisions for Generating Thermal Load Credits i. Thermal load credits may be generated from the following activities including but not limited to: (1) Riparian area shading (2) Receiving stream flow augmentation (3) Recycling of wastewater effluent through reuse (4) Application of cooling technology (5) Other activities related to improving or restoring instream temperatures or conditions for salmonids (e.g., fish habitat improvements, floodplain restoration, wetland restoration). ii. Credits must be from activities implemented after the September 26, 2006, adoption date of the Willamette TMDL. iii. Credits for reducing thermal load must be generated in the area of the Willamette Basin upstream of the “Point of Maximum Impact” defined in the Willamette Basin Temperature TMDL (September 2006). iv. Credits for reducing thermal load with riparian shading via tree planting may be generated at the time trees are planted and may be used for a maximum of 20 years provided a long-term maintenance plan exists and is implemented. g. Trading Agreements i. The permittee must ensure that trading agreements are written agreements that are signed and dated by authorized representatives of the buyer and seller. At a minimum the agreements must include the following: (1) Name of party(s) involved with the generation and use of credits and their responsibilities (e.g., seller, buyer). (2) Location map of the project area used to generate the water quality credits. (3) Description of activities that will generate the credits. For riparian shade restoration plans, plant selection and planting densities appropriate for site-specific soil conditions must be included. For flow augmentation plans, source and period of augmentation water must be included. (4) Quantity of credits to be generated including a summary of the methodology utilized to calculate the quantity of credits and specific units of credits generated (e.g., the Shad-a- lator model developed by DEQ was used to calculate credits from shade restoration activities). (5) Long-term financial plan for implementation and maintenance of credits. (6) Maintenance plan that includes a schedule and specific activities for the life of the credit. (7) Monitoring plan to ensure that the activities generating the credits are functioning as intended. (8) Consequences for failure to fulfill negotiated terms. ii. A breach of a trading agreement by either party is not a violation of this permit. If the credits expected from the breached agreement are necessary to maintain compliance with its waste discharge limitation in Schedule A, the permittee must update and submit its credit trading program to the Department within 60 days of the breach. The permittee must explain in its updated credit trading program how it will compensate for the loss of credits. h. Annual Credit Trading Program Report i. The permittee must submit to the Department by [insert month, day] an annual report summarizing the results of its credit trading activities for the previous calendar year. At a minimum, the report must include: ii. Summary descriptions of trades, including whether credits were: (1) Generated by activities conducted by the permittee or purchased by the permittee; and (2) How the credits were used (e.g., applied towards compliance with waste discharge limitations, sold to another permittee). iii. A progress update relative to the interim goals defined for the trading program.
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