The Clean Water/Carbon Connection

Can the CWSRF Represent a Financial Nexus of Climate Change and Water?

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By Michael Curley

In the words of a man who farms 13,000-plus acres and has 12,000 certified tons of carbon credits, “selfless do-gooding is not a motivating factor for most farmers.” Amen.

Farms and farmers have a vitally important role to play in protecting the environment. They are a major factor in the water pollution game. And they could be a major factor in the climate change game, too.

Forty-eight years ago when Congress first passed the Clean Water Act, urban sewage was the main cause of water pollution. $250 billion later, we have largely won that battle. Now the No. 1 and No. 2 sources of water pollution are agricultural runoff and stormwater. Where does climate change come into this picture?

Animals and plants. The cover crops that farmers plant suck nitrogen out of the atmosphere. So do the planting of trees and shrubs along the banks of waterways abutting farms. Farm animals too are a major source of greenhouse gases. They emit carbon both as a gas and in manure. These two issues can be dealt with, but it is expensive to do so. A machine called an “anaerobic digester” is used to take the carbon out of animal manure. Anaerobic bacteria in the digester break down the manure chemically and capture the carbon-rich methane in it. Now, asking a busy farmer to follow his cows around to collect their manure isn’t going to work, but structures called Concentrated Animal Feeding Operations (CAFOs) do. These structures are just what their name says. They are giant structures where farm animals are fed. And where they eat, there is an abundance of manure. Anaerobic digesters can be installed right there in the CAFOs. Manure from the floor can be put directly into the digesters right there on the spot.

CAFOs and anaerobic digesters are smart business for farmers. The manure that is collected can be used on the farm as fertilizer. This saves the farmer the cost of buying fertilizer. And it saves the soil and the environment from the burden of dealing with fertilizers made of synthetic chemicals. The farmer can also sell the manure as fertilizer to other farms. So, to offset the large expense of building CAFOs and installing anaerobic digesters, they can actually make or save farmers some money.

In addition, the farmer might not have to spend a lot of cash on either the CAFO or the digester. It might be possible to borrow the money. The Clean Water State Revolving Fund (CWSRF) program has a unique and quirky provision that might facilitate the financing of CAFOs and digesters.

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The CWSRF was enacted in 1987 as part of the war on urban sewage. Since that time, it has provided more than $140 billion of loans to more than 40,000 projects. Some 96 percent of these funds have been loaned for urban sewage projects for local government agencies called Publicly-Owned Treatment Works (POTWs). These facilities are deemed “point sources” of water pollution by the law. The CWSRF statute does permit loans for some “non-point sources” of pollution. Unfortunately, however, CAFOs and anaerobic digesters are “point sources.” The law specifically says that the only “point source” projects that can be funded are those that are owned by POTWs.

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There is an exception to this rule that was elegantly exploited by the State of Minnesota, which wanted to finance CAFOs with loans from its CWSRF. The CWSRF statute contains a special provision called the National Estuary Program (NEP). There are 28 estuaries across the country that are participants in the NEP. The law says that CWSRFs can fund any project – both “point” and “non-point” – that is part of an estuary’s Comprehensive Conservation & Management Plan (CCMP). Each of the NEPs has its own board of directors and promulgates its own CCMP. The estuary for the Mississippi River is part of the NEP. However, it is called the Barataria-Terrebonne Estuary, oddly named for two local areas in Louisiana instead of the largest river system in the United States. The Barataria-Terrebonne estuary itself extends only from the Gulf of Mexico upstream to Baton Rouge. But the watershed for the Barataria-Terrebonne estuary encompasses more than one-third of the entire country.

Minnesota is about 1,400 miles north of the Gulf of Mexico. But it is, in fact, located within the Mississippi River watershed, which means, as far as the CWSRF statute is concerned, that the Barataria-Terrebonne Estuary Board has jurisdiction over it. So, the Minnesota CWSRF wrote to the Barataria-Terrebonne Estuary Board, demonstrated how the CAFOs in Minnesota could reduce the manure fouling the water that came right through their estuary and asked if funding their CAFOs could be included in their CCMP. The Barataria-Terrebone Estuary Board readily agreed. A Memorandum of Understanding was drafted and signed by both parties. Minnesota now funds their CAFOs, which are point sources of pollution NOT owned by a POTW, through their CWSRF, thanks to the NEP and the Barataria-Terrebonne Estuary. It should be noted that although the Mississippi River basin extends to 32 states within the United States, all 32 of which have CAFO issues, only Minnesota has solved the problem of funding them with the CWSRF’s long-term, low-interest loans.

The value of the CWSRFs is that they can make very long-term loans at very low rates of interest — much lower and longer than commercial banks can. So, this financial benefit coupled with either the sale of the fertilizer and the methane from the CAFO and the anaerobic digester OR the savings, which would inure to the farmer from using the fertilizer, instead of purchasing it, make up the economics of CAFOs and digesters for farmers across the country.

There is one factor that hasn’t been included in these calculations: carbon. CAFOs certainly reduce the amount of animal waste that winds up in the streams and rivers that border farms. But what about the carbon that they sequester? Where do the CAFO benefits to the global warming mitigation game get their rewards? The answer is that they don’t. Our farmer at the beginning of the story with 13,000 acres under tillage and some 12,000 tons of certified carbon credits in his pocket, has just that, unfortunately – 12,000 tons of certified carbon credits in his pocket. Needless to say, our farmer would rather sell the credits and have the money in his pocket.

And, while we’re on the subject of credits, the farmer also earns a substantial amount of nutrient reduction credits from the pollution reduction that the CAFO produces every year. Who buys those nutrient reduction credits? The answer is the same for the nutrient credits as it is for the carbon credits. Nobody buys either.

Thus, the nexus between clean water and climate change. Farmers undertake projects like building CAFOs and installing anaerobic digesters not because they are “selfless do-gooders,” but because they would like to make some money or at least save some money by reducing expenses. They produce clean water and they reduce carbon emissions.

Are there potential buyers who need nutrient credits? Yes, downstream POTWs who could take some of the pressure off their discharge permits by buying nutrient credits from an upstream farmer. Are there buyers for carbon credits? Yes, power plants, for sure, and other firms such as airlines that also contribute huge amounts of carbon to the atmosphere and would like to reduce their impact.

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On the water pollution side, there has already been a case in Iowa where a POTW faced reductions in the discharge limit in its permit that would have cost it a fortune to comply with. Purely by accident its engineers came across an upstream farmer willing to undertake a project that would provide more nutrient reduction at a fraction of the cost. The POTW went to the state and offered to pay for the farmer’s project in return for getting credit for the nutrient reductions it caused. The state agreed. This story is an isolated incident in one State. It needs to be a pattern, or a system, in all 50 states.

Unfortunately, there is nothing on the carbon/global warming side that is as good as the nutrient credit transfer in Iowa.

So, how can we develop this nexus between carbon credits and nutrient credits, between clean water and global warming? How can we develop a system for selling the carbon credits and the nutrient credits that are produced on farms? Surely airline and power plant executives are not going to start scouring the countryside looking for carbon credits. And POTW executives aren’t going to get in their cars, drive from farm to farm, and look for doable nutrient reduction projects (with willing farmers) and then talk state regulators into reducing their discharge permit requirements by the amount of the nutrient reductions. It’s just not going to happen on its own, by chance.

No, the way it will happen is through the common denominator, or the thread, that runs through all of the above examples: the CWSRFs.

Yes, a CWSRF could acquire, through one of its several financial powers, carbon credits produced by CAFOs, or cover crops, or tree plantings on stream banks. They could then offer them for sale to power companies, airlines, and the like. A CWSRF could also acquire the nutrient credits from the runoff reductions caused by the same projects. They could also sell these to downstream POTWs facing permit restrictions.

In short, there is a nexus, for sure, between clean water and climate change. And that nexus may well be the nation’s 51 CWSRFs.

Michael Curley, Esq., is a lawyer and visiting scholar at the Environmental Law Institute. In 1990, Curley was appointed to the Environmental Financial Advisory Board at the U.S. EPA, where he served for 21 years. His new book, “Environmental Finance for the Developing World,” was published by Taylor & Francis in May 2020. He is a frequent contributor to WF&M.

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