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Stormwater Credit Trading: Lessons from Washington D.C.

Lessons and advice from the folks behind the nation’s first stormwater credit trading market

Properties in flood-prone areas, like this church, are participating in a unique, market-based approach to urban flooding. © Michael D-L Jordan/dlp

Like many urban areas with large swaths of impervious surfaces—from rooftops to parking lots to roads and sidewalks—metropolitan Chicago and Washington D.C. have lots in common. In both “concrete jungles,” rain bounces off surfaces and overwhelms sewer systems, picking up toxins and trash along the way. As climate change brings more intense rainfall, increased stormwater runoff is too much to handle.

Metropolitan Chicago’s sewer systems (many of which combine rainwater and domestic sewage in the same pipes) get overwhelmed. This leads to flooded basements or overflows into rivers and, our jewel, Lake Michigan. In Washington, D.C., more than 17 billion gallons of stormwater runoff and sewage flow into local rivers each year, making it the fastest growing source of water pollution in the Chesapeake Bay. Additionally, intense stormwater severely erodes tributaries of the majestic Potomac and Anacostia Rivers, further degrading local water quality and natural habitat.

What can be done to avoid the costly damages to homes, businesses, and ecosystems caused by stormwater runoff? It’s a $773 million dollar question here for Cook County, Illinois, which has seen that amount in total insurance claims payouts to flooding damages in a five-year period. And that number doesn’t even account for the costly ecosystem damages which wouldn’t be reflected in insurance claims.

Lucky for us, there is a promising new approach to grappling with flooding and water pollution: stormwater credit trading, or the buying and selling of credits representing new stormwater management capacity.

Washington, D.C. established the nation’s first stormwater credit trading program in 2013. To learn more about it, the Metropolitan Planning Council partnered with The Nature Conservancy (TNC)—a global environmental organization and a major player in the Washington, D.C. market— to hear first-hand how it all works.

Guest speakers at a late autumn 2018 workshop at MPC included the designer of the Washington, D.C. Stormwater Retention Credit Program, Brian Van Wye from the Department of Energy and Environment in the District, and Craig Holland from The Nature Conservancy, the largest supplier of credits in the market. Here are main take-aways from their conversation.

How does the Stormwater Retention Credit Program work in Washington, D.C.?

New stormwater regulations passed in 2013 created the requirements for real estate developments to handle more stormwater on their sites through green infrastructure. If not all 100% of the required stormwater could be retained (or retaining only a portion makes economic sense), developers can go offsite with 50% or less of their site requirements. There are two ways a site can meet the stormwater rule offsite: pay an in-lieu fee (a.k.a., paying a fee in-lieu of constructing onsite stormwater controls) or purchase stormwater retention credits through the Stormwater Retention Credit Program.

The stormwater retention credit market enables developers to meet their mandated requirements by purchasing credits from offsite “supply sites” designed with features that reduce stormwater runoff, such as rain gardens, green roofs, or permeable pavement. In areas of rapid development and high property values, offsite green infrastructure is typically cheaper than building 100% stormwater capacity onsite.

Both stormwater credit trading and in-lieu fees utilize private sector real estate development to generate investments in stormwater infrastructure, often in communities that experience more flooding than real estate booms.

The results from this approach in D.C.? Since 2013, Washington D.C.’s stormwater credit trading market boasts 45 trades and over $500,000 in sales. The market saw 20 trades in 2018 alone. Van Wye noted that they have seen 10 times more area developed under the District’s stormwater management regulations, including properties that comply on-site and through the Stormwater Retention Credit Program compared to historical Department of Energy and Environment investments! Additionally, there has been significant green infrastructure investment in disinvested areas, creating more greenspace and stormwater retention capacity in areas experiencing little development.

From all this new investment in stormwater management, the Washington, D.C. region’s ability to retain stormwater runoff from entering sewers and streams has increased thanks to numerous small green infrastructure sites spread out geographically. A major goal of this effort was to tackle pollution entering waterways, which has also significantly been reduced.

What do supply sites look like?

Historic Mount Olivet Cemetery in northeast Washington was a natural fit for solving local water issues. As a private property vital to the local community with ample space not being utilized and a need to generate additional revenue streams, the cemetery became a unique option to participate in stormwater credit trading.

The Nature Conservancy and the Catholic Archdiocese of Washington entered into a multifaceted collaboration to undertake an innovative green infrastructure project. By replacing or retrofitting impervious surfaces on the cemetery property—primarily unused access roads—with water-retaining green infrastructure such as grass, flower beds, shrubs and trees, the site now generates stormwater retention credits that are sold on the Washington, D.C. Stormwater Retention Credit market.

This kind of “supply site” in a stormwater credit trading marketplace demonstrates how new stormwater investments can come with multiple other benefits from providing habitat for pollinators to new green space addressing urban heat island to improved aesthetics for the neighboring community and visitors.

This is one reason why The Nature Conservancy got excited to spearhead new strategies to support the Stormwater Retention Credit Program in D.C. by helping finance the development of green infrastructure projects that created credits to boost the stormwater retention credit trading market. Holland noted how vital a role The Nature Conservancy plays in conducting upfront research, like a cost analysis to develop credits and a contractor risk analysis to understand what risks contractors would be willing to take on, as well as aggregating credits to be sold in the marketplace and taking care of the supply site maintenance.

What helped this be successful? A price floor

To reduce the financial uncertainty for credit aggregators and investors, a Price Lock Program was added to the D.C. Stormwater Retention Credit Program a few years after it was underway to encourage construction of green infrastructure. The Department of Energy and Environment established a $11.5 million fund (financed by its stormwater impervious surface fee) to purchase stormwater retention credits from eligible stormwater retention credit generators looking for the option to sell credits to the District at fixed prices.  

The Price Lock Program creates a price floor in the market and offers certainty about the revenue from a SRC-generating project. Van Wye explained how this kind of purchase guarantee option can make it easier to generate credits on land owned by non-profits, such as churches, cemeteries, schools, etc.

Coupled with the in-lieu fee, which creates the price ceiling, players in the Stormwater Retention Credit marketplace had greater confidence in trading because these mechanisms provide a lot of certainty: for developers, their most expensive option is paying the in-lieu fee, and for suppliers, if all else fails, they can sell credits to the local government.

Advice for the Chicago region?

During the late-autumn 2018 panel that MPC hosted, Van Wye and Holland closed the conversation by imparting words of wisdom to stakeholders exploring new ways to tackle flooding and water pollution challenges that could include stormwater credit trading. Here are a few that resonated with me:

Ultimately, this concept of stormwater credit trading and the early lessons from Washington, D.C.’s example could serve as a model for other cities interested in accelerating stormwater management, like green infrastructure, to not only improve water quality and lessen the impacts of flooding, but further prepare communities to be resilient to weather any future storms.

MPC Research Assistant Colby Richardson assisted with this post. Colby graduated Magna Cum Laude from Union College in Schenectady, New York in the spring of 2018, earning a BA in Environmental Policy. Following his graduation, he relocated to Chicago to further explore his interests in water quality, environmental conservation, and urban planning.