D.C.’s marketplace for stormwater retention credits wasn't taking off, but a new investment could change that.
When it rains heavily in D.C., the surrounding ecosystem takes a beating.
A full 43 percent of land in the city is impervious to rainwater. As it flows down the streets, it picks up motor oil, pet waste, fertilizers, garbage, and whatever else is lying there, flushing it into the sewer. For two-thirds of the city, that all empties into the nearest river or stream, with enough force to gauge the banks of the smaller tributaries.
For the rest of the city, the runoff flows into a combined sewer, which overloads and projects a sludgy mess of feces into the river system. Before the city took action in 2005, those overflows added up to 3.2 billion gallons per year. In either situation, the rivers then carry the junk into the Chesapeake Bay, where runoff is the fastest-growing source of pollution.
While a massive $2.6 billion tunnel system is underway to deal with some of the runoff, it’s not enough. That’s why the city turned to green infrastructure: rain gardens, green roofs, permeable surfaces, and leafy drainage ditches known as bioswales that filter and store extra rainwater, easing the load on the sewer system. These options cost much less than “gray infrastructure” and they make the city prettier and more enjoyable.
“For decades and decades people designed in the city to get stormwater off of a site as fast as possible,” says Brian Van Wye, chief of program implementation for D.C.’s Stormwater Management Division. “What we’re trying to do is turn that on its head and slow it down and, as much as possible, turn stormwater into a resource on that site.”
But the city can’t pay for it all by itself. That’s why, in 2013, the District Department of Energy and Environment came up with a new idea to get more green spaces scattered around the area. The agency created retention credits, available to homeowners, churches, businesses, and anyone else with land that could be upgraded to retain more rainwater. Those credits can then be sold to developers who may need them in order to meet the retention requirements for large new building projects.
Pricing the value of stormwater retention makes sense, but new markets are tough to get started. Until enough people buy and sell, there isn’t an established price for the credits, making it an unpredictable investment. Since trading started in 2014, there have only been two exchanges. On the demand side, it takes time for new projects to wrap up and need the credits; on the supply side, owners need enough money up front to pay for upgrades in order to profit from the credits down the road.
Now the private sector is stepping in to nudge the market in the right direction. Last week, Prudential invested $1.7 million in the recently founded District Stormwater LLC. This company, affiliated with The Nature Conservancy, will work with property owners to install green improvements for free in exchange for the retention credits. If the business succeeds, every other city with runoff problems will want to take a look at D.C.
Inventing a market
The Environmental Protection Agency’s Clean Water Act agreement with D.C. says new developments of at least 5,000 square feet must retain the expected runoff from a storm that drops 1.2 inches of rain—this covers 90 percent of all downpours in the area. This regulation is the real driver of retention efforts in the city, Van Wye says. All of the city’s programs to help homeowners, schools, and churches voluntarily green their property add up to just one-tenth of the retention that the large new developments must now provide.
When the rules were coming together, developers got on board, but asked for more flexibility in meeting the goal. Some new developments, especially in dense, downtown neighborhoods, don’t have much open space to work with. A green roof might preclude a rooftop pool or bar; large underground cisterns might cut into parking spaces. The city came up with a compromise: if developers meet 50 percent of their water retention requirement, they can purchase credits from others in the city who’ve expanded their retention capacity. Rainwater is rainwater; as long as the right amount is diverted from the sewers, the developer has done his or her duty.
At first glance, that might sound like it lets developers off the hook. But, Van Wye says, “We realized that, actually, a trading program could give us better benefits and better outcomes.”
The large construction projects that have to comply with retention only account for about 1 percent of the city’s land, Van Wye says. By giving other properties throughout the district a financial incentive to trap runoff on their own land, the city can capture more “first flush” water—the initial rainfall that catches the most pollution—before it hits the rivers.
And with more retention sites dispersed throughout the area, the city can capture more water from smaller storms. In one year, this could save 57 percent more runoff than if retention was concentrated only in large developments.
The green infrastructure comes with a host of other benefits, too: beautification, cooling effects for urban heat islands, wildlife habitat, even health boosts for people in the city. Van Wye also believes the marketplace is good for D.C.’s environmental justice: It’s expected to drive investments to the lower-density eastern neighborhoods, which are lower income and historically populated by people of color.
The young market faces a challenge in that the value of the credits is still uncertain. If you’re considering a retrofit to earn credits, you want to know how much you can sell them for, just as a developer wants to know how much they would cost.
“Once it gets going, it can become somewhat self-perpetuating, but it needs to get jumpstarted,” Van Wye says.
Here’s the jumpstart
With Prudential’s $1.7 million investment, District Stormwater will install green infrastructure in places deemed most ecologically beneficial, and then sell the credits. If it succeeds in turning a profit, Prudential will recoup its investment, plus interest, and the approach could be considered for other cities, says Lata Reddy, vice president of corporate social responsibility at Prudential.
The company is staffed by members of The Nature Conservancy and Encourage Capital. They are selecting sites for improvement in order to optimize the social and environmental benefit. Then they contact property owners with significant amounts of impervious land and offer to upgrade the retention capacity, free of charge. The owner will get to enjoy the new green space and save money on the stormwater runoff charge that comes with each water bill. In exchange, District Stormwater will get some portion of the retention credits, which it can sell on the marketplace. It’s a business model designed to overcome the capital barrier to entry, says Craig Holland, director of product development at NatureVest, The Nature Conservancy’s investment arm.
“The issue with individual property owners doing voluntary projects is they often lack the financing to be able to do them,” Holland says. “They don’t know a whole lot about the market, they’re not necessarily set up to be a sophisticated business to go have a transaction with a real estate developer.”
This initial amount is not enough to deal with D.C.’s runoff problem entirely. A single 1.2-inch storm in D.C. sends 525 million gallons of runoff hurtling into the sewers. That’s about the volume of 800 Olympic-sized pools.
But if the initial effort creates a dependable supply of credits, and developers know they can count on the marketplace, it could have an effect far beyond the amount of the actual investment. Newly invented marketplaces are tricky, unpredictable beasts, but if they reach maturity they might be able to accomplish a policy goal more quickly and efficiently than government-sponsored construction, with city residents feeling the benefits all along.