May 2007  
Pennsylvania's Environmental Revolutionary: Kathleen McGinty
by Cameron Walker

The Ecosystem Marketplace follows the career of Kathleen McGinty, head of the Pennsylvania Department of Environmental Protection (DEP), as she works to banish the idea that the economy loses when the environment wins.

Pennsylvania, where the Declaration of Independence was signed and George Washington's army over-wintered, was one of the hot spots of the American Revolution.

Now the state is part of another revolution, one that reframes the government's approach to the environment by introducing market-based approaches to address water quality, energy needs and global warming.

At the head of this latter revolution is the head of the Pennsylvania Department of Environmental Protection (DEP), Kathleen McGinty. McGinty, a Philadelphia native, served as the chair of the White House Council on Environmental Quality and created the White House Office of Environmental Policy during the Clinton-Gore administration.

Since she took the helm of the state DEP in 2003, she's put into place a nutrient-trading program to reduce pollution flowing into the Chesapeake Bay (for a definition of nutrient trading click here), and she has moved the state to the forefront on alternative energy issues.

"Kathleen McGinty just really understands how market-based incentives will be able to make the policies the DEP has put into place benefit [the state] both economically and environmentally," says Peter Hughes, president of Red Barn Trading Company, a Pennsylvania firm that is involved in nutrient trading.

McGinty says she benefits from the fact that Pennsylvania's forward-looking stance on environmental markets flies under the radar when compared to showier counterparts on both coasts. When people learn about the state's programs, they're pleasantly surprised—and start thinking that if markets can work in Pennsylvania, they can work elsewhere. "It's all the more important to me to try my very best to make it work in Pennsylvania because I'm hoping that can help further catalyze the national dynamic," she says.

To the White House and Back

McGinty inherited her interest in public service from her father, a Philadelphia policeman passionate about his work. The environmental focus of her own public service, she says, was really more of an accident than a plan. After studying chemistry and continuing on to law school, McGinty won a congressional fellowship from the American Chemical Society. With the fellowship, she started working for a senator from Tennessee who was chair of the Senate subcommittee on science and technology. The senator's environmental advisor was leaving as McGinty's fellowship ended, and then-senator Al Gore invited McGinty to be his new advisor.

All this happened around the same time that Congress was studying amendments to the Clean Air Act. In 1990, the first trading program was put in place to tackle the problem of acid rain. "The first [major legislation] I was involved in on the environment was smack-dab right in the middle of the first use of market mechanisms to achieve a big environmental objective," she says.

When Gore became vice-president, McGinty took her environmental work to the White House, becoming a deputy advisor to then-president Bill Clinton.

While she says she'd never trade in her time shaping national environmental policy, her return to her native state offers tangible rewards. At the federal level, she says, "you are many degrees removed from the action on the ground." In Pennsylvania, she's watched the steel go in on new alternative energy production facilities and witnessed the restoration of a village creek in an early nutrient trade.

Ahead of its Time

Even before McGinty's return, Pennsylvania had displayed early interest in trading. The state moved ahead of anticipated requirements to reduce nitrogen oxide pollution from power plants, and put in place a state cap-and-trade system five years before federal requirements kicked in. Once installed at the DEP, McGinty wanted to broaden the scope of trading beyond the Clean Air Act's provisions.

Chesapeake Bay has been one of the first focuses for trading. The 200-mile-long bay, the largest estuary in North America, has been ailing as nutrients from urban and rural areas work their way downstream. Nutrients can create low-oxygen dead zones that smother aquatic species. Sediment entering streams can block out sunlight and tamper with habitat, says Harry Campbell, a scientist with the Chesapeake Bay Foundation.

Nearly half of Pennsylvania drains into the Bay. The state needs to slash nitrogen and phosphorous pollution by 2010 to meet federal water quality standards and, hopefully, improve the Bay's health.

To help reach these standards, McGinty and the DEP have created a nutrient-trading program that links up farmlands and other producers of nonpoint source pollution to point source polluters such as sewage treatment and other municipal plants. Farmers can generate credits by putting into place one of several best management practices on their land, these credits can then be purchased by municipalities to offset their emissions from the pipe. "We not only get our sewage treatment plants cleaned up, but we get to preserve our farmland and open space at the same time," says McGinty.

Red Barn Trading Co.—which aggregates credits from about 600 farms—and a development in Susquehanna County completed the first trade under the program in November 2006.

The trading program discounts every pound of nitrogen or phosphorous removed from the system many times over, McGinty says. The agency has restricted the types of best management practices that can be used and takes into account how far the management practice is from the stream and how far the stream is from the bay. "If you are a farmer in Pennsylvania, and you put in place a best management practice that reduces nitrogen by 100 pounds, we would give you about 15 pounds of credit that would be tradable," she explains. Ten percent of credits are put into a state-controlled reserve bank for insurance.

The Chesapeake Bay Foundation is not convinced these best management practices and trading ratios will reduce nutrient pollution quickly enough to meet federal goals. The organization is concerned that the trading program provides point sources the means to offset pollution and does too little to reduce pollution from all sources, Campbell says. In addition, he worries that development sprawl will create credits. "We are concerned the department is taking a myopic view," says Campbell. "That said, we do believe trading programs in and of themselves can improve [the Bay's water quality]."

McGinty, for her part, says the program—which took four years to construct— now represents the best in science, environmental policy, and financial design. "This has not been for the faint of heart," she says. "This has been a tremendously challenging exercise."

Neighboring Chesapeake Bay states are also developing trading programs to meet their own requirements. "Four years ago, where there was either no or tepid interest in trading in other Bay state jurisdictions, now it seems to be pretty well solidified as part of the program," McGinty says.

The state also worked with the World Resources Institute to develop an online trading tool. This tool will allow McGinty's department to keep track of credits and approve projects for trading, while buyers and sellers can create accounts and participate in the marketplace online. Pennsylvania will be the first state to use an online program like this one. "More than any other state, they¹ve been open to this free-wheeling marketplace," says Mindy Selman, an associate at WRI. Unlike other water quality trading programs – which often involve high transaction costs to link buyers and sellers, and execute trades – Pennsylvania's marketplace will reduce these transaction costs by making information about buyers and sellers readily available and allowing exchanges of credits online, says Selman.

In-State Energy

Trading is also a key part of the state's energy program. The alternative energy portfolio standard, passed in 2004, requires electricity suppliers and distributors to boost their use of clean and renewable energy through an alternative energy-trading program. Utilities are required by 2011 to generate 3.5 percent of their electricity using traditional renewable sources, such as solar and wind power, and to increase this to 8 percent by 2020. By the same year, 850 megawatts of energy must be solar — the third highest solar requirement nationwide.

Utility companies can purchase renewable energy credits to meet the standard. Even though current rate caps, which discourage active credit-buying, don't expire until 2011, Philadelphia-based utility PECO filed a petition with the state in March to purchase 250 megawatts of energy for five years and bank these credits to meet future requirements.

This is all happening in a state that, four years ago, didn't even have an energy office. Now, Pennsylvania has the second largest solar energy program in the country, is one of the leaders in the eastern U.S. for wind energy—and also plans on paving the way in biofuels production. "Energy is where the action is in terms of the huge leaps forward we need to make in environmental quality," McGinty says.

Renewable energy has also been a huge boost to the economy. McGinty estimates the state has attracted $2 billion of new investments after seeking out renewable energy manufacturing companies. These efforts are paying off: Spanish wind energy company Gamesa Corp. just opened their fourth Pennsylvania factory. Conergy, a German solar company, will build their U.S. headquarters in the state. Russian oil company Lukoil is partnering in new corn and cellulosic ethanol plants.

Much of McGinty's interest in renewable energy—and in the carbon emissions that renewables can potentially reduce—came from her work with Al Gore and climate change researchers during her tenure in Washington. McGinty has also worked in the private sector as a partner at NatSource, an energy commodities firm, where she started clean-energy investment funds. NatSource later joined the state's efforts to build the nutrient trading program.

Market Integrity

Governor Edward Rendell is also on the verge of announcing a climate action plan. "We already have a substantial packet of initiatives that put us a nice way down the road on the climate issue, but suffice it to say, we have some more work to do," McGinty says. Market forces might likely play a role in this new project, she says.

But that's not to say McGinty will turn anything into a market. "I do feel strongly that anyone who cares about the use of market mechanisms needs to stand up against the abuse of market mechanisms," McGinty says. "As an 100 percent unabashed cheerleader for trading, I equally aggressively fought against the trading of a neurotoxin, namely mercury."

When it comes to carbon dioxide, the global environment benefits whether greenhouse gases are reduced in Calcutta or Chicago, McGinty says. But for mercury, which can accumulate in hotspots, one place's gain would be another's human and environmental health crisis. For this reason, she says, she worked to stop a state mercury-trading program.

An Organizing Principle

McGinty's home base for her many efforts is the top-floor office of the Rachel Carson State Office Building, named for another Pennsylvania native committed to protecting the environment. From here, McGinty can spot peregrine falcons through the floor-to-ceiling glass windows of her office. In 1996, state workers placed a nesting box on the state building--and peregrine falcons, once threatened with extinction, returned. Now McGinty can watch falcons soaring, nesting, and defending their territory from outside threats.

"They are very aggressive," she says, "It's quite a show," she says. The falcons also inspire her when she's facing challenges, and perhaps aren't too unlike the woman with whom they share their high perch.

"I really feel a special obligation to help push into the dustbin of history's worst ideas that the economy loses when the environment wins," McGinty says. "There could be nothing further from the truth." With forward-looking approaches to the environment, Pennsylvania can be more than just a section in U.S. history books, she says, "if we aggressively embrace the environment as a central organizing principle for economic development."