Search
April/May 2002 Legal Perspectives, Vol. 1, Issue 4

Member Pipeline - Legal - April/May 2002 Legal Perspectives

Click Here
to see previous Issues

AMSA Legal Perspectives Logo

print Printer friendly version

Volume I, Issue 4

April/May 2002

“. . . the policy is intended to encourage the adoption of trading programs that facilitate implementation of TMDLs, reduce the costs of compliance with CWA regulations, establish incentives for voluntary reductions and promote watershed-based initiatives that result in greater water quality and environmental benefits . . .”
EPA Proposed Policy on Water Quality Trading, p. 3, 67 Fed. Reg. 34,709, May 15, 2002

On May 15, 2002, the U.S. Environmental Protection Agency (EPA or Agency) published in the Federal Register for public comment a proposed Water Quality Trading Policy (Proposed Policy). When final, the Policy will supersede the Clinton Administration’s 1996 Effluent Trading in Watersheds Policy. EPA plans to use the Policy in conjunction with the 1996 Draft Framework for Watershed-Based Trading (http://www.epa.gov/owow/watershed/framwork.html). The new Policy will take precedence in the case of inconsistencies with the Framework.

AMSA corresponded and met with EPA in the months leading up to the Proposed Policy’s release. AMSA used these opportunities to outline trading program elements important to publicly owned treatment works (POTWs). In an April 30 letter to EPA Administrator Whitman, AMSA endorsed EPA’s plans to move its trading policy forward, stating that EPA’s effort “represents a positive step towards encouraging greater use of voluntary, market-based approaches to achieve water quality objectives.” AMSA cautioned, however, that trading can not replace the need for a fair and equitable allocation of sources’ pollutant removal obligations. See http://www.amsa-cleanwater.org/private/legreg/outreach/043002EPAletter.pdf.

This issue of Legal Perspectives provides an overview of key water quality trading issues, including a general description of water quality trading; a list of common trading program elements; a review of state trading precedent; an outline of challenging trading issues; and a discussion of trading types most relevant to POTWs. This information should be helpful as the POTW community comments on the Proposed Policy, and continues to identify ways to make trading a viable component of water quality achievement efforts. AMSA will provide a detailed analysis of the Proposed Policy in a forthcoming Regulatory Alert.

A General Description of Trading
Water quality trading (or “effluent trading”) can have many meanings depending on a trading program’s scope or a state’s trading regulation or policy. All trading programs are rooted in the concept that market-driven systems can sometimes yield environmental improvement more cost-effectively than command and control approaches. In a trade, one discharger cost-effectively reduces its pollutant loading below the level required by regulation, generating a credit that can be sold to another discharger with fewer loading reduction options. The end result should achieve cost-effective, net water quality benefits.

Common Trading Program Elements
Most water quality trading programs contain several common components. These include:

  • Pollutant baselines and reduction goals;
  • Eligible pollutants and dischargers;
  • Geographic boundaries;
  • Provisions to ensure consistency with federal and state statutes and regulations;
  • Systems to administer, enforce, and track trades;
  • Trading ratios; and
  • Stakeholder participation.

State Precedent for Trading
The nation’s first effluent trading program was created in 1984 to trade phosphorus between point and nonpoint dischargers in Colorado’s Dillon Reservoir. Since then, more than 37 trading programs and related activities have occurred nationwide. U.S. Effluent Trading and Offset Projects, 11/99, http://www.epa.gov/owow/watershed/trading/traenvrn.pdf.

In most cases, POTWs play a major role in, and are an important consideration for, the design of trading programs. For example, Boulder, Colorado’s trading program pays nonpoint sources to reduce ammonia, temperature, and pH, making costly upgrades at the POTW unnecessary. This program netted savings through 1996 of $1.6 to $5.6 million. POTWs are playing a lead role in developing a Chesapeake Bay nutrient trading program that will involve six states and the District of Columbia.

Some trading programs are specifically designed to implement total maximum daily loads (TMDLs). For example, Connecticut and EPA designed a watershed-based effluent trading program to implement a nitrogen TMDL in the Long Island Sound. This program is expected to save $200 million in POTW upgrades. Idaho and EPA also developed a watershed-based trading program to implement a phosphorus TMDL for the lower Boise River. Finally, under a TMDL-based trading program in North Carolina’s Tar-Pamlico basin, the State underwrites nonpoint source nitrogen and phosphorus reductions to minimize trading uncertainties for point sources.

Trading Challenges
Water quality trading can be controversial when stakeholders disagree on key design and implementation issues. Difficulties commonly arise in the following areas:

  • Developing data quality and quantity standards. These protocols are essential for setting trading baselines and assessing progress toward reduction goals.
     
  • Enforcing credit generation commitments. This is of particular concern in the area of nonpoint source credits. EPA has little authority over nonpoints, and state programs may not effectively hold nonpoint sources accountable.
     
  • Documenting trades. Typically, the point source’s National Pollutant Discharge Elimination System (NPDES) permit is seen as the place to document the details of a trade, including the nonpoint source’s obligations. POTWs are reluctant to accept this “dual” liability for nonpoint sources in their permits.
     
  • Managing program and transaction costs. Significant costs can be incurred by various parties designing and administering the program, setting baselines, negotiating trades, conducting monitoring, and collecting data. These costs can be underestimated or undervalued in the negotiation process.
     
  • Setting fair trading ratios. Trading ratios establish the unit of pollutant reduction that sources must obtain to receive credit for a unit of load reduction. A 1:1 ratio means one unit of pollutant reduction is needed to generate one unit of pollutant credit. Similarly, a 2:1 ratio means that two units of pollutant reduction are needed to generate one unit of pollutant credit. When ratios are set too high, as they often are, they can deter participation in the trading program. For example, in a mercury trading program contemplated and eventually abandoned for California’s San Francisco Bay, ratios of 3:1 to 5:1 were considered. These ratios limited point source interest in the program. In Colorado’s Cherry Creek Basin, ratios vary from 1.3:1 to 3:1 depending on the certainty of the pollutant control measure.
     
  • Resolving pre-TMDL trading issues. A TMDL creates a baseline for reductions by allocating the pollutant loads to various sources. Without this baseline, controversy can arise over the reduction obligations of various dischargers. Furthermore, dischargers may not receive credit in the final TMDL allocations for pre-TMDL reductions.

Trading Types Relevant to POTWs
POTWs are most likely to explore four specific types of water quality trades:

1) Point/point source trades. These trades are often effective because, in this case, the sources’ NPDES permits are an acceptable vehicle to document and enforce the trade. In point/point trades, a POTW cost-effectively generates credits and sells them to another point source – POTW or industrial. The second discharger applies the credits against the need for new controls.

2) Point/nonpoint trades. These trades are more difficult as discussed above. POTWs are unwilling to incorporate a nonpoint source’s commitments in their permit. Furthermore, point/nonpoint trades are not “trades” in reality. For example, in one kind of point/nonpoint trade, a POTW needing to make reductions to achieve water quality standards (WQS) would install nonpoint source controls (e.g., buffer strips) in lieu of plant upgrades. While such actions may be cost-effective, the POTW is in fact paying for activities that the nonpoint source should carry out on its own. Thus, point/nonpoint trades can violate the principle that nonpoint sources be held accountable for their share of load reductions needed to meet WQS.

3) Intra-plant or intra-system trades. These trades ultimately could be both successful and cost-effective for POTWs. The required element of trust in the trading partner exists where the facility trades with itself or within its system or municipality. In intra-plant trading, a facility saves costs by allocating pollutant discharges among multiple outfalls. In intra-system trading, POTWs with responsibility for storm water trade pollutant reductions between the storm water system and the treatment works. EPA is poised to pilot this type of trading at one POTW.

4) Pretreatment trades. Pretreatment trading may be most helpful to POTWs with a growing industrial base. Precedent for pretreatment trading exists in Illinois and New Jersey. In pretreatment trading, the POTW sanctions trading of certain pollutants between industrial dischargers to the POTW. For example, the Passaic Valley Sewerage Commission’s Effluent Trading Project allows indirect dischargers to the POTW to trade heavy metals in their effluent discharges, helping the facility meet biosolids metals requirements.

Trading For the Future
When finalized, EPA’s Trading Policy may provide an opportunity to move closer to a watershed-based approach to achieving water quality goals. AMSA will continue advocating the benefits of a watershed focus, advancing the importance of fair and equitable pollutant allocations, and seeking ways to make water quality trading a viable option for those POTWs who desire to make it a part of their efforts to meet WQS.

 

© 2002 Association of Metropolitan Sewerage Agencies

Legal Perspectives is a monthly publication of the Association of Metropolitan Sewerage Agencies (AMSA).

Founded in 1970, AMSA represents the interests of over 270 of the nation's POTWs. AMSA members serve the majority of the sewered population in the United States and collectively treat and reclaim over 18 billion gallons of wastewater everyday.

We welcome your comments or questions on Legal Perspectives. Please contact Alexandra Dapolito Dunn, General Counsel, AMSA at adunn@amsa-cleanwater.org or 202/533-1803.