Advances in Water Quality Trading as a Flexible Compliance Tool

By Water Environment Federation

Advances in Water Quality Trading as a Flexible Compliance Tool explores the status of water quality trading and recent changes in the industry and is a guide for implementing and using water quality trading for regulatory compliance purposes. Topics such as current legal and regulatory challenges, in depth case studies, and future applications are discussed in detail. This book offers a look at where and how optimizing investments in water quality through trading are unfolding. Municipalities, industries, agencies, and environmental organizations all benefit from this guidance.

• Language: English
• Publisher: Water Environment Federation
• Release date: Jul 1, 2015
• ISBN: 9781572783232

Book preview

programs

Preface

The Water Environment Federation established a Task Force to develop a publication that would serve as a resource for its members and other interested stakeholders for implementing and using water quality trading for regulatory compliance purposes. Industry experts believe that the use of water quality trading as a regulatory compliance tool has progressed sufficiently over the last decade to the point where its members and stakeholders could benefit from a compilation of case histories, regulatory successes, and emerging legal support.

To that purpose, this publication builds on the initial 2006 WEF publication, Water Quality Trading: A Guide for the Wastewater Community, to showcase the advances in the use of water quality trading programs and approaches as a flexible regulatory/permitting compliance tool.

The 2006 publication was intended to serve, as its title indicates, as a guide to water quality trading. The Task Force members in writing this latest publication focused on the practitioner, the entity/person who was looking to implement a water quality trading program to assist with meeting its permit compliance requirements. This publication is structured to support the reader with a general background of the impetus of water quality trading; potential uses for a water quality trading program; current policy directions; the significant legal underpinning and case law that has emerged in support of these compliance programs; the future of water quality trading programs; and, most importantly, a broad compilation of eight actual case histories from across the United States and Canada that illustrate the breadth of water quality trading program implementation. The intent of the publication is to be a valuable practical resource for the planning and implementation of a water quality trading program to support regulatory compliance in a more natural system and cost-effective manner than traditional engineered compliance tools and strategies.

Each case history will provide the reader with

•  Background of the specific water quality trading program,

•  Drivers for the trading program,

•  Program development,

•  Program design,

•  Program implementation, and

•  Future of the program.

This publication’s final chapter investigates the common threads of success for a water quality trading program.

This Special Publication was produced under the direction of Mark S. Kieser, Co-Chair, and Charles Logue, Co-Chair.

In addition to the WEF Task Force and Technical Practice Committee Control Group members, reviewers include Andrew Feng Fang and Lola Guerra.

Authors’ and reviewers’ efforts were supported by the following organizations:

Alfa Laval Inc., Richmond, Virginia

American Farmland Trust, DeKalb, Illinois

CABE Associates, Inc., Dover, Delaware

CH2M HILL, Chantilly, Virginia

Cobb County Water System, Marietta, Georgia

Conestoga-Rovers & Associates (CRA), Shelby Township, Michigan

DC Water, Washington, D.C.

Donohue & Associates, Sheboygan, Wisconsin

Environmental Banc & Exchange, LLC (EBX), Owings Mills, Maryland, and Raleigh, North Carolina

Environmental Incentives, LLC, South Lake Tahoe, California

Electric Power Research Institute (EPRI), Palo Alto, California

Great Bay National Estuarine Research Reserve, New Hampshire Fish & Game Department, Durham, New Hampshire

Hatch Mott MacDonald, Cincinnati, Ohio

HDR Engineering, Inc., Cleveland, Ohio

Kieser & Associates, LLC, Kalamazoo, Michigan

Loudoun Water, Ashburn, Virginia

Macon Water Authority, Macon, Georgia

Miami Conservancy District, Dayton, Ohio

Michael Baker Jr., Inc., Alexandria, Virginia

South Nation Conservation, Finch, Ontario, Canada

Southwestern Ohio Council for Higher Education, Dayton, Ohio

Stantec, Edmonton, Alberta, Canada

The Freshwater Trust, Portland, Oregon

Troutman Sanders LLP, Richmond, Virginia, and Washington, D.C.

URS, La Jolla, California

Willamette Partnership, Portland, Oregon

World Resources Institute, Washington, D.C.

XCG Consultants, Ltd., Oakville, Ontario, Canada

1

Introduction, History, and Concept

G. Tracy Mehan, III

1.0     INTRODUCTION

1.1     U.S. Environmental Protection Agency’s 2003 Water Quality Trading Policy

1.2     Water Environment Federation’s 2006 Water Quality Trading Guide

1.3     Why Another Volume on Water Quality Trading Now? A Preview

1.4     Challenges to Adoption and Implementation of Water Quality Trading

1.5     A Pressing Need for Water Quality Trading

2.0     A BRIEF HISTORY OF THE TRADING CONCEPT

2.1     Water Markets in the West

2.2     Acid Rain Trading and Phase-Out of Lead in Gasoline

3.0     GENERAL CONCEPTS OF RELEVANCE TO WATER QUALITY TRADING

3.1     Sound Program Design and Implementation

3.2     Multiple Environmental Benefits and Water Quality Trading

3.3     Hope, Realism, and Managing Expectations

4.0     REFERENCES

1.0     INTRODUCTION

1.1     U.S. Environmental Protection Agency’s 2003 Water Quality Trading Policy

Water quality trading (WQT) is an idea that the U.S. Environmental Protection Agency (U.S. EPA) has studied for at least two decades. It is supported by an earlier policy statement by the agency and then a draft framework in 1996 (Mehan, 2003). Water quality trading formalized and promulgated a more extensive and comprehensive WQT policy in 2003 to encourage states, interstate agencies and tribes to develop and implement [WQT] programs for nutrients, sediments and other pollutants where opportunities exist to achieve water quality improvements at reduced costs (U.S. EPA, 2003).

U.S. EPA’s trading policy supports voluntary trading to improve or preserve water quality in a variety of circumstances. For example, in unimpaired waters, trading may be used to preserve WQT by offsetting new or increased discharges of pollutants. In waters impaired by pollutants, it may be used to achieve earlier reductions and progress toward water quality standards (WQS) pending the development of a total maximum daily load (TMDL), or pollution budget, under the Clean Water Act (CWA). It may also be used to reduce the cost of achieving reductions established by a TMDL. This is where most trading is likely to occur. However, U.S. EPA does not support trading that delays implementation of an approved TMDL. U.S. EPA also supports pre-TMDL trading to compensate for an increased discharge, resulting in a net reduction of the pollutant traded so that water quality improvements are made in advance of TMDL development.

Safeguards are woven throughout the policy, the CWA, and implementing regulations of the CWA. Pollution reduction credits can be generated for purchase only when a source reduces pollution beyond required levels, for instance, for a National Pollutant Discharge Elimination Permit System (NPDES) permittee or reductions below a water quality based effluent limitation.

U.S. EPA does not support any trading activity that impairs a designated use or drinking water intake or that would cause a toxic effect or exceedance of a human health criterion. The latter conditions help avoid the creation of locally high concentrations of a pollutant or hot spots, which are an important consideration in any trading program.

Accountability for all trades is also stressed in the U.S. EPA policy. Point sources remain accountable, that is, legally liable, through their NPDES permits. Point sources that purchase pollution credits from nonpoint sources (NPSs) can rely on private, binding business contracts between trading partners and other financial instruments to incentivize performance.

Following the release of the new policy, U.S. EPA took the following actions to advance the practice of trading:

•  Funding 10 trading projects;

•  Hosting a national forum on the subject;

•  Issuing guidance on watershed-based permitting to complement its trading policy; and

•  Finally, moving to track trades through, as well as to upgrade, its legacy Permit Compliance System, which is the repository for data on NPDES facility discharges and limits (Mehan, 2003a).

Trading capitalizes on the economies of scale and pollution control cost differentials among and between various sources of pollution. By allowing one source to meet its regulatory obligations by using pollutant reductions created more efficiently or less costly by another source, be it regulated or unregulated, trading creates incentives to improve water quality. Although WQS remain the same, efficiency is increased, costs are decreased, and, under the right conditions, environmental benefits are multiplied across all media (land, water, and air), at least for point to nonpoint trading.

Regarding the multiplication of environmental benefits, in 2003, which is the same year that U.S. EPA released its trading policy, the World Resources Institute (WRI), a well-regarded environmental organization and an early supporter of trading, suggested an innovative approach linking nitrogen reduction for the Gulf of Mexico with nitrous oxide, a potent greenhouse gas (GHG). One ton of nitrous oxide emissions had the same warming effect of 310 tons of carbon dioxide (Greenhalgh and Sauer, 2003). Approximately 74[%] of all U.S. nitrous oxide emissions come from agriculture, primarily from agricultural soil management activities such as commercial fertilizer application and other cropping factors, according to Greenhalgh and Sauer (2003). Lowering nitrogen fertilizer use reduces both the nitrogen that leaches into waterways and the amount that is volatilized as GHGs.

The WRI pointed out that the agricultural policies and decisions that slow the rate of nutrient losses into waterways frequently improve carbon sequestration and storage in soil. As an example, take a regional market program in the Upper Mississippi River valley or the Ohio River Valley in which agricultural producers sell water credits to wastewater systems and climate credits to users of fossil fuels under regulatory pressure to reduce GHG emissions because of new regulations under the Clean Air Act (CAA). This stacking of benefits creates tremendous incentives for a market to take hold on both counts.

1.2     Water Environment Federation’s 2006 Water Quality Trading Guide

Not long after the release of U.S. EPA’s formal policy on trading, in 2006, the Water Environment Federation (WEF) published Water Quality Trading: A Guide for the Wastewater Community (Jones et al., 2006).

These authors wrote this text on WQT mindful of the central contradiction of the CWA [Clean Water Act], that is, that it has been extremely successful in controlling point-source pollution, but does not regulate nonpoint pollution or diffuse runoff, which is the primary source of impairments of waters as diverse as the Gulf of Mexico, Chesapeake Bay, and Lake Erie.

Water Quality Trading was informed and inspired by five trading research projects sponsored by the Water Environment Research Foundation. Those projects included the Connecticut Long Island Sound nitrogen trading or exchange program, which is a good example of point-source to point-source trading; the Cherry Creek, Colorado, phosphorus trading program; and others in Maryland, Michigan, and Wisconsin. Other trading cases, some still under development, were also considered. These are discussed throughout the text to help describe and illuminate a systematic approach to evaluating the efficacy of trading in varying circumstances. The primary focus of both the case studies and the narrative is point-source to NPS trading. Again, this category involves trading between regulated (point) and unregulated (nonpoint) sources under the CWA or comparable state laws.

Water Quality Trading did an excellent job presenting a comprehensive review of WQT in the context of the main elements of the CWA, that is, WQS, antidegradation, antibacksliding, the TMDL program, and the complexities of the NPDES permitting scheme. It also explored challenges inherent to data quality, monitoring, and modeling. This volume also presented an economic framework that provided practitioners a means of assessing the advantages and disadvantages of various trading options, a logical, almost stepwise sequence for evaluating and making decisions about trading (Jones et al., 2006). Moreover, it outlined a process for estimating trading credit needs as well as identifying, characterizing, and evaluating trading options, with a view to developing a specific proposal. It included helpful matrices, figures, and checklists.

In other words, the 2006 guide provided the water resource recovery facility (WRRF) operator a tool to consider economic efficiency goals side by side with his or her mission of protecting water quality in the interest of all stakeholders in the watershed. As stated by the authors, The water-quality-management process is, in the end, a political process …we must always remember that the ‘science’ will always be limited by funding, but also practicality.

The guide went to great lengths to address tough issues such as avoiding pollution hotspots that might result from a poorly designed trading proposal. It affirmed the importance of sustained engagement with all stakeholders, no matter how skeptical they may be at the outset of the public dialogue. It faced, head on, the issue of uncertainty in measuring pollutant reductions in point to nonpoint trading given the variability of management practices applied, say, on farms fields to reduce nutrient runoff at levels adequate to justify credits against a wastewater system’s or other point source’s permit limit. It reviewed the establishment of adequate baselines and the array of trading ratios available both to compensate for this lack of precision in trading (i.e., uncertainty, delivery, retirement, and cross-pollutant ratios) while satisfying regulators and stakeholders as to the efficacy of trades and the inviolability of WQS. Presciently, it highlighted the great potential for third parties to play active roles in trading through various means, acting as bankers, brokers, or aggregators of pollutant reductions available as credits for trades, analogous to the role private contractors play in the disposal of biosolids (formerly known as sludge) generated by WRRFs that farmers use to fertilize and enrich soils.

1.3     Why Another Volume on Water Quality Trading Now? A Preview

As this brief synopsis of the 2006 WEF guide reveals, the topic of WQT, including its technical, legal, policy, and political dimensions, is immense and complex. It was complex then, and it complex now. What is different today is that the water sector now has 8 additional years of accumulated experience and practice to draw upon, especially with the increasing prominence of nutrients as a cause of impairments, TMDLs, and a sharper regulatory focus.

The contributors of this new publication describe, in detail, their careful observations of existing and emerging trading programs throughout the United States and Canada. They share the lessons they learned and the new practices or techniques they developed, discovered, or stumbled upon, both in the course of their work in the United States and Canada.

Water Environment Federation has published this new volume as a supplement to, not a replacement of, its well-received guide of 2006. With the nation coming out of a recession and a population likely to increase by 130 million over the next 40 years (State-EPA Nutrient Innovations Task Group, 2009), calling upon the collective experience of the water sector for the promotion of WQT will ensure that our waters are protected and our economy flourishes, benefitting future generations.

This new volume offers both thematic commentary and detailed case studies on the evolving policy and current practice of WQT. It provides background on technical, legal, policy, and practical issues affecting effective implementation of trading programs throughout North America.

Chapter 2 focuses on the history of point-source and NPS trading programs dating back to the 1980s. The authors delve into the essential elements of successful trading programs. Starting with the construct of cooperative federalism, they note that CWA necessitates a framework that balances competing federal and state interests. Regulatory drivers create incentives and the playing field, with rules governing stakeholders who in engage in trading.

Chapter 2 identifies those critical elements to an enforceable trading framework that addresses the benefits and risks of trading, including market failure, noncompliance, and variable public perceptions of market solutions. While trading portends significant opportunities for accelerating watershed restoration, certain institutional challenges and impediments continue to slow the pace of trading in various locales. This chapter explores some of those policy and social barriers to more robust trading markets in light of real world experience.

The current state of development of WQT policy and regulatory guidance is examined in Chapter 3. U.S. EPA has no immediate plans to update its 2003 trading policy or develop new guidance documents at the national level. U.S. EPA Region 3 (Philadelphia, Pennsylvania) is the only region doing anything of this nature in response to the Chesapeake Bay TMDL that sets out certain expectations for Chesapeake Bay state trading programs to ensure they pass muster, observe the authors. The only other federal activity is the efforts of the Office of Environmental Markets at the U.S. Department of Agriculture, which is preparing issue papers and providing funding to support the development of trading programs.

Significant impetus for new trading policy and practice is coming from the nongovernmental organization (NGO) sector, say the authors. The National Network on Water Quality Trading was formed to facilitate dialogue among stakeholders and to develop consensus-based best management practices (BMPs) for trading. In the Pacific Northwest, the Willamette Partnership, The Freshwater Trust, and U.S. EPA Region 10 (Seattle, Washington) are working together to achieve just such a consensus to ensure such practices produce the intended water quality benefits, comply with applicable laws and regulations, and increase the confidence of participants in, and observers of, WQT programs. These NGO-driven policies and practices could significantly influence future policy development nationally. Several contributors to this new volume are members of NGOs on the cutting edge of WQT policy and practice.

Chapter 4 covers the potential and realized financial, environmental, and social benefits of WQT programs in the United States. Numerous papers, and several case studies, demonstrate that these programs can reduce the cost of compliance with water quality based requirements, encourage progress toward meeting WQS, achieve greater environmental benefits for watersheds, and offset new discharges to allow for economic growth. With that said, the authors recognize that few trading programs have been empirically analyzed. Definitive evidence that these programs achieve their intended effects is still limited. As more trading programs emerge and trading activity increases, the environmental effects of more on-the-ground conservation, as opposed to end-of-pipe treatment, will persuade practitioners and communities to include trading in their toolboxes. Moreover, the social benefits of more dialogue and, consequently, social capital throughout the watershed community and the generation of offsets enabling growth will enhance the case for WQT.

Attending to the legal challenges of trading, design, implementation, and challenges to WQT are addressed in Chapter 5. Although trading is not specifically mentioned in the text of the CWA, it complements the water quality continuum established by Congress in Section 303 of CWA as well as the regulatory scheme for implementation of WQS through the processes of impairment listing, TMDL development, and water quality based permitting. No federal court case specifically addresses (or resolves) the fundamental question of whether or not trading is legal. Nevertheless, several cases provide support for the continued use and growth of trading. Additionally, a number of states have enacted or adopted state-specific statutes, rules, and guidance documents to authorize and implement trading.

Chapter 6 sets forth a future trading vision that can take on a broader suite of issues beyond nutrients such as pathogens, sediments, and microconstituents. Trading will provide a means to allocate costs to the source of pollution and establish alternative fees related to the cause-and-effect relationship between pollution sources and impairments. Trading will also allow pollution abatement costs to be collected from the raw human activity sources.

Chapter 7 examines nutrient trading programs developed by Pennsylvania, Virginia, and Maryland in light of the TMDL for nitrogen, phosphorus, and sediments prepared by U.S. EPA Region 3 for the Chesapeake Bay, which was adopted in 2010. Thus, nutrient trading in these three states must be consistent with all such requirements. The chapter describes and compares and contrasts the evolution of these programs both pre-and post-TMDL.

Chapter 8 provides a case study of the Great Miami River Watershed (Ohio) trading program, which brought together WRRFs and agricultural producers in a collaborative effort to mitigate the costs and rate increases associated with technological improvements to local treatment plants caused by new nutrient water quality criteria. The chapter describes how the program was formed, how it works, and how stakeholders have worked to overcome challenges, including shifting policy positions on the part of the Ohio Environmental Protection Agency.

Water quality trading case studies from Minnesota are presented— Minnesota is a state with some of the earliest and most enduring point-source and NPS trading programs in the country. In Chapter 9, the authors illustrate just how and why these programs have long served as successful point-source compliance mechanisms, especially in the case of a summertime, low-flow dissolved oxygen TMDL on one of the state’s largest rivers, thus demonstrating trading’s cost-effectiveness for WRRFs. Some trades have been successfully tested in state courts, providing evidence of their legal viability and limits under the CWA and in implementing state legislation.

In Chapter 10, readers are offered a stormwater trading case study from California, which is a complex setting for the regulated community. The Lake Tahoe Lake Clarity Crediting Program provides a framework for connecting on-the-ground actions to pollutant load reductions from urban runoff called for in a bi-state TMDL. Load reductions are quantitatively tracked using Lake Clarity Credits and compared to credit targets in municipal stormwater permits to determine compliance. Pre-TMDL-required offsets for phosphorus are driving the City of Santa Rosa and numerous other partners to develop the state’s first watershed-based permitting program in the Laguna de Santa Rosa. These efforts reveal how traditional technology-based requirements for NPSs are inadequate for WQT and TMDLs where quantified load-reduction performance is essential for verifying compliance.

A case study for the North Carolina Environmental Management Commission is discussed in Chapter 11, specifically, the development and implementation of its Nutrient Sensitive Waters Management Strategies to reduce nutrient loadings to certain waterbodies within the state. The authors review the nutrient management watershed plans and requirements adopted to meet targeted goals. The focus is on NPS trading for new development and best practices established by the state, regulated by local municipalities, but implemented by third-party nutrient offset providers.

In Chapter 12, a case study on one of the original point-source to point-source trading programs in the nation, Connecticut’s Nitrogen Credit Exchange for Long Island Sound, is presented. Established in 2002, this program encompasses 80 publicly owned treatment works (POTWs) under a state-issued Nitrogen General Permit and is designed to assist permitted entities to achieve a 64% reduction in nitrogen loads to alleviate chronic summertime hypoxia affecting the western half of Long Island Sound.

Credits are tracked by a Nitrogen Credit Advisory Board, facilitating an annual trade with credits generation or deficits measured against an annual permit allocation for each facility. The allocation is ratcheted down annually to achieve the intended waste load allocation (WLA) for the year. The exchange uses an incentive approach using trading ratios based on natural attenuation processes that provide a robust market of relative costs and credit availability. This favors generation at the lowest marginal cost. From 2002 to 2012, 10 million credits were purchased by POTWs ($35 million) against 9 million credits ($28 million) supplied. The aggregate reduction for all 80 facilities put them all in compliance with the 2014 WLA.

Chapter 13 presents an Oregon case study that centers around trading thermal credits for compliance with NPDES permits under the CWA. Working with the state environmental agency, the Willamette Partnership has established the infrastructure for a trading system, and The Freshwater Trust, acting as project developer for the City of Medford, has entered into a contract with the city to generate 20 years of thermal offsets through riparian restoration in the Rogue River Basin.

Water quality trading offers the city cost savings and improved watershed health. Litigation over temperature TMDLs in Oregon has slowed issuance of new permits and, therefore, the expansion of trading in the state. However, the Medford program, now in its third year, provides a useful model of trading infrastructure and valuable lessons on developing WQS and reporting requirements that might be useful for other states, whether they are considering trading thermal, nutrient, or other constituents.

In Chapter 14, a Canadian perspective is provided on the current status of WQT in Ontario, beginning with the legal responsibilities of the federal and provincial governments for water quality. The author also provides an in-depth look at the South Nation River’s Total Phosphorus Management Program and makes recommendations for advancing trading in the province. Finally, Chapter 15 provides closing comments and observations on the state of the playing field of WQT.

1.4     Challenges to Adoption and Implementation of Water Quality Trading

Water quality trading is a cost-effective or least-cost means of compliance to regulatory ends established by the CWA. It is, therefore, carried on within the constraints and limitations of that 41-year-old statute. To take just one example, trading is not allowed to meet a technology-based standard as noted in U.S. EPA’s policy. With that said, the law is the primary driver or rationale for adopting trading.

There are many substantive technical challenges to successful implementation of water quality programs. These challenges will be discussed in the following chapters of this volume by practitioners who are dealing with them daily in concrete circumstances throughout North America. However, there are three cross-cutting issues or challenges to trading that merit attention in this introductory chapter: the absence of WQS for nutrients, insufficient capacity (staff, time, resources) in state agencies, and divergent regulatory approaches within (U.S. EPA headquarter regions) and between regulatory agencies (U.S. EPA states).

U.S. EPA envisioned nutrients as the primary parameters for trading back in 2003. However, outside the Chesapeake Bay, Great Lakes, Long Island Sound, Florida, North Carolina, and a few watersheds subject to an applicable TMDL, there is little pressure on point sources to concern themselves with nutrients. Out of more than 16,500 municipal or POTWs in the United States, approximately 4% have numeric limits for nitrogen and 9.9% for phosphorus (State-EPA Nutrient Innovations Task Group, 2009). Some permit limits are derived from TMDLs, but this is not an adequate substitute for WQS with adequate criteria. The effective or virtual absence of a regulatory driver is a kind of barrier to the adoption of trading and, even more consequentially, further improvements to water quality and ecology in impaired waters. Rigorous and enforceable numeric nutrient water quality criteria, admittedly a technically daunting task, would create a demand for WQT. For example, Pennsylvania and Virginia are both pursuing various forms of trading in response to rigorous, cutting-edge numeric criteria for the Chesapeake Bay, point-source to NPS trading in the case of the former and point-source to point-source trading, under the umbrella of a statewide general permit, in the case of the latter. Wisconsin is working to implement trading and other adaptive management options as part of its new nutrient standards for freshwater lakes and rivers.

This is not to denigrate voluntary or more collaborative approaches to dealing with nutrient impairments. However, such examples of successful efforts, absent of a regulatory driver, are scarce on the ground or, more precisely, in the nation’s watersheds.

Yet, even in instances where such numeric nutrient criteria are in place, the absence of defined market parameters can negate trading opportunities. Consider the case of DC Water and its Blue Plains wastewater plant, the largest in the world, across the Potomac River from Alexandria, Virginia. It is spending $1 billion to remove the next incremental amount of nutrients (one more milligram per liter of nutrients or one-tenth of the improvements to date) for the benefit of the Chesapeake Bay. Blue Plains’ discharge is 2% of the total load to the Chesapeake Bay (Hawkins, 2013). Clearly, this is a case where trading might have been appropriate and useful. However, the District of Columbia would have to engage in an interstate trade for which there is no market established by interstate agreement, practice, law, or rulemaking.

A very real challenge to trading and watershed-based permitting is the lack of state capacity (i.e., personnel, time, resources) to deal with a complicated, time-intensive effort to set up a market and regulatory program to facilitate trading between point sources and NPSs. Most states are delegated authority by U.S. EPA to manage the NPDES and TMDL programs. Those same programs dominate the workload of an ever-diminishing number of water quality staff at both the state and federal levels. Taking time to stop the assembly line, so to speak, and shift attention to a customized, complex program like trading is difficult, especially since the onset of the Great Recession, with its negative effect on staffing levels.

A wastewater operator, or other regulated party, must anticipate carrying much of the technical and financial burden, not just for his or her side of the program, but also the regulators’, within the bounds of law and propriety. Although this may not be an ideal situation, it is inevitable given current fiscal realities.

Another barrier to trading are the vagaries of views among U.S. EPA staff in headquarters and its various regional offices, not to mention between U.S. EPA regions and state water quality bureaus. For example, for a time, U.S. EPA Region 5 (Chicago, Illinois) and the Wisconsin Department of Natural Resources were having difficulty trying to resolve their differing views on how to design that state’s WQT program for nutrients and other adaptive management programs.

Despite differing views, U.S. EPA headquarters has consistently and forthrightly supported trading before both congressional committees and in other venues (Shapiro, 2013; Saiyid, 2013a, 2013b). However, assistant administrators, including the one for water, and all 10 regional administrators are on the same level in U.S. EPA’s organization chart. All report directly to the administrator of the entire agency. Moreover, enforcement is a separate office in headquarters with its own assistant administrator and staff deployed in each regional office. They are often involved in trading and other regulatory decisions in and around the states. This far-flung and diffuse management hierarchy, or matrix, makes consistency a difficult thing to achieve. Of course, this is not just a challenge for WQT, but for all aspects of the National Water Program.

1.5     A Pressing Need for Water Quality Trading

With an ageing infrastructure, increasing pressure on ratepayers, and the ecological threats of impairments by nutrients and other pollutants, the need for broader acceptance and adoption of WQT as a least-cost solution to meeting regulatory standards is even more necessary now than it was in 2003. Additionally, there are multiple environmental benefits to be won, which go beyond cost savings and compliance. These should not be left on the table. They are essential to realizing the ultimate object of the CWA as stated in Section 101: to restore and maintain the chemical, physical, and biological integrity of the nation’s waters.

2.0     A BRIEF HISTORY OF THE TRADING CONCEPT

2.1     Water Markets in the West

There are several antecedents for WQT, including water markets in the west, acid rain trading, and the phase-out of lead in gasoline. Water is a scarce commodity or resource in the western United States. As a means of valuing and reallocating water uses to their highest and best uses, at least in economic terms, water markets are being developed more and more. This is possible because western states have legal regimes that follow the Doctrine of Prior Appropriation. Reduced to its simplest form, it posits two controlling principles: first in time, first in right, or the rule of priority, and use it or lose it. Subject to regulation under a state’s general police power, these laws create a property right in an allocated share of water that is exclusive, transferable, and legally defensible. Water rights, subject to certain limits, can be bought, sold, or leased to cities or businesses, farmers, conservation groups, and the like.

For reasons both historical and practical, farmers are the biggest users of water as senior appropriators. In Nevada, for instance, agriculture accounts for 75% of water use (Colorado River Water Users Association, 2007). Yet, the economic value of water for municipal and industrial users far exceeds that of farmers. California growers consume 80% of the state’s water, but contribute only 2% to the gross state product (Glennon, 2009). As such, there is an opportunity for trades in which cities or businesses (or even environmental groups) buy or lease water from farmers for other uses. Between 1987 and 2005, there were 3,232 sales and leases of water rights in western states, involving 31 mil. ac-ft of water, which is more than twice the annual flow of the Colorado River (Glennon, 2009).

Pioneering institutions like the Oregon Water Trust, now the Freshwater Trust, have been paying ranchers to permanently shorten their irrigation season and leave water in-stream in late summer when the fish need it most (Scarborough and Lund, 2007). Interestingly, the Freshwater Trust won the 2013 United States Water Prize for its work in WQT of temperature credits from the planting of streamside trees (U.S. Water Alliance, 2013). From 1998 until approximately 2006, more than $300 million (adjusted for inflation) has been spent on leases and purchases of water for instream flows; this is nearly 4 times the amount spent by private entities and government agencies between 1990 and 1997.

Incentives matter for both water quantity and WQT. While the circumstances of western water law are different from those under the CWA, there are lessons to be learned from the progress made to develop water markets in the west. Specifically, these new water markets demonstrate the benefits of creating a space where agriculture and municipal water and wastewater utilities can seek mutual benefit in a collaborative manner.

2.2     Acid Rain Trading and Phase-Out of Lead in Gasoline

In 1990, Congress amended the CAA to address the problem of acid deposition (i.e., acid rain). The new program set a nationwide cap on emissions. By the year 2000, sulfur dioxide emissions from fossil fuel-fired electric power plants had to be reduced by 10 million tons per year from 1980 levels. Nitrogen oxide emissions were also to be reduced by 2 million tons per year below 1980 levels. The possibility of trading came about by allocating pollution allowances to sources based on past emissions and fuel consumption (one allowance permits the holder to emit 1 ton of sulfur dioxide during or after the calendar year of issuance). These allowances could be reallocated within a company to cover multiple units, transferred to another owner, or even transferred to a later year. Without getting into the myriad details of the program, acid rain was well suited to a trading approach because reductions are of relatively constant value over time and space (Percival et al., 2013).

The acid rain trading program was very successful. Originally, allowances were estimated to cost between $1,000 and $1,500 because it was assumed that power plants would install scrubbers. However, prices came in between $50 and just over $200 during the first 10 years. Companies were able to find less expensive ways of compliance such as switching to low-sulfur coal or blended fuel. Utilities that over complied, or exceeded control requirements, banked their allowances for use during the later more restrictive phase of the program when they would be more valuable.

By 2006, sulfur dioxide emissions were reduced by about 40%. U.S. EPA estimated the program’s benefits at $122 billion annually in 2010, with cost estimates at $3 billion annually in 2000 dollars. Add to this the nonhealth benefits of reduced effects on forests, lakes, streams, and buildings. And the Office of Management and Budget estimated that the acid rain program had a benefit-cost ratio of 40:1, the largest quantified human health benefits of any program in the previous 10 years.

The acid rain trading effort was actually preceded by another such program under the CAA, that is, the reduction of lead in gasoline. This was the first trading program under any environmental law. U.S. EPA began the phase-out in 1982, reducing the cost by allocating lead content credits among gasoline refiners and allowing refiners to trade the lead content credits or bank them for