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Water Quality Trading Program
Policy Issues Related to Water Quality Trading
Compliance
mechanism
The trading program must ensure compliance with Clean Water Act (CWA),
state and local regulations regarding water quality. This prevents the
trading program from degrading water quality. Designing the trading program
in the context of regulatory and enforcement mechanisms (primarily the
NPDES permit system), will ensure compliance of the program with federal,
state, and local laws. The EPA Water Quality Trading Policy recommends
the state take the lead to establish clear and enforceable mechanisms
consistent with NPDES regulations. In our case, NJDEP will need a mechanism
to authorize, evaluate, permit and verify trading programs. The key is
to make the mechanism timely, consistent, and responsive so as not to
hinder trade, while maintaining a mechanism robust enough to ensure trading
does improve water quality and avoids hot spots.
Other states have tried many different approaches to develop a regulatory
compliance assurance mechanism. States that have used a general permit
approach, such as in the Long Island Sound or the Tar-Pamlico River Basin,
have been more successful than states that have tried to regulate and
approve each individual trade. The general permit approach sets a collective
cap on a group of dischargers, and allows for informal trading among the
dischargers to meet the cap. The state can retain the authority to enforce
against individual dischargers. The general permit approach reduces transaction
costs, and does not demand heavy administrative costs from the state regulatory
agency. The general permit approach has supported both point/point and
point/nonpoint trading programs.
Public Involvement
Water quality trading programs need to make public participation accessible
and viable in order to generate public trust and build a stable market.
EPA recommends citizen involvement throughout the trading program, especially
at the early stages. The public should have access to information about
the boundaries of the trading area, discharges of the point and nonpoint
sources involved in trading, volume of credits bought and sold, and credit
prices.
Market Driver
The presence
of a market driver pushes the demand for water quality trading. Typically,
the market driver is a Total Maximum Daily Load (TMDL) which might be
too expensive for certain dischargers to comply with strictly through
upgrading treatment equipment. The TMDL sets a pollution budget for a
watershed. It allocates to each source a pollution reduction level necessary
to achieve a water quality standard. Waste load allocations for point
sources are reflected in enforceable NPDES permit limits. Load allocations
for nonpoint sources are not enforceable, but can be used in a trading
program as a financial incentive to reduce pollution beyond TMDL levels.
Hot Spots and
Environmental Justice
A market based instrument such as water quality trading must not compromise
the health of lower income citizens. Achieving water quality improvement
in the overall watershed should not come at the expense of localized impacts
to disadvantaged communities. Trading which results in localized areas
of unacceptably high pollutant concentration, or hot spots, in low income
segments of the watershed will undoubtedly raise controversial questions
of environmental justice abuses.
Liability
If a credit seller does not achieve the pollutant reductions it was paid
for, liability and enforceability are important issues to clarify in designing
a trading program. Also, if the credit seller in this scenario is a nonpoint
source (NPS), the problem becomes even more complicated since the Clean
Water Act does not regulate NPS pollution.
One possible solution was used in the Kalamazoo River Phosphorus Trading
Demonstration Program (1997-2000). The program developed a service agreement
which served as a contractual, non-permit, obligation for NPS participants.
This would have made NPS accountable for their part of the transaction
without using a command and control approach. (No actual trades occurred
in this trading project).
Nonpoint Sources
and Negative Perceptions of Trading
Throughout various
trading programs, some nonpoint sources (NPS) have not looked favorably
on water quality trading, despite the opportunity of financial gain which
trading offers. In these cases, NPS have been concerned that the monitoring
and assessment of NPS pollutant loads necessary to facilitate trading
could lead to increased regulation of NPS discharge. These nonpoint sources
perceive monitoring by regulatory agencies as intrusive, unreliable, expensive,
and a precursor to further regulation.
The Kalamazoo River Phosphorus Trading Demonstration Program (1997-2000)
provided some valuable lessons learned regarding this topic. They recommended
that when trying to involved farmers in a trading program:
• Avoid unnecessary publicity; protect their anonymity as much as
possible
• Use an approach that emphasizes what is in the best interest of
the farm
• When formalizing a point/nonpoint trade, use private contracts
rather than include the farmer in a PS discharger permit
• Remember that farmers understand commodities – pollution
credits viewed as a commodity should be attractive to them.
