Rutgers New Jersey Agricultural Experiment Station [Water Resources Program]

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.

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

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