Rutgers New Jersey Agricultural Experiment Station [Water Resources Program]

Water Quality Trading Program

What is water quality trading?
Water quality trading represents a market based approach to achieving better water quality at lower cost. It is an alternative to traditional command and control regulation. Not only does it hold the potential of reduced costs for point sources (factories, wastewater treatment plants, etc.) to comply with water quality standards, it may be the best way to encourage reduction of rampant non point source pollution such as agriculture and urban land use, which are not regulated by the Clean Water Act. Water quality trading is multi-disciplinary and integrates science, engineering, policy, and economics. Stakeholders in a trading program can include industries, wastewater treatment plants, local businesses, farmers, municipalities, environmental NGOs, government officials, and citizen groups.

Trading is based on the fact that sources in a watershed can face very different costs to control the same pollutant. A trading program allots a certain number of pollution credits
to sources collocated in the same watershed. The sources can choose to pollute under their limit and sell their credits, or pollute over their limit and purchase credits. If the limits and credits are properly allocated, such as with a TMDL, the net effect will improve water quality in the watershed, at lower cost than making each individual pollutant source upgrade their equipment to comply. Trading can occur among point sources and nonpoint sources. Depending on the structure of the program, sources can trade directly or indirectly with each other. Several water quality trading programs are underway nationwide, and some have been very successful, including nitrogen trading in Long Island Sound, and nutrient trading in the North Carolina Tar-Pamlico River Basin. These programs are saving hundreds of millions of dollars while significantly reducing water pollution.

These are just some of the key issues which are important to making a successful trading program:

• Presence of a regulatory driver, such as a TMDL
• Presence of market drivers that make trading financially attractive
• Establishing a framework that reduces transaction costs and simplifies the trading process, while still being transparent and compliant with the Clean Water Act and state/local laws
• Avoiding hot spots of higher pollutant concentration and ensuring equity for lower income residents

Source: US EPA Water Quality Trading Assessment Handbook (2004), available at

What is the Passaic Water Quality Trading Project?

The non-tidal portion of the Passaic River watershed encompasses 803 square miles, with 669 square miles of the watershed in New Jersey. About 25% of New Jersey’s population (i.e. 2 million people) lives in this watershed. Three of New Jersey’s twenty watershed management areas (WMAs 3,4, and 6) overlap with the non-tidal Passaic River watershed.

New Jersey has imposed a rigorous in-stream water quality standard for phosphorus concentration of 0.1 mg/l. Excess phosphorus can cause algal bloom, reduced dissolved oxygen, and eutrophication of water bodies, which can result in fish kills and drinking water supply problems.

Most of the 19 sewage treatment plants in the non-tidal Passaic River watershed will need to invest heavily on upgraded equipment to comply with the phosphorus standard. A trading project has been proposed as a cost effective alternative to meeting the phosphorus effluent standard. The project design, implementation and evaluation will extend from 2005-2008. Last year the EPA tentatively awarded a grant to fund development of the trading program.

The program will focus on both point-point and point-nonpoint trading opportunities. Potential participants include sewage treatment plants, municipal stormwater sources, and farmers. Watershed studies have been completed for the Passaic and a TMDL is near completion for waters impaired due to exceedance of the 0.1 mg/l phosphorus standard. This project will provide a cost-effective way to implement the TMDL once it is completed. An active coalition of point sources, the NJDEP, and a team of experts from Rutgers and Cornell Universities have been assembled to complete this endeavor.

Source: Obropta C.C. (2004), ‘Development, Implementation, and Evaluation of a Water Quality Trading Program for the Non-Tidal Passaic River Watershed’, Proposal to USEPA Targeted Watershed Grants Program, available at:

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