EPA Unveils Water Quality Trading Policy

On May 15, 2002, the U.S. Environmental Protection Agency (EPA) released a proposed Water Quality Trading Policy (the policy). This new initiative may benefit a wide range of municipal and commercial parties with the opportunity to apply common-sense, lower-cost and innovative solutions to water quality problems in their regions. While the focus is on nutrients and sediment, the policy also discusses the potential for trading other pollutant reductions under certain circumstances. The EPA received comments through July 15, 2002, on this proposal.

The new policy would strengthen and expand the EPA’s support for watershed-based trading set forth in the EPA’s May 1996 Draft Framework for Watershed-Based Trading. EPA officials believe that most trading will occur as states, tribes and sources implement programs to restore polluted waters. The policy supports trading among and between regulated and unregulated sources through watershed partnerships and programs developed by states and tribes.

Under the proposed Policy, stakeholders first would be required to meet technology control requirements. Subsequently, participants could use pollution reduction credits to make further progress toward water quality goals. The policy states that sources should reduce pollution loads beyond the level required by the most stringent technology requirements in order to create a pollution reduction "credit" that can be traded. One example provided by the EPA is of a landowner or a farmer who could create credits by changing cropping practices and planting shrubs and trees next to a stream. A municipal wastewater treatment plant then could use these credits to meet water quality limits in its permit.

This new policy is especially significant in light of recent court decisions under the Total Maximum Daily Load Program (TMDL). These recent decisions have held that TMDLs are required for waters that are impaired primarily by nonpoint sources of pollution.

Studies have estimated that flexible approaches to improving water quality could save $900 million annually compared to the least flexible approach. For example, nitrogen trading among publicly owned treatment works that discharge into Long Island Sound is expected to save more than $200 million in upgrading treatment facilities to meet water quality goals. In addition, a number of successful pilot trading projects recently have been completed and a number of states are developing water quality trading programs. Market-based approaches also create economic incentives for innovation, emerging technology, voluntary reductions and greater efficiency in improving the quality of the nation’s waters.

The EPA has identified numerous potential state and tribal applications for water quality trading programs, including the following:

• reducing the cost of compliance with water-quality-based requirements
• offsetting growth and maintaining water quality
• achieving early reductions and progress toward water-quality standards pending development of TMDLs for impaired waters
• reducing the cost of implementing TMDLs through greater efficiency and flexible approaches
• establishing economic incentives for voluntary reductions from all sources, especially agriculture and urban storm water runoff
• achieving greater environmental benefits than those under existing regulatory programs
• developing other market-based programs that bundle ecological services to achieve multiple environmental and economic benefits

The EPA has provided a list of requirements for trading programs to be consistent with the Clean Water Act (CWA). In addition, in order to attain EPA approval, water quality trading programs must include all of the following general elements:

• clear legal authority for trading to occur
• a fungible, clearly defined unit of trade
• standardized protocols to quantify pollutant loads and load reductions, pollutant reduction credits, allowances or other tradable units
• mechanisms for determining compliance and ensuring enforcement
• public participation and access to information
• periodic assessments of environmental and economic effectiveness and program revisions as needed

TMDLs specify the maximum amount of a particular pollutant that can pass through a water body each day without water quality standards being violated. Recently, the Ninth Circuit Court of Appeals in Pronsolino v. Nostri held that the EPA it was within its authority under the CWA to set TMDL for waters impaired by nonpoint sources, but also held that states have primary authority to implement TMDLs for nonpoint source-impaired waters. The Eleventh Circuit also recently followed the same reasoning in Sierra Club v. Meiburg. These decisions undoubtedly will boost interest in point/nonpoint source trading as states begin to comply with consent decrees setting forth schedules for establishing TMDLs.