Water Quality Trading

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Water Quality Trading

• Claire Schary
• Water Quality Trading Coordinator
• U.S. Environmental Protection Agency,
• Region 10, Seattle, WA
• schary.claire_at_epa.gov
• [phone]
• May 5, 2005

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What is Water Quality Trading?

• A source facing higher pollution reduction costs
  compensates another source for achieving
  equivalent, less costly reductions.
• Market-based tool to solve water quality problems
• Voluntary, flexible, stimulates innovation
• Cost-effective pollution reduction
• Operates within existing programs
• Value for the pollution reduction credit is
  created by limiting the total amount of pollution
  allowed.

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Conditions Necessary for Trading

• Market Driver
• regulatory requirement sets limit on pollutant
  discharges
• defines commodity and market area
• Cost differential
• the financial incentive for entering into a trade
• must cover transaction costs
• Ability
• technical feasibility and adequate supply
• Opportunity
• tools for trading available

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Water Quality Trading TMDLs Are the Primary
Regulatory Drivers

• Total Maximum Daily Loads (TMDLs) are the most
  common drivers for Water Quality Trading
• TMDLs set a pollutant budget on all sources to
  achieve reductions necessary to achieve water
  quality standards in impaired water bodies
• Under TMDLs point sources are assigned individual
  Waste Load Allocations
• Enforced in NPDES permit through specified limit
• Under TMDLs nonpoint sources are assigned Load
  Allocation by category
• State, federal cost-share programs used to
  encourage use of Best Management Practices (BMPs)

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EPA Region 10s Water Quality Trading Experience

• Idaho
• Lower Boise River Water Quality Trading
  Demonstration Project - phosphorus
• Mid-Snake River Project - phosphorus
• Idaho DEQ issued Water Pollutant Trading Guidance
  for Watersheds based on project experience
• Oregon
• Tualatin River - Clean Water Services Water
  Quality Trading Project temperature trading
  under watershed permit.
• Oregon DEQ issued Internal Management Directive
  on water quality trading
• Water Quality Trading Assessment Handbook

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Lower Boise River
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Phosphorus Trading Lower Boise River

• Dynamic, market-based trading
• Broad authorization to trade subject to trading
  rules
• Liability remains with permit holder
• PS, NPS sign private trade contracts
• Environment protected
• BMP List specifies acceptable practices,
  measurement
• Location-based trade ratios applied to achieve
  environmentally equivalent reductions
• Robust participation by agriculture
• Trading driven by economic decisions
• Private association oversees trading system
• Mechanisms to support farm-scale and watershed
  scale participation

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Phosphorus Trading Mid-Snake R.

• Trades between point sources only (not enough
  supply from nonpoint sources so far)
• Upstream point source City of Twin Falls has
  surplus phosphorus reductions
• Downstream point source fish farmers need to make
  reductions
• Trade reduction credits from Twin Falls will be
  used 30 miles downstream by fish farmers
• Water quality is protected by
• TMDLs overall phosphorus reduction requirement,
• instream concentration limits, and
• upper limits in fish farmers permits to prevent
  hot spots

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Theory to Practice inWater Quality Trading

• Not all pollutants are tradable commodities
• Trading Policy allows nutrients, phosphorus,
  sediment, and case-by-case for others
• Issues for pollutant trading suitability
• Pollutant form Different forms of same pollutant
  discharged
• Impact Fate and transport of pollutant, and its
  varying impact on sensitive portions of the
  watershed
• Location of dischargers in the watershed for
  determining environmentally equivalent reductions
• Time Match of timing of discharge and reductions
  across sources permit cycles
• Quantity supply and demand must align

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Financial Attractiveness of Water Quality
Trading

• Need to determine if trading makes financial
  sense for one or more permittees in the
  watershed
• TMDL allocations affect ability to trade
• Cost of required reductions based on control
  technology options and lumpiness of reduction
  amounts achieved
• Cost of incremental reduction amounts for
  individual sources are what drives the demand for
  trading
• not the same as average cost of reductions
• Assess potential control costs for other point
  sources, nonpoint sources in the watershed and
  identify potential trades
• Consider transaction costs, risk, and alternative
  compliance strategies by other sources

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Market Infrastructure to Support Trading

• Transaction costs strongly influenced by market
  design, regulatory constraints, and uncertainty
  of outcomes
• Participants uncertainty that a viable water
  quality trading market will develop
• Participants uncertainty of regulatory approval
  of trades
• Designing a market to address these needs, while
  matching the market size to the volume of trading
  expected, helps reduce transaction costs.

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How Can Water Quality Trading Be Used to Improve
Multiple Resources?

• One project can generate multiple types of
  credits
• Depends on what is beneficial for other resources
• Other types of credit markets need to define what
  is their baseline and then what is surplus for
  trading
• Water Quality Trading Policy on baselines for
  credit calculations
• Must be consistent with water quality standards
• Must lead to reduction amounts that are equal to
  or greater than those established under existing
  regulatory requirements or under a TMDL.
• When there is a TMDL, the Waste Load Allocations
  and Load Allocations are the baseline.

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Question

• For credits to be established for other ecosystem
  services besides water quality
• What is the baseline and what is a surplus
  reduction?
• How will environmental equivalency be established
  so the credit can be used in a different
  location?
• Will there be sufficient demand and supply, and
  at the same time?