For nearly 30 years, environmental regulation has included examples of market-like mechanisms, where overall pollution limits (“budgets”) are set and individual sources assigned trade-able “emission credits” that can be traded among sources as they negotiate the most efficient pathways to overall reduction necessary to meet the budget. Although proliferating “cap and trade” systems for greenhouse gases are probably the most widely known, other examples abound.
The Environmental Protection Agency (EPA) is reviving and expanding long-established agency support for trading mechanisms in “impaired areas” that exceed national water quality objectives sent under the Clean Water Act (CWA). In these areas, the pollution budget is calculated as the Total Maximum Daily Load (TMDL) of a given pollutant that would allow an impaired area to meet national standards, considering ambient environmental sources, runoff from contaminated and disturbed areas, and ongoing discharges from industrial and municipal sources. The practical questions are “how much tighter than generally applicable discharge standards (such as “categorical standards”) do local standards have to be in order for total discharges to stay within the local TMDL?” and “how do we allocate the TMDL across all the entities responsible for discharges?”
It’s mathematically possible to compare TMDL levels with the pollutants that would be discharged if every source simply met applicable national standards – to give every source an equivalent reduction of X%. But since the costs of those X% reductions could vary wildly based on technologies and operational imperatives, it’s long been recognized that other methodologies might achieve the desired reductions with lower costs and fewer dislocations. Since President Trump took office, EPA has been working to facilitate these efforts.
What EPA Policies Have Been in Place Since 2003?
EPA’s existing Water Quality Trading Policy dates from 2003, when the agency compiled and synthesized earlier efforts. As stated in the document:
The purpose of this policy is to encourage states, interstate agencies and tribes to develop and implement water quality trading programs for nutrients, sediments and other pollutants where opportunities exist to achieve water quality improvements at reduced costs. More specifically, the policy is intended to encourage voluntary trading programs that facilitate implementation of TMDLs, reduce the costs of compliance with CWA regulations, establish incentives for voluntary reductions and promote watershed-based initiatives.
The Policy emphasized that all existing CWA requirements would remain in place, and that any trading programs would need to provide “credible” terms and goals. It identified that trading programs should do the following:be consistent with CWA requirements:
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Specify geographic trading areas covered (such as watersheds or impacted areas with TMDLs)
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Specify pollutants and parameters to be traded (particularly nutrients and sediments, possibly other pollutants and cross-trading between pollutants where demonstrated to be appropriate, but not persistent bioaccumulative toxics (PBTs))
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Provide appropriate baselines for establishing and trading credits (e.g., an established TMDL for one or more pollutants)
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Incorporate legally binding quantification of credits, monitoring and followup, public participation and access to information, compliance and enforcement, and program evaluation.
EPA incorporated this policy into a Water Quality Trading Toolkit for Permit Writers issued in 2007 and updated in 2009. The Toolkit includes more detailed guidance, including review of existing programs and sample permit language.
What is EPA Doing in 2019 to Revise and Expand its Efforts?
EPA is pressing several initiatives in 2019. These clarify and update the longstanding guidance summarized above, based on the agency’s views of evolving resource management tools (such as mapping and monitoring technologies) and practical information gathered from trading programs over the intervening years. EPA is also addressing ambiguities in its earlier guidance that have been interpreted conservatively by would-be local trading efforts in ways that have complicated or discouraged these efforts.
In February 2019, EPA issued a memo updating the 2003 Policy and promulgating Market-Based Principles. The memo provides the following Principles, with limited additional documentation:
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“States, tribes, and stakeholders should consider implementing water quality trading and other market-based programs on a watershed scale.
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The EPA encourages the use of adaptive management strategies for implementing market-based programs.
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Water quality credits and offsets may be banked for future use.
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The EPA encourages simplicity and flexibility in implementing baseline concepts.
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A single project may generate credits for multiple markets.
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Financing opportunities exist to assist with deployment of nonpoint land use practices.”
In September 2019 EPA published a notice in the Federal Register requesting comment on policy approaches for addressing “baseline” issues in watersheds with approved TMDLs. EPA states that interpretations of its discussion of these issues in the 2003 Policy and 2007/2009 Toolkit have been “… seen by some stakeholders as confusing, complex and restrictive, creating a barrier to entry for point source-nonpoint source trading in watersheds where a TMDL has been approved by the EPA .” Questions for comment consist of the following:
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Definition of baseline. If and how to soften the 2003 Policy pronouncement that TMDLs must be “approved or established” before creating a baseline; and that a nonpoint source must meet its TMDL allocation before trading (since allocations are not enforceable under CWA, and because the sequencing may defeat the incentive for trading).
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Baselines for trading. Whether EPA should support tradability of any reasonably assured pollutant reduction by a point source that hasn’t already been factored into establishment of the TMDL.
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Incremental baseline. Whether nonpoint sources may be allowed to apply reductions before a TMDL is established through layering of pre-establishment and post-establishment quantities in incremental steps.
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Compliance schedules. Whether permit authorities may allow extensions of compliance deadlines to allow nonpoint sources time to make necessary changes.
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Water Quality Standard Variances. Whether short-term variances might be used to allow nonpoint sources time to make necessary changes.
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Alternative approaches to disaggregation. How permit agencies might disaggregate TMDL totals, including by geographic subareas, discharger categories, and time intervals to facilitate trading and reductions.
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In-lieu fee programs. Whether to allow permitted facilities to water quality-based effluent limitations (WQBELs) by in-lieu payments into designated funds for use to reduce nonpoint source loading.
EPA’s request provides the agency’s inclination on each of these matters, and encourages reactions and alternatives.
What’s Next?
In November 2019, EPA extended the comment period for its September notice until December 18, 2019. After the comment period ends, EPA will review submissions and take further steps it considers appropriate. After that, permit agencies around the country should review the changes in guidance, and some may initiate or expand trading programs.
Self-Assessment Checklist
Does the organization own or operate any facility that discharges pollutants into an impaired water body subject to any TMDL?
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Has the organization been directed to achieve discharge reductions stricter than those that would result from application of applicable categorical standards?
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Has the organization evaluated whether it could make additional reductions if compensation where available, e.g., through a water quality trading program?
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Has the organization evaluated whether it could make required reductions more economically if it could purchase credits through a water quality trading program?
Where Can I Go For More Information?
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EPA Water Quality Trading under the National Pollutant Discharge Elimination System Program”
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EPA “Water Quality Trading and Policy” webpage, including 2003, 2009 and 2019 documents
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About the Author
Jon Elliott is President of Touchstone Environmental and has been a major contributor to STP’s product range for over 30 years.
Mr. Elliott has a diverse educational background. In addition to his Juris Doctor (University of California, Boalt Hall School of Law, 1981), he holds a Master of Public Policy (Goldman School of Public Policy [GSPP], UC Berkeley, 1980), and a Bachelor of Science in Mechanical Engineering (Princeton University, 1977).
Mr. Elliott is active in professional and community organizations. In addition, he is a past chairman of the Board of Directors of the GSPP Alumni Association, and past member of the Executive Committee of the State Bar of California's Environmental Law Section (including past chair of its Legislative Committee).
You may contact Mr. Elliott directly at: tei@ix.netcom.com