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February 19, 2019
EPA wants to revive water quality trading

For the first time since it issued its Water Quality Trading Policy (Policy) in 2003, the EPA appears to be taking consequential steps to encourage broader use of a practice that seems highly attractive at first glance but that has been constrained because of how the Policy was written and how stakeholders have interpreted it.

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In a new memo, David Ross, the Agency’s assistant administrator for the Office of Water, describes six “market-based principles designed to encourage creativity and innovation in the development and implementation of programs that reduce pollutants in our Nation’s waters.” The principles address trading issues such as geographic boundaries of a trading program, pollutant measurement, banking of credits, and identifying a water quality baseline.

Substantial cost savings

Water quality trading under the Clean Water Act is an option for compliance with a water quality-based effluent limitation (WQBEL) in a National Pollutant Discharge Elimination System (NPDES) permit. Trading is based on the fact that pollutant sources in a watershed may face very different costs to control the same pollutant. Under trading programs, permitted facilities facing higher pollution control costs may be able to meet their regulatory obligations by purchasing environmentally equivalent (or superior) pollution reductions from another source at lower cost.

“Trading can produce substantial cost savings while meeting the same water quality goal,” says the EPA. “It may also offer greater flexibility on the timing and level of technology a facility might install.”

New tools available

These benefits were well recognized long before the EPA published its Policy. However, in writing the policy, the Agency decided to be conservative about the water quality trading parameters it would find acceptable. As a result, the memo notes, the Policy included a “detailed and prescriptive set of recommendations” that many states, tribes, and stakeholders perceived as having the force and effect of law, “mandating certain actions or outcomes, and containing standards or requirements with which a market-based program must comply.”

The Agency now emphasizes that the Policy is not a regulation; rather, it is a set of recommendations that states and nongovernmental stakeholders may incorporate into projects; they are also free to propose their own market-based strategies to help instill new vitality into trading.

“States and tribes should adopt policy principles that will be most effective for their communities and resources,” states the memo.

Also, the memo now notes that since 2003, new nonpoint pollution control technologies, including technical mapping and robust modeling programs, have provided the EPA with the opportunity to modernize its water quality trading policy.

Six principles

The Agency says it can support the following six principles.

  • Watershed projects. Focusing on entire watersheds, including interstate areas, rather than on areas with municipal or jurisdictional boundaries can result in greater market opportunities and larger-scale resource improvements over time.
  • Adaptive management. Adaptive management is an alternative approach to precise measurement of pollution reductions, which can be confounded by natural variability, particularly with nonpoint source discharges. Under an adaptive management approach, alternatives include allowing credits to be generated and verified based on scientifically defensible estimates of pollutant reductions, making use of third-party audits, allowing water quality improvements over time, and allowing modeling and measurement strategies to evolve and improve without sacrificing certainty for market participants.
  • Banking credits and offsets. Allowing banking and future use of water quality credits encourages early adoption of pollutant reduction practices. Also, program managers should consider whether existing practices could generate credits or offsets on a lookback basis; that is, developing credits for activities that occurred before the trading program began if those activities currently reduce runoff and nonpoint source pollution.
  • Simplicity and flexibility. Trading has been slowed by “overly rigid and complicated baseline policies.” Alternatively, documented current conditions can provide a simple and appropriate baseline.
  • Credits for multiple markets. If a single project reduces pollutant discharges into waterways, reduces air emissions, and creates wetlands or wildlife habitat in accordance with an established market-based trading or banking program, the project proponent should be able to generate and sell credits within each of those programs or markets.
  • Financing. The memo encourages the use of existing and emerging financing approaches to support water quality trading projects. Existing approaches include Section 319 Grants, State Revolving Loan Funds, and Water Infrastructure Finance and Innovation Act (WIFIA) funds. Newer opportunities either offered through or supported by the Agency’s Water Finance Center include Pay for Success, Pay for Performance, green bonds, and energy and water performance contracting.

A 1-page document issued with the memo lists other actions the EPA has taken and is planning to promote water quality trading.  These include a memorandum of understanding signed with the Water Research Foundation to advance nutrient management within the agricultural community and working with the Department of Agriculture to convene meetings and webinars on innovative financing for nutrient reduction.

Both documents are available here.

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