Water Quality Trading Is Nearly Here

Sept. 1, 2007
In January 2003, the EPA announced a policy to allow pollutant trading for holders of NPDES permits.

by Jay Collert, CHMM, CET

In January 2003, the EPA announced a policy to allow pollutant trading for holders of NPDES permits. It’s now moving forward with additional published guidance and grant money. While this program doesn’t appear to fully match the Clean Air Act, which allows permittees to buy and sell emission credits on the Chicago Mercantile Exchange, NPDES permit holders will be allowed to trade permit limitations between other permit holders. And some parts of this program have been hardwired into current NPDES permits for five years, even though it hasn’t been implemented wide-scale... yet.

How It Will Work

Permitting authorities are key players in any water quality trading program. Trades involving point sources - whether buyers or sellers - should be reflected in their NPDES permits. Listed below are some fundamental issues regulatory authorities should address when establishing a trading program or evaluating potential opportunities:

  • Pollutants most suitable for trading
  • Geographic scope of trading
  • Types of trading scenarios
  • Appropriate circumstances for trading
  • Definition of a pollutant reduction credit
  • Definition of a baseline for generating credits
  • Trading ratios
  • Types of effluent limitations that may be met through trading
  • Credit reconciliation based on timing and duration of credits
  • Role of stakeholders
  • Potential for and avoidance of localized exceedances of water quality standards

It’s essential the permitting authority have a clear understanding of these fundamental issues and how they’ll affect development of the NPDES permit that implements water quality trading.

Funding Now Available

The Targeted Watersheds Grant (TWG) Program is a competitive program that encourages protection and restoration of the country’s water resources through cooperative conservation. Its fundamental principles include: collaboration, new technologies, market incentives, and results-oriented strategies. The underlying premise is that strong partnerships lead to measurable environmental results. Hence, the continuing goal is to build on successes of strong public/private partnerships that have been working hard to improve the state of their watersheds. In an effort to increase the number of water quality trading projects throughout the country, the President has requested about $3 million of 2007 TWG Program funds for water quality trading projects in his Fiscal Year 2007 budget request. If the first round of grant programs is found successful, more money will most likely be available in successive years for this program, which will certainly drive wider implementation.

Pollutant Limitations

Not all pollutants are necessarily suitable for trading. Regulatory authorities should deter¬mine which pollutants may be traded within a specific watershed or as part of a particular trading program and may determine whether certain pollutants may be traded at all.

EPA’s Trading Policy supports trading for total nitrogen (TN), total phosphorous (TP), and sediment and indicates that other pollut¬ants may be considered for trading on a case-by-case basis. EPA doesn’t support trading of persistent bioaccumulative toxics (PBTs). The policy explicitly supports trading to reduce nutrients. A number of established trading programs and pilot projects have shown nitrogen and phosphorus can be successfully traded within a watershed to make progress toward meeting a TMDL and water quality standards.

Appendices A and B of EPA’s Water Quality Trading Assessment Handbook provide detailed information on evaluating trading suitability for phosphorus and nitrogen. Trading of other types of non-conventional pollutants may be supported on a case-by-case basis provided the trading programs are properly designed and prior approval is provided through a NPDES permit, a TMDL, or in a state-, tribe-, or EPA-supported watershed plan or pilot trading project.

The Trading Policy explicitly supports trading to reduce sediment loads. Another conventional pollutant that may be suitable for trading is temperature, or thermal load. Appendices C and D of the handbook provide detailed information on evaluating trading suitability for temperature and sediments. Trading of other types of conventional pollutants may be supported on a case-by-case basis, as long as the trading program is properly designed to ensure that trades are consistent with water quality standards.


Since the federal government is the permitting authority in very few U.S. states and territories, the real player for this program will be the states, territories and Indian tribes where the permits are actually written. If it’s embraced at that level, and enough grant money is available for the agencies to explore the program, permits in the very near future will certainly contain water quality trading with more regularity.

About the Author: Jay Collert, CHMM, CET, is a nationally recognized environmental trainer and consultant with the Annapolis, MD-based Aarcher Institute of Environmental Training LLC. Contact: 281-256-9044, [email protected] or www.aarcherinstitute.com

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