New Water Quality Trading Policy Designed to Reduce Compliance Costs

Jan. 1, 2003
The U. S. Environmental Protection Agency has released a new Water Quality Trading Policy to cut industrial, municipal and agricultural discharges into the nation's waterways.

The U. S. Environmental Protection Agency has released a new Water Quality Trading Policy to cut industrial, municipal and agricultural discharges into the nation's waterways.

The policy is designed to provide more flexibility in meeting the requirements of the Clean Water and federal regulations. The goal is to reduce costs while improving and maintaining the quality of the nation's waters.

Water quality trading is a market-based approach to improve and preserve water quality. Trading can provide greater efficiency in achieving water quality goals in watersheds by allowing one source to meet its regulatory obligations by using pollutant reductions created by another source that has lower pollution control costs. EPA's policy endorses trading as an economic incentive for voluntary pollutant reductions from point and nonpoint sources of pollution and as a way to achieve ancillary environmental benefits such as creation of habitat.

EPA's new Water Quality Trading Policy provides guidance to states and tribes on how trading can occur under the Clean Water Act and its implementing regulations. The policy discusses Clean Water Act (CWA) requirements that are relevant to water quality trading including: requirements to obtain permits, antibacksliding provisions, development of water quality standards including antidegradation policy, National Pollutant Discharge Elimination System permit regulations, total maximum daily loads (TMDLs) and water quality management plans.

EPA's policy supports trading of nutrients (e.g., total phosphorus, total nitrogen) and sediment load reductions. The policy recognizes the potential for environmental benefits from trading of pollutants other than nutrients and sediments but believes that these trades may warrant more scrutiny. The policy does not support any trading activity that would cause a toxic effect, exceed a human health criterion or cause an impairment of water quality. EPA does not support trading of persistent bioaccumulative toxic pollutants at this time.

The policy supports trading in a variety of circumstances. For example, in unimpaired waters trading may be used to preserve good water quality by offsetting new or increased discharges of pollutants; in waters impaired by pollutants trading may be used to achieve earlier pollutant reductions and progress towards water quality standards pending the development of a TMDL; and trading may be used to reduce the cost of achieving reductions established by a TMDL. EPA does not support trading that delays implementation of an approved TMDL.

The policy draws on lessons learned from pilot programs conducted under EPA's 1996 Draft Framework for Watershed-Based Trading by identifying common elements that EPA believes are necessary for trading programs to be credible and successful. These elements include clearly defined units of trade, use of standardized protocols to quantify pollutant loads and reductions, provisions to address the uncertainty of nonpoint source loads and reductions that are traded, accountability mechanisms for all trades, public participation and access to information, and monitoring and program evaluation.

"The Water Quality Trading Policy I am announcing today recognizes that within a watershed, the most effective and economical way to reduce pollution is to provide incentives to encourage action by those who can achieve reductions easily and cost-effectively," said EPA Administrator Christie Whitman. "Our new Water Quality Trading Policy will result in cleaner water, at less cost, and in less time. It provides the flexibility needed to meet local challenges while demanding accountability to ensure that water quality does improve."

In order for a water quality trade to take place, a pollution reduction "credit" must first be created. EPA's water quality trading policy states that sources should reduce pollution loads beyond the level required by the most stringent water quality based requirements in order to create a pollution reduction "credit" that can be traded. For example, a landowner or a farmer 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.

An independent study of three watersheds in Minnesota, Michigan and Wisconsin looked at the cost of controlling phosphorous loadings. (World Resources Institute 2000) The study found that the cost of reducing phosphorous from controlling point sources - traditional pipe-in-the water dischargers regulated by the Clean Water Act - to be considerably higher than those based on trading between point and non-point sources which are not regulated by the Clean Water Act.

EPA currently is supporting 11 trading projects to address a range of water quality challenges across the country. EPA supplied over $800,000 in fiscal year 2002 funding support and EPA Regional offices are providing technical and other support to the projects.

The projects target a variety of pollutants, including nitrogen, selenium, mercury, acid mine drainage and general nutrient loading.

Example projects include reducing nitrogen loads in the Chesapeake Bay watershed; creation of an electronic marketplace for nutrient trading in Chesapeake Bay; trading to reduce selenium loads to the Lower Colorado River; and trading to reduce impacts from urban and agricultural runoff near Montgomery, AL. Another project is evaluating the feasibility of reducing acid mine drainage in the Cheat River, WV.

For more information log on to EPA's Trading website at

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