United States Office of Water EPA 800-R-96-001
Environmental Protection (4102) May 1996
Agency
vvEPA Draft Framework for
Watershed-Based Trading
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Purpose of This Framework
This framework is a companion to the Environmental Protection Agency's effluent trading
policy and has been developed to encourage trading and assist in evaluating and designing
trading programs. Specifically, the framework provides:
• Background on what effluent trading is and the benefits it offers.
• A series of conditions that are necessary for trading, including those which ensure
protection of water quality comparable to the protection that would be provided
without trading.
• A template of regulatory, economic, data, technical, scientific, institutional,
administrative, accountability, and enforcement issues that facilitates identification and
evaluation of trading opportunities.
• Worksheets/checklists to evaluate whether potential trades meet threshold conditions.
Who Should Read This Document
This framework provides information to help all stakeholders establish successful trading
programs that are protective of water quality:
• Local and national community groups— Private citizens, environmental
organizations, and chambers of commerce.
• Members of the regulated and nonregulated community— Municipalities, business,
industry, commercial enterprises, and those engaged in land use activities that can
affect water quality, such as agriculture and forestry.
• Governmental organizations— Local governments, state agencies, regional
organizations, and federal agencies involved in protecting the environment.
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This document provides a framework on how best to implement the Clean Water Act
and EPA's regulations to facilitate trading in watersheds. It also provides information to the
public and regulated community on how EPA intends to exercise its discretion in
implementing its regulations. This framework is designed to implement the President's policy
of promoting, encouraging, and facilitating trading wherever possible. The document
supplements, but does not replace, any existing guidance. It is not a substitute for EPA's
regulations, nor is it a regulation itself. Thus, it does not impose legally binding requirements
on EPA, states, or the regulated community. EPA may change this framework in the future,
as appropriate.
For additional copies of the framework, you can faxNCEPI at (513)
569-7186; you must specify the publication number and title.
Copies of the framework are also available on disk in WordPerfect
6.1 format or can be accessed on the EPA Office of Water Home
Page (Internet address: http://www.epa.gov/OW/watershed.)
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TABLE OF CONTENTS
EXECUTIVE SUMMARY ix
CHAPTER 1. INTRODUCTION 1-1
USING THIS FRAMEWORK 1 -1
ISSUES FOR THE FUTURE 1-1
CHAPTER 2. PRINCIPLES FOR TRADING 2-1
TRADING AND THE CLEAN WATER ACT 2-1
OVERVIEW OF WATER QUALITY RULES AND MANAGEMENT IN THE UNITED STATES 2-1
WATER QUALITY STANDARDS 2-1
EFFLUENT GUIDELINES, CATEGORICAL PRETREATMENT STANDARDS, AND LOCAL LIMITS 2-2
DIFFUSE SOURCES 2-3
TOTAL MAXIMUM DAILY LOADS (TMDL s) 2-3
ANTI-BACKSLIDING REQUIREMENTS 2-3
EFFLUENT TRADING PRINCIPLES To MEET WATER QUALITY OBJECTIVES 2-4
PRINCIPLE 1: TRADING PARTICIPANTS MEET APPLICABLE CWA TECHNOLOGY-BASED
REQUIREMENTS 2-4
PRINCIPLE 2: TRADES ARE CONSISTENT WITH WATER QUALITY STANDARDS THROUGHOUT A
WATERSHED, AS WELL AS ANTI-BACKSLIDING, OTHER REQUIREMENTS OF THE
CLEAN WATER ACT, OTHER FEDERAL LAWS, STATE LAWS, AND LOCAL
ORDINANCES 2-4
PRINCIPLE 3: TRADES ARE DEVELOPED WITHIN A TMDL OR OTHER EQUIVALENT
ANALYTICAL AND MANAGEMENT FRAMEWORK 2-6
PRINCIPLE 4: TRADES OCCUR IN THE CONTEXT OF CURRENT REGULATORY AND
ENFORCEMENT MECHANISMS 2-7
PRINCIPLE 5: TRADING BOUNDARIES GENERALLY COINCIDE WITH WATERSHED OR
WATERBODY SEGMENT BOUNDARIES, AND TRADING AREAS ARE OF A
MANAGEABLE SIZE 2-8
PRINCIPLE 6: TRADING WILL GENERALLY ADD TO EXISTING AMBIENT MONITORING 2-9
PRINCIPLE 7: CAREFUL CONSIDERATION is GIVEN TO TYPES OF POLLUTANTS TRADED 2-10
PRINCIPLE 8: STAKEHOLDER INVOLVEMENT AND PUBLIC PARTICIPATION ARE KEY
COMPONENT S OF TRADING 2-10
CHAPTER 3. THE ECONOMICS OF TRADING 3-1
INTRODUCTION 3-1
COST SAVINGS 3-1
COMPARING COSTS 3-1
FACTORS THAT AFFECT THE ECONOMICS OF TRADING 3-5
TRADING RATIOS 3-5
TRANSACTION COSTS 3-6
UNCERTAINTY AND ITS ALLEVIATION 3-8
NUMBER OF TRADING PARTICIPANTS 3-8
IV
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AVAILABILITY OF COST DATA 3-10
CHAPTER 4. IDENTIFYING AND EVALUATING TRADING OPPORTUNITIES 4-1
WHERE To BEGIN? 4-1
A SCREENING PROCESS FOR TRADING 4-1
SCREENING LEVEL 1: CONSISTENCY WITH WATER QUALITY AND ENVIRONMENTAL OBJECTIVE
SCREENING LEVEL 2: ECONOMIC BENEFITS TO TRADING PARTNERS 4-3
SCREENING LEVEL 3: COORDINATION AND ADMINISTRATIVE SUPPORT 4-4
TEMPLATE OF FAVORABLE CONDITIONS 4-5
CHAPTER 5. POINT SOURCE/POINT SOURCE AND INTRA-PLANT TRADING 5-1
INTRODUCTION 5-1
5.1 REGULATORY ISSUES 5-2
ANTI-DEGRADATION POLICY 5-2
ANTI-BACKSLIDING REQUIREMENTS 5-3
REOPENER CLAUSE 5-3
5.2 ECONOMIC ISSUES 5-3
UNIT COST DIFFERENCES 5-4
TRANSACTION COSTS 5-4
OTHER ECONOMIC CONSIDERATIONS 5-4
5.3 DATA-RELATED ISSUES 5-5
CURRENT OR POTENTIAL FUTURE PERMIT LIMITS 5-6
LOADINGS 5-6
CONTROL OPTIONS 5-6
WATER QUALITY IMPACTS 5-7
5.4 TECHNICAL AND SCIENTIFIC ISSUES 5-7
LOCAL CONDITIONS 5-7
SPATIAL CONSIDERATIONS 5-8
TEMPORAL CONSIDERATIONS 5-8
CHEMICAL CONSIDERATIONS 5-8
ADDRESSING CONSIDERATIONS 5-9
5.5 INSTITUTIONAL ISSUES 5-9
5.6 ADMINISTRATIVE ISSUES 5-9
INITIAL ALLOCATION 5-10
PROGRAM OPERATION 5-10
TRADE TIMING, FREQUENCY, AND DURATION 5-11
STEPS TO ENCOURAGE TRADING 5-12
5.7 ACCOUNTABILITY AND ENFORCEMENT 5-13
5.8 WORKSHEET CHECKLIST 5-15
CHAPTER 6. PRETREATMENT TRADING 6-1
INTRODUCTION 6-1
6.1 REGULATORY ISSUES 6-2
6.2 ECONOMIC ISSUES 6-4
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POTENTIAL COST SAVINGS 6-4
TRANSACTION COSTS 6-4
TECHNOLOGICAL INNOVATION 6-5
LOCAL ECONOMIC DEVELOPMENT 6-5
6.3 DATA-RELATED ISSUES 6-5
POLLUTANT LOADINGS 6-7
POLLUTION REDUCTION OPTIONS AND COSTS 6-7
6.4 TECHNICAL AND SCIENTIFIC ISSUES 6-8
MASS - vs. CONCENTRATION-BASED LIMITS 6-8
UNIT OF EXCHANGE 6-8
6.5 INSTITUTIONAL ISSUES 6-9
STAKEHOLDER PARTICIPATION AND SUPPORT 6-9
6.6 ADMINISTRATIVE ISSUES 6-10
INITIAL ALLOCATION 6-10
REALLOCATION THROUGH TRADES 6-10
TIMING, FREQUENCY, AND DURATION 6-10
REVIEW AND APPROVAL OF TRADES 6-12
6.7 ACCOUNTABILITY AND ENFORCEMENT 6-12
6.8 WORKSHEET/CHECKLIST 6-13
CHAPTER 7. POINT SOURCE/NONPOINT SOURCE TRADING 7-1
INTRODUCTION 7-1
7.1 REGULATORY ISSUES 7-2
WATER QUALITY STANDARDS 7-2
TMDLs 7-2
TRADING SITUATIONS FOR POINT AND NONPOINT SOURCES 7-3
7.2 ECONOMIC ISSUES 7-5
UNIT COST DIFFERENCES 7-5
ANCILLARY BENEFITS 7-5
COMPARABILITY OF COSTS 7-5
TRANSACTION COSTS 7-6
COST SHARING 7-6
PIGGYBACKING 7-6
7.3 DATA-RELATED ISSUES 7-7
WATER QUALITY AND POLLUTANT LOADINGS 7-7
DATA-RELATED ROLE OF TMDLs 7-8
ECONOMIC AND GEOGRAPHIC DATA 7-8
7.4 TECHNICAL AND SCIENTIFIC ISSUES 7-9
SPATIAL CONSIDERATIONS 7-9
TEMPORAL CONSIDERATIONS 7-9
CHEMICAL CONSIDERATIONS 7-9
ACCOMMODATING DIFFERENCES 7-10
7.5 INSTITUTIONAL ISSUES 7-10
IDENTIFYING POTENTIAL STAKEHOLDERS 7-11
MATCHING TRADING SUPPORT NEEDS To EXISTING ROLES AND RESPONSIBILITIES 7-11
7.6 ADMINISTRATIVE ISSUES 7-12
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MATCHING ADMINISTRATIVE ARRANGEMENTS To TRADING ARRANGEMENTS 7-13
INFORMATION MANAGEMENT 7-13
FACILITATION AND BROKERING 7-14
TRACKING AND DOCUMENTATION 7-14
TECHNICAL ASSISTANCE 7-15
7.7 ACCOUNTABILITY AND ENFORCEMENT 7-15
REASONABLE ASSURANCE WITHIN A TMDL OR EQUIVALENT ASSESSMENT AND
REMEDIATION PLAN 7-15
MEETING THE REASONABLE ASSURANCE TEST 7-16
REASONABLE ASSURANCE AND ACTUAL PERFORMANCE 7-18
REASONABLE ASSURANCE FOR PERMIT-BASED TRADES 7-18
WATERSHED BANKS 7-19
7.8 WORKSHEET/CHECKLIST 7-20
CHAPTER 8. NONPOINT/NONPOINT SOURCE TRADING 8-1
INTRODUCTION 8-1
8.1 REGULATORY ISSUES 8-2
STATE AND LOCAL REGULATORY PROGRAMS 8-2
QUASI-REGULATORY AND VOLUNTARY MANAGEMENT PROGRAMS 8-4
WETLAND MITIGATION BANKING 8-4
8.2 ECONOMIC ISSUES 8-5
PHYSICAL SITE CONDITIONS 8-5
NATURE OF BMP REQUIRED 8-6
SCALE OF BMP IMPLEMENTATION 8-6
AVAILABILITY OF COST-SHARING 8-6
TRANSACTION COSTS 8-7
8.3 DATA-RELATED ISSUES 8-8
POLLUTANT LOADS AND WATER QUALITY MONITORING DATA 8-8
ECONOMIC AND GEOGRAPHIC DATA 8-9
8.4 TECHNICAL AND SCIENTIFIC ISSUES 8-9
NATURAL CONDITIONS 8-9
EFFECTIVENESS OF BMPs 8-10
SPATIAL, TEMPORAL, AND CHEMICAL CONSIDERATIONS 8-11
MANAGING LOAD DIFFERENCES 8-11
8.5 INSTITUTIONAL ISSUES 8-12
IDENTIFYING SUPPORTING INSTITUTIONS 8-12
COORDINATING INSTITUTIONS 8-12
8.6 ADMINISTRATIVE ISSUES 8-13
ADMINISTRATION WHEN ONE PARTY Is REGULATED 8-14
ADMINISTRATION WHEN BOTH PARTIES ARE UNREGULATED 8-15
8.7 ACCOUNTABILITY AND ENFORCEMENT 8-15
NONPOINT SOURCE ACCOUNTABILITY AND ENFORCEMENT ARE LIMITED 8-16
8.8 WORKSHEET/CHECKLIST 8-17
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GLOSSARY GLOSSARY-I
APPENDIX A - EFFLUENT TRADING IN WATERSHEDS POLICY STATEMENT APPENDIX A-1
APPENDIX B - ISSUES FOR FUTURE CONSIDERATION APPENDIX B-l
APPENDIX C - EXAMPLES OF EXISTING AND POTENTIAL FUTURE TRADING
PROGRAMS APPENDIX C-l
APPENDIX D - REFERENCES APPENDIX D-1
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EXECUTIVE SUMMARY
Two intertwined ideas are embodied in this Draft Framework for Watershed-Based Trading: (1)
the preservation of water quality progress made since the 1972 Clean Water Act; and (2) the
importance of addressing remaining water quality problems in a way that recognizes the
financial consequences and impacts of water quality control decisions.
Why Is EPA Publishing This
Framework Now?
In response to President Clinton's
Reinventing Environmental Regulation
(March 1995), EPA is strongly promoting
the use of watershed-based trading.
Trading is an innovative way for water
quality agencies and community
stakeholders to develop common-sense,
cost-effective solutions for water quality
problems in their watersheds. Community
stakeholders include states and water
quality agencies, local governments, point
source dischargers, contributors to
nonpoint source pollution, citizen groups,
other federal agencies, and the public at
large. Trading can allow communities to
grow and prosper while retaining their
commitment to water quality.
The bulk of this framework discusses
effluent trading in watersheds. Remaining
sections discuss transactions that, while not
technically fulfilling the definition of
"effluent" trades, do involve the exchange
of valued water quality or other ecological
improvements between partners
responding to market initiatives. This
document therefore includes activities such
as trades within a facility (intra-plant
trading) and wetland mitigation banking.
Trading and Water Quality
Trading is not a retreat from Clean Water
Act (CWA) goals. It can be a more
efficient, market-driven approach to meet
those goals. EPA supports only trades that
meet existing CWA water quality
requirements.
Similarly, support for trading does not
represent any change in EPA's traditional
enforcement responsibilities under the
CWA. EPA encourages innovation in
meeting water quality goals but will not
depart from its enforcement and
compliance responsibilities under the
CWA. Trades that depend on fundamental
change in EPA's enforcement and
compliance responsibilities will not be
allowed.
EPA encourages trades that will result in
desired pollution controls at appropriate
locations and scales. Water quality
standards must be met throughout
watersheds. A buyer cannot arrange for
reductions from a downstream discharger
if violations of water quality standards
would result. Generally, trades will shift
additional load reductions to upstream
sources. Thus, discharges will be reduced
in the area between the sources.
Trading Provides Flexibility
Trading provides watershed managers with
opportunities to facilitate implementing
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loading reductions in a way that maximizes
water quality and ecological
improvements. Managers can encourage
trades that result in desired pollution
controls, preferred reduction locations, and
optimal scales for effective efforts.
Trading can fully use the flexibility of
existing regulatory programs. The
following examples illustrate this
flexibility and demonstrate how trading
can contribute to the cost-effectiveness of
meeting water quality objectives.
• Selected publicly owned treatment
works (POTWs) on North Carolina's
Tar Pamlico Basin pay into a state fund
that supports implementation of best
management practices (BMPs) on
farms. The plants achieve water
quality goals less expensively than if
each plant upgraded its facility
independently.
• In a redevelopment area where space
and cost constrain installing additional
stormwater controls, the city of Tampa
is considering collecting fees from
developers and building a single
facility that would control and treat
more stormwater than feasible in the
redevelopment area.
• To meet a nitrogen target, EPA's
Chesapeake Bay Program considered
whether several POTWs on a
Chesapeake Bay tributary could pay
others to install a higher level of
technology than that required and
thereby achieve the same water quality
goal at a lower total cost than if each
plant enhanced its own treatment. (To
date, no trading program has
developed.)
• A POTW in the western United States
investigated the potential for some
photofinishers discharging to the
POTW to reduce their silver loading to
zero in exchange for payments from
others who would continue to discharge
silver as a cost-effective way of
meeting a new silver loading limit. It
was thought that the photofinishers
could meet the limit more cost-
effectively as a group than if they acted
independently. (To date, no trading
program has developed.)
Trading Encourages Environmental
Benefits
Regardless of who trades and how, the
common goal of trading is achieving water
quality objectives, including water quality
standards, more cost-effectively. Some
communities will use trading to meet their
waterbodies* designated uses at a lower
cost than the cost without trading. Other
communities will use trading to expand a
waterbodys designated uses for the same
amount they would have spent preserving
fewer uses without trading. Communities
can also use trading to maintain water
quality in the face of proposed new
discharges.
Trading might provide states and
dischargers with new opportunities to
comply with the anti-degradation policy.
In the absence of trading, load increases
for some of the nation's cleaner waters
may be justified only on the basis of
important social and economic growth.
Trading provides an additional option for a
new source, or a source proposing to add
new pollution to a waterbody, to offset the
new loading by arranging for pollution
reductions from an existing source.
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Trading can produce environmental
benefits by accelerating and/or increasing
the implementation of pollution control
measures in a watershed. Sources have
more flexibility in their selection of
pollution controls when they also can
consider options at other sources.
Where trading involves nonpoint source
pollution reduction, it offers a mechanism
to implement restoration and enhancement
projects. Such projects improve water
quality not only along chemical
parameters, but also along physical
parameters, such as temperature and flow,
which can help preserve and expand
designated uses. Moreover, such projects
provide an array of other habitat benefits
for aquatic life, birds, and other animals.
In particular, trading offers significant
opportunities to expand nonpoint source
pollution reductions beyond current levels.
Point/nonpoint and nonpoint/nonpoint
trading can facilitate nonpoint source
reductions where they otherwise would not
have occurred. In so doing, it can help
address one of the sources of water
pollution that is most persistent and
difficult to reduce (economically,
technically, and politically).
Beyond implementing trades, the process
communities go through when they
consider a trading option moves them
toward more complete management
approaches and more effective
environmental protection. Identifying
trading opportunities involves examining
all pollution sources at once when
evaluating technical and financial
capabilities to achieve loading reductions.
This brings regulated and unregulated
sources together with other watershed
stakeholders and engages them in a
partnership to solve water quality
problems.
The examples below illustrate some of the
ways trading can provide environmental
benefits.
• Four POTWs at Lake Dillon have the
opportunity to purchase nonpoint
source loading reductions and avoid
more expensive plant upgrades. In
addition, nonpoint sources sometimes
may trade with other nonpoint sources
to offset additional loading. Through
the process of developing the trading
program, the POTWs also identified
inexpensive operational improvements.
As a result, water quality standards are
maintained.
• Boulder, Colorado's POTW
contributed funds to a riparian
enhancement project on a nearby creek
to alleviate ammonia problems,
augment stream flow, and defer
expensive plant modifications. Studies
had shown that upgrades alone would
be insufficient to reach water quality
standards due to the degraded condition
of the creek. Short-term results are
promising for ammonia reduction, and
the creek is receiving the ecological
benefits from restoration.
• The State of Maryland accepts fee-
based compensation for mitigation
requirements if it determines that
creation, restoration, and enhancement
of small nontidal wetlands is not
feasible. Fees are deposited into a trust
fund that pays for larger restoration
projects. The state believes
consolidating otherwise small and
isolated restoration projects into larger
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ones is a more environmentally
effective approach to mitigation and
water quality protection.
Economic Benefits of Trading
One of the most immediately visible
benefits of trading is the money some
sources save while meeting pollution
control responsibilities. Sources that "sell"
loading reductions can also benefit
financially and can invest proceeds in
research and development, for example, or
use them to offset other costs.
These economic benefits reach beyond
dischargers to consumers and
communities. Trading can keep municipal
wastewater treatment or stormwater utility
charges from increasing as quickly or by as
much as they might without trading.
Trading also can keep costs to consumers
down as industry and business save on
pollution control costs.
The array of control options provided
under trading often includes less expensive
choices that can satisfy loading reduction
responsibilities. Increasing the
affordability of pollution control makes it
possible for sources to achieve reductions
more quickly and/or in greater amounts
than without trading.
Reducing the total cost of achieving an
environmental objective makes resources
available for other uses. Industry may
invest in research and development. Local
government may invest in additional
resource protection activities, or in
community services such as education,
welfare, and police protection.
Additionally, trading can facilitate
economic development while protecting
water quality. Some communities face
growth constraints because nearby
waterbodies already have water quality
problems or could soon develop problems.
Trading provides a mechanism for new and
expanding sources to offset additional
loading by obtaining reductions from
other sources.
Who Might Trade?
Many sources or contributors to water
pollution might consider trading. Point
source dischargers, nonpoint sources, and
indirect dischargers may all participate in
trades.
Point sources are direct dischargers that
introduce pollutants into waters of the
United States. Examples of point sources
include POTWs, private wastewater
treatment facilities, industrial dischargers,
federal facilities that discharge pollutants,
active and inactive mining operations,
aquaculture operations, and municipal
stormwater outfalls (generally communities
with populations over 100,000). Point
sources are regulated under the National
Pollutant Discharge Elimination System
(NPDES) established under section 402 of
the CWA. Many point source dischargers
are required to comply with national
discharge standards developed for
industrial categories.
Indirect dischargers are industrial or
commercial (i.e., nonresident!al)
dischargers that discharge pollutants to a
POTW. Many indirect dischargers
"pretreat" their wastewater prior to
releasing effluent to POTW collection
systems. Pretreatment includes pollution
prevention and waste minimization
practices, as well as on-site and off-site
pollution control technology. Indirect
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dischargers are regulated under certain
circumstances by POTWs according to
CWA requirements. Many indirect
dischargers also comply with national
discharge standards developed for
industrial categories.
Nonpoint sources are more diffuse,
conveying pollution via erosion, runoff,
and snowmelt to surface waters. Nonpoint
sources also pollute groundwater via
infiltration; this pollution can sometimes
reach surface waters. Nonpoint sources
include agriculture, silviculture, urban
development, construction, land disposal,
and modification of flow and channel
structure. The CWA does not require
federal controls for nonpoint sources.
Instead, it requires that states, with EPA
funding and technical support, develop and
implement programs to control nonpoint
sources.
Five Types of Trading in a Watershed
Context
Generally, the term "trading" describes any
agreement between parties contributing to
water quality problems on the same
waterbody that alters the allocation of
pollutant reduction responsibilities among
the sources. Such agreements also may
include third parties, such as state agencies,
local agencies, or brokerage entities. This
framework groups trades into five
categories:
1 Point/Point Source Trading: a
point source(s) arranges for another
point source(s) to undertake greater-
than-required reductions in pollutant
discharge in lieu of reducing its own
level of pollutant discharge, beyond
the minimum technology-based
discharge standards, to achieve water
quality objectives more cost-
effectively.
Intra-plant Trading: a point source
allocates pollutant discharges among
its outfalls in a cost-effective manner,
provided that the combined permitted
discharge with trading is no greater
than the combined permitted
discharge without trading and
discharge from each outfall complies
with the requirements necessary to
meet applicable water quality
standards.
Pretreatment Trading: an indirect
industrial source(s) that discharges to
a POTW arranges for greater-than-
required reductions in pollutant
discharge by other indirect sources in
lieu of upgrading its own
pretreatment beyond the minimum
technology-based discharge
standards, to achieve water quality
goals more cost-effectively.
Point/Nonpoint Source Trading: a
point source(s) arranges for control of
pollutants from nonpoint source(s) to
undertake greater-than-required
pollutant reductions in lieu of
upgrading its own treatment beyond
the minimum technology-based
discharge standards, to achieve water
quality objectives more cost-
effectively.
Nonpoint/Nonpoint Source
Trading: a nonpoint source(s)
arranges for more cost-effective
control of other nonpoint sources in
lieu of installing or upgrading its own
control or implement pollution
prevention practices.
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These categorizations are broad and might
not reflect all possible trading
combinations. As communities gain
experience with trading and as EPA
improves its understanding of the
opportunities afforded by watershed-based
decision making, the Agency will provide
information about additional forms of
trading.
Trading Arrangements
Trading arrangements can take many
different forms. There are varying degrees
of complexity related to the number of
partners involved, the pollutant or
reduction traded, and the form of the trade.
Trading programs that involve point
sources or indirect discharges require
EPA's preapproval of trades.
Under trading arrangements, the total
pollutant reduction must be the same or
greater than what would be achieved if no
trade occurred. A "buyer" and "seller"
agree to a trade in which the buyer
compensates the seller to reduce pollutant
loads. Buyers purchase pollutant
reductions at a lower cost than what they
would spend to achieve the reductions
themselves. Sellers provide pollutant
reductions and may receive compensation.
Sources may negotiate trades bilaterally or
may trade within the context of an
organized program. Sources may negotiate
prices or exchange rates for loading
reductions themselves, or they may face
those established by a market. A buyer
and seller may be the only parties to
trading, or third parties—public or
private—may become involved.
The hypothetical examples below illustrate
several of these possibilities.
• A food processor facing new reduction
requirements (the buyer) contracts
directly with another processor (the
seller) to install additional new control
devices to reduce the seller's pollutant
loads. The seller now maintains the
level of control that provides the load
reduction required of the seller as well
as an additional load reduction credited
to the buyer. The trade is incorporated
into the NPDES permit and is approved
by the permitting authority.
• Nonpoint source silviculture operations
purchase "water quality improvement
shares" from a nonprofit environmental
organization. The organization uses
the proceeds from the sale of shares to
conduct stream and habitat restoration
projects, which provide water quality
improvements. The tree farmers
receive pollutant reduction credits
proportionate to their funding
contribution to the water quality
improvements.
More detailed examples of possible trading
arrangements are provided in Chapters 5
through 8 of this framework.
Trading Mechanisms
EPA believes that two basic types of
trading mechanisms exist if one of the
trading partners is required to have an
NPDES permit under section 402 of the
CWA:
1. Trades can occur through development
of a total maximum daily load (TMDL)
or other equivalent analytical
framework. A TMDL establishes the
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loading capacity of a defined watershed
area, identifies reductions or other
remedial activities needed to achieve
water quality standards, identifies
sources, and recommends allocations
for point and nonpoint sources. Parties
to the trade then negotiate within the
loading capacity determined under the
TMDL.
Trades in the context of a TMDL can
be between two or more partners, cover
a range of geographic scales, and
involve one or more remedial actions.
Other analytical frameworks may be
appropriate if, like TMDLs, they are
approved by EPA. Analytical
frameworks must link pollutant
contributions to ambient conditions and
determine the pollutant reductions
needed from various sources to achieve
water quality objectives.
2. Trades can also occur in the context of
a point source permit. In this context, a
permittee would arrange a trade with
other sources of a pollutant, with
approval of the permitting authority.
Achievement of the required in-stream
water quality would rely on the
permittee meeting its limits and on
actions by the trading partner. The
permittee would retain the
responsibility for achieving the
required pollutant reductions.
In addition to direct trades between parties,
trading partners could participate in public
or private banks that could buy and sell
pollutant reduction or other remedial action
credits within a watershed. Each of these
approaches works with individual buyers
and sellers and public and private
organizations.
Finally, any trading approach will rely on
in-stream water quality data to help ensure
that the trade is working as forecasted.
Trading partners should be sure that the
ambient monitoring necessary to evaluate
the success or failure of the trade to
produce the expected water quality impacts
is part of any trading arrangement.
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CHAPTER 1. INTRODUCTION
This framework provides readers with important questions that must be asked and
answered to trade successfully.
Using This Framework
This framework supplements EPA's
January, 1996 policy statement on effluent
trading (Appendix A). It is intended to
provide basic information to anyone
interested in trading. Water quality
managers, potential traders, environmental
groups, and others will find assistance for
identifying and evaluating trading
opportunities. This framework can also be
used as a resource when designing a
trading project or program. Chapter 2,
Principles for Trading, Chapter 3, The
Economics of Trading, and Chapter 4,
Identifying and Evaluating Candidates, are
especially important for anyone reading
this framework for the first time.
Chapters 5 through 8 describe several
types of trading: point/point source and
intra-plant trading, pretreatment trading,
point/nonpoint source trading, and
nonpoint/nonpoint source trading,
respectively. These four chapters also
address issues specific to each type in
detail and are designed so they can be
referenced individually. Regardless of
your specific interest, a quick study of
Chapters 5 through 8 will enhance your
understanding of the concepts and issues
presented in this framework.
Issues for the Future
This draft Framework will be a living
document that EPA hopes will encourage
innovation and open the door to new ideas.
Because the applicability of trading is so
site-specific, this framework cannot solve
all the implementation challenges that
potential traders might face. EPA has tried
to identify some areas where questions still
remain. As you read this document, we
hope you will consider the following:
• What type of analysis is sufficient to
support a trading program?
• What has been/will be the impact on
permit writers or POTWs from
reviewing trades? What has been/can
be done to minimize this impact or help
defray any additional cost?
• When proposing new limits, what water
quality-related information can be
shared with industrial pollution sources
that can lead them to initiate a dialogue
to identify potential opportunities to
trade?
• Who can help to broker the
development of trading programs
and/or the proposal of trades?
• Are there additional ways to ensure
accountability is built into
point/nonpoint source trades, beyond
those discussed in Chapter 7?
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• Are there any examples of local
ordinances requiring nonpoint source
controls that provide
accountability/enforcement for
point/nonpoint trades?
• Is the role of TMDLs sufficiently
described in the document?
• Are there any examples of
cross-pollutant trading that follow the
principles presented in this document?
(Please see Appendix B.)
• Are there other examples of effluent
trading programs in place? (Please see
Appendix C for a list of
existing/proposed trading programs.)
• Can you identify specific locations
(e.g., a watershed or sewer district)
where trading could be applied or
considered?
• Can you identify industries or facilities
where intra-plant trading can be used or
facilities that could use intra-plant
trading to achieve water quality-based
limits? (Please see Appendix B)
We would like to hear your comments,
ideas, and suggestions on this draft. We
especially invite you to share with us any
experiences you might have had with
trading in your own community as we
develop the trading concept.
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CHAPTER 2. PRINCIPLES FOR TRADING
The fundamental principle of trading within the Clean Water Act framework is that water
quality standards must be met and technology-based requirements must remain in place.
Trading and the Clean Water Act
Proper design of a trading approach is
essential for attaining environmental
objectives. The applicability and
usefulness of trading depend on water
quality problems in a given area.
Similarly, the benefits of trading tend to be
site-specific in nature. For these reasons,
trading is a tool that is most effective when
well designed and administered when and
where appropriate.
This chapter discusses ways in which
trading can work. It is divided into two
major sections: the first provides a brief
overview; and the second discusses eight
principles for trading. This chapter
identifies statutory and regulatory
requirements, analytical and planning
constructs, and design and implementation
considerations for effective trading.
Overview of Water Quality Rules and
Management in the United States
The CWA is the backbone of water quality
management in the United States. The
act's provisions and implementing
regulations create a system to protect water
quality and environmental health. A
number of CWA provisions affect how
trading can occur, including, water quality
standards, effluent guidelines, and total
maximum daily loads (TMDLs).
Water Quality Standards
Water quality standards consist of
designated uses, numeric and narrative
criteria, and antidegradation
implementation policies.
Designated Uses. States designate uses
(e.g., recreational contact, fishing,
industrial discharge) for each body of
water and establish water quality standards
that protect, restore, and maintain
designated uses.
Criteria. Water quality criteria, which
describe the specific water quality
conditions that will achieve designated
uses, can be expressed in chemical,
physical, or biological terms. Examples
include: 10 mg/1 BOD; 29* Celsius, indices
of biological integrity, or narrative
statements such as "no discharge of toxics
in toxic amounts."
Anti-Degradation Policy. The anti-
degradation policy specifies that all
existing uses of a waterbody must be
maintained, whether or not they are
designated uses. If the water is cleaner
than necessary to support
fishable/swimmable uses, that water
quality must be maintained unless
important economic and social goals
dictate otherwise. A three-tiered anti-
degradation policy is part of each state's
water quality standards:
• Tier 1: Maintain existing beneficial
uses of surface waters and prevent
degradation that could interfere with
those uses.
• Tier 2: Protect water quality in
"fishable/swimmable" waters (i.e.,
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bodies of water in which water quality
meets or exceeds the levels necessary
to support (1) the propagation offish,
shellfish and wildlife and (2) recreation
on and in the water).
• Tier 3: Provide special protection for
"Outstanding Natural Resource
Waters," such as waters of national or
state parks, wildlife refuges, or other
waters of exceptional recreational or
ecological significance.
Effluent Guidelines, Categorical
Pretreatment Standards, and Local Limits
To achieve water quality standards,
governmental authorities typically rely on
effluent guidelines, categorical
pretreatment standards, and local limits for
point sources and indirect dischargers,
respectively.
A point source is any discernible, confined,
and discrete conveyance, including but not
limited to, any pipe, ditch, channel, tunnel,
conduit, well, discrete fissure, container,
rolling stock, concentrated animal feeding
operation, landfill leachate collection
system, or vessel or other floating craft
from which pollutants are or may be
discharged.
The term "point source" includes
storm water discharges from municipal
separate storm sewers generally serving
communities with populations of greater
than 100,000 and stormwater discharges
associated with industrial activities, but
does not include return flows from
irrigated agriculture or agricultural
stormwater runoff. Publicly owned
treatment works (POTWs) are an example
of a point source.
Indirect dischargers are industrial or
commercial dischargers that discharge
pollutants to a POTW. Many POTWs
receive effluent from industrial and
commercial sources that is indirectly
discharged to waterbodies through the
POTWs.
POTWs, other direct dischargers, and
indirect industrial dischargers must meet
national minimum technology-based
effluent limits that EPA sets independent
of receiving water quality.
Direct Dischargers. EPA has issued
technology-based requirements for 51
categories of direct industrial dischargers,
most of which are divided into
subcategories. These "effluent guidelines"
are based on assessments of the greatest
degree of pollution control applicable
technology can achieve that is
economically achievable for the industry.
In the case of POTWs, the national
baseline is called "secondary treatment."
Point source dischargers are subject to a
permitting system known as the National
Pollutant Discharge Elimination System
(NPDES). They receive NPDES permits
from a permitting authority that reflect
applicable technology-based requirements
and any more stringent water quality-based
effluent limits, along with monitoring and
other requirements.
When technology-based requirements are
not stringent enough for receiving waters
to meet water quality standards, permitting
authorities develop more stringent "water
quality-based" effluent limits (WQBELs)
that will result in the attainment of water
quality standards. WQBELs are
incorporated into point sources* NPDES
permits. The process of establishing these
limits varies across states and EPA
Regions.
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Indirect Dischargers. Pretreatment
standards include specific pollutant
discharge standards for 39 industrial
categories, pollution discharge prohibitions
for all indirect dischargers, and local
discharge limits developed by POTWs for
their systems. The national baselines for
indirect industrial dischargers are called
"categorical pretreatment standards." All
indirect dischargers must comply with
general prohibitions that address
discharges that can cause pass through
and/or interference, as well as specific
prohibitions that address fire and explosive
hazards in treatment works. Indirect
dischargers are regulated by the POTW
and do not require an NPDES permit
themselves; they are required to meet
applicable limits in accordance with
pretreatment standards.
POTWs may develop requirements for
indirect dischargers to supplement
categorical pretreatment standards called
"local limits." Local limits help POTWs
ensure that they remain in compliance with
their NPDES permits, as well as preventing
indirect dischargers' wastestreams from
interfering with plant operations or passing
through POTWs untreated.
Diffuse Sources
The CWA does not regulate diffuse, or
"nonpoint," sources through a federal
permit program. Instead, it provides grants
for states to establish plans for reducing
pollution from nonpoint sources. Nonpoint
source management plans must adhere to
all applicable state and local regulations
and policies.
Section 6217 of The Coastal Zone Act
Reauthorization Amendments (CZARA)
requires coastal states to provide for the
implementation of nonpoint source
management measures for land uses and
critical coastal areas adjacent to impaired
or threatened coastal waters. A variety of
state laws and local ordinances also contain
provisions that specify best management
practices (BMPs) to control pollutants from
nonpoint sources.
Total Maximum Daily Loads (TMDLs)
A TMDL is an analysis used to calculate
the maximum pollutant load a waterbody
can receive (loading capacity) without
violating water quality standards. States
are required to establish TMDLs for
waterbodies where technology-based
requirements alone are insufficient to attain
water quality standards.
A TMDL includes allocations of pollutant
loads among sources: wasteload
allocations (WLAs) for point sources, load
allocations (LAs) for nonpoint sources,
background loadings from natural sources,
and margins of safety to ensure
achievement of water quality goals. The
CWA requires that EPA review and
approve TMDLs.
Anti-Backsliding Requirements
The anti-backsliding requirement of CWA
section 402(o) generally prohibits reissuing
a permit with a technology-based effluent
limit that is less stringent than the existing
technology-based limit. With respect to
water quality-based effluent limits
(WQBELs) the anti-backsliding clause in
CWA section 303(d)(4) specifies that
backsliding from a WQBEL can occur in
only two situations:
1. Where a waterbody is not attaining its
water quality standard, a limit may be
relaxed only if a TMDL or WLA has
been performed establishing a new
limit and implementation of that
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TMDL/WLA will ensure compliance
with water quality standards.
2. Where a waterbody is attaining its
water quality standards, a limit may be
relaxed only if the requirements of the
anti-degradation policy are being met.
Effluent Trading Principles to Meet
Water Quality Objectives
To work within the framework of laws,
regulations, and policies for attaining water
quality in the United States, trading should
follow eight principles:
3. Trading participants meet applicable
CWA technology-based requirements.
4. Trades are consistent with water quality
standards throughout a watershed, as
well as anti-backsliding, other
requirements of the CWA, other federal
laws, state laws, and local ordinances;.
3. Trades are developed within a TMDL
process or other equivalent analytical
and management framework.
4. Trades occur in the context of current
regulatory and enforcement
mechanisms.
5. Trading boundaries generally coincide
with watershed or waterbody segment
boundaries, and trading areas are of a
manageable size.
6 Trading will generally add to existing
ambient monitoring.
7. Careful consideration is given to the
types of pollutants traded.
8. Stakeholder involvement and public
participation are key components of
trading.
These principles are discussed in greater
detail below.
Principle 1: Trading participants meet
applicable CWA technology-based
requirements.
Technology-based requirements are
minimum national effluent standards
imposed on POTWs and industrial
dischargers by NPDES permits. These
technology-based requirements, as defined
by sections 301(b)(l), 301(b)(2), 304(b),
and 306 of the CWA, establish the
discharge standards to be achieved by all
POTWs and designated categories of
industrial dischargers. All dischargers
must install appropriate treatment to
achieve these required levels.
Implications for Trading
Establishing the principle that all trading
partners meet applicable technology-based
requirements preserves minimum levels of
water quality protection mandated by the
CWA. It also promotes fairness by
allowing only those sources which have
already met a baseline contribution to
water quality protection efforts to benefit
from trading. The result of implementing
this principle is that sources that meet
technology-based requirements may trade
to achieve any more stringent water
quality-based requirements.
Since national minimum standards are
expressed as limits on the amount of a
pollutant that can be in the effluent a
facility discharges, it is not possible to
arrange for comparable pollution controls
at another source. This is why all traders
must first meet technology-based
requirements.
Principle 2: Trades are consistent with
water quality standards throughout a
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watershed, as well as anti-backsliding,
other requirements of the Clean Water
Act, other federal laws, state laws, and
local ordinances.
Water quality standards articulate water
quality goals. Standards comprise
designated uses, water quality criteria, and
an anti-degradation policy. Control
mechanisms used to meet the goals include
TMDLs, WLAs, LAs, WQBELs, other
NPDES permit provisions, BMPs, and
other local ordinances related to water
quality protection. Regulatory agencies
vary control mechanisms as necessary to
achieve water quality objectives.
Implications for Trading
Similar to applying Principle 1, applying
Principle 2 ensures a certain level of water
quality prior to implementation of a trading
program and promotes fairness by allowing
only those sources which meet baseline
requirements to benefit from trading.
Specific implications of Principle 2 for
trading include:
• Trades must not produce water quality
effects that constrain designated uses
for a waterbody.
• Traders or administrative authorities
must be able to demonstrate that trades
will ensure attainment of water quality
standards throughout the watershed.
• No trader may discharge a higher level
of pollutants than what is specified in
permits or rules.
• Trading cannot result in a reissued
permit that has less stringent limits than
the original permit except, in the case
of a water quality-based requirement,
where the new limit is covered by a
TMDL or is consistent with the anti-
degradation policy.
• Traders must comply with assigned
WLAs and LAs, although trading may
help to develop those WLAs and LAs
as part of a TMDL.
• Prior to trading, traders should comply
with BMP requirements, if applicable.
To avoid double counting, pollutant
reduction credits associated with federal
requirements are not available for trading.
For example, reduction credits from new or
revised effluent guidelines or BMPs
required by the Coastal Zone Act
Reauthorization Amendments (CZARA)
cannot be counted again in a trade.
Trades may not shift pollutant load
reductions within a watershed in such a
way that water quality standards are
attained at the downstream end of the
watershed while causing standards to be
violated within an upstream portion of the
watershed.
An agency reviewing a trade should ensure
that the pollution reductions required of a
source reflect a margin of safety that is
proportional to the uncertainty associated
with load reductions over large spatial
scales and is adequate to ensure that the
reductions will actually attain water quality
standards throughout the trading area.
Complex issues of flow, hydrology,
pollutant degradation, and related matters
should be evaluated over a potentially
large watershed.
Regulators can incorporate Principle 2 in
trading programs by modifying or revising
existing control mechanisms such as
TMDLs, WLAs, LAs, WQBELs, and other
NPDES permit provisions in a way that
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allows trading and is consistent with the
CWA.
Principle 3: Trades are developed within
a TMDL or other equivalent analytical
and management framework.
Based on section 303(d) of the CWA,
states establish TMDLs for waterbodies, or
portions of waterbodies, where technology-
based requirements alone are insufficient
to attain water quality goals. TMDLs
provide estimates of pollutant loadings
from all sources, include a margin of
safety, and predict resulting ambient
pollutant concentrations. Data from a
TMDL can be used to forecast how
changes in various discharges will affect
water quality.
Other analytical frameworks may be
sufficient for trading purposes if they are
approved by EPA. These analytical
frameworks should also be able to
determine the desired ambient condition,
link pollutant contributions from sources to
ambient conditions, and predict the effects
of pollutant reductions from different
sources on in-stream water quality.
Examples of other appropriate frameworks
include Lakewide Area Management Plans
(LaMPs) and Remedial Action plans
(RAPs), used in the Great Lakes.
In cases where a TMDL has already
assigned load reductions, trades can occur
in the context of a point source NPDES
permit. With the permitting authority's
approval, a permittee would arrange a trade
with other sources of a pollutant.(See
Principle 4.)
For pretreatment trading, the appropriate
analytical framework is called the
Maximum Allowable Headworks Loading
(MAHL). A POTW determines the MAHL
for specific pollutants, while preventing
indirect dischargers' wastestreams from
interfering with plant operations or passing
through POTWs untreated. The POTW
also determines the Maximum Allowable
Industrial Loading (MAIL), which is the
total daily mass that the POTW can accept
from all permitted industrial users.
Implications for Trading
TMDLs and similar water quality
management approaches provide a basis
for successful trading for two reasons:
• TMDLs allocate pollution control
responsibilities among covered
dischargers using a process that can be
easily adapted to incorporate trades.
• Data and analyses generated in TMDLs
typically enable water quality managers
to better understand and predict general
effects of proposed trades.
The TMDL process establishes the baseline
pollution reduction responsibilities
necessary to achieve designated water
quality standards. This provides a starting
point to compare the costs of the baseline
responsibilities necessary to achieve
alternative allocations that also meet water
quality goals. In this way, TMDLs
facilitate identification of the economic and
water quality benefits of various
allocations of pollutant reduction
responsibilities.
Trades can be incorporated into TMDLs in
two ways. If sources are contemplating
trading when a TMDL is being developed,
final allocations can reflect traded loading
reductions. This approach resembles a
negotiated allocation process.
If sources begin considering trading after a
TMDL is already in place, states may
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revise allocations to reflect proposed
changes in load reduction responsibilities,
i.e., trades. Such revisions may involve
reopening NPDES permits or otherwise
defining responsibilities for specific
dischargers. The cost to the permitting
authority should thus be considered in any
trading program. Revisions to TMDLs
require EPA review.
When a TMDL assigns pollutant reduction
responsibilities to a nonpoint source, there
must be reasonable assurance that nonpoint
source controls will be implemented.
"Reasonable assurance" generally means
that the proposed nonpoint source controls
are (1) technically feasible, (2) specific to
the pollutant of concern, (3) to be
implemented according to a schedule and
within a reasonable time period, and (4)
supported by reliable delivery mechanisms
and adequate funding. Examples of
reasonable assurance include state
regulations or local ordinances,
performance bonds, memoranda of
understanding, contracts, or similar
agreements.
Principle 4: Trades occur in the context
of current regulatory and enforcement
mechanisms.
All point source dischargers, regardless of
involvement in trading, must comply with
the CWA. Regulatory authorities use
enforcement procedures as a tool for
ensuring compliance with NPDES permit
requirements, which are derived to achieve
water quality standards.
Many types of enforcement tools are
available to water quality agencies. These
tools can vary in intensity and breadth of
application. Several examples are notice
of violation or administrative order; civil
action, including assessment of fines;
assessment of criminal penalties, including
substantial jail sentences; and revocation of
discharge permit.
Water quality agencies cannot use these
enforcement tools unless individual
dischargers are subject to and aware of
specific requirements. These requirements
are defined in the water quality regulations
rules and management mechanisms (e.g.,
Clean Water Act, NPDES permits, local
ordinances) discussed at the beginning of
this chapter.
For nonpoint sources, some state
regulations and local ordinances establish
guidelines for selected nonpoint sources
that are similar to technology-based
requirements. Typically, states and
localities specify several BMPs for each
nonpoint source category as minimum
measures to protect water quality.
Jurisdictions require nonpoint sources to
select options that offer economical
pollution control given the characteristics
of the land and the environment.
(Jurisdictions "recommend" BMPs when
commitments are voluntary.)
Implications for Trading
Trading should not lessen accountability
for achieving water quality objectives.
Trades must rely on existing regulatory and
enforcement mechanisms where
appropriate. For example, all trades
involving point source dischargers should
be reflected in a revised or reissued
NPDES permit for each point source. A
trade implemented through a permit is not
a basis for extending the compliance
period that would otherwise apply to the
point source under a non-trade permit.
Point sources are to meet compliance
schedules as they would if no trade had
been approved.
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EPA anticipates that parties to trades will
need to work with federal, state, tribal,
and/or local regulatory entities on a case-
by-case basis to ensure an appropriate level
of accountability and enforceability in a
trading arrangement. These entities can
help traders incorporate traded pollutant
loading reduction responsibilities into
current regulatory and enforcement
mechanisms.
Principle 5: Trading boundaries
generally coincide with watershed or
waterbody segment boundaries, and
trading areas are of a manageable size.
Most detailed analyses of waterbodies that
provide baseline data for trading programs
examine entire waterbodies or defined
segments of waterbodies. EPA and state
water quality agencies use various systems
that assign waterbody identification
numbers to specific hydrologic units.
These units, often called segments, have
been delineated based on hydrologic
features, such as the presence of a dam, the
confluence of two rivers, or gradations of
salinity in an estuary. Division of
waterbodies into segments helps define
where selected discharges are most likely
to affect the water quality. Ideally, these
segments comprise all land and water
within the confines of a drainage.
Implications for Trading
Matching geographic trading areas with
appropriate hydrologic units helps ensure
that trades meet and maintain water quality
standards throughout a trading area and in
downstream or contiguous areas. For
pretreatment trading, the trading boundary
coincides with the collection system for an
individual treatment plant.
Trading can involve shifting some amount
of pollutant loading reductions from one
location to another. A new location could
be 100 yards away, across a lake, or half a
mile upstream. Thus, selecting trading
zone boundaries entails delineating the
watersheds or segment(s) that might be
affected by a set of dischargers.
Establishing the principle that trading
boundaries and watershed or segment
boundaries coincide ensures that the parties
to a trade are affecting the same waterbody
or stream/river segment. Implementing
this principle protects the waterbody as a
whole and guards against having adverse
localized effects or specialized local
problems, such as poor mixing.
The most appropriate hydrologic unit, and
therefore geographic area, for trading
depends on site-specific hydrogeologic
conditions: water chemistry; ecological
parameters; and the location, number, and
types of sources. Often trading zone
boundaries coincide with watershed or
segment boundaries developed in TMDLs.
These boundaries should be of a
manageable size to ensure that assessments
are reliable.
Delineation of these boundaries can vary
for different pollutants, particularly those
for which effects depend on biological or
chemical processes that occur after the
pollutant is discharged (e.g., decay rates).
With such pollutants, shifting discharges
from one point source to another can
change the location of key downstream
impacts.
The definition of a trading boundary also is
affected by the governing body or
management structure of the trading
program. The trading boundary should
prevent localized problems that could
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occur if trading boundaries overlap for
different trading programs or kinds of
trading.
Consider, for example, a situation where
point/point source trades are beneficial
across three segments, but point/nonpoint
source trades are beneficial in only one
segment. As a result, trading area sizes
might vary from program to program and
might involve any number of segments.
Principle 6: Trading will generally add
to existing ambient monitoring.
Availability of data is important to all
parties involved in maintaining water
quality. Access to data on water quality
and changes that result from pollutant
loads allows analysts to evaluate proposed
methods of meeting water quality
standards. Most of the data necessary to
conduct such evaluations will need to be
collected through ambient water quality
monitoring. Such monitoring may be
conducted by government agencies,
pollutant dischargers, or other groups,
using approved sample collection, analysis,
and reporting methods.
Implications for Trading
An assessment of trading water quality
impacts may involve water quality analysis
and modeling. The data needed depend on
the sophistication of the analysis, the
pollutant(s) involved, and the nature of the
receiving water. Three general categories
of data are necessary to support trades:
• Current water quality conditions.
• Predicted effectiveness of pollution
reduction options.
• Assessment of trading results.
Data describing current water quality
conditions help evaluate types and levels
of water quality improvements necessary
to meet and maintain water quality
standards. Together with data on current
loadings and facility-specific information,
regulatory authorities use water quality
data in the TMDL and NPDES permitting
processes to establish wasteload and load
allocations and effluent limits that will
yield in-stream pollutant concentrations
that meet applicable water quality
standards. Data also are needed to verify
that trading obligations have been met and
to build technical credibility. To evaluate
the potential impact of trades on water
quality, it is necessary to understand the
probable effects of various pollutant load
reduction options.
Predicting effectiveness involves obtaining
data on factors present in the trading area
that are not strictly related to water quality.
Spatial (where), temporal (when), chemical
(pollutant type/form), weather pattern, and
geographic (e.g., slope, soil type)
characteristics all can affect the level of
pollution control achieved by trading. The
necessary level of detail will vary
depending on the complexity of the
waterbody system and type of analytical
techniques used.
Once trades are initiated, ongoing ambient
and effluent monitoring data are needed to
determine whether trades are meeting and
maintaining water quality standards and
whether traders are meeting applicable
limits. As trading occurs, managers can
conduct periodic evaluations to determine
whether program design or administration
adjustments are warranted.
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Principle 7: Careful consideration is
given to types of pollutants traded.
Different pollutants have specific chemical
characteristics that interact with receiving
waters and affect water quality in unique
ways. A given pollutant's effect on water
quality depends on numerous factors, such
as the source of discharge or the weather.
Some pollutants can collect in receiving
waters in relatively large quantities without
causing ecological damage, whereas small
quantities of other pollutants can be quite
harmful. In addition, a pollutant that
generates no harmful impacts in one area
within a waterbody might generate harmful
local effects in another area.
Implications for Trading
Selecting pollutants that are eligible for
trading has implications for meeting water
quality goals and avoiding unnecessary
risks to ecological health. Localized
effects of pollutants are a particular
concern for trading programs.
Trading often changes the location in a
watershed or segment where pollutant
loading reductions occur. Thus, while
some locations might receive smaller
pollutant loads, other locations might not
receive the additional reductions they
would have received without trading.
Analysis of such trades, including the
potential impacts of spatial or temporal
variations in loadings, is necessary to avoid
localized violations of water quality
standards. Further assurance is obtained
by performing a site-specific cross check,
ensuring that water quality criteria are met
at the point where they apply.
Ensuring that water quality standards are
attained throughout a trading area is easier
for some pollutants than for others.
Nutrients, for example, might be less likely
to create serious localized effects. On the
other hand, it could be difficult to prevent
local violations of water quality standards
when trades involve certain toxic
pollutants.
When trading facilitates reduction of
toxics, it could be valuable. The
appropriateness of trading toxics, however,
is dictated by the nature of the pollutants
considered and site-specific conditions.
For toxic pollutants that are persistent and
bioaccumulative in nature, it might be
inadvisable to supplement regulation of
toxic pollutants with a trading option.
EPA does not currently envision a situation
in which "cross-pollutant" trading could
work under current regulatory conditions
and technical limitations. Most (if not all)
trades to date have involved the same
pollutant, such as nitrogen for nitrogen or
phosphorus for phosphorus. A few
communities are considering trading
involving different pollutants, such as
nitrogen for phosphorus or nitrogen for
zinc. (See Appendix B.)
Sufficient data are often unavailable to
enable assessment of the impacts of
different pollutants, and therefore the
relative value of pollutant load reductions.
Without such assessment, though, water
quality managers are unable to predict the
effects of trading. In the future, in cases
where environmental benefits can be
thoroughly demonstrated, EPA will
consider the use of cross-pollutant trading.
Principle 8: Stakeholder involvement
and public participation are key
components of trading.
Trading brings watershed stakeholders—
regulated sources, nonregulated sources,
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regulatory agencies, other interested
organizations, and the general
public—together and engages them in a
partnership to solve water quality
problems. All stakeholders, including
partners to a trade and waterbody
beneficiaries, can benefit from their
involvement in trading processes.
Trades draw on the expertise and local
knowledge of stakeholders to ensure that
trading projects have their support. A
trading option can serve as a consensus-
building exercise, leading to more
cooperative, comprehensive solutions.
Such solutions can provide benefits that
might not have been captured in a
traditional regulatory approach, such as
increased identification and control of
cumulative effects (e.g., habitat
degradation).
Implications for Trading
The Clean Water Act or EPA regulations
require public notice and comment
procedures or a hearing where trades
involve point sources, NPDES permits,
TMDLs, and other CWA programs. State
and local authorities also can implement
public notice and participation procedures
for proposed trades that do not involve
point sources.
Stakeholder involvement and public
participation in trading educate the
community about the cost savings and
environmental benefits obtainable through
trading. They also educate those managing
a trading program about concerns of the
general public. Trading can build new
alliances both among stakeholders and
between stakeholders and the general
public. These groups might have had few
prior opportunities to work together,
especially where watershed approaches are
new or absent. Thus, the process
communities go through when they
consider a trading option moves them
toward better management approaches and
more effective environmental protection.
Communities that design and direct
innovative alternatives, such as trading, for
achieving environmental goals can be
rewarded with greater efficiency or
effectiveness than that possible under
current regulatory approaches. Continued
progress in achieving environmental
quality and economic development will
depend on greater involvement of
communities in designing local solutions to
local problems. Such involvement and
outreach also can lead to greater
involvement in water quality improvement
projects beyond the scope of initial trades.
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CHAPTER 3. THE ECONOMICS OF TRADING
Relative costs and expected water quality improvements among available pollution
reduction options are key indicators of whether economic incentives make trading feasible
and whether expected benefits are sufficient to sustain successful trading.
Introduction
This chapter describes economic concepts
related to effluent trading and economic
conditions necessary to support trading.
The chapter presents two major
discussions: descriptions of potential cost
savings from trading and factors that affect
trading economics. Several hypothetical
examples are used to illustrate major points
and clarify how economic comparisons are
key to successful effluent trading.
Cost Savings
Cost savings are the primary economic
benefit of trading among pollution
dischargers. Dischargers will be interested
in trading if it represents a way for them to
reduce their costs to meet environmental
objectives. Where such savings are
unavailable, interest in trading is likely to
be weak.
Market entry and production expansion
also generate economic benefits that can be
captured through trades. Dischargers,
therefore, also will be interested in trading
when it allows location of a new enterprise
or expansion of an existing one that would
not have been possible without trades.
Understanding the source of cost savings
and/or other economic gains to potential
traders is essential for identifying and
evaluating opportunities to trade. Buyers
benefit by purchasing pollutant reductions
from others that are less expensive than
their own costs of reduction. Sellers
benefit from payments they receive to
reduce loads below their own
requirements.
Comparing Costs
When considering trades, sources will
compare the cost-effectiveness of
achieving additional pollutant reductions
with that of other sources. The cost-
effectiveness of load reductions is typically
described in terms of cost per mass unit of
pollutants reduced, such as dollars per
pound or dollars per kilogram. Each
potential trading partner could have one or
more options to achieve additional
pollutant load reductions, and each option
will have a specific level of cost-
effectiveness. In their practical
application, different options may be
additive or mutually exclusive.
In evaluating trading opportunities, it is
often convenient to analyze costs on a per
unit of pollutant load reduction basis. Two
different unit cost measures are widely
used in economic analyses: (1) average
cost—the cost per unit of reduction across
all units; and (2) marginal cost—the cost of
one more unit of reduction. Neither cost
measure, however, is a perfect choice for
evaluating trades.
The relevant unit cost for a proposed trade
is the average cost of only the additional
reductions. This measure is sometimes
referred to as the incremental cost. In its
practical application, incremental cost is a
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hybrid of average and marginal cost; it is
calculated by dividing the total cost of
additional reductions by the quantity of
additional reductions. Costs of, and
reductions from, any pre-existing treatment
are not factored into this calculation.
In comparison, average cost, strictly
defined, is calculated by dividing the total
cost of all a source's loading reductions
(existing and proposed) by the total
quantity of reductions. This calculation
will over- or under-estimate unit costs for
additional reductions, depending on
whether the average cost of pre-existing
controls is higher or lower, respectively,
than additional controls. In contrast,
marginal cost, by definition, assumes that
pollutant load reductions can always be
implemented in small units, for example, a
pound at a time. Because this frequently is
not the case, marginal cost is often
incalculable.
Focusing on incremental cost is consistent
with the scale of control/reduction options
available to most sources. Generally,
pollution controls are feasible to implement
in relatively large installments that reduce
multiple units of pollutants. Point sources
in particular tend to purchase additional
loading reduction capability in large
increments. For example, a wastewater
treatment plant upgrade or plant expansion
may be designed to treat millions of
gallons a day. Many nonpoint sources also
implement runoff controls and best
management practices in relatively large
increments for sizable areas of land.
In some cases, a point or nonpoint source
may be able to achieve load reductions in
smaller increments than discussed above,
For example, a point source could increase
the amount of chemicals it uses in its
treatment process without investing in
additional equipment; similarly, a nonpoint
source could install another ten feet of
vegetative buffer strip. In such instances,
it might be possible to calculate a true
marginal cost. Incremental cost
calculations will be a practical approach
for most trading situations.
Exhibit 3.1 provides a simple illustration of
the incremental cost concept. A more
formal explanation of the relationship of
incremental cost to average and marginal
cost is presented in Exhibit 3.2
In Exhibit 3.1, a point source has three
options to achieve additional reductions
(and the options are mutually exclusive):
EXHIBIT 3.1: INCREMENTAL COSTS
Option
A
B
C
Pounds
Reduced
100
150
200
Total
Cost
$2,00
0
$2,25
0
$2,60
0
Incremental
Unit Cost
$20
$15
$13
The point source in Exhibit 3.1 could
reduce its costs to achieve additional load
reductions if reductions were available
from another source at a lower unit cost.
Alternatively, this point source might sell
load reductions to other sources if it could
get a higher price per unit than its
incremental costs. For example, if its
reduction requirement is 100 pounds and
the market price for reductions is $18/lb, it
could select Option C and sell the
additional 100 pounds to other sources at a
profit of $5/lb.
Dischargers* motivation to trade will be
strongest when the potential cost savings
(economic benefits) associated with trading
are high. Cost savings are achievable
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EXHIBITS.!: WHY Focus ON
INCREMENTAL COSTS?
Average cost (AC) is defined as the cost per
unit of reduction, and marginal cost (MC) is
defined as the cost of one more unit of
reduction, where the unit is very small (even
infmitesimally small). Their relationship to
total pollution control costs (TC) and
pollutant loading reduction quantities (Q) is
described below (where AC and MC are
cost functions and • indicates a partial
derivative):
1. AC = TC/Q
2. MC = • TC / • Q
The ability to calculate marginal cost
assumes a continuous cost function
representing cases where it is possible to
continuously achieve pollutant load
reductions on a unit-by-unit basis. This
assumption does not always hold. Many
pollution control options, in fact, are more
accurately represented by step-functions,
where marginal cost is undefined at some
points and can be equal to average cost at
others.
For this reason, focusing on the incremental
cost of additional pollutant load reduction
options will facilitate practical application of
the concepts discussed in this framework to
real-world trading opportunities.
Incremental cost is defined as the average
cost of the additional incremental
reductions, as compared to the average cost
of the overall total reductions achieved.
This incremental cost computation is similar
to a marginal cost computation where the
unit of change is defined as a measurable
unit (i.e., not very small), such as the units
of additional load reductions achieved by an
option.
• The incremental unit cost of pollution
control often increases as levels of
control become more stringent and
more sophisticated and expensive
technologies are required to reduce
pollutant loadings further. A
discharger might be able to reduce the
first 1,000 kg of pollutant from its
effluent stream for $50 per kg, while
reduction of the next 100 kg is $100
per kg, and reduction of another 100 kg
costs $1,000 per kg. Thus, dischargers
with varying levels of on-site control
mechanisms may have different unit
costs of pollution control.
• Economies of scale also result in
different unit costs across sources.
Economies of scale in pollution
reduction occur when average unit
costs decrease as the volume of
effluent treated increases. For
example, a source that treats extremely
large quantities of effluent might have
low unit load reduction costs compared
to sources with smaller discharges to
treat.
Differences in unit costs among pollution
sources help identify potential trading
opportunities. An important motivating
factor for participation in trading, however,
is the magnitude of cost savings that
dischargers can realize. Therefore,
potential traders will want to identify both
the differences in unit costs across sources
and the total amount of pollution reduction
that can be traded across these sources.
Exhibit 3.3 illustrates how differences in
unit load reduction costs provide an
incentive to trade.
when unit costs differ among dischargers.
These cost differences can arise for a
number of reasons. For example:
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EXHIBIT 3.3: POLLUTION REDUCTION COSTS WITHOUT AND WITH
EFFLUENT TRADING—A HYPOTHETICAL EXAMPLE
Lake Aqua, a popular recreation spot, has exhibited a steady decline in water quality over the
past several years. Local fishermen indicate that catch rates have decreased in recent years.
The State Department of Environmental Quality has conducted a water quality study revealing
high nutrient levels, especially nitrogen (N). In fact, nitrogen levels in the lake exceed
acceptable standards as defined by state statutes. The water quality study also determined that
nearly 100% of nitrogen loadings into the lake are discharged from two sources, Mammoth, Inc.
and the Spruce Wastewater Treatment Plant (WWTP). In response to this problem, the local
water quality district has determined that nitrogen discharges into Lake Aqua must be reduced
by 200 kg per day. The local water quality district divides responsibility for pollution reduction
equally across both sources.
Mammoth, Inc. and Spruce WWTP have different unit load reduction costs. Spruce is able to
remove nitrogen more cheaply because it processes much more effluent than Mammoth, Inc.,
resulting in an economy of scale. Unit load reduction costs for nitrogen are as follows:
Mammoth, Inc. = $30/kg
Spruce WWTP = $10/kg
In the absence of trading, Spruce WWTP and Mammoth, Inc. are each responsible for removing
100 kg/day of nitrogen from their own effluent streams. The chart below shows per day
compliance costs for this scenario.
Nitrogen Reduction Responsibility
Amount of N Removed In-House
Unit Load Reduction Cost
Compliance Costs Without Trade
Mammoth, Inc.
100 kg/day
100 kg/day
$30/kg
Spruce WWTP
100 kg/day
100 kg/day
$10/kg
$3,000/day
$l,000/day
Using a trading scheme, Mammoth, Inc. and Spruce can comply with the local water quality
standards more efficiently. In the trade, Mammoth, Inc. purchases 100 kg of nitrogen reduction
from Spruce WWTP for $20/kg. Thus, Mammoth, Inc. does not reduce its nitrogen discharge,
and pays Spruce $2,000 to reduce its discharge by an additional 100 kg. This transaction is
summarized in the table below.
Nitrogen Reduction Responsibility 100 kg/day
Amount of N Reduced In-House 0 kg/day
Unit Load Reduction Cost (N) $30/kg
In-House Control Costs $0/day
Payment from Buyer to Seller $2,000/day
Compliance Costs with Trade $2,000/day
In-House Savings from Trading $l,000/day
Watershed-wide Savings from Trading = $2,000/day
100 kg/day
200 kg/day
$10/kg
$2,000/day
$-2,000/day
$0/day
$l,000/day
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Factors That Affect the Economics of
Trading
Several major factors can influence the
economics of trading. This section
examines the following factors, building on
Exhibit 3.3 to illustrate key points:
• Trading ratios
• Transaction costs
• Uncertainty and its alleviation
• Number of trading participants
• Availability of cost data.
Trading Ratios
A trading ratio specifies how many units of
pollutant reduction a source must purchase
to receive credit for one unit of load
reduction. Trading ratios incorporate one
or more of the following scientific and
policy principles:
• Relative value—Trading ratios can
reflect the relative environmental
benefit of reducing a unit of pollution
from one source compared to another
(or, conversely, the relative harm of not
reducing a unit compared to another).
• Address "leaks "—Trading ratios can
require buyers to offset the full water
quality impact of their activities, for
example when a residential
development creates additional point
and nonpoint source loadings.
• Margin of safety—Trading ratios can
require buyers to purchase more units
of reduction than they would have
achieved without trading to account for
uncertainties in the level of control
needed to attain water quality
standards, and to provide a buffer in
case traded reductions are less effective
than expected.
• Differential water quality impacts—
Trading ratios can be set to achieve
load reductions that maintain current
water quality where improvements are
not needed, or they can be set to
improve water quality above a level
that would have been achieved without
trades.
Other important considerations include
differences in location, timing, and/or
chemistry of pollutant loadings that may be
traded. These are discussed in more detail
in Chapters 5 through 8.
Trading ratios affect the economics of
trading primarily by changing unit load
reduction costs and the prices negotiated
for purchase of reductions. Ratios greater
than 1:1 may raise trading costs to buyers
and modify profits to sellers.
A ratio of 1:1 indicates an equal exchange
between sources. In Exhibit 3.3, the
trading ratio was 1:1, and Mammoth, Inc.
paid Spruce WWTP to reduce 100 kg/day
of nitrogen and received credit as if it had
reduced 100 kg/day of its own nitrogen
loadings.
As indicated above, there are several
reasons for using a trading ratio other than
1:1. For example, a ratio of 2:1 could
incorporate a margin of safety, while
increasing that ratio to 3:1 could
implement a net reduction strategy. In this
case, the three units of reduction purchased
for one unit of credit are considered as
follows: the first goes toward the credit;
the second provides a margin of safety for
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selling source reductions that are less
certain than those from the buying source;
and the third provides greater net loading
reductions.
To analyze the economics of a specific
trade, it is important to include the
consequences of a mandated trading ratio.
Exhibit 3.4 shows how a trading ratio can
affect the economics of a trading situation.
Transaction Costs
Transaction costs are expenses for trading
participants, including public and private
participants and facilitators, that occur only
as a result of trading. Examples of
transaction costs include costs associated
with:
• Identifying potential trading partners.
• Negotiations to implement a trade.
• Additional ambient water quality
monitoring and analysis required for
trading.
• Additional documentation of trading
agreements.
• Government and/or private
administration of trades.
Transaction costs normally affect trades by
raising the effective price of pollutant
reductions to buyers and/or the potential
monetary compensation to sellers. Trading
can at times reduce transaction costs for
trading partners if environmental goals are
achieved more quickly than without a
trade. However, high transaction costs can
also partially or totally offset cost savings
associated with trading, thereby negating
economic and environmental benefits that
trading could otherwise achieve.
Trade administrators can take a number of
steps to minimize transaction costs,
including:
• Establishing information
clearinghouses.
• Helping potential trading partners
identify trading opportunities.
• Providing information about relative
water quality impacts of pollutant load
reduction options of eligible sources.
• Setting and communicating clear
procedures and criteria for evaluating
trades.
• Initiating trading programs in areas that
have numerous water quality analyses
and abundant data.
Administrative resources must be used
effectively since the cost of such resources
represents a transaction cost of the trading
process. For example, although it is up to
the sources involved to propose trading
options, permits that include a trade may
be more challenging to develop than
permits without trades. Decisions on how
increased costs associated with trading will
be divided by the permitting authority and
sources will vary. Governmental
organizations have the capability to help
minimize transaction costs. They can
efficiently fold trading programs into other
water quality programs that require similar
administrative resources.
Evaluation of transaction costs for a
trading opportunity requires careful
consideration of costs associated with
alternative actions. In some instances,
administrative costs for conventional water
pollution control can be higher than those
from trading. All effects of trading on
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EXHIBIT 3.4: THE EFFECTS OF A TRADING RATIO—A HYPOTHETICAL EXAMPLE
The local water quality district is interested in enhancing water quality in Lake Aqua to the
greatest extent possible. Thus, it wants to use trading to increase water quality more than it
could with conventional control methods. The district has investigated the potential cost
savings to trading participants, and believes that savings will be quite high. Therefore, the
district mandates a trading ratio of 2:1, whereby a buyer must purchase 2 kg of nitrogen
reduction to receive credit for 1 kg of reduction.
Nitrogen discharges into Lake Aqua must be reduced by 200 kg per day. Mammoth, Inc. and
Spruce WWTP are each responsible for reducing 100 kg/day of in-house nitrogen discharges.
In the absence of trading, Spruce WWTP and Mammoth, Inc. are each responsible for
removing 100 kg/day of nitrogen from their own effluent streams. The chart below shows
the per day compliance costs for this scenario.
Mammoth, Inc. Spruce WWTP
Nitrogen Reduction Responsibility 100 kg/day 100 kg/day
Amount of N Reduced In-House 100 kg/day 100 kg/day
Unit Load Reduction Cost $30/kg $10/kg
Compliance Costs Without Trade $3,000/day $l,000/day
Total Nitrogen Removed from Lake Aqua = 200 kg per day
Under the district's trading scheme with a 2:1 trading ratio, Mammoth, Inc. and Spruce can
comply with water quality standards more efficiently, and less nitrogen will be discharged into
Lake Aqua. In the trade, Mammoth, Inc. purchases 200 kg of N reduction from Spruce
WWTP for $13/kg. Thus, Mammoth, Inc. does not reduce its N discharge, and pays Spruce
$2,600 to reduce its discharge by an additional 200 kg. This transaction is summarized in the
table below.
Nitrogen Reduction Responsibility 100 kg/day 100 kg/day
Amount of N Reduced In-House 0 kg/day 300 kg/day
Unit Load Reduction Cost $30/kg $10/kg
In-House Control Costs $0/day $3,000/day
Payment from Buyer to Seller $2,600/day -$2,600/day
Compliance Costs with Trade $2,600/day $400/day
In-House Savings from Trading $400/day $600/day
Total Nitrogen Removed from Lake Aqua = 300 kg per day
Watershed-wide Savings from Trading = $1,000 per day
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administrative and other costs should be
considered to determine the net transaction
costs associated with trading.
Exhibit 3.5 provides a numerical
illustration of how transaction costs can
affect a particular trade.
Uncertainty and Its Alleviation
Potential trading partners and other
stakeholders might be uncertain about
some elements of trading and therefore
view trading as risky. Uncertainty can take
many forms. Several examples are
presented below.
• Potential traders might be concerned
that a regulatory agency would annul a
trade. An agency could conceivably do
this if a trade produced lower loading
reductions than expected or resulted in
increased potential for ecological harm.
• Potential traders might question the
longevity of a trading option, resulting
in an unwillingness to make investment
choices that rely on trading.
• Potential traders might be uncertain
about the accuracy of data on pollution
control costs.
Minimizing uncertainty encourages interest
and participation in trades. Reduced
uncertainty often translates into lower
long-term transaction costs, fewer
adjustments in costs to account for
uncertainty, and increased potential for
cost savings. Note that a particular action
to reduce uncertainty might incur costs,
and might itself be counted as a transaction
cost while serving to reduce overall
transaction costs.
Clearly specifying roles and
responsibilities in permits, memoranda of
agreement, contracts, and other trading
documents helps reduce risk and
uncertainty. Other tools such as
performance bonds can supplement trading
documents and further reduce risk and
uncertainty. A performance bond is a sum
of money set aside by a seller at the time of
a trade. If the seller reduces the amount of
pollution it sold in the trade, it reclaims the
money and any interest. If the seller is
unable to reduce its pollutant loading
adequately, it loses the money to a
pollution abatement fund or some other
suitable recipient. Other methods for
reducing uncertainty also can be used by
trading programs.
Number of Trading Participants
The number of participants involved in
effluent trading can change the economics
of trading in several ways. The specific
effects of increasing or decreasing the
number of participants are completely
dependent on the circumstances of a
particular trading situation. Several
general conclusions, however, can be made
about the impacts of increasing the number
of participants.
As the number of participants increases,
the availability of information about water
quality impacts is likely to increase,
resulting in less uncertainty among
participants. Increasing the number of
participants also heightens the probability
of sustaining a trading program over the
long term. This increased probability is
due to the fact that if several participants
decide to withdraw from the program,
enough participants will remain to continue
trading.
Trading programs can attract more
participants by fostering a cooperative
atmosphere, choosing a market area that is
large enough to sustain trading while
meeting water quality objectives, and
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EXHIBIT 3.5: THE EFFECTS OF TRANSACTION COSTS ON EFFLUENT TRADING—A
HYPOTHETICAL EXAMPLE
Recalling from Exhibit 3.3, Mammoth, Inc. and Spruce WWTP are mandated by the local
water quality district to reduce nitrogen loadings into Lake Aqua. This example shows how
transaction costs affect the attractiveness of trading.
For this trade, Mammoth, Inc. and Spruce have calculated their respective transaction costs,
including the costs of negotiation, administration, sampling, inspections, and documentation.
The total transaction cost for each participant is estimated to be $l,000/day. A price of
$20/kg was negotiated for the trade.
Mammoth, Inc. Spruce WWTP
Compliance Cost without trading $3,000/day $l,000/day
Nitrogen Reduction Responsibility 100 kg/day 100 kg/day
Amount of N Reduced In-House 0 kg/day 200 kg/day
Unit Load Reduction Cost $30/kg $10/kg
In-House Control Costs $0/day $2,000/day
Payment from Buyer to Seller $2,000/day - $2,000/day
Transaction Cost +$l,000/day +$l,000/day
Compliance Costs With Trade $3,000/day $l,000/day
In-House Savings from Trading $0/day $0/day
In the above example, trading is not economically attractive because total compliance costs
with trading (including transaction costs) are the same as compliance costs without trading.
Now consider the following example. In this case, an information clearing house has been
established, thus reducing the transaction costs associated with trading. Transaction costs are
$750/day per participant.
Mammoth, Inc. Spruce WWTP
Compliance Cost without Trading $3,000/day $l,000/day
Nitrogen Reduction Responsibility 100 kg/day 100 kg/day
Amount of N Reduced In-House 0 kg/day 200 kg/day
Unit Load Reduction Cost $30/kg $10/kg
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EXHIBIT 3.5:
In-House Control Costs
Payment from Buyer to Seller
Transaction Cost
Compliance Costs With Trade
In-House Savings from Trading
Watershed-wide Savings from Trading
(CONTINUED)
$0/day
$2,000/day
+$750/day
$2,750/day
$250/day
$500/day
$2,000/day
- $2,000/day
+$750/day
$750/day
$250/day
promoting information exchange.
Developing interest in trading from
numerous dischargers and obtaining the
benefits described above can be especially
important for a new trading program.
Availability of Cost Data
To assess effluent trading opportunities,
potential traders need to know their own
pollutant reduction costs. This information
enables dischargers to determine whether
they want to enter the market as buyers or
sellers. It also enables them to estimate
their potential cost savings or monetary
compensation from trading using the
methods described in this chapter.
Dischargers can estimate their own
pollution control costs in the absence of
trading. Obtaining information on the
costs of other dischargers could be more
problematic. Information can be shared in
several ways:
• A discharger can advertise that it
wishes to sell pollution reduction
credits at a specified price, thus
providing necessary data for other
potential trading participants.
• Public agencies and/or private
organizations can assist potential
traders by simply facilitating the flow
of information. They can use public
information outlets to suggest typical
costs of compliance within the
watershed.
• Regulatory agencies and/or private
parties can take responsibility for the
flow of information by facilitating
operation of a market, including
helping to track prices for trades.
It is important to remember that favorable
economic conditions alone are not enough
to promote effluent trading. Trading will
not occur unless potential participants have
access to necessary cost data and other
relevant information.
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CHAPTER 4. IDENTIFYING AND EVALUATING TRADING OPPORTUNITIES
A screening approach helps water quality managers, dischargers, and other stakeholders
apply Clean Water Act and economic principles in a systematic way to take advantage of
options, such as trading, that meet water quality objectives and improve cost-effectiveness.
Where to Begin?
Chapters 2 and 3 introduced a series of
CWA principles and economic concepts
that lay the foundation for successful
trading— from a single trade to a
watershed-wide trading program. The
question remains: How can someone apply
those principles to real-world situations
and identify places where trading could be
a viable option? And once such candidates
are identified, how should someone go
about evaluating how well site-specific
conditions and program choices meet those
principles?
A screening process helps stakeholders
focus on make-or-break issues first—those
conditions which are difficult to change or
accommodate—before moving on to other
issues. For example, if no potential trades
can meet CWA principles, economic and
administrative issues are moot. A
screening process also groups related
issues together to streamline consideration
of many issues.
The exact order in which someone
addresses relevant issues in a screening
process beyond starting with a water
quality standard depends on who potential
traders are and what their interests and
priorities are. For example, dischargers
might start with a given water quality
objective first, examine preliminary
economic questions second, revisit water
quality issues, and then conduct more
detailed economic analysis, and so forth.
A screening process can be conducted in
iterations to provide the level of analysis
necessary for evaluative and decision-
making purposes.
A Screening Process for Trading
Determining the potential for trading
hinges on three major questions:
1. Are trades consistent with water quality
and other environmental objectives?
2. Will any potential trading partners
benefit from trading?
3. Are administrative arrangements
available to support trading?
Together, these questions form the basis of
a screening process that can help identify
and evaluate potential trading
opportunities. Each of the CWA principles
and economic concepts presented in
Chapters 2 and 3 is represented in at least
one of these questions.
Stakeholders first begin with a given water
quality objective and then ask whether it is
possible to reach that objective more cost-
effectively. This approach represents a
bottom-up development process that many
existing trading programs and programs
currently under consideration have
followed.
In practice, the questions above can be
conceptualized as points of a triangle:
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Water Quality
Economics
Administration
After starting with water quality, the
direction taken depends on who you are.
Further, it might be necessary to go around
the triangle (through the screening process)
more than once to arrive at a final go/no go
decision. The three issue sets described
here are interrelated: how stakeholders
answer and resolve any one set of
questions affects, constrains, and creates
opportunities for other issues.
This chapter provides two screening
processes that help identify and evaluate
trading opportunities. The first process is
somewhat broad and can be used to
streamline identification of viable trading
opportunities. As described above, three
broad levels of screening criteria can be
used to identify and evaluate potential
trading programs. Level 1 examines how
trading will support water quality
standards; Level 2 determines availability
of economic benefits to trading partners;
and Level 3 examines accessibility to
administrative and institutional support.
The second process is essentially a
checklist of threshold conditions that
should be met for a trading program to
succeed. Together, these screening
processes also can be used to guide design
of a trading program and to measure the
probability of success.
Screening Level 1: Consistency With
Water Quality and Environmental
Objectives
The initial step is to determine whether a
trade will support water quality objectives.
Trading will be most attractive if (1)
sources that already meet technology-
based requirements are looking for an
alternative way to meet more stringent
water quality-based limits or (2) a number
of sources are faced with further pollutant
reductions to meet an in-stream water
quality standard.
Clean Water Act provisions establish
guideposts for trading that can be used to
assess a proposed trading program's
consistency with the statute and
regulations. Trading that is consistent with
water quality standards generally meets the
principles outlined in Chapter 2. The
purpose of Screening Level 1 is to
determine if and how these principles can
be met.
Screening for consistency with water
quality and environmental objectives can
be accomplished in several ways,
depending on available information. Three
related screening tools are discussed
below: (1) use of existing regulatory
information (2) water quality monitoring
data and simple analysis, and (3) more
complex analysis and the use of computer
simulation models.
After determining that a candidate for
trading can satisfy CWA provisions, it is
essential to note any adjustments in trading
proposals that might be necessary to ensure
compliance with the CWA. These
adjustments should then be reviewed to
ensure that economic benefits identified
under Screening Level 2 are preserved.
Regulatory Information. A review of
regulatory documents, such as NPDES
permits, local ordinances, and compliance
reports, helps determine whether
technology-based requirements are in place
where appropriate. The effective dates of
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enforceable requirements provide a context
for evaluating where a potential trader
stands with respect to applicable
technology-based requirements. Permits
and management plans usually indicate
how long such enforcement mechanisms
have been in place and when they are
scheduled for review, renewal, or revision.
Reviewing the language and structure of
such tools can help determine whether
trading arrangements can be incorporated
into existing enforcement mechanisms.
This review also provides assurances that
trades would be consistent with the anti-
backsliding requirement. When regulatory
documents and proposed trades are
complex, discussions with appropriate
permit writers and managers can clarify
expected trading effects.
Data and Simple Analysis. Ambient and
effluent water quality monitoring data and
analysis can help determine if potential
trades meet the principles outlined in
Chapter 2. Where data and analytical tools
are available, analysts can estimate impacts
of reallocations of pollutant loading
reductions or other water quality
improvements in a manner that might
occur under trading.
Various analyses can indicate what trades
are likely to support water quality and
enhance compliance with the anti-
degradation policy. Analysis also can
identify what types of trades might create
localized effects and threaten ambient or
local standards. Additionally, when
assessing potential trades, dischargers*
geographic locations should be identified,
noting any special considerations, such as
shallow streams, dissolved oxygen sags, or
poorly mixed areas (e.g., embayments,
lagoons).
Where ambient data are unavailable, or of
suspect quality, it might be possible to
identify and evaluate potential trading
candidates using relatively simple
calculations (e.g., mass balance).
However, for trades involving nonpoint
sources, it might be necessary to gather
additional ambient data.
Complex Analysis and Models. While
simple calculations using available data
might be adequate, a variety of computer
models are available to help understand the
potential effects of trading on water quality
(although some computer models might be
too complex for screening purposes).
Models are used to understand how
pollutant loads and waterbody responses
change with trades, considering spatial,
temporal, and chemical parameters. In
many cases, these models can provide the
information needed to evaluate the
compliance of trading actions with CWA
provisions. More sophisticated analysis
may be necessary where trading is
considered for complex waterbodies,
numerous potential traders, or pollutants
for which precise safeguards are required.
EPA»s Compendium of Watershed-Scale
Models for TMDL Development (EPA
841-R-92-002, June 1992) provides
detailed information on available models.
Screening Level 2: Economic Benefits to
Trading Partners
As described in Chapter 3, cost savings are
a primary attraction to trading among
sources of pollution. Dischargers will be
interested in buying or selling water quality
improvements when such transactions
reduce their costs to meet environmental
objectives. They also will be interested if
trading allows expansion of an existing
facility or location of a new source that
would not have been possible without
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trades. Where economic benefits are
unavailable, interest in trading by pollution
sources is likely to be weak.
To determine if dischargers might be
interested in trading, stakeholders might
want to estimate a unit load reduction cost
for each potential trader. A list of these
costs can provide a range of cost
reductions. The size of unit cost
differences among potential traders is a
good indicator of the strength and stability
of economic benefits from trading.
Another useful indicator is the magnitude
of cost savings that dischargers can realize.
Therefore, stakeholders in trading should
estimate the total amount of pollution
reduction that can be traded among
dischargers. This estimate, along with
information on unit costs, can be used to
compute the total cost savings available
from trading.
If it is not possible to obtain preliminary
estimates of incremental unit load
reduction costs, stakeholders may examine
many other characteristics of potential
traders that indicate differences in unit
costs. Several such characteristics are
listed below.
• Potential traders are numerous—The
probability of finding dischargers with
different unit load reduction costs
increases as the number of dischargers
increases.
• Potential traders treat varying amounts
of effluent—As discussed in Chapter 3,
dischargers that treat larger amounts of
effluent tend to have lower unit costs.
Thus, if some dischargers treat different
amounts of effluent than others, there
are likely to be differences in unit costs.
• Potential traders use different
technologies to treat effluent (including
older treatment equipment)—Unit load
reduction costs are dependent on the
equipment and technology used to treat
effluent. Usually, newer technology is
more efficient and can achieve lower
unit costs over the long term. Older
treatment technologies, on the other
hand, might be less efficient, resulting
in relatively higher unit costs.
Therefore, dischargers with different
technology levels are likely to have
different unit costs.
• Potential traders treat effluent to
different degrees—As a discharger gets
closer to removing 100 percent of a
pollutant from its effluent, it is more
likely to incur higher pollution control
costs. In fact, the cost of pollution
control tends to increase at an
increasing rate the closer a discharger
gets to full removal of a pollutant.
Therefore, potential traders treating
varying percentages of their pollutant
loads are likely to have different unit
load reduction costs (although similar
facilities generally use similar
technologies and treat to similar
performance levels).
Screening Level 3: Coordination and
Administrative Support
Where water quality objectives and
economic benefits appear achievable, the
last level of the screening process
addresses the administrative feasibility of
trading. Screening Level 3 asks the
question: Do potential traders—public
and/or private—have sufficient resources
and a cooperative setting in which to
administer a trading program? Important
issues to examine are identified below.
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Matching administrative capabilities to
the scope of trading activities—Careful
attention should be given to matching
the level of administration to the scope
of trading. Overly complex or
centralized administration establishes
unnecessary technical and budgetary
requirements that raise costs associated
with participation. Alternatively,
inappropriately weak or decentralized
structures fail to provide necessary
support and place a greater burden on
participants to identify each other and
establish trades. As the number of
participants increases, trading might
benefit from more formalized
administration (which again, can be
publicly and/or privately provided) that
can provide clearinghouse and
facilitation functions.
Information needs of participants—
When participants have adequate
access to information about trading
options and potential trading partners,
cost savings can be maximized. Useful
information relates to who is trading
what, where and when, and at what
price. Trade administrators should be
able to facilitate information flow.
Institutional responsibilities—Many
organizations play a role in trading,
necessitating clearly defined
responsibilities. Assigning
responsibilities requires creative use of
existing institutional structures to
maximize effectiveness and minimize
the need for additional resources.
Local institutions (public and/or
private) are likely to be more effective
than state or federal agencies alone for
site-specific trading programs.
Consensus on the role of trading—
Achieving consensus is an important
precursor to developing and
implementing a trading program.
Trade administrators should receive
watershed-wide support for trading
programs before development and
implementation.
• Tracking and documenting trades—
Trade administrators need to have the
capability to track and document
trades. Such capability is essential to
ensuring compliance with traded
responsibilities. Tracking also provides
a storehouse of information that is
important to potential traders. A
number of options are available to
conduct any necessary tracking. For
example, trading parties and/or a
regulatory agency could assume
responsibility.
• Ongoing monitoring In addition to
tracking trades, administrators need to
be able to track the impacts of trades on
water quality. As discussed in Chapter
2, once trades are initiated, ongoing
ambient and effluent monitoring data
are needed to determine whether trades
are meeting water quality standards and
traders are meeting applicable limits.
• Accountability and enforcement—
Organizations responsible for trading
programs need to have access to
enforcement mechanisms that allow
them to uphold all provisions of the
trading program and meet requirements
of the CW A.
Template of Favorable Conditions
The three-level screening process
described above can assist in determining
whether a particular trading opportunity
satisfies broad criteria for success. Moving
from Level 1 to Level 3 sequentially
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provides an efficient way to screen out
weak candidates and focuses attention on
stronger ones.
Each broadly drawn criterion comprises
several narrow, specific criteria. Many of
these specific criteria represent CWA
principles for trading identified in Chapter
2 and economic conditions described in
Chapter 3. Others are separate conditions
or situations that are important for
successful trading. Together, these
principles form a set of favorable
conditions for trading. As more of these
conditions can be met, a more solid
opportunity exists to use trading as a cost-
effective and ecologically sound water
quality management tool.
These conditions can be incorporated into
a screening process that may be applied to
a potential trading program subsequent to
the broad three-level process. The
conditions might also serve as a valuable
design checklist when preparing a trading
program for implementation.
The conditions listed in the checklist below
apply to all types of trading discussed in
this framework. These general conditions
provide a template that is the basis for the
type-specific checklists provided in
Chapters 5 through 8.
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WORKSHEET FOR FAVORABLE CONDITIONS FOR TRADING
Legal and Regulatory Conditions
General:
• Is trading implemented within the context of Clean Water Act statutory and regulatory yes
requirements ? no
Specific:
Is trading consistent with applicable technology-based requirements? yes
no
Are resultant conditions from trading expected to achieve water quality standards? yes
no
Is trading consistent with the anti-degradation policy? yes
no
Is trading consistent with anti-backsliding requirements? yes
no
Economic Conditions
General:
Can dischargers save or make money by trading (i.e., are there economic incentives to yes
trade)? no
Specific:
Are total incremental costs for pollution reduction, which include direct incremental yes
costs and transaction costs, different among dischargers? no
Do cost differentials among dischargers allow one discharger to reduce pollution more yes
cheaply than another? no
Are transaction costs less than cost savings from the trade? yes
no
Do cost savings from trading outweigh the uncertainty that dischargers face under yes
trading schemes? no
Is there a sufficient supply of pollution reduction for sale, and a reasonable demand to yes
buy reduction credits? no
Are potential aggregate savings to a trading candidate large enough to attract serious yes
interest? no
Data Availability Conditions
General:
Are the data necessary to implement a trading program available or estimable? yes
no
Specific:
Are there are enough data to understand pollution quantities and flows within the yes
watershed (e.g., have water quality authorities conducted a TMDL)? no
Can regulatory authorities monitor water quality across the trading area and points of yes
discharge under trading? no
Can dischargers estimate their direct costs of reducing a specified unit(s) of pollution? yes
no
Can dischargers estimate transaction costs that they would have to pay to conduct yes
trades? no
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Administrative and Institutional Conditions
General:
• Are governmental authorities and potential trading participants capable of administering yes
a trading program? no
Specific:
• Do governmental authorities have enforcement mechanisms to ensure trades are being yes
implemented correctly and applicable limits are being met? no
• Is information about trading partners readily available so that buyers and sellers can yes
coordinate? no
• Are responsibilities clearly defined for institutions and dischargers taking part in yes
trading? no
• Is the scope of administrative infrastructure compatible with the amount and complexity yes
of the trading that is expected? no
• Has the administering agency established who is accountable for implementing yes
measures to reduce pollutant loading? no
• Has the administering agency established who is accountable for water quality yes
improvements? no
• Is the agency that enforces trading provisions able to give necessary feedback to parties yes
responsible for water quality? no
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CHAPTER 5. POINT SOURCE/POINT SOURCE AND INTRA-PLANT TRADING
Point/point source trading involves two or more dischargers, enabling one facility, in lieu
of upgrading its own pollution controls, to arrange for greater than required controls at a
second facility that can further reduce pollutant loads more cost-effectively. Intra-plant
trading allows a single facility that maintains multiple outfalls to allocate pollutant
discharges among them in a cost-effective manner.
Introduction
Both point/point source trading and intra-
plant trading involve trading between point
sources. The Clean Water Act (CWA)
defines a point source as "any discernible,
confined and discrete conveyance ... from
which pollutants are or may be
discharged." Point/point trading involves
two or more facilities, and intra-plant
trading involves only one.
Point/point and intra-plant trading are
unique among types of trading discussed in
this framework in that all potential trading
parties are subject to the same regulatory
regime—National Pollutant Discharge
Elimination System (NPDES) permits. As
a result, many issues related to these trades
are relatively straightforward and/or are
addressed according to established
protocols, compared to other types of
trading. Nonetheless, site-specific water
quality conditions and effluent
characteristics of the particular trading
partners involved will determine whether
contemplated trades warrant any special
considerations, analyses, or administrative
arrangements to supplement NPDES
permits.
Additionally, even though point sources
are regulated by the same permit program,
the cast of potential trading partners in any
watershed or segment can be quite diverse.
A watershed's point sources could include
discharges from municipal treatment
plants, industrial facilities, federal
facilities, active and inactive mines, and
large concentrated animal feedlots, as well
as any stormwater collected and discharged
through a discrete outfall. The diversity of
point sources in a watershed can create
opportunities for trading, as illustrated in
Exhibit 5.1.
Effluent characteristics, economic
incentives, treatment options, financial
capabilities, experiences with permit
authorities, and/or familiarity with other
EXHIBIT 5.1: POINT/POINT
TRADING SOUTH SAN FRANCISCO
BAY
The San Francisco Regional Water
Quality Control Board directed three
POTWs and a stormwater management
agency to negotiate how together they
could achieve a 900-pound-per-year
reduction in copper loadings needed to
meet TMDL allocations. The 900 Ib/yr
reduction target exceeds reductions San
Jose, Palo Alto, and Sunnyvale POTWs
and the Santa Clara Valley Nonpoint
Source Pollution Control Program have
already achieved to meet their WLAs.
The four parties will report back to the
Board to specify how the additional
reduction target will be met, including
identifying specific responsibilities.
Options include point/point trading
between some or all parties.
Source: USEPA Region 9, personal
communication, October 1995.
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permittees will differ among point sources.
When trading involves more than one type
of point source, such differences might
require some attention.
5.1 Regulatory Issues
Both point/point source trading and intra-
plant trading may help achieve water
quality standards when technology-based
discharge limits are insufficient to do so.
Under point/point source trading and intra-
plant trading, all point sources would still
meet technology-based requirements. The
only instance in which EPA has authorized
an intra-plant trade to meet technology-
based requirements is in the iron and steel
industry. (See Appendix B.) It is unclear
whether future effluent guidelines will
allow this form of intra-plant trading.
Beyond technology-based requirements,
dischargers would be free to exchange
pollution reduction requirements between
outfalls, subject to criteria established by
permit authorities. In point/point source
trading, municipal and industrial facilities
could buy and sell or otherwise exchange
pollution reduction requirements, provided
that resulting changes in allowable
discharges are consistent with water quality
standards and comply with the principles
identified in Chapter 2. Revised limits are
then incorporated into dischargers* permits
by the permitting authority.
In intra-plant trading, a facility with
multiple outfalls could negotiate revised
permit limits with the permit authority,
enabling it to allocate its total pollutant
load across outfalls in a cost-effective
manner while attaining water quality
standards and complying with other trading
principles.
As noted in the Executive Summary and
Chapter 2, both point/point source trading
and intra-plant trading take place within
the context of the NPDES program. Like
conventional NPDES permits, permits for
point sources engaged in a trade contain
specific effluent limits for each outfall.
These limits must reflect the results of any
trade.
In addition, terms of trades can be
documented in the special conditions
section of permits and incorporated into
permit compliance schedules, though
additional monitoring may be required.
Incorporating results of trades into NPDES
permits for each involved facility will
ensure that permittees are clearly
accountable for compliance. NPDES
permits may be issued in the context of a
total maximum daily load (TMDL). (The
role of TMDLs in trading is discussed in
more detail in Chapter 7.)
In addition to documenting trades in
effluent limits, NPDES permits issued to
point sources engaged in trades must be
developed in a manner consistent with the
anti-degradation policy and anti-
backsliding requirements of the CWA.
The implications of these requirements for
trading are described below.
Anti-Degradation Policy
The extent to which point/point trading can
enhance compliance with a state anti-
degradation policy depends on whether
receiving waters in question are Tier 1, 2,
or 3. The implications of anti-degradation
policies for trading also will depend on
each state's approach. It will be necessary
to ensure compliance with the specific
requirements of the state's anti-degradation
policy before enacting a trade.
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For waters where water quality is not
better than fishable/swimmable (Tier
1), trading can be incorporated into the
development of a new TMDL,
providing a means of reducing
pollutant loads, attaining water quality
standards, protecting existing uses,
and/or improving water quality to a
Tier 2 level at less cost.
For waters that are better than
fishable/swimmable quality (Tier 2),
point/point source trading might offer a
means of accommodating important
economic or social development and
result in less degradation than a non-
trading option, and/or provide other
benefits to the community (e.g., lower
wastewater treatment rates). In these
areas, new dischargers could trade with
existing dischargers to reach a cost-
effective reallocation of pollutant loads.
• Similarly, for Outstanding Natural
Resource Waters (Tier 3), trading
might be the only means of
accommodating new dischargers,
provided that current high levels of
water quality will be maintained.
Anti-Backsliding Requirements
CWA anti-backsliding requirements are
met by point sources trading in
waterbodies that are newly water-quality-
limited, or where wasteload allocations
(WLAs) are being revised downward. In
such cases, point sources face loading
reduction requirements above what they
are already achieving. Point sources
buying loading reductions could continue
discharging at current limits with permits
no less strict than those in place before
trading. Point sources selling reductions
end up with stricter limits.
The CWA, however, allows backsliding
from a water quality-based effluent limit
(WQBEL) in two situations:
1. Where a waterbody is not attaining its
water quality standard, a limit may be
relaxed only if a TMDL or WLA has
been performed establishing a new
limit and implementation of that
TMDL/WLA will ensure compliance
with water quality standards.
2. Where a waterbody is attaining its
water quality standards, a limit may be
relaxed only if requirements of the anti-
degradation policy are being met.
Most trades will allow a point source to
meet new pollutant reduction requirements
more cost-effectively by arranging for
treatment by another source. If a trade is
implemented through a TMDL, a point
source might receive a reduced WQBEL as
a result of the trade. A reduced WQBEL
would be part of a suite of pollution
controls that would attain water quality
standards.
Reopener Clause
As a further protection against the
possibility that trading might cause adverse
water quality effects, permitting authorities
can invoke a reopener clause in any
NPDES permit. This clause gives permit
agencies the power to alter discharge limits
at any time during the life of a permit if in-
stream surveys, improved water quality
modeling, or other factors indicate that a
modification is necessary.
5.2 Economic Issues
The economic benefits of point/point
source trading and intra-plant trading can
be substantial. While experience to date
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with point/point source trading is limited,
EPA estimates that potential pollution
control cost savings associated with this
form of trading might reach as high as $1.9
billion per year, according to an analysis of
benefits and costs prepared for President
Clinton's Clean Water Initiative (USEPA,
Office of Water, March 1994, EPA 800-R-
002). Similar national estimates for intra-
plant trading are not available.
Unit Cost Differences
Dischargers* motivation to trade will be
strongest when the potential cost savings
associated with trading are high. As
discussed in Chapter 3, cost savings are
possible when incremental costs of
reducing pollution differ from source to
source. In the case of point sources,
differences in incremental costs might arise
for a number of reasons.
Economies of scale—the tendency for
average pollution control costs to fall as
volumes of effluent to be treated
increase—are one common factor. As
noted in the introduction to this chapter,
many types of point sources can exist
within a watershed. Some types tend to
discharge much greater amounts of effluent
than others. For instance, a large
wastewater treatment plant is likely to
discharge higher volumes of effluent than a
small paper mill. This situation creates
opportunities to take advantage of
economies of scale. The same situation
also can exist for a single plant (i.e., intra-
plant trading) in cases where a plant has
outfalls that discharge varying volumes of
effluent.
Another factor that is likely to create
differences in incremental control costs is a
tendency for the cost-effectiveness of
pollution control to diminish as levels of
control become more stringent and more
sophisticated and expensive technologies
are required. As a result, it might be more
expensive per unit to reduce the effluent
concentration of a pollutant from 2 mg/1 to
1 mg/1 than to reduce the concentration
from 20 mg/1 to 2 mg/1.
Potentially, point sources in a watershed
differ significantly in the level of treatment
currently achieved. Even though they all
operate under the NPDES regulatory
system, differences in technology-based
requirements among different industries
might result in different pollutant
concentrations. Additionally, age of
facility and treatment processes are factors
in relative current pollutant loadings
among dischargers.
Transaction Costs
As discussed in Chapter 3, transaction
costs (the costs incurred in identifying
potential partners, negotiating and
documenting a trade, and soliciting and
maintaining regulatory approval for a
trade) can significantly affect trading.
Methods available to reduce transaction
costs can involve some level of
governmental and/or private action (e.g.,
clearinghouse, facilitator). Since point
sources are already regulated under the
NPDES permit system, government
agencies and industries may prefer a more
market-like approach to trading that avoids
significant government roles beyond the
NPDES process.
Other Economic Considerations
A number of other economic
considerations may influence point
sources* interest in trading. Many point
sources are profit-seeking businesses that
work within the setting of the market
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economy. Given this setting, interest in
trading might depend not only on the
absolute magnitude of potential cost
savings (net of all transaction costs), but
also on the relative size of those savings
compared to overall operating costs (e.g.,
total production costs for an iron and steel
manufacturer). If the benefits of trading
outweigh associated costs, but returns on
investments in trading have little overall
impact on a discharger's total operating
costs, the discharger might choose to
devote its limited resources to endeavors
that promise greater returns.
Further, trading programs might be most
successful when they are organized to
include a range of industries, or when
neutral parties broker trades. Firms in the
same industry could be reluctant to share
sensitive information due to competitive
pressures.
Point sources subject to financial
regulations might face economic incentives
for a particular trading scenario that are
different from those of unregulated
sources. An example of a financially
regulated point source is a POTW that
charges rates approved by a public utilities
commission. Such POTWs undergo
review processes in which commissions
verify the authenticity of POTW-reported
costs. The review process keeps POTW
rates in line with costs.
Because such POTWs have to justify all
costs and expenditures to be able to charge
a given rate, they will want to discuss
potential participation in a trading program
with the appropriate utility regulator.
Some rate boards might be averse to
POTWs' participating in a new program
such as trading; other rate boards might
encourage trades if they are economically
justifiable. Specific questions include
whether a rate board would allow a POTW
to pay another source for loading
reductions credited to the POTW (POTW
as buyer), and whether a rate board would
allow a POTW to overcontrol and sell a
portion of its additional reductions to other
sources (POTW as seller).
For example, when EPA»s Chesapeake
Bay Program identified potential
point/point trading opportunities among six
POTWs discharging to the lower Potomac
River, several plants raised concerns about
how they could incorporate trades into
their capital planning process. Many
operators felt that their rate boards and the
public would view even a partial reliance
on trading as risky, given the need to make
financial investment decisions for future
plant operations well in advance of an
actual need for additional capacity or
treatment capabilities.
5.3 Data-Related Issues
Dischargers and permitting authorities will
be interested in obtaining a range of data in
order to implement a trading program. To
formulate a trading proposal, dischargers
need information on current or proposed
permit limits and pollution reduction goals;
current pollutant discharges; and the cost,
applicability, and effectiveness of
alternative pollution control methods. To
assess the acceptability of potential trades,
dischargers also may want to evaluate
potential effects of alternative discharge
limits on water quality.
With the exception of cost data, permitting
authorities will need similar information to
evaluate proposed trades. Cost data may
also be of value to permitting authorities if
their interests include tracking the
economic benefits of trading. This
information might be particularly useful,
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for example, in documenting the
accomplishments of an agencys trading
program and encouraging other agencies to
initiate similar efforts.
EPA maintains a number of databases that
can provide useful information in support
of trading programs. For example, EPA»s
Permit Compliance System maintains
information on current pollutant loadings
and permit limits. Similarly, the STORET
system and EPA»s Waterbody System can
provide information on water quality
conditions, and the Agencys Treatability
Database is a source of data on applicable
treatment technologies. These centralized
sources might not, however, contain the
most current information available or
provide sufficient detail on site-specific
conditions. Potential sources of more
detailed and current information are
described below.
Current or Potential Future Permit Limits
Some of the information that will support
trading is readily available from public
sources. For example, NPDES permits
specify current permit limits, and
information on these limits can be obtained
from the permitting authority. Also,
permitting authorities may publish
documents related to TMDL development
and proposed wasteload allocations that
provide information on potential pollution
reduction requirements beyond
technology-based requirements and water
quality impacts. More general data on
applicable water quality standards should
be available from the local permitting
authority, the states, or EPA.
Loadings
Data on current point source loadings, like
information on current or proposed permit
limits, can usually be obtained from public
sources—in this case, NPDES permittees*
Discharge Monitoring Reports (DMRs).
Dischargers typically file these reports on a
monthly basis, providing data on effluent
flows and the concentrations of each
pollutant in their discharge that their
permits require them to monitor. In some
cases, DMRs might not include data on all
pollutants of concern. Supplemental
information might be obtained as part of
the TMDL development effort or through
special monitoring studies.
DMR requirements are a main difference
between point/point and other types of
trading with respect to data availability.
DMRs provide by far the most complete
pollutant release information in any
medium and for any source. Furthermore,
DMRs contain actual releases, rather than
permitted releases, as some forms of
reporting do. As a result, DMR provides a
better picture of the real world than permits
alone.
Control Options
Both dischargers and permitting authorities
can obtain general information on the cost,
applicability, and effectiveness of
alternative pollution control methods from
EPA effluent guideline development
documents and similar sources, as well as
from trade associations and other industry
organizations. These sources, however,
are designed primarily to provide rough
estimates of the cost or effectiveness of
alternative methods, not to provide detailed
assessments for application to a particular
facility. To avoid mischaracterizing the
cost-effectiveness of control options
available to them, dischargers or other
interested parties can complete more
detailed, plant-specific assessments before
proposing a trade.
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In conducting such assessments,
dischargers are encouraged to consider
pollution prevention practices as well as
end-of-pipe treatment. In many situations,
pollution prevention can be more cost-
effective than end-of-pipe treatment in
achieving pollution reduction goals.
Facilities that explore pollution prevention
opportunities might be better positioned to
discharge at lower levels than those set in
the NPDES limits they would have had in
the absence of trading and to offer
pollution reductions in trades with other
dischargers. State and EPA regional
pollution prevention coordinators might
prove to be a good source of pollution
prevention ideas.
Water Quality Impacts
An assessment of trading water quality
impacts might involve water quality
modeling and analysis. Data needed for
such efforts will depend on the
sophistication of the analyses, the
pollutant(s) involved, and the nature of the
receiving waters.
If trading is integrated into TMDL
development processes, the analytic effort
should be no different than that ordinarily
required. If trades are negotiated following
initial development of TMDLs, permitting
agencies will likely evaluate proposed
trades—or ask dischargers to evaluate
proposed trades—using analytic techniques
like those employed in developing the
original TMDLs. If this is the case, data
requirements for trading analyses should
be similar or identical to those for the
original TMDL efforts. Additional data
should be necessary only if permitting
authorities employ specialized approaches
to analyze proposed trades.
Even so, several typical data gaps are
notable and might necessitate special
sampling. For example, despite an
abundance of effluent data, little
documentation of ambient water quality
downstream from point sources exists.
Additionally, mixing zone data are
especially rare.
5.4 Technical and Scientific Issues
As noted earlier, technical and scientific
issues facing point/point and intra-plant
trading revolve around the fact that such
trading produces additional load reductions
at sellers* outfalls rather than at buyers'
outfalls, where additional reductions would
otherwise occur. As a result, assessing
trading effects at the edge of mixing zones
and downstream is a key part of any water
quality analysis for trading.
Point source discharges must meet permit
limitations. If the permit limit is based on
the protection of the water quality rather
than technology-based effluent guidelines,
the limit is probably based on meeting
water quality standards at the edge of the
mixing zone. Mixing zone effects, as well
as downstream effects, depend in part on
spatial, temporal, and chemical differences
between trading partners* loads.
Local Conditions
A key factor in evaluating trades is the
need to ensure attainment of water quality
standards and protect against adverse
effects on the aquatic environment in the
immediate vicinity of a point source
outfall. This is a special concern in the
case of pollutants that do not degrade or
decay, such as metals, as well as with other
pollutants that can bioaccumulate, with
resulting toxic effects on aquatic life.
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Careful analysis of such trades, including
the potential impacts of spatial or temporal
variations in loadings, will be necessary to
ensure that the creation of local "hot spots"
or "dead zones" is avoided. To facilitate
this type of analysis, procedures for
conducting local water quality evaluations
can be based on those which permitting
agencies currently employ in establishing
water quality-based effluent limits (i.e.,
current state or regional policies on the use
of mixing zones and the application of
acute vs. chronic water quality criteria).
Spatial Considerations
The effect of trades on water quality will
depend, in part, on where trading partners
are located relative to each other in
watersheds and segments. Distances
between partners and existing water quality
conditions (e.g., assimilative capacity,
levels of non-traded pollutants) at, near,
and between traders* outfalls are factors in
how well additional reductions at sellers*
outfalls will maintain or improve overall
water quality in the area of concern.
Temporal Considerations
Many point source loads are relatively
constant and predictable over time, as
allowed by their NPDES permits. Among
the different types of point sources, and
even among same-type point sources,
however, temporal characteristics of loads
can vary dramatically. For example,
loadings from combined sewer systems
and sanitary sewers with inflow are highly
influenced by rainfall. Feedlot and
stormwater loadings also are weather-
dependent. Loadings from other types of
point sources, such as industrial
dischargers and mining operations, can
vary according to production cycles and
processes. A given unit of pollutant will
also have different water quality impacts,
depending on the flow and temperature of
receiving waters at particular times.
Several simple analytical techniques can
help compare loads from different sources.
Calculating daily, monthly, or annual
average loadings (whichever period is most
appropriate) is one approach. More
sophisticated analyses involving time
series data are also options. Such
comparisons should factor in seasonal
differences in loadings and/or assimilative
capacity (e.g., dry seasons), as necessary.
Chemical Considerations
Chemical differences can exist between the
same pollutant coming from different point
sources. Point source pollutants typically
reach waterbodies in dissolved form, but
pollutants from sources where discharges
have come into contact with land or other
materials (including soils, asphalt, and
other conveyances) might be attached or
adsorbed to sediment. Such differences
should be accounted for in water quality
analyses conducted to support trading.
In reviewing proposed trades, permitting
authorities might also need to evaluate the
effects of trading arrangements on
loadings of pollutants other than those
explicitly traded, to ensure that no
inadvertent violations of water quality
standards result. For example, if trading of
conventional pollutants shifts additional
load reductions to a discharger whose
effluent also contains certain toxics, the
resulting effect on toxic loadings is worth
examining. Permitting authorities can ask
dischargers to reformulate trading
proposals if the projected impact on other
pollutants would threaten to violate permit
conditions or water quality standards.
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Addressing Considerations
A variety of tools are available to
permitting authorities and dischargers to
accommodate differences between trading
partners* loadings and their effects on
water quality. TMDL margins of safety,
discussed in Chapter 7, are one approach.
The use of trading ratios, introduced in
Chapter 3, also can accommodate
differences between loadings for the
purposes of trading.
Trading ratios (also sometimes referred to
as "offset ratios") may be used to guard
against the creation of hot spots, to provide
a margin of safety against uncertainties in
water quality modeling, or even to create a
buffer to accommodate future discharge
growth. It is important to note, however,
that the use of trading ratios can dilute or
possibly eliminate incentives to trade since
the costs associated with achieving more
stringent control through trading might
outweigh potential cost savings that would
otherwise be achieved. While permitting
authorities can employ trading ratios in an
effort to ensure that trades result in water
quality improvements, they should
recognize that stringent trading ratios
might eliminate the potential economic
benefits of trading.
5.5 Institutional Issues
Few, if any, institutional modifications for
point/point source trading and intra-plant
trading programs may be necessary. Both
take place within the context of the
existing NPDES program, which provides
a well-established framework for
interaction between the permitting
authority and point sources that wish to
participate in a trading initiative. In
addition, the NPDES program provides
established procedures for inviting
environmental groups and other interested
parties, including the general public, to
comment on proposed permit conditions.
These procedures can be employed to
invite public review and comment on
proposed trades.
The existence of a well-established
institutional framework within which
point/point source and intra-plant trading
can occur simplifies the implementation of
these types of trading programs.
Nonetheless, permitting authorities might
wish to modify current procedures to
facilitate trading implementation. These
modifications are likely to be modest when
permitting authorities adopt informal
trading programs, under which they
encourage dischargers to propose
alternative limits as an integral part of
TMDL development processes.
As outlined below, the need for new
procedures might be greater if permitting
authorities choose to implement a more
structured program for the review and
approval of trades following initial
development of a TMDL. Involving all
interested parties—including dischargers,
local government agencies, community and
environmental groups, and the general
public—in the development of these
procedures will give trading programs the
greatest possible chance of success.
5.6 Administrative Issues
The initial design of a point source trading
program involves consideration of a
number of issues. These include:
• The process by which the permitting
authority establishes initial pollutant
load allocations among contributing
dischargers.
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• Whether the permitting authority will
require dischargers to employ trading
ratios of greater than 1:1.
These issues are discussed in more detail
below.
Initial Allocation
Trades should begin with identification of
the pollutants of concern, the dischargers
contributing to the pollution problem, and
the total reduction in pollutant loads
needed to meet water quality standards.
This can be accomplished through the
development of TMDLs and/or WQBELs.
Once the state (or, if EPA disapproves the
state's TMDL, EPA) determines the
TMDL for a specific pollutant, load
reductions needed to reduce pollution to
levels established in the TMDL are
allocated among the contributing sources.
The initial allocation can have a significant
effect on the economic positions of
potential participants in a trade since it
establishes discharge limits with which a
source must comply if it cannot trade for
additional discharge credits. All other
factors being equal, the more expensive it
will be for a source to comply with its
initial allocation, the more the source will
likely be willing to pay to acquire pollution
reduction credits from other dischargers.
Nevertheless, a discharger that can
inexpensively comply with its initial
allocation could be well-positioned to
invest in additional pollution controls,
thereby creating pollution reduction credits
that it could trade to other dischargers.
Permitting authorities have several options
in establishing an initial allocation prior to
trading. From an administrative
standpoint, a simple and equitable option is
to allocate loads in a manner that is
consistent with standard wasteload
allocation procedures, such as requiring all
dischargers to achieve a proportional
reduction in current loads.
These procedures can vary significantly
across states and EPA Regions. EPA»s
Technical Support Document for Water
Quality-based Toxics Control (EPA/505/2-
90-001, March 1991) lists 19 allocation
methods and indicates that regulatory
agencies can apply any other strategy that
meets applicable legal requirements.
Under current practice, however, most
states or EPA Regions allocate loads to
dischargers using methods that impose
similar effluent limits or require equivalent
reductions in pollutant loads.
Based on initial allocations, the state can
work with dischargers to determine if any
point/point trades are appropriate.
Program Operation
Once the basic design of trading programs
is defined, it will be necessary for
permitting authorities to establish standard
operating procedures. In particular,
permitting authorities will need to establish
conditions, standards, and procedures for:
• Submitting proposed trades for the
authority's consideration.
• Evaluating proposed trades.
• Establishing appropriate timeframes for
review and approval/disapproval of
proposed trades.
• Incorporating approved trades into
permits and TMDLs.
• Ensuring public participation in trading
program development and
implementation.
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For example, permitting authorities should
specify information that dischargers will be
required to include in trading proposals, as
well as the form in which proposals should
be submitted. In some situations, this may
include asking dischargers to develop
water quality analyses to support their
trading proposals, and to provide
documentation of approved analytic
methods and results as part of their
submission.
If permitting authorities make this request,
they should identify in advance any
recommended methods and standard
assumptions (e.g., the minimum flow
condition to be employed in evaluating
achievement of water quality-based
effluent limits). This will help to ensure
that dischargers submit trading proposals
that are well formulated and fully
documented, and will facilitate the review
of proposals by the permitting agency.
In addition, all parties will benefit if
permitting authorities clearly define
procedures and standards they will employ
in evaluating proposed trades, including
the methods by which they will verify
results of dischargers* water quality
analyses. If these standards and
procedures are articulated clearly, both the
dischargers* transaction costs and
permitting authorities* administrative costs
can be kept to a minimum. To the extent
that permitting authorities incur additional
administrative costs resulting from trading,
they can examine opportunities to recover
those expenses.
Trade Timing, Frequency, and Duration
An additional administrative issue is the
establishment of conditions governing the
timing, frequency, and duration of trades.
One option that would help to reduce
transaction costs is to tie trading to the
permitting authority's standard permit
renewal cycle (e.g., every 5 years). This
might be particularly attractive to
permitting authorities that move toward
watershed permitting strategies that
synchronize the permit development
process for all dischargers in a geographic
region.
In addition, transaction costs may be
minimized by tying the duration of trades
to the duration of the involved dischargers*
permits. Notably, the CWA currently
prohibits permit terms of greater than 5
years. Granting trades the longest possible
term would help dischargers to predict
accurately the value of acquiring or selling
discharge credits, and to make investments
in pollution control accordingly.
As discussed in Chapter 2, trades may
occur outside the TMDL process where
permits are revised to adjust effluent limits
and add permit conditions needed to
comply with trading principles. Tying
trading to a permitting authority's standard
permit renewal cycles offers advantages to
both the permitting authority and
dischargers. For this reason, EPA
encourages dischargers interested in trades
to submit proposals at least a year before
their permit expires.
Consideration of trading proposals
submitted in between permit cycles will be
at each permitting authority's discretion.
Reopener clauses provide opportunities to
accommodate dischargers that negotiate a
trade after permit limits are issued by
reopening participating dischargers*
permits and incorporating revised limits. A
disadvantage of this approach is the
additional administrative burden on
permitting authorities.
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Nonetheless, the potential benefits of
trading might justify the additional
administrative cost. This could be
particularly true if trading provides a
means of accommodating growth, either to
expand an existing facility or construct a
new facility. In these circumstances,
allowing expanding or new facilities to
trade with dischargers that already hold
permits might offer both a cost-effective
means of controlling pollution and the
regulatory flexibility needed to support
regional economic growth, while still
meeting the requirements of the CWA.
Steps to Encourage Trading
Permitting authorities or other groups can
take a number of other steps to facilitate
and encourage trading. For example, a
permitting authority or third party could
support the exploration of trading
opportunities by forming a multiparty
advisory committee or convening
stakeholder forums. Alternatively,
permitting authorities could take the lead
by requiring negotiated solutions to
pollution problems, which might include
trades, as in the case of South San
Francisco Bay (see Exhibit 5.1).
Actively engaging stakeholders at early
stages will ensure that processes fairly
consider all legitimate interests, fostering
the development of trading proposals that
are likely to receive broad support. In
addition, the involvement of stakeholders
might help to identify additional trading
opportunities, and can provide a forum for
identifying and overcoming potential
obstacles to trading.
Another means of encouraging trading is
providing dischargers with information
relevant to possible trades. While most of
this information is already publicly
available, its organization into a useful and
easily understood format would help
dischargers that could legitimately benefit
from trading to identify and pursue their
opportunities more efficiently. For
example, permitting authorities or
interested third parties could develop and
make available readily accessible databases
listing point sources on a stream segment
or within a potential trading zone,
including data on the type and quantity of
pollutants discharged, current or proposed
permit limits, and relative water quality
impacts.
The experience with tradable effluent
allowances on the Fox River described in
Exhibit 5.2 emphasizes the importance of
designing a trading program in a way that
will facilitate trades and what happens
when a trading program is not well
structured.
Permitting authorities also could provide
information from past water quality studies
that would allow dischargers to develop
better trading strategies and improve the
focus of their water quality analyses. Such
information would save dischargers time
and effort in investigating trading
opportunities and identifying potential
trading partners. Outside parties could also
provide dischargers technical assistance in
developing trading strategies. For
example, an independent broker could
work directly with a group of dischargers
in performing a water quality study for a
proposed trade or could act as an
intermediary in negotiating a trading
arrangement.
Steps like these could improve the
efficiency of the negotiating process and
further reduce transaction costs. While not
essential in all cases, they could increase
the likelihood that the potential benefits of
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EXHIBIT 5.2: LEARNING FROM THE Fox RIVER EXPERIENCE
In a 1981 effort to reduce pollution in the Fox River, the state of Wisconsin initiated a point/point
source trading program, focusing on the discharge of BOD by 15 industrial and 6 municipal
facilities. A preliminary analysis suggested that trading of BOD allowances could lead to annual
savings of up to $6.8 million. To date, however, only one trade has taken place, in which a paper
mill closed its wastewater treatment plant and asked the state to shift its allocation to the
municipal treatment plant that began treating its wastewater. The full predicted economic
benefits of trading have not been realized.
Several factors might have limited the success of point/point source trading on the Fox River. For
example, many of the industrial facilities eligible to participate in the program are paper mills.
Competitive pressures within the paper industry might dampen willingness to trade between
facilities. In addition, some researchers suggest that the potential cost savings from trading on the
Fox River represent such a small share of total paper production costs (less than 1 percent) that
corporations have little incentive to invest management time in negotiating trades. Moreover,
Wisconsin staff believe that the facilities generally have been reluctant to "trade away" part of
their BOD load allocation since many believe they will need the full allocation to accommodate
future growth.
In addition to these factors, there are significant administrative impediments to trading under the
Fox River program. In particular, dischargers are not allowed to trade unless they demonstrate
need; i.e., they may trade if a plant is increasing production or is unable to achieve discharge
limits using the treatment systems currently in place, but cannot trade solely to reduce treatment
costs. Relaxing this constraint, as well as taking other steps to facilitate trading, could have had a
substantial beneficial effect on the trading program.
Source: The Benefits and Feasibility of Effluent Trading Between Point Sources: An Analysis in
Support of Clean Water Act Reauthorization , prepared for the Offices of Water and Policy,
Planning, and Evaluation, USEPA, September 1993.
trading, both economic and environmental,
would be realized.
5.7 Accountability and Enforcement
Incorporating results of point/point and
intra-plant trades into NPDES permit limits
ensures that permittees are accountable for
compliance and creates a clear
administrative mechanism for enforcement.
Information on effluent limits that would
have been issued without trading should be
included in the fact sheet accompanying
permits. As with any standard NPDES
permit, permittees would be responsible for
compliance with all permit conditions,
including monitoring, record-keeping, and
reporting. Violating permits might subject
violators to administrative, civil, or
criminal action. Exhibit 5.3 illustrates the
development of a cumulative limit for a
group of dischargers involved in a trade.
A potential concern of state and regional
enforcement officials is that point source
dischargers could prolong trading
negotiations to postpone compliance with
permit limits. To avoid this problem,
permitting authorities can establish
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deadlines for trading proposals—for
example, asking that a proposed trade be
submitted for an authority's review a year
before an existing permit expires. If no
proposal is received by the deadline, the
permitting authority can begin standard
review procedures for the purpose of
issuing a new permit. The assurance that a
conventional permit will be issued if
trading negotiations become prolonged
should provide an incentive for expeditious
resolution of negotiations and a guarantee
that dischargers will conduct such
negotiations in good faith.
5.8 Worksheet/Checklist
The following checklist outlines key
questions to consider in implementing a
point/point source or intra-plant trading
program.
EXHIBIT 5.3: USE OF THE BUBBLE
APPROACH IN EPA REGION 2
For at least two waterbodies, Lake
Champlain and Long Island Sound, EPA's
Region 2 has established bubbles as part of
setting discharge limits for selected point
sources. Under this approach, New York
State has issued nitrogen limits in permits
for discharges within a defined geographic
area—the bubble. A "group" permit
contains a cumulative limit for all
dischargers in the bubble, and individual
permits contain limits for each discharger.
As long as the cumulative limit is met, no
action would be taken on individual
performance. If the cumulative limit is
exceeded, enforcement would be taken on a
plant-by-plant basis based on the individual
permits.
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WORKSHEET FOR EVALUATING SUCCESS OF POINT/POINT SOURCE AND INTRA-PLANT TRADING
Legal and Regulatory Conditions
General:
Will point sources and administrative agencies implement trading within the context of
NPDES permits?
Specific:
Can point sources and administrative agencies include conditions in NPDES permits?
Can administrative agencies specify effluent limits for each outfall, if necessary?
Can administrative agencies include reopener clauses in permits to allow alterations to
trading arrangements?
yes
no
yes
no
yes
no
yes
no
Economic Conditions
General:
Can point sources save or make money by trading (i.e., are there economic incentives to
trade)?
Specific:
Do point sources* total incremental costs for pollution reduction, which include direct
incremental costs and transaction costs, differ among point sources or outfalls?
Do cost differentials among point sources or outfalls allow one point source or outfall to
reduce pollution more cheaply than another?
Are transaction costs less than cost savings from the trade?
Do cost savings from trading outweigh the uncertainties that point sources face under
trading schemes?
Is there a sufficient supply of pollution reduction for sale, as well as a reasonable
demand to buy reduction credits among point sources?
Are competitive pressures among dischargers subdued enough to allow trades?
yes
no
yes
no
yes
no
yes
no
yes
no
yes
no
yes
no
Data Availability Conditions
General:
Are the data necessary to implement a trading program among point sources available?
Are there enough data to understand pollution quantities and flows within the watershed
(e.g., water quality authorities have conducted a TMDL), including local impacts at
specific outfalls?
Can regulatory authorities monitor point source discharges and water quality under
trading?
Can point sources estimate their direct costs of reducing a specified unit(s) of pollution
(direct incremental costs)?
Can point sources estimate transaction costs that they would have to pay to conduct
trades?
yes
no
Specific:
yes
no
yes
no
yes
no
yes
no
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Administrative and Institutional Conditions
General:
• Are governmental authorities and point sources capable of administering a trading yes
program? no
Specific:
• Do governmental authorities have enforcement mechanisms to ensure that point sources yes
comply with NPDES permit conditions under trading arrangements? no
• Is information about trading partners readily available so that buyers and sellers can yes
coordinate? no
• Are responsibilities clearly defined for institutions and point sources taking part in yes
trading? no
• Is the scope of the administrative infrastructure compatible with the amount and yes
complexity of the trading that is expected? no
• Do NPDES permits establish accountability for both water quality and pollutant yes
reductions among point sources? no
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CHAPTER 6. PRETREATMENT TRADING
Pretreatment includes physical, chemical, and biological processes used by industrial and
commercial customers to reduce, eliminate, or alter pollutants in wastewater before its
release to publicly owned treatment works (POTWs). Pretreatment trading refers to
agreements that affect the allocation of pollutant loads among facilities that discharge
wastewater to POTWs.
Introduction
Approximately 1,500 POTWs administer
approved local pretreatment programs.
Approved states administer local
pretreatment programs for an additional
314 plants. Available data suggest that
plants with pretreatment programs account
for over 80 percent of the total national
POTW wastewater flow, even though less
than 20 percent of all POTWs operate
pretreatment programs.
Unlike other regulatory programs, the
concept of trading is not completely new in
the pretreatment program. The term
"trading" is relatively new. In the
pretreatment program, trading is discussed
in terms of allocation of local discharge
limitations (i.e., local limits), which dictate
what the indirect dischargers can send to
the POTW. POTWs are required to
develop local discharge criteria to protect
plant workers, plant operations, receiving
water environments, and the quality of the
biosolids.
These criteria are called local limits. EPA
has designed the local limits development
process to facilitate the most appropriate
allocation of pollutants as determined by
the POTW, including trading, if desired by
the POTW (Guidance Manual on the
Development and Implementation of Local
Discharge Limitations Under the
Pretreatment Program, December 1987).
To date, POTWs have preferred the
uniform concentration limit allocation
approach for local limits. This allocation
method results in a single discharge
concentration limit for each pollutant that
is the same for all users. This method
provides POTWs with an allocation
vehicle that has minimal burden in both
development and implementation and is
viewed as an equitable approach. For
POTWs, a method with low burden that
produces the desired environmental results
is often preferable to other methods that
are more resource-intensive.
As noted, the uniform concentration limit
method does have advantages, but it also
has shortcomings. Specifically, it provides
allocations to industries that might not
even discharge the pollutant in question.
Also, the uniform concentration approach
does not reflect any differences in
dischargers' ability to reduce pollutants
and costs in achieving a uniform limit.
In the future, if standards for water and
biosolids quality become more stringent, or
if industrial growth places increasing
pressure on POTW operations, POTWs
might want to consider other allocation
methods (mass allocations) for their local
limits.
EPA is not aware of any POTWs that have
developed formal pretreatment trading
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programs to date. Some POTWs are,
however, implementing methods of
allocating local limits that incorporate
certain aspects of trading, as illustrated in
the case of Oxford, North Carolina, in
Example 6.1.
EXAMPLE 6.1: PRETREATMENT TRADING
IN THE TOWN OF OXFORD, NORTH
CAROLINA
Oxford has used an allocation approach
similar to trading. After determining the
total pollutant loading capacity available, the
POTW and industries agree on specific
limits for the seven industries involved:
three textile mills, a rubber manufacturer, an
asphalt roofing manufacturer, a cosmetic
manufacturer, and a china manufacturer.
POTWs or states administering local
pretreatment programs may choose to
allow indirect dischargers (also known as
industrial users or Ills) that send their
wastes to POTWs to exchange reductions
of pollutant loadings. These exchanges
should be formalized through the IU
permit. In general, where a POTW has an
approved pretreatment program and
established procedures to allocate and track
pollutant loadings and agrees to allow
pollutant trades, one firm may coordinate
with one or more other firms to implement
improved controls, rather than reducing in-
house loadings. Incentives for trades may
include payments between firms for
additional reductions.
In all cases, trades are subject to IU
permitted pollutant limitations and
requirements established by POTWs to
protect operations as well as biosolid and
water quality. EPA»s technology-based
(categorical) limits for indirect dischargers
must always be met and cannot be traded.
POTWs can implement trading programs
at their discretion when developing local
limits. EPA and states, however, may
require that a POTW develop written
procedures and appropriate legal
authorities for implementing a trading
program. For example, in cases where a
POTW has instituted its local limits
through a uniform concentration method,
the POTW will probably need to change its
local limits allocation to a mass allocation
to implement trading. This will require a
change to their legal authority since most
local limits are contained within the
POTW's ordinance.
6.1 Regulatory Issues
General pretreatment regulations establish
a three-part approach to controlling
discharges from nondomestic sources to a
POTW:
1. General prohibitions forbid discharge
of pollutants that cause pass through or
interference, and specific prohibitions
forbid certain discharges of concern,
such as those posing fire or explosive
hazards, and corrosive, solid, or
viscous substances.
2. EPA promulgates categorical
Pretreatment Standards, which are
national technology-based standards,
on an industry-by-industry basis.
3. Individual POTWs develop local limits
(as well as Pretreatment Standards)
when necessary to ensure compliance
with their NPDES permits and
biosolids use or disposal standards, and
to protect worker health and safety.
Under current regulations, POTWs must
develop local pretreatment programs if
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they have design flows (combination of all
treatment works) exceeding 5 million
gallons per day (mgd) and they receive
discharges from industrial users that may
cause "pass through" or "interference," or
are otherwise subject to pretreatment
standards. At the discretion of EPA or
state authority, POTWs with design flows
less than 5 mgd may also be required to
develop programs.
Pass through occurs when pollutants exit
POTWs at levels above the limits or in
violation of any requirement in their
NPDES permits. Interference occurs when
pollutants inhibit or disrupt POTW
operations, thereby leading to violations of
NPDES permits or preventing the use or
disposal of biosolids (i.e., sewage sludge)
in compliance with statutory requirements.
Trading applies only to allocated local
limits. In no case may a categorical
industrial user be allowed to discharge
pollutants in excess of those limits
specified in applicable National
Categorical Pretreatment Standards
promulgated by EPA.
The National Pretreatment Program
provides POTWs with considerable
flexibility in establishing local limits. EPA
has established guidance to assist the
POTWs in development of local limits (see
introduction to this chapter). In addition,
many EPA Regional offices and states
have developed more specific guidance on
development and implementation of local
limits.
The legal framework for the pretreatment
program splits responsibility for regulating
industrial users across federal, state, and
local authorities. In communities where
POTWs have approved local pretreatment
programs, the POTWs are responsible for
direct regulation and oversight of industrial
user compliance and enforcement.
Where a POTW does not have an approved
program, industrial users must still comply
with the general and specific prohibitions
discussed earlier, and if an industrial user
is subject to categorical standards, it must
comply with the standards and report its
compliance status to EPA or the state twice
per year. In general, pollutant trading
would be possible only in the cases where
the state or EPA requires the POTW to
establish local limits in addition to other
legal authorities that may be required to
support a trading program.
Approved pretreatment programs
interested in developing and implementing
trading programs will also need to review
applicable local, state, and federal
requirements to determine whether changes
are needed to the approved program. In
addition, POTWs will need to ensure that
results of trades do not violate the terms of
their NPDES permits or approved
pretreatment programs, or otherwise
interfere with POTW operations.
Some regulatory issues are of less concern
for pretreatment trading than for point
source trading. CWA anti-backsliding
requirements and anti-degradation policy
do not apply to IU permits issued by
POTWs to their industrial users. As long
as the net effects of trades allow POTWs to
meet their NPDES permit limits and
conform to parameters set out in
pretreatment programs, these policies will
not affect pretreatment trading.
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6.2 Economic Issues
Pretreatment trading can reduce the costs
of pollution abatement while promoting
improvements in environmental quality.
As explained below, trading also can
encourage investment in new control
technologies and local economic
development.
Potential Cost Savings
Development of a trading program may be
undertaken at any POTW where indirect
dischargers face differing costs for
pollutant reductions and the POTW feels
implementing a trading program might be
beneficial to the pretreatment program.
Industrial users choosing pollutant trading
may need to install flow monitoring
equipment, where none exists, and monitor
facility flows for determining compliance
with IU permits.
Cost savings could be significant in cases
where dischargers would need to purchase
and install expensive new treatment
equipment. For example, one industrial
user might need to install new treatment
equipment to reduce its pollutant loadings,
while another might be able to simply
increase its use of existing treatment
capacity. In this case, the first firm (that
would otherwise need to install new
equipment) could save money by
negotiating with the second firm to
increase its level of treatment. If trading
allocations allow some industrial users to
avoid large capital investments, substantial
savings might result.
Not surprisingly, incentives for engaging in
trades will be larger in cases where control
costs are a significant proportion of a
firm's total operating expenditures,
including costs of manufacturing and
distributing products. In such cases, firms
will be highly motivated to seek
opportunities for reducing pollution
abatement costs. Firms for which pollution
control costs are less significant may
choose to focus their attention on other
types of concerns.
Economic incentives for trading may be
weaker in cases where industrial users are
direct competitors in the same industry.
Such dischargers might be reluctant to
engage in trades if the financial benefits
would provide a competitive advantage to
other firms. Trading might still be
desirable in these cases as long as it
benefits all participating dischargers.
Transaction Costs
Transaction costs include costs of revising
POTW legal authorities and IU permits,
identifying opportunities for trading,
negotiating trades, and completing any
necessary analysis and reporting. These
costs need to be accounted for in
developing and implementing trades.
Trading primarily impacts the way that
allowable pollutant loads are allocated to
industrial users. When pollutant
allocations (or re-allocations to reflect
trades) are determined, POTWs must write
the results into permits or other control
mechanisms, much as discharge limits are
imposed under the current program.
Changes in approved pretreatment
programs to accommodate trading would
be expected to necessitate a program
modification. Monitoring and enforcement
activities may remain substantially
unchanged.
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Technological Innovation
Because trading may provide incentives for
developing innovative technologies, it may
encourage continued improvement in
technology performance and/or reductions
in control costs over time, as new
technologies are developed and
implemented. Firms could benefit by
developing more cost-effective control
technologies, then agreeing to increase
their level of treatment (or pollution
prevention) in exchange for payments from
other firms. As more firms become
interested in trading, markets for such
technologies are likely to expand, and
firms could work cooperatively to develop
pollution prevention techniques or new
treatment processes.
Local Economic Development
The current regulations and guidance allow
the POTW to change to an alternative
allocation method under selected
circumstances: in cases where POTWs use
a uniform allocation method for local
limits implementation and the uniform
allocation makes it appear that all of their
capacity for accepting industrial pollutants
has been exhausted; or where POTWs may
want to increase surplus capacity.
The change in allocation may require a
modification to the existing approved
program, requiring a minor modification of
the NPDES permit and public notice of the
change. The choice of local limits
allocation directly affects the allowable
loadings from each contributing source. In
many cases, during development of local
limits the POTW builds in a safety factor
and growth factor, allowing industrial
growth without having to change existing
allocations.
Local limits allocation, including trading,
provides opportunities for POTWs to
accommodate new indirect dischargers or
facility expansions, even in cases where
POTWs must reduce their own discharges
or have little available capacity. This
capability may foster local economic
growth. Likewise, the local economy
benefits if trading allows industries to
reduce their pollution control costs, freeing
resources to finance new capital
investments.
For example, pollutant loads from a new or
expanding firm can be accommodated by
using the existing load allocated to the
growth factor or allowing the firm to
negotiate with current users for a share of
the total industrial user allocation, with
cooperation and prior approval by the local
pretreatment program. The new or
expanded firm could either compensate
current users for reducing their discharges
or develop more cost-effective treatment
technologies and engage in trades to
reduce the burdens on existing users.
Trading can also relieve financial pressures
on individual firms by allowing them to
pay or otherwise arrange with others for
further pollution reduction rather than
purchasing control technology. In these
cases, trading may free funds for other
types of investments, such as plant
expansion or additional employment.
6.3 Data-Related Issues
To implement pretreatment trading
programs, dischargers and POTWs need
information characterizing opportunities
for and effects of trades. Loading
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information for the pollutant(s) of concern,
general wastestream characteristics, and
treatment options and cost information are
particularly important for developing
pretreatment trading programs.
Pollutant Loadings
Local limits are developed to protect
against pass through and interference
(including adverse impacts on biosolids
disposal), including the specific
prohibitions specified at 40 CFR 403.5(b).
A POTW will determine the Maximum
Allowable Headwork Loading (MAHL) it
may receive for specific pollutants, while
protecting against pass through and
interference. POTWs will subtract from
the MAHL such things as reserved mass
for expansion and safety from slug loads,
residential and non-IU loadings, and other
factors.
The resultant pollutant loading, expressed
generally as pounds per day, is then the
Maximum Allowable Industrial Loading
(MAIL). This MAIL is the total daily mass
that a POTW can accept from all permitted
Ills and ensure the POTW is protecting
against pass through and interference.
POTWs wishing to develop a trading
program will adopt the MAILs in its legal
authority (often an ordinance or other
regulation) as part of its local limits. The
POTW will also develop a procedure to
allocate the MAILs to its Ills.
As mentioned earlier, most approved
pretreatment programs go one step farther
when adopting local limits. They divide
the MAIL by the total industrial flow to get
a uniform concentration local limit for each
pollutant of concern. This uniform
concentration local limit is then adopted
and applied to each IU.
Detailed information on pollutant loadings
is needed to identify opportunities for
trades and to determine whether a
particular trade will result in a reallocation
of loads through the IU permits, while
ensuring that the MAIL is not exceeded.
Much of the information on pollutant
loading is already available to the POTW
from various sources.
• In cases where POTWs currently
express local discharge limits as mass
loadings, the current total permitted
loading is available in the IU permits or
other control mechanisms used by
POTWs.
• In cases where POTWs express limits
as concentrations, the POTW often
collects information on IU wastewater
flows and can convert the permit limits
to mass loadings. For example, if a
discharger's limit for zinc is 1.5 mg/1
and its flow is 10,000 gallons per day,
its permitted daily loadings are 1.5 mg/1
x 0.010 mgd.x: 8.34 = 0.125 Ib of zinc
per day. The POTW would perform
this evaluation for all lUs that are
permitted to discharge the pollutant(s)
in question. The sum of these daily
loadings would be compared to the
MAIL that forms the basis for the local
limits, to ensure that the MAIL is not
exceeded. The POTW would generally
be required to adopt the MAIL into its
legal authorities for each pollutant for
which trading is implemented.
When firms engaging in trades discharge
the same pollutants, comparisons are
straightforward; loadings can be summed
and compared to the POTW MAIL. When
industrial users have more than one
pollutant involved in a potential trade,
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POTWs also will need to consider trading
impacts on total loadings of other
pollutants received.
Once trades have been implemented,
information on loadings will be collected
through IU permit (or other control
mechanism) reporting requirements.
Industrial users also provide reports or
notifications in cases where self-
monitoring indicates violations of
applicable pretreatment standards or
requirements, and report any substantial
change in the volume or character of
pollutants in their discharge.
Pollution Reduction Options and Costs
To determine whether opportunities for
trading exist, individual industrial
dischargers will, at a minimum, need
information on whether their POTW has a
trading program or is willing to develop
such a program, their pollutant loadings,
pollution reduction costs, and the price at
which pollution reduction credits can be
bought from or sold to other dischargers.
General information on pollution reduction
costs also will be useful to POTWs
considering whether an investment of
management resources in promoting
trading will be worthwhile. For example,
if available information on a POTW*s
industrial users indicates that
administrative costs to the POTW are
substantially less than savings to the
industrial users, trading is likely to be
beneficial and a POTW might be willing to
cooperatively invest the resources.
Dischargers might be interested in detailed
information on pollution reduction options
and costs. This information would enable
them to determine costs they would incur
for increased pollution reduction
(especially in cases where new technology
must be implemented). It also would help
develop their strategy for negotiating with
potential trading partners.
General information on costs, applicability,
and effectiveness of alternative pollution
reduction methods is available from EPA
effluent guideline development documents
and similar sources. As noted in Chapter
5, however, these sources are designed to
provide rough comparisons of costs and
effectiveness of treatment methods
identified during development of the
applicable standards.
To avoid mischaracterizing the cost-
effectiveness of pollution reduction options
available to them, indirect dischargers can
complete more detailed, facility-specific
assessments before proposing a trade. In
conducting such assessments, indirect
dischargers are encouraged to consider
pollution prevention practices prior to end-
of-pipe treatment. In many situations,
pollution prevention can be more cost-
effective than end-of-pipe treatment in
achieving pollution reduction goals.
As a result, facilities that explore pollution
prevention opportunities will be better
positioned to exceed pollution reduction
performance standards requirements and to
offer pollution reduction credits in trades
with other dischargers. In addition, many
POTWs may require pollution prevention
opportunities to be explored prior to a
request for pollutant trading.
6.4 Technical and Scientific Issues
POTWs interested in implementing trading
programs may face two types of technical
issues: the development and adoption of
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mass-based limits, and implementation of a
program to permit and track pollutant
loadings.
Mass- vs. Concentration-Based Limits
POTWs (or states operating pretreatment
programs in lieu of approved local
programs) develop local limits based on
evaluation of local POTW operations and
guidance provided by EPA, as explained in
Section 6.3. Development of local limits
may be based on a range of methods:
• Uniform concentration limits for all
industrial users—For each pollutant,
the maximum allowable industrial
loading to the POTW is divided by the
total flow from all industrial users.
• Concentration limits based on
industrial contributory flow—This
method is similar to the uniform
concentration limit allocation except
that the flow from only those users that
actually have the pollutant in their raw
wastewater at greater than background
levels is used to derive a concentration
limit for the pollutant.
• Mass proportion for each pollutant—
The maximum allowable industrial
loading to the POTW is allocated
individually among each IU in
proportion to the IU*s current loading.
Mass limits (MAILs) are adopted for
pollutants, and portions of the MAILs
are allocated to the Ills.
• Selected industrial reduction—The
POTW selects the pollutant loading
reductions that each IU will be required
to accomplish.
POTWs using the mass-proportion method,
or other methods that specify mass
loadings limits rather than pollutant
concentration limits, will find it easier to
implement trading programs than those
using other methods. These POTWs will
not need to convert concentrations into
loadings (as discussed in the previous
section) to evaluate the impacts of trades.
In addition, POTWs using mass-based
limits are already accustomed to
incorporating this type of limit into their
permitting, monitoring, and enforcement
procedures.
POTWs currently using other approaches
generally will be required to adopt mass-
based limits to facilitate implementation of
trading programs.
Unit of Exchange
POTWs can define units to be traded in
various ways, for example, pounds per day
of a particular pollutant. Regardless of
whether trading is implemented, units used
to develop local limits have at least two
dimensions: the time period covered (e.g.,
day) and the unit of mass (e.g., kilograms
or pounds). In addition, the unit may be
expressed as an average, a maximum, or
both.
Another issue to consider is whether to
include batch dischargers in a trading
program. Including batch dischargers
increases opportunities for trades. If batch
dischargers are included, a trading program
needs to ensure that combined discharges
do not exceed a POTW*s peak capacity.
The timing of discharges may be
particularly important.
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6.5 Institutional Issues
Because the local limits development
process already provides an institutional
framework for pretreatment trading,
relatively few institutional issues need to
be addressed to implement trading
programs. Issues to be considered include
whether a POTW wants to develop a
trading program, what changes to a POTW
legal authorities are necessary (if any),
what procedures must be developed for
implementation, and availability of POTW
resources to institute a trading program.
Some POTWs may not need to alter their
current procedures substantially. Once
local limits are adopted and procedural and
resource issues addressed, POTWs could
encourage dischargers to seek out trading
opportunities, or could act as brokers,
bringing together potential trading
partners. POTWs would then review
results of negotiations and incorporate
them into permits and individual control
mechanisms where appropriate.
A trading program that includes an
established administrative structure will
require more extensive development
efforts. Such programs could include
designating certain officials or
organizations as responsible for
encouraging trading and developing
standardized procedures. A key
consideration will be minimizing the costs
of program administration and engaging in
transactions so that such costs do not
outweigh the pollution reduction cost
savings that trading would provide.
To minimize transaction costs, criteria for
approving trades, including relevant data
and analysis submitted by dischargers
interested in trading, could be specified in
advance. This would decrease uncertainty
and clarify responsibilities. POTWs are
likely to maintain primary responsibility
for oversight of program operations
(subject to federal, state, and local
government approval, as needed); ongoing
involvement of other interested parties
generally will be desirable.
Stakeholder Participation and Support
Trading programs are most likely to be
successful if all stakeholders are involved
in and committed to development of the
program. Stakeholders include POTWs
and industrial users, as well as EPA and
the state agencies responsible for the
pretreatment program; elected officials;
federal, state and local agency staff; the
general public; and environmental
organizations.
Because POTWs are generally operated by
local government agencies, they are likely
to share community interest in
environmental protection and economic
development. As a result, they may
support trading programs as a method of
expediting compliance with pollution
reduction requirements and reducing the
potential corresponding costs. Industrial
users may find trading programs desirable
if they can reduce their pollution reduction
costs by amounts that exceed any costs
associated with participating in trading
programs, particularly if these savings are
a significant proportion of their total
operating costs and can be gained without
providing disproportionate benefits to their
competitors.
Other interested groups may be supportive
if they view programs as maintaining or
improving environmental quality while
providing economic benefits to local areas.
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POTWs can encourage trading by
providing information on topics of interest
to each participating group. For example,
information on environmental benefits and
cost savings could be developed for review
by industry and local community leaders,
as well as all other stakeholders.
6.6 Administrative Issues
Administration of a pretreatment program
that incorporates trading includes at least
three primary activities: (1) the initial
development of local limits and resultant
allocation to the Ills through permits
(2) review and approval of the trade by the
POTW, and (3) reallocation of pollutant
loadings (IU permit modification or
reissuance). These components are
discussed below.
Initial Allocation
Under a typical local limits development
process, as discussed earlier, POTWs
identify pollutants of concern, develop
loadings to protect the POTW, incorporate
these loadings into their legal authorities,
and include appropriate discharge limits
based on the loadings in IU permits.
Incorporation of pollutant limits into
permits (whether mass or uniform
concentration) can have a significant effect
on industrial users, determining relative
bargaining power when trading occurs and
costs of required controls if dischargers
cannot find opportunities for trades. The
perceived equity of the initial allocation
can also affect program implementation,
particularly where industry protests the
results.
Reallocation Through Trades
In a trading program, once an initial
allocation is made (i.e., an IU permit is
issued), industrial users could negotiate
exchanges in pollutant reductions among
themselves. These exchanges may be
trades directly negotiated between two
dischargers, or may include the
development of a more formal market for
buying and selling discharge allowances.
In the latter case, industrial users with high
pollution reduction costs could acquire
additional pollution discharge credits,
while those with lower costs would be
compensated for removing larger quantities
of pollutants through the sale of their
credits or through other forms of
compensation. As noted earlier, such
compensation need not be monetary; other
types of mutually beneficial agreements
may be reached.
Once exchange units are established,
POTWs may require trading ratios (termed
"offset ratios") greater than one-to-one
(e.g., 1.25:1) to encourage further
reductions in pollutant loadings. While
such ratios might be desirable, they should
be applied carefully to avoid constraining
opportunities for trades.
Timing, Frequency, and Duration
Another issue in developing trading
programs is establishing conditions
governing the timing, frequency, and
duration of trades. Frequent trades with
short durations may be difficult for
POTWs to track and control (and allocate
sufficient resources), while infrequent
trades with long durations may inhibit
desirable changes from initial allocations
and hence decrease benefits of trading.
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Trading could be allowed on an ongoing
basis. If trades occur too frequently or on
an unpredictable schedule, however,
POTWs may need to devote substantial
resources to reviewing the effects of the
trades and may find it difficult to track
constantly changing allocations.
Conversely, if trades are allowed
infrequently, industrial users will not be
able to accrue the full benefits of trading.
They may not be able to exchange
allowances with other industrial users to
reflect changes in pollution reduction costs
or needs (resulting from changes in
production processes, costs, or the scope of
operations) as they occur.
One option is to allow trading whenever
permits or other individual control
mechanisms of participating industrial
users are scheduled for renewal. In cases
where POTWs renew permits or individual
control mechanisms on a staggered basis,
trading could be encouraged by grouping
industrial users according to pollutants
discharged, and addressing pollution
reduction conditions for all members of a
group simultaneously. As with other
options, any change in trading would be
allowed only after POTW approval and
incorporation of the resulting allocation
into a revised permit or other individual
control mechanism.
Incorporating trading into standard review
and renewal cycles provides the least
disruption of current operations. It also
reduces burdens on POTW staff, who can
review implications of proposed trades at
the same time they are reviewing other
industrial user information. Time frames
within which trading is allowed can best be
determined through discussions between
POTWs and participating industrial users.
Federal regulations limit duration of
permits or individual control mechanisms
to a maximum of 5 years. Therefore,
incorporation of a trade into permits or
other individual control mechanisms will
necessitate renewing trading agreements at
least once every 5 years. In addition,
POTWs will be expected to retain authority
to reopen and revise permits or other
individual control mechanisms that
incorporate trades. Such flexibility may be
needed to respond to future changes in
POTW operations or NPDES permit
requirements.
It is important to realize that trading that
results in less stringent local limits for one
or more of a POTW*s industrial users may
be a substantial program modification, and
therefore would require approval of EPA
or the state authority. This may not be the
case where the Approval Authority has
approved the MAIL and the reallocation is
within the MAIL. It may be best to have
trading activity occur along with the local
limit reevaluation process, which is
required at least every 5 years in
connection with the POTW»s NPDES
permit reissuance.
The duration of trading agreements could
be determined by the trading partners and
provided for approval to the POTW in
advance. Dischargers may not be willing
to engage in trades if the duration of
agreements is too short, because of
negotiation costs, uncertainty inherent in a
need to renegotiate, and the risk that an
investment in improved pollution reduction
methods would be lost if a trade were
discontinued after only a short period. In
general, if POTWs are willing to allow
trading agreements to remain in place for
longer periods of time, it is more likely that
trades will occur, particularly in cases
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where industrial users are investing in
treatment equipment with relatively higher
costs and long life spans.
Review and Approval of Trades
Once a POTW is able to consider trades
and the industrial users agree to a trade, the
next step is POTW review and approval.
This review may be accomplished through
the same procedures used in the existing
permitting processes. Reviews will need to
consider issues related to protecting
POTWs from interference and ensuring
that standards for POTW effluent and
biosolids quality are met (i.e., MAILs are
not exceeded). Once trades are approved,
they must be incorporated into industrial
users* permits or other control mechanisms
to ensure all applicable limits and
monitoring requirements are fully
enforceable.
6.8 Worksheet/Checklist
The following checklist provides examples
of the types of issues a POTW should
consider in determining whether and how
to implement a trading program. The more
positive responses, the more likely the
trading program will be successful.
6.7 Accountability and Enforcement
POTWs have developed mechanisms to
ensure that relevant pretreatment standards
are met, regardless of whether trading is
implemented. The principal mechanism
used by POTWs to ensure the
enforceability of local limits is the IU
permit. All changes to allocated pollutant
loadings and monitoring and reporting
requirements must be enforceable by the
POTW's pretreatment program. Therefore,
whenever a POTW changes the allocation
of pollutant loadings between Ills, such
changes must be adequately reflected in
the relevant IU permit. This will ensure
the continued enforceability of local limits,
as well as provide detailed information to
each IU on what it is allowed to discharge.
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WORKSHEET FOR POTWs TO EVALUATE POTENTIAL FOR PRETREATMENT TRADING
Legal and Regulatory Conditions
General:
Is pretreatment trading implemented within the context of the National Categorical
Pretreatment Standards and NPDES permits?
Specific:
Are local POTW standards more stringent than National Categorical Pretreatment
Standards?
Do the results of pretreatment trading comply with conditions within the NPDES permits
of POTWs?
yes
no
yes
no
yes
no
Economic Conditions
General:
Can dischargers to POTWs save or make money by trading (i.e., are there economic
incentives to trade)?
Specific:
Do total marginal costs for pollution reduction, which include direct marginal costs and
transaction costs, differ among dischargers?
Do cost differentials among dischargers allow one discharger to reduce pollution more
cheaply than another?
Do cost savings from trading outweigh the risks that dischargers face under trading
schemes?
Is there a sufficient supply of pollution reduction for sale, and a reasonable demand to
buy reduction credits?
Are competitive pressures among dischargers subdued enough to allow trades?
yes
no
yes
no
yes
no
yes
no
yes
no
yes
no
Data Availability Conditions
General:
Are the data necessary to implement a trading program available or estimable?
Are there enough data to understand pollution quantities and flows to the POTW?
If pollution limits are expressed in permits and ordinances as concentrations, are data on
wastewater flow available to convert limits to loadings?
Do industrial users of POTWs submit at least two compliance reports per year, which
provide information on loading?
Can industrial users estimate costs for pollution control and transaction costs that they
would have to pay to conduct trades?
yes
no
Specific:
yes
no
yes
no
yes
no
yes
no
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Administrative and Institutional Conditions
General:
• Are governmental authorities and potential trading participants capable of administering yes
a trading program? (If no, do not proceed.) no
• Does the POTW have an approved pretreatment program? (If no, stop and contact yes
appropriate state/EPA Regional office.) no
Specific:
Has the POTW developed and adopted technically based local limits and have the local yes
limits been publicly noticed and approved by the approval authority? (If no, do not no
proceed.)
• Have the technically based local limits been allocated to industrial users? yes
no
• Has the POTW developed the necessary legal authorities and implementation procedures yes
to implement trading? no
• Does the POTW have enforcement mechanisms in place to ensure pretreatment trades yes
(discharge limits) are being complied with? no
• Does the POTW currently have adequate resources to expend on administration of the yes
trade? (If no, do not proceed.) no
Is the economic benefit to the POTW, community, and industrial user greater than the yes
transactional costs of implementing the trade? no
• Are the data required from the industrial user(s) available or can the data be obtained? yes
no
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CHAPTER 7. POINT SOURCE/NONPOINT SOURCE TRADING
In point/nonpoint source trades, point and nonpoint sources agree on reductions. Typically,
these agreements involve reductions in nonpoint source pollutant loadings in lieu of
additional point source reductions. Point sources seeking trades with nonpoint sources have
already met technology-based requirements and are seeking cost-effective ways to implement
pollution controls needed to meet water quality standards and objectives.
Introduction
There is significant interest in point/
nonpoint source trading. It has been the
subject of numerous academic studies,
EPA-supported investigations, and
pioneering attempts at successful
implementation. Exhibit 7.1 identifies
several of these efforts.
Differences between point and nonpoint
sources create perhaps the most significant
watershed management opportunities
among the trading types discussed in this
framework. Point sources are subject to
NPDES permitting and include wastewater
treatment plants, industrial dischargers,
active and inactive mines, and ambient
sewer overflow (CSO) or stormwater
outfalls. Nonpoint sources are not subject
to NPDES permits and can include
landowners engaged in agriculture,
silviculture, and development; public or
private enterprises involved in small-scale
construction or hydromodification; and
owners/operators of degraded riparian
habitat.
As a general rule:
• Considering nonpoint and point source
reductions together advances the
watershed-based approach to water
quality management—prioritization,
selection, and implementation of
options on the basis of environmental
effectiveness, cost-effectiveness,
location, and other key factors occur in
a watershed context.
Nonpoint source management
combined with point source controls in
the trading context can provide broad
ecological benefits such as stream,
wetland, and habitat restoration.
EXHIBIT 7.1: POINT/NONPOINT SOURCE
TRADING AROUND THE COUNTRY
Programs in place or operating:
• Boulder Creek, CO
• Chatfield Basin, CO
• Cherry Creek, CO
• Dillon, CO
• Tar Pamlico, NC
Programs under
consideration/investigation:
• Chehalis River, WA
• Clear Creek, CO
• Denver Metro/South Platte, CO
• Flat Head Lake, MT
• San Joaquin Basin, CA
South San Francisco Bay, CA
• Tampa Bay, FL
• Truckee River, NV
Yakima River, WA
Selected Midwest communities (atrazine
for drinking water concerns)
• Several Chesapeake Bay Basin
tributaries
EPA-sponsored studies/simulations:
• Boone River, TN; Honey Creek
Watershed, OH; and Wicomico River,
MD
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• Nonpoint source loads may be less
expensive to reduce per unit of
pollutant than point source loads.
• Nonpoint sources significantly
outnumber point sources in most
watersheds, resulting in a wide pool of
potential trading partners.
• Where greater than 1:1 pollutant
loading reduction ratios are achieved,
nonpoint trades can result in greater
reductions than those achievable
without trades.
Differences between point and nonpoint
sources also present challenges in
designing trades. Potentially complex
issues related to technical, scientific,
regulatory, and institutional issues must all
be considered when trades are designed.
7.1 Regulatory Issues
Point/nonpoint trading may help to achieve
water quality standards when technology-
based discharge limits for point sources are
insufficient to do so. Point sources which
are in compliance with technology-based
effluent limitations could trade with
nonpoint sources to achieve additional
pollution reductions needed to meet water
quality-based effluent limitations.
Water Quality Standards
Point/nonpoint source trading, as with
other types of trading, may shift the
location of additional reductions in
pollutant loading from the point source
mixing zone to one or more zones adjacent
to nonpoint sources. For each trade, a
permitting authority should specify critical
locations in the watershed to conduct site-
specific cross checks. These cross checks
will ensure that water quality standards are
met throughout the watershed. Where point
and nonpoint sources are far apart, trades
are limited by the extent to which they can
comply with water quality standards,
including applicable mixing zone policies.
Technical and scientific issues associated
with water quality standards and analyses
are discussed in more detail in Section 7.4.
TMDLs
States establish total maximum daily loads
(TMDLs) when technology-based
requirements do not or are not expected to
meet water quality standards. TMDLs
recommend a mix of pollutant reductions
(often reflecting a variety of regulatory and
nonregulatory controls) necessary to attain
and maintain water quality goals, and they
include a margin of safety to account for
technical uncertainty. TMDLs must be
approved by EPA and are established by
EPA if state TMDLs are disapproved. As
part of each TMDL, wasteload allocations
(WLAs) and load allocations (LAs)
establish target loads or load reductions for
pollutants that point/nonpoint source
trading can help meet. LAs may be
developed for individual nonpoint sources,
but are more commonly developed for
several or all nonpoint sources within a
TMDL»s geographic area.
WLAs are developed for specific point
sources and incorporated into NPDES
permits. LAs are implemented through
state and local nonpoint source control
programs, which rely on a mix of local,
state, and federal requirements, contractual
arrangements established by federal and
state farm programs, and voluntary
measures. EPA believes that only trades
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between sources covered under the same
TMDL or similar assessment and
remediation plan are appropriate.
Trading Situations for Point and
Nonpoint Sources
Given the differences in statutory and
regulatory foundations, point/nonpoint
source trading is sometimes viewed as
difficult to implement in practice. EPA
believes that point/nonpoint source trading,
including consideration of the technical
and legal uncertainties normally associated
with the control of nonpoint sources, is
practical and feasible in at least three
situations.
In all three of the situations described
below, agreed-upon activities may involve
a number of parties, cover a range of
geographic scales, and involve a number of
remedial actions. Participation in a trade
is voluntary and subject to the approval of
the appropriate regulatory authority. Like
any other trade, a point/nonpoint trade
should comply with the principles
articulated in Chapter 2.
1. Trades may occur in the context of a
TMDL. TMDLs establish the loading
capacity of a watershed, identify
needed reductions and related remedial
activities necessary to meet water
quality standards, identify sources, and
recommend allocations for point and
nonpoint sources. TMDLs, because
they focus on achieving, maintaining,
and protecting water quality standards,
necessarily require knowledge of
ambient water quality conditions.
Parties cooperating in a trade negotiate
within the loading capacity of the
TMDL, and the TMDL is reviewed and
approved by EPA.
2. Second, trades may occur in the
context of other analyses and
remediation plans similar to TMDLs.
These are appropriate frameworks for
trading if they, like TMDLs, link
pollutant contributions to ambient
conditions and determine needed
reductions and remedial activities
necessary to meet water quality
standards. Like TMDLs, other
analyses and remediation plans require
knowledge of ambient water quality
conditions and must be approved by
EPA. Examples include Lakewide
Area Management Plans (LaMPs) and
Remedial Action Plans (RAPs) used in
the Great Lakes. The relationship of
federal and state NPDES requirements
and requirements applicable to
nonpoint source controls is important.
Each party to a trade is responsible for
fulfilling its obligations.
3. The third situation for a trade is when
an NPDES permittee arranges a trade in
order to meet the ambient water quality
conditions expected to result from
implementing its effluent limits. This
again is a voluntary arrangement
between parties. In this situation the
permittee looks for other sources of the
pollutant being controlled in its effluent
and arranges for the other sources to
remove a specified amount of that
pollutant. The proposed trade is
submitted by the permittee with the
permit application. After the permit
writer has approved the trade, the
permit writer uses the trade information
to derive the point source's permit
requirement and documents those
requirement in the permit fact sheet.
Thus, in situations 1 and 2 described above
the regulatory authority approves a trade
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via approval of a TMDL or similar analysis
and an NPDES permittee is responsible for
meeting effluent limits established for its
facility as part of the trade with other
partners. EPA and state enforcement
authority applies to NPDES permits, and
the effluent limits are agreed on as part of
the trade.
Compliance for any nonpoint sources in 1
and 2 is determined by the appropriate
existing regulatory authority and is based
on reasonable assurance that the nonpoint
sources will comply with the provisions of
the trade. It is likely to rely on a mix of
state, local, and other federal authorities.
Reasonable assurance means that the
proposed nonpoint source controls are
technically feasible, specific to the
pollutant of concern, to be implemented
according to a schedule and within a
reasonable time period, and supported by
reliable delivery mechanisms and adequate
funding. The permit fact sheet for the
point source participating in the trade
should document the basis for reasonable
assurance.
In the third situation described above,
some of the permittee's effluent limits may
be less stringent than they would have been
without trading because the nonpoint
source will remove some of the specified
pollutant. The permit-issuing authority
includes conditions in the permit that
specify the nonpoint pollution controls to
be implemented and reopener clauses to
provide for recalculation of the point
source's effluent limits if nonpoint sources
fail to meet their obligations over a
reasonable time period.
Unlike situations 1 and 2 described above,
in situation 3 a permittee arranging a trade
remains accountable for the reductions
agreed to by the nonpoint source(s).
Reductions agreed to by the two partners
are linked through the NPDES permit, and
failure of a nonpoint source partner results
in enforcement actions against the NPDES
permit holder. In this situation, it is the
responsibility of the permit holder to
ensure that other parties to the trade can
meet obligations undertaken as part of the
trade.
For situations 1 and 2 described above,
accountability and enforcement for the
point and nonpoint source are not linked.
If a permittee fails in its obligations,
applicable federal and state enforcement,
based in the CWA, occurs. If the nonpoint
source fails in its obligations, appropriate
corrective action, most likely rooted in
local, state, or contracts law, occurs. A
failure of a nonpoint source partner does
not trigger an enforcement action against
the point source trading partner, but it may
result in a revision to the TMDL or a
modification to the point source's current
permit limitations and conditions to ensure
water quality is protected.
7.2 Economic Issues
Several economic issues are specific to
point/nonpoint source trading. They relate
to differences in unit control costs,
ancillary benefits from nonpoint source
controls, comparability of costs,
transaction costs, cost sharing, and
piggybacking.
Unit Cost Differences
As noted in Chapter 3, the economic
attractiveness of point/nonpoint source
trading depends on differences between
unit costs of pollutant reductions for point
sources compared to such costs for
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nonpoint sources. Often, nonpoint source
reduction is cheaper than point source
reduction on a per unit basis, although
incorporating a margin of safety into a
trade may affect the cost differential.
The reason for this cost variance is that
point sources often require expensive
technological methods to control pollution
in their effluent. Most types of nonpoint
sources, on the other hand, can often rely
on cheaper, nonstructural best management
practices (BMPs) to reduce pollutant
loading. Structural BMPs are those which
require construction efforts or physical
changes to a site, whereas nonstructural
BMPs change the way people (and/or
animals) use a site and do not otherwise
change physical site conditions.
Point sources, therefore, can often save
substantial sums by arranging for pollution
control from nonpoint sources. In turn,
nonpoint sources can receive compensation
for implementing desirable BMPs, such as
planting riparian vegetation. These
measures also may have value for the
nonpoint source, for example, reduction of
soil erosion for farmers.
Additionally, the CWA regulatory structure
has focused on point sources for over 20
years. As a result, the less expensive point
source control methods have already been
implemented. While states and nonpoint
sources have made good progress in
reducing nonpoint pollution, significant
nonpoint pollution reduction opportunities
remain.
Ancillary Benefits
As stated above, nonpoint sources
generally use BMPs to decrease their
pollutant loads. These BMPs can provide
benefits along chemical, physical and
biological parameters, and can be a way to
implement restoration and enhancement
projects. For instance, wetland restoration
may be prescribed to prevent agricultural
runoff. While this BMP improves water
quality, it also may provide habitat
functions for wildlife.
Comparability of Costs
Point sources and nonpoint sources
contemplating trading may calculate their
costs in different ways. Such differences
can originate in accounting procedures that
are more likely to be employed by point
sources than by nonpoint sources. In some
cases, it may be necessary to adjust point
and/or nonpoint source costs to account for
these differences. For example, point
source controls are in many cases more
capital-intensive than those for nonpoint
sources and so are depreciated over
multiple years. Many BMPs, however, are
less capital-intensive, often involving
operational techniques, and so are
deducted as current year expenses.
Transaction Costs
Transaction costs associated with
point/nonpoint source trading can be
biased upward because potential nonpoint
source partners are often numerous, but the
potential to reduce loadings from any
individual nonpoint source may be low.
This situation can result in point sources
having to coordinate with multiple
nonpoint sources to achieve loading
reduction targets. Additionally, nonpoint
sources may have few regulatory
incentives to trade. So unless nonpoint
sources benefit largely from trading, point
sources and other stakeholders may have to
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lobby nonpoint sources to create trading
opportunities.
Stakeholders can help reduce transaction
costs by supplying both point and nonpoint
sources with information on potential
trading partners. Point sources and other
parties seeking nonpoint source trading
partners may contact local governments
and state agencies involved in nonpoint
source pollution management. Nonprofit
environmental organizations also may be
able to direct interested parties to candidate
nonpoint sources. Additionally, watershed
management, growth management, and
local comprehensive plans often identify
unaddressed nonpoint source pollution
problems.
Cost Sharing
Cost sharing is an aspect of nonpoint
source management that affects
point/nonpoint source trading. Many
governmental programs offer cost sharing
options to nonpoint sources to install
BMPs for pollution control. These cost
share programs are often essential to
meeting nonpoint load reductions in an
approved TMDL.
Cost-share BMPs may be more attractive
than non-cost-share BMPs to point sources
since cost sharing may result in lower
prices for trades. Therefore, state officials
approving a trade should consult with the
state nonpoint and cost-share programs
(including U.S. Department of Agriculture
programs) to ensure that any existing
commitments to implement nonpoint load
reductions will not be compromised by a
trade.
Piggybacking
Often point/nonpoint source trading can
achieve cost savings by expanding
nonpoint source pollution control projects
that are already being implemented. Such
projects are often implemented by
organizations that do not themselves cause
pollution (e.g., nonprofit environmental
protection groups). Trading partners
achieve cost savings because expansion of
such projects is usually cheaper on a unit
cost basis than implementation of a new
nonpoint source control project. Thus,
point sources achieve required loading
reductions for less money than they could
otherwise, even through a more standard
trading arrangement.
Piggybacking also can reduce transaction
costs. For such arrangements, stakeholders
share information about existing or
planned projects where point sources could
contribute additional funding to expand a
project's scope. This lowers costs to point
sources associated with trade identification,
evaluation, implementation, and
monitoring. An example of piggybacking
appears in Chapter 8.
7.3 Data-Related Issues
Data in two general areas provide
important information for identifying,
designing, and implementing trading
programs: (1) water quality and pollution
control effectiveness and (2) economic and
geographic information. Some of these
data will be on hand as part of regular
water quality management activities where
TMDLs and similar analyses have been
performed. Where unavailable, some data,
such as control cost and effectiveness
information, can be obtained from other
watersheds or published literature and
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customized to areas considering trading.
Water quality data are most useful when
they are specific to waterbody segment(s)
where trading is proposed.
Water Quality and Pollutant Loadings
To help ensure trading principles are
upheld, agencies should have sufficient
water quality monitoring in place to
support loading estimates from point and
nonpoint sources, establish water quality
objectives, and measure needed pollutant
reductions. Adequate data will provide
confidence in presumed cause-and-effect
relationships between pollution control
measures and water quality responses.
Many data limitations exist for
point/nonpoint source trading. An
abundance of effluent loading data for
most point sources exists, but loading data
for nonpoint sources are rarely available
for individual nonpoint sources. Instead,
nonpoint source loading data are typically
available only for whole tributaries, or
more generally, as estimates of background
loading.
Data documenting point source discharge
effects in the mixing zone and on local
ambient water quality are not generally
widely available. Also, there is little
documentation of ambient water quality
downstream from point source dischargers.
Additionally, mixing zone data are
especially rare. (Ohio is an exception.)
However, models are available to assist in
the estimation of nonpoint source loadings,
both before and after the application of
various BMPs.
Data documenting nonpoint source effects
on water quality are even more inconsistent
across nonpoint source categories, states,
and individual waterbodies. The often
large numbers of nonpoint sources and the
variance of their loadings according to
spatial (e.g., location relative to water
edge) and temporal (e.g., seasonal) factors
further complicate the task of attributing
specific environmental effects to
identifiable pollution sources.
Nonetheless, reliable estimates of expected
loading reductions from nonpoint source
BMPs and restoration efforts are key to
predicting water quality improvements
under trading. A variety of water quality
analyses can be used to estimate nonpoint
source loading reductions and evaluate
their effects on receiving waters.
The best information on potential
reductions will come from local water
quality data collected before and after
implementation of BMPs or restoration
projects. Good field data also are needed
to verify compliance with NPDES permit
conditions, and agreements between point
and nonpoint sources, and to build
technical credibility. Some agencies, like
the U.S. Geological Survey's National
Water Quality Assessment program, are
beginning to systematically monitor
nonpoint source contributions to water
quality problems in particular waterbodies.
To be most helpful, such analyses should
be linked to specific characteristics of the
nonpoint source control measures (e.g.,
scale, scope, method). Where local data
are not available, it may be possible to use
effectiveness estimates from other nearby
areas, adjusting for any differences in
rainfall, topography, soil type, and other
factors influencing-effectiveness. One
source for BMP effectiveness information
is Guidance Specifying Management
Measures For Sources of Nonpoint
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Pollution In Coastal Waters (EPA840-B-
92-002, January 1993).
Trading program organizers can conduct
their own field research to provide better
data when needed for design and
evaluation purposes. Both the Lake Dillon
and Tar Pamlico River point/nonpoint
source trading programs relied, in part, on
effectiveness data generated by local
demonstration projects. Additionally,
monitoring of nonpoint source pollutant
loadings can be expanded as part of a
trading program to provide information
about BMP effectiveness as trading occurs.
Data-Related Role ofTMDLs
TMDLs can play an important role in
linking the selection and implementation of
trades to the attainment of water quality
standards by providing a framework for
data collection and analysis. The TMDL
process results in estimates of pollutant
loadings from all sources and predicts the
resulting pollutant concentrations in
receiving waters. As a result, a framework
for evaluating water quality implications of
various trading scenarios will generally
exist where TMDLs have been developed.
Economic and Geographic Data
As discussed in Section 7.2, cost-
effectiveness estimates for reductions in
point source and nonpoint source pollutant
loadings will help to identify where
sufficient cost differentials, and therefore
potential trading opportunities, exist. Cost
estimates specific to sources or source sub-
categories, such as secondary treatment
plants and livestock feedlots, in a trading
area will be preferable to less specific
estimates or estimates from other areas.
An understanding of the spatial distribution
of potential trading participants and their
characteristics within a trading area is a
key component of evaluating water quality
effects of trading. Point and nonpoint
sources can be identified and listed by
location, e.g., River Mile 34. Knowledge
of local topography and soil conditions, as
well as rainfall, snowmelt, and evapotran-
spiration, also is important because these
factors influence nonpoint source loadings.
Maps indicating sources and locations
where additional reductions are possible
(e.g., where BMPs are not fully
implemented) can be simple but powerful
tools to help water quality managers and
other stakeholders visualize potential
trading scenarios. Geographic information
systems (GIS) provide sophisticated
mapping capabilities and can combine sets
of information based on various decision
factors and display results in map form.
7.4 Technical and Scientific Issues
Spatial, temporal, and chemical differences
between point and nonpoint source
pollutant loadings pose challenges to
understanding and predicting effects of
point/nonpoint trading on water quality.
Accommodating these differences in the
conditions of a trade can help attain
environmental objectives.
Spatial Considerations
Because point/nonpoint source trading
shifts additional loading reductions from
point sources to nonpoint sources,
understanding how nonpoint source
loadings behave relative to point source
loadings as they enter a waterbody helps
predict trading effects on water quality.
Point sources are more likely to discharge
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a load continuously at specifically
identifiable points. In contrast,
concentrations of pollutants in nonpoint
source discharges vary considerably and
are released intermittently over the length
of the water-land boundary.
In some cases nonpoint sources may be
located within the same watershed but
upstream or distant from the point source
and/or waterbody of concern. Examination
of the implications of the relative locations
of trading partners and impacts on
receiving waters is necessary.
Temporal Considerations
Substituting reductions in nonpoint source
loadings for further point source reductions
also changes the timing of when those
reductions occur. Most point source
loadings are more predictable, as allowed
by daily and monthly average limits in
their NPDES permits. Nonpoint source
loads are typically more random and
variable, being influenced by daily and
seasonal weather conditions.
Nonpoint source loadings generally
increase during rainy seasons and decrease
during dry seasons. (One exception is
nonpoint source pollution conveyed by
irrigation return flows.) Since rain also
dilutes nonpoint source runoff with higher
waterbody flows, the short term effects of
nonpoint sources may be mitigated to some
extent. In many northern and high-altitude
climates, spring snowmelt is a major
source of nonpoint source pollution. Point
source loadings are relatively constant
across seasons; exceptions include
combined sewer overflows (CSOs) and
sanitary sewers with high inflow.
During dry seasons, point source loadings
are higher relative to a waterbodys
assimilative capacity; although loadings
remain constant on average, waterbody
flows are reduced. For this reason,
estimating loads coming from a point
source during low flow periods after a
trade is critical to protecting water quality
year-round.
Chemical Considerations
Chemical differences can exist between the
same pollutant coming from a point source
compared to a nonpoint source. Pollutants
from point sources typically reach
waterbodies in a dissolved form, making
them readily available to plants and
animals. For example, only inorganic
forms of nitrogen are bioavailable.
In contrast, some pollutants from nonpoint
sources can be attached or adsorbed to
sediment when they reach water.
(Although in some situations, point source
loadings can also be attached to sediment.)
In this form, chemical pollutants are less
available to create water quality problems.
Elevated concentrations of sediment can
directly cause water quality problems due
to increased turbidity (decreasing the
amount of sunlight available to aquatic
life), clogged fish gills, and increased
levels of sediment oxygen demand.
Accommodating Differences
Several approaches are available to
account for differences between point and
nonpoint source loadings and address
uncertainty about how to exchange point
source for nonpoint source loading
reductions in such a way that water quality
standards are achieved throughout
watersheds.
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For example, using long-term average
loadings for both point and nonpoint
source loadings allows the loadings of each
to be compared over time periods where
variance is acceptable (i.e., where adverse
effects are chronic but not acute). This
comparison should be made based on an
evaluation of the load during periods of
"critical" conditions appropriate to the
waterbody; e.g., low flow, high loadings,
etc. Margins of safety offer a way to
protect water quality. They reflect
uncertainty about the relative effectiveness
of point source and nonpoint source
controls where trading is an option.
Establishing exchange rates between point
and nonpoint sources that reflect known
and unknown differences in effect should
also be considered.
Exchange rates, or trading ratios define the
number of units of nonpoint source
pollutant loading reduction that are
equivalent to one unit of point source
loading reduction. Where nonpoint source
loading reductions are less certain than
point source reductions, point sources
would pay for more than one unit of
loading reduction for every unit of credit
received. This "extra" reduction represents
a margin of safety that should be
proportional to the uncertainty associated
with predicted nonpoint reductions and
will help ensure that expected water quality
improvements actually occur. The use of
trading ratios for two programs is briefly
described in Exhibit 7.2.
7.5 Institutional Issues
Support from institutions and organizations
that have relationships with point and
nonpoint sources is critical to developing a
successful trading program. Trading
programs involving point and nonpoint
EXHIBIT 7.2: TRADING RATIOS IN THE
DILLON AND TAR PAMLICO PROGRAMS
Point sources in the Lake Dillon program
trade at a ratio of 2:1; that is, they reduce
two pounds of nonpoint source phosphorus
loadings and receive credit for one pound.
Dillon Lake established this ratio because it
was estimated that one additional pound
allowed to be discharged by the POTW due
to growth would lead to two additional
pounds from nonpoint sources. New
developments are required to install erosion
controls that are at least 50 percent
effective. As a result, the one additional
pound from the POTW leads to one
additional pound from nonpoint sources.
Therefore, a 2:1 ratio was applied. (In
general, various averaging periods can
accompany trading ratios.)
Using a slightly different approach, the Tar
Pamlico River Basin point/nonpoint source
trading program «s fee for nonpoint source
loading reductions is based on a weighted
average of a trading ratio of 3:1 for cropland
BMPs and 2:1 for animal BMPs. (The
different crop and animal ratios reflect
differences in effectiveness and certainty of
the different activities and suitable BMPs.)
In this program, point sources contribute a
specified amount to an agricultural cost-
share fund for every kilogram of nutrient
reduction they want to buy.
sources build new alliances between
stakeholders that may have had few prior
opportunities to work together, especially
where watershed approaches are new or
not yet used.
Identifying Potential Stakeholders
The list of potential stakeholders in
point/nonpoint source trading programs is
long and diverse. The point source
community is relatively small (compared to
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the nonpoint source community),
comprising mostly municipal and industrial
sources holding NPDES permits along
with their regulators and affiliate
associations. In contrast, many different
types of nonpoint sources are potential
trading partners. As a result, numerous
organizations with ties to nonpoint sources
may play a role in supporting
point/nonpoint source trading.
Additionally, each category of nonpoint
source typically represents a distinct
constituency and communication between
constituencies is often infrequent.
A first step in addressing institutional
issues for point/nonpoint source trading
involves identifying the specific
institutions and organizations—even down
to the departmental office or branch if
necessary— that currently regulate,
manage, assist, or act as watchdogs for the
specific point and nonpoint sources in the
area where trading is being considered.
Some of these state, regional, and local
organizations are identified in Exhibit 7.3.
Matching Trading Support Needs to
Existing Roles and Responsibilities
Key support needs of any trading program
include:
• Regulatory oversight
• Providing information
• Brokering and facilitation
• Tracking and documentation
• Technical assistance.
The appropriate level of support in any
area is directly related to the scale and
EXHIBIT 7.3: POINT/NONPOINT SOURCE
TRADING INSTITUTIONAL STAKEHOLDERS
• Environmental Protection Departments
• Natural Resource Management
Agencies
Public Health Departments
• Public Works Departments
• Public Utility Commissions
• Fish and Wildlife Agencies
Forest Service Offices
• Mining Offices
Local Conservation Districts
• State Soil and Water Conservation
Districts;
State Agriculture and Forestry
Departments
• Natural Resource Conservation Service,
Other USDA Affiliates
Watershed Organizations
• Transportation Planning and Road
Construction Organizations
• Land Use Planning and Zoning
Organizations
• Flood Control Districts
• Navigation Districts
Water/Irrigation Districts
• University Cooperative Extension
Services
• Array of Nonprofits and trade
associations related to above
scope of trading. Since point/nonpoint
source trading has the potential to involve
a large number of traders, many trades, and
a large geographic area, information,
facilitation, and tracking may be
particularly important. Because many
unregulated nonpoint sources are
accustomed to receiving technical
assistance to help them implement
voluntary pollution reduction efforts, this
too may be a key support need of any
point/nonpoint source trading program.
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Generally, entities that already provide
support to trading partners will be the best
candidates to perform these functions for a
trading program. By matching roles and
responsibilities in a trading program to
current ones, point/nonpoint source trading
can be more easily integrated into the
existing water quality management
framework of a given area.
7.6 Administrative Issues
Administrative issues relate to the nuts and
bolts of trading between point and
nonpoint sources. Generally, they include
the following activities:
• Guidelines for trading (e.g., eligibility,
trading ratios)
• Information management and
dissemination
• Facilitation and brokering
• Tracking and documentation
• Technical assistance.
Experience to date with point/nonpoint
source trading, other types of effluent
trading, and trading in other media has
shown that the most successful trading
programs are those which minimize
administrative requirements for trading
parties and their governmental partners.
For example, the lead banking and trading
program that helped reduce lead content in
gasoline has been cited as the most
successful trading program in the United
States. (Banking describes arrangements
where pollutant reductions may be taken as
credit some time after they are purchased.)
Its success has been attributed in large part
to simple trading arrangements and
reporting requirements.
In contrast, many electric utilities have
cited burdensome administrative
requirements as reasons for not
participating in the acid rain allowance
auction established under the Clean Air
Act and held through the Chicago Board of
Trade. Further, it is widely believed that
the Fox River point/point trading program
faltered due to a poorly designed trading
scheme (as described in Chapter 5).
Matching Administrative Arrangements
to Trading Arrangements
The type of trading arrangements between
point and nonpoint sources, as well as the
number of trades and traders, will
influence how much and what kind of
administrative support is needed and
whether point and nonpoint sources would
benefit from administrative assistance from
other stakeholders. For example, if a
single point source is trading with a
handful of nonpoint sources, administrative
activities will likely be limited and
additional assistance unnecessary. On the
other hand, if a dozen point sources are
trading with a hundred potential partners,
administrative activities will likely be
broad and assistance from selected
agencies and watershed groups could
greatly facilitate trading and keep
transaction costs down. In fact, successful
trading schemes are most likely to occur
where there is a watershed group
committed to overseeing the effort.
Specific arrangements point and nonpoint
sources can use to carry out their trades are
as varied as the possible combinations of
point and nonpoint sources. They range
from simple, single-trade arrangements to
highly structured programs designed to
support an active trading market.
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Information Management
To facilitate trading, potential point and
nonpoint source partners need to be able to
identify each other. This can be
accomplished by the sources independently
or through a centralized service.
Regulatory agencies, resource management
departments, watershed groups, trade
associations, and nonpoint source
organizations are examples of candidates
that can provide information about point
and/or nonpoint sources to interested
parties.
Point sources and other parties attempting
to identify potential nonpoint source
trading partners can consult a wide variety
of resources, depending on the type of
pollutant loading reduction sought and the
profile of nonpoint sources in the trading
area. Agencies and departments
responsible for managing nonpoint source
pollution can identify where nonpoint
source BMPs are not required and/or have
not been implemented. They also can
describe the type of pollutants that
nonpoint source BMPs and restoration
projects can reduce.
Land use maps and property owner lists are
often kept by local planning departments
and/or state agencies. Regional planning
and watershed organizations also may be a
source of land use information. Where
available, geographic information systems
(GIS) also are a useful resource.
For nonpoint sources and other parties
seeking point sources interested in trading,
agencies regulating point sources generally
have a considerable amount of readily
available public information. This
information describes applicable
technology-and water quality-based limits,
pollutant loadings, compliance records,
and facility descriptions. Plant managers,
public works officials, corporate
environmental managers, and trade
associations are contacts to solicit point
source interest in trading.
Selected print and electronic media provide
forums for communication about many
aspects of trading. This can be especially
important because point/nonpoint source
trading involves many individuals and
groups that may be unfamiliar with each
other outside trading programs. For
example, local newspapers, existing
environmental and association
publications, trading-specific newsletters,
and electronic bulletin boards offer
avenues for disseminating information
about trading programs and publicizing
opportunities.
Facilitation and Brokering
In some cases, point and nonpoint source
trading partners can benefit from
facilitation or brokering assistance to
identify, evaluate, and/or transact trades.
Traders will likely look for two things in a
facilitator or broker: a familiarity with
participants and issues and independence.
Watershed associations, conservation
districts, nonprofit groups, private firms,
and some government agencies would
meet these criteria.
Tracking and Documentation
At a minimum, tracking and
documentation of trades should provide
feedback to regulatory agencies and natural
resource managers to ensure that trading is
consistent with water quality objectives.
Additionally, following implementation of
BMPs and restoration projects would
enable lists of candidate nonpoint source
projects to be kept up-to-date. Tracking
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can provide valuable information to
support estimation of the overall
effectiveness of trading programs. For
larger trading programs, regular (e.g.,
annual, quarterly) summaries of trading
activities can be an important
administrative tool.
Information that point and nonpoint
traders, as well as other stakeholders,
might find of interest includes:
• Parties to a trade
• Number of loading reduction credits
available/needed
• Terms of trade (e.g., type of
arrangement, price, trading ratio,
monitoring/ maintenance conditions,
etc.)
• Location and type of point and
nonpoint source(s).
• Type of management planned or
implemented.
Tracking and documenting trades also will
develop information that can be used to
enhance trading opportunities and can be
shared with others to assist their
consideration, design, and implementation
of trading programs.
Technical Assistance
Because many potential nonpoint source
trading partners mighthave had limited
experience with BMPs and other pollution
prevention measures, appropriate technical
assistance can increase chances for
successful trading. Many stakeholders
listed above in Exhibit 7.3 have
traditionally provided assistance to
nonpoint sources to help them implement
and manage BMPs. Identifying any
necessary assistance is particularly
important when nonpoint source owners or
managers, rather than third parties, are
responsible for operating and maintaining
BMPs providing loading reduction credits.
7.7 Accountability and Enforcement
The contrast between accountability and
enforcement authorities and approaches
between point and nonpoint sources is a
critical consideration for point/nonpoint
trades. Point sources are controlled by
federal and state regulations, whereas
nonpoint sources are generally managed
through local, state, and other federal
regulatory, nonregulatory, and voluntary
programs. EPA anticipates that parties to a
trade will need to work with federal, state,
tribal, or local regulatory entities on a case-
by-case basis to ensure that there is an
appropriate level of accountability and
enforceability in a trading arrangement.
Reasonable Assurance Within a TMDL or
Equivalent Assessment and Remediation
Plan
In the first two situations for
point/nonpoint source trading described
above (section 7.1, Regulatory Issues), a
trade will occur in the context of a TMDL
or an equivalent assessment and
remediation plan. A trade agreement
between partners and the state agency must
include a reasonable assurance that all
parties will be able to implement the
conditions of the trade. Point sources are
subject to direct federal and state
regulatory NPDES requirements. This
direct enforcement authority provides a
reasonable assurance that agreed-upon
activities will be implemented and that if
implementation does not occur there is a
regulatory recourse available to compel
compliance.
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Reasonable assurance in the context of
nonpoint source commitments is very
different. Nonregulatory, non-federal
reasonable assurances are appropriate
bases for trades under the following
conditions
1. The first condition for reasonable
assurance for nonpoint sources is that
proposed controls are technically
feasible. Expectations for reductions
included as part of a trade must be
consistent with actual field information
or commonly accepted modeling or
textbook values. Performance
expectations of BMPs must be
consistent with past practice or
expectations based on the application
of the specific practice to similar
situations. Thus, for example, expected
reductions in sediment from
agricultural activities must be based on
similar soils, hydrology, crop practices,
and associated pesticide and fertilizer
application and usage.
2. The second condition for meeting
reasonable assurance is that the
appropriate local, state, or federal
agencies have a reasonable expectation
that a nonpoint source will implement
specified controls. Reasonable
assurance of implementation can be
based on recent history of
implementation and experience with
similar types of activities. It may
include local or state regulatory
authority, or agreements between
different parties to provide financial or
technical assistance to finance
implementation, especially where these
agreements include contractual
arrangements with a federal or state
cost-share provider.
Examples of reasonable assurance vary.
Some include:
• Performance measures for controlling
and mitigating effects of development
or other land-disturbing activities.
• Local ordinances, state laws, or written
agreements or contracts that require
implementation of best management
practices for construction, agriculture,
forestry, road construction, etc.
• Local ordinances for erosion control
and flood protection.
• Local ordinances or state laws that rely
initially on voluntary compliance, but
provide for direct action in the event
voluntary approaches are ineffective.
• Existence of financial mechanisms to
support implementation of these and
other voluntary and regulatory
measures.
Exhibit 7.4 illustrates several examples of
state laws to implement nonpoint source
controls.
Meeting the Reasonable Assurance Test
In determining whether these types of
programs meet the reasonable assurance
test, designers of a trade need to consider a
number of factors. First, are the proposed
measures regulatory or voluntary? Unlike
NPDES permits, these types of measures
are rarely subject to direct federal
oversight. They may be subject to local or
state regulation. Examples of local
regulation are zoning or construction
runoff requirements applied to developers.
These requirements typically have high
rates of compliance, contain penalty
provisions if violated, and are generally
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EXHIBIT 7.4: STATE LAWS FOR IMPLEMENTING NONPOINT SOURCE CONTROLS
The Rhode Island Coastal Resources Management Council has broad authority to enforce
standards to reduce pollutant loadings from new development, redevelopment, and new and
relocated roads, highways, and bridges. Violators may be subject to administrative fees, fines,
and in some cases, criminal prosecution.
The state of Delaware requires stormwater practices for new development to reduce total
suspended solid loadings to surface waters. The state has responsibility for enforcement,
exercised through referral from delegated agencies or citizen complaints. Delaware sediment
and stormwater regulations provide the authority to levy penalties for violations.
Maryland's Forest Conservation Act requires that local jurisdictions with planning and zoning
authority adopt forest conservation programs that address how forests will be retained or
planted in priority areas. The Department of Natural Resources has the right and authority to
intervene in any local approvals of a forest conservation plan. The statute establishes
enforcement authority through DNR for violation, stop work orders and penalties.
Wisconsin law allows the state's Department of Natural Resources to directly remedy sites of
significant pollution. The law applies to any nonpoint source category, including agriculture,
urban, construction sites, and forestry, except for animal waste. DNR may order the abatement
of any water pollution deemed to be significant. Examples of covered water pollution include
a violation of water quality standards, a significant impairment of aquatic habitat or organisms,
and restrictions of navigation due to sedimentation.
North Carolina's "Nondischarge Rules" require certain categories of new and expanded animal
waste systems to apply for and receive an approved management plan. In certain cases, where
the state determines that a facility has an adverse impact on water quality, the rules also allow
the state to require systems to apply for and receive an individual nondischarge permit from the
Division of Environmental Management.
The Kentucky Agriculture Water Quality Act requires that surface water and groundwater
resources be protected from pollution from agriculture and silviculture activities. It also
creates the Agriculture Water Quality Authority, which is a 15-member peer group made up of
representatives from various agencies, organizations, and farmers. The Authority reviews
water quality data and evaluates BMP effectiveness. The law also establishes a "Bad Actor
Clause" that sets out a procedure to follow in the event that contamination occurs.
Vermont has a law and regulations that implement and enforce land use practices designed to
reduce the amount of agricultural pollutants entering state waters. Violators may face
injunctions or administrative penalties if they do not follow recommended corrective actions.
The state of Oregon requires some landowners engaged in agricultural activities to develop
water quality management plans. If, under these plans, reasonable attempts at voluntary
solutions have failed, applicable parties may be subject to enforcement procedures such as civil
penalties as high as $10,000.
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enforced. In addition, regulatory
authorities need to provide for direct action
in the event that voluntary approaches fail.
In the absence of a specific regulatory
requirement, past practice, intent, and
ability to pay for the agreed-upon activities
may be considered. In this regard,
voluntary programs with good records of
past implementation may be considered.
Similarly, existing programs with poor
records of implementation may not meet
the reasonable assurance test.
Reasonable assurance may depend on the
existence of effective or assured financial
support mechanisms. Voluntary programs
with a past history of good compliance and
a guaranteed source of funding probably
meet the reasonable assurance test.
Similarly, voluntary or regulatory
programs eligible for funding support from
assured sources of financing, such as low
interest, government-guaranteed loans or
assured payment streams, should be
carefully evaluated for purposes of
determining whether the measures being
proposed meet the reasonable assurance
test.
Contracts between nonpoint sources and
federal or state agencies provide financial
assistance in return for the owner or
operator's commitment to install and
maintain particular practices and also may
meet the reasonable assurance test. Certain
programs provide, for example, economic
incentives for voluntary action to reduce
nonpoint pollution (e.g., USDA and state
cost-share, loan programs from State
Revolving Funds (SRFs), capitalized under
the CWA).
Finally, reasonable assurance should
consider the consequences if an
implementation activity fails to occur.
Specific performance contracts,
incorporating performance bonds and other
individual financial incentives, provide a
very strong incentive for continued
implementation. Lack of dedicated
funding or specific financial incentives
may indicate that reasonable assurance will
be extremely difficult to demonstrate.
The third consideration in determining
reasonable assurance is the time frame for
implementation. Reasonable assurance
would not apply, for example, to a local
ordinance expected to be acted on by a city
or county government in the near future. It
would apply, however, if the ordinance had
been passed and contained explicit
implementation time frames consistent
with any trade.
Reasonable assurance must be
demonstrated for all these factors before
EPA approves a TMDL based on
reductions expected as a result of nonpoint
source controls.
Reasonable Assurance and Actual
Performance
Point sources must meet an individual
discharge limit, i.e., an NPDES water
quality-based effluent limit. Nonpoint
source controls have higher degrees of
technical uncertainty. A well-designed
nonpoint source BMP, based on accepted
modeling, data from similar applications,
and commonly accepted professional
expectations, may nonetheless fail to
perform up to those expectations. In this
situation, the TMDL might need to be
revised or additional BMPs developed and
implemented.
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EXHIBIT 7.5: WATERSHED BANKS
A watershed bank enters into binding legal agreements (including Consent Agreements,
Administrative Orders, or other legal contracts) with sources that will be implementing pollution
controls in exchange for financial payments. The value of a bank is determined through the
development of a TMDL or other equivalent analysis that allocates assimilative capacity and
pollutant loads. The bank can be operated by a regulatory entity such as a state authority or can be
operated by another public, private, or nonprofit entity. To compensate for any possible
nonperformance by the watershed bank, the regulatory entity can require the bank to post a bond or
related financial instrument in an amount sufficient to ensure that the regulatory entity would be able
to implement needed pollution control measures. In setting prices for pollutant load reduction
credits, a watershed bank will need to consider:
The availability of nonpoint pollutant load reduction opportunities in the watershed.
The likely future effects of implementing federal grant and other state nonpoint pollution
control programs and the resulting effect on the availability of nonpoint pollution control
opportunities.
The likelihood of point sources seeking to initiate independent trades with nonpoint sources
and the resulting effect on the availability of nonpoint pollution control opportunities.
The need to generate cash income sufficient to cover the costs of the banking activity and to
cover any unexpected costs associated with implementation of pollution control measures
over time.
The technical feasibility and time constraints of developing multiple pollution control
programs at the same time.
Reasonable Assurance for Permit-Based
Trades
In the third situation described in section
7.1, in which point sources identify trades
with nonpoint sources that provide for
cost-effective implementation of controls
in lieu of treating their effluent to the
degree specified in a water-quality based
effluent limit, responsibility for
determining reasonable assurance rests
primarily with the NPDES permittee. In
this situation, responsibility for meeting
effluent limits, and ensuring that nonpoint
source controls are implemented and
effective, remains with the permittee. This
trading arrangement must be explained in
the fact sheet submitted when a permit is
issued or reissued. EPA believes that the
same consideration of reasonable
assurance applied within the context of a
TMDL is appropriate between the
permittee and nonpoint sources for permit-
based trades.
Watershed Banks
In addition to direct trades between parties,
trading partners could participate in public
or private banks, which could buy and sell
pollutant reduction or other remedial action
credits within a watershed. Each of these
approaches works with individual buyers
and sellers and public and private
organizations. (See exhibit 7.5.)
7.8 Worksheet/Checklist
The following checklist outlines key
questions to consider in implementing a
point/nonpoint source trading program.
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WORKSHEET FOR EVALUATING SUCCESS OF POINT/NONPOINT SOURCE TRADING
Legal and Regulatory Conditions
General:
• Is point/nonpoint source trading implemented within the context of NPDES permitting,
local ordinances for nonpoint sources, TMDLs, and/or other applicable water quality
regulations?
Specific:
Can specific effluent limits be assigned to each point source, if necessary?
Do reopener clauses in NPDES permits allow trading arrangements to be altered if water
quality standards are not met?
Does the regulatory climate for nonpoint sources create trading opportunities?
yes
no
yes
no
yes
no
yes
no
Economic Conditions
General:
Can point and nonpoint sources save or make money by trading (i.e., are there economic
incentives to trade)?
Specific:
• Do total incremental costs for pollution reduction, which include direct incremental costs
?
and transaction costs, differ among dischargers?
Do cost differentials among dischargers allow point sources to reduce pollution more
cheaply than nonpoint sources?
Do cost savings from trading outweigh the uncertainty that dischargers face under
trading schemes?
Are transactions costs less than cost savings from the trade?
Is there a sufficient supply of pollution reduction for sale, as well as a reasonable
demand to buy reduction credits?
yes
no
yes
no
yes
no
yes
no
yes
no
yes
no
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Data Availability Conditions
General:
• Are the data necessary to implement a trading program available or estimable? yes
no
Specific:
Are there enough data to understand pollution quantities and flows within the watershed yes
(e.g., have water quality authorities conducted a TMDL or similar analysis)? no
Can ambient water quality be monitored under trading? yes
no
Are the physical characteristics of the watershed and waterbody appropriate to yes
accommodate trading? no
Can point sources estimate their direct costs for reducing a specified unit(s) of pollution yes
(direct incremental costs)? no
Can a direct cost or a watershed-wide average cost be calculated for nonpoint sources to yes
reduce a specified unit(s) of pollution? no
Can dischargers estimate transaction costs that they would have to pay to conduct trades? yes
no
Administrative and Institutional Conditions
General:
Are governmental authorities and potential trading participants capable of administering yes
a trading program? no
Specific:
• Do governmental authorities have enforcement mechanisms to ensure trades are being yes
implemented correctly and applicable limits and water quality standards are being met? no
• Is information about trading partners readily available so that buyers and sellers can yes
coordinate? no
• Are responsibilities clearly defined for institutions and dischargers taking part in trading? yes
no
• Is the scope of administrative infrastructure compatible with the amount and complexity yes
of the trading that is expected? no
• Are accountability for implementation of measures to reduce pollutant loading and yes
accountability for water quality improvements clearly established? no
• Can the agency responsible for enforcing trading provisions give necessary feedback to yes
parties responsible for water quality? no
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CHAPTER 8. NONPOINT/NONPOINT SOURCE TRADING
Nonpoint/nonpoint trading describes situations where nonpoint sources that have a
responsibility or a commitment to reduce pollutant loads arrange for reductions at other
nonpoint source sites.
Introduction
Nonpoint/nonpoint trading occurs where
nonpoint sources meet state or local
requirements by installing best
management practices (BMPs) or
conducting restoration at another location.
The terms on-site and off-site describe
where BMP and restoration projects occur
relative to the nonpoint source property in
question. As a result, nonpoint/nonpoint
trading is a somewhat new term to describe
off-site activities. (To be consistent with
other chapters, this chapter uses the term
"nonpoint source" to mean landowners and
contributors to nonpoint source pollution).
This chapter focuses on arrangements
where at least one nonpoint source faces a
voluntary commitment or mandatory,
enforceable requirement to implement
BMPs or reduce loadings by some amount
and the buyer pays at least part of the cost
to the seller in cash or in services. Exhibit
8.1 describes two such trades.
Off-site options and trading programs are
not alone in increasing the effectiveness of
nonpoint source pollution control. Many
watershed management and related
programs provide cost-sharing, low-
interest loans and grants, and technical
assistance to support nonpoint source
controls. Some of these programs embody
the same cost-effectiveness principles as
trading.
EXHIBIT 8.1: NONPOINT/NONPOINT TRADES
AT LAKE DILLON, COLORADO
Several nonpoint/nonpoint source trades have
been implemented at Lake Dillon, Colorado,
under a framework originally established for
point/nonpoint source trading that has been in
place since 1984. The four POTWs discharging
to the lake have not needed to trade to meet their
loading allocations due to high plant operating
efficiencies and slower-than-anticipated
population growth. Instead, controlling nonpoint
source loading is now a major objective in the
lake's phosphorus mitigation strategy.
In one trade, the Town of Frisco plans to use
phosphorus loading reductions the Frisco
Sanitation District achieved with stormwater
controls to offset additional phosphorus loadings
a proposed new golf course is expected to
generate. (This trade also is an example of
banking reductions for future application.) In
another trade, Keystone Resort paid for
sewering individual septic systems in specific
areas to produce reductions it could use to offset
new nonpoint source loads projected to come
from future resort development. In both trades,
additional nonpoint source loads were fully
offset with nonpoint source loading reductions
(i.e., no net gain in nonpoint source loadings).
Sources: Incentive Analysis for Clean Water Act
Re authorization: Point Source/Nonpoint Source
Trading for Nutrient Discharge Reductions prepared
for the EPA Offices of Water and Policy, Planning,
and Evaluation, April 1992; and Northwest Colorado
Council of Governments, personal communication,
May 1996.
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An important reason nonpoint sources,
regulators, and watershed managers
exercise off-site options is to capture cost
savings or additional environmental
benefits unavailable from on-site options.
A number of factors can influence costs
and expected effectiveness of nonpoint
source control, including site
characteristics; available BMP options;
proximity to incompatible land uses (e.g., a
wetland in the middle of an urban area);
and location-specific technical
considerations related to implementation,
operation, maintenance, monitoring, and
other actions. Trading, which can result in
more selective siting of BMPs, can
minimize costs and maximize
environmental results.
8.1 Regulatory Issues
The major distinguishing regulatory feature
of nonpoint/nonpoint source trading is that
trading parties are rarely regulated by
federal implementation of the CWA.
Instead, the federal government relies on
state programs, operated in part with
federal dollars, to manage nonpoint source
pollution by vesting the states with
management responsibility. This situation
gives states flexibility in how they exercise
that responsibility and enables them to
defer to local land use authorities.
Examples of this approach are found in
section 319 of the CWA and the Coastal
Zone Act Reauthorization Amendments
(CZARA). Under these laws, coastal states
develop and implement comprehensive
management plans (subject to EPA
approval) that address nonpoint source
pollution. Federal grant eligibility under
the nonpoint source and coastal zone
management programs is contingent on
EPA approval of such plans.
States and local governments rely on a
wide variety of regulatory and
nonregulatory tools to manage nonpoint
source pollution. The specific approach
taken in any given jurisdiction reflects a
combination of local economic and
environmental priorities and preferences,
as well as historical treatment of land uses
and other local considerations. As a result,
regulation of nonpoint sources varies
greatly across jurisdictions, and readers
interested in trading are encouraged to
familiarize themselves with local nonpoint
source management approaches.
Three strategies for managing nonpoint
source pollution that state and local
governments employ are discussed below:
• State and local regulatory programs
• Quasi-regulatory programs
• Voluntary programs.
In addition, wetland mitigation banking is
available as a management tool under the
CWA section 404 permit program. It also
is discussed below.
State and Local Regulatory Programs
State and local governments can use
permitting, licensing, or other prior
approval processes to protect water quality,
natural resources, and public health from
land uses that generate or have the
potential to generate nonpoint source
pollution. State and local governments
also can operate permit programs in which
an activity's location triggers permit
review. Exhibit 8.2 describes key features
of state and local permit programs and
provides examples of activities and
geographic areas that most often receive
attention from such programs.
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EXHIBIT 8.2: STATE AND LOCAL PERMIT PROGRAMS FOR NONPOINT SOURCES
State and local permit programs involving nonpoint sources can be extremely diverse due to the fact that
they are optional and lack federal guidance. These programs, however, do have some common features.
Permit programs also tend to apply to a common set of activities and a common set of geographical areas.
Key features:
Enabling legislation and/or ordinance
Definition, description, delineation of area subject to regulation
Identification of uses and activities allowed, permitted, and prohibited
Permitting criteria, design, and performance standards (sometimes specified by state statute)
Required and/or voluntary BMPs
• Monitoring requirements
Requirements for prevention or mitigation of adverse impacts
• Penalties for noncompliance
Examples of regulated activities (many of which can also fall under regulation by the
NPDES program) :
Building and development, including roads
Timber harvesting
Landfills
Livestock management
Pesticide and fertilizer application
Marina siting
Golf courses
Septic system siting and operation
Common special permit areas:
Wetlands and adjacent uplands
• Shorelines
Floodplains
Wellhead protection areas
Coastal zones
Special management areas
Riparian zones
Erosion-prone areas such as hillsides
Aquifer recharge areas
Drinking water supply sources
Sensitive-designated areas
Unregulated sources can be trading
partners with regulated or unregulated
sources. Activities may be exempt from
permit review, always permitted, or
omitted in ordinances. "Grandfather"
clauses also provide exemptions for land
uses that existed prior to enactment of
enabling legislation.
Jurisdictions exempt certain activities from
permit programs for a number of reasons,
including the following: use compatible
with water quality protection; use provides
substantial and broad economic benefits:
and/or use provides substantial public
benefits. Such unregulated nonpoint
sources are generally addressed in one or
more management plans that depend on
quasi-regulatory programs or voluntary
implementation of BMPs.
Flexibility at the local level creates
significant opportunities for trading among
nonpoint sources. Combinations of
permitted and unregulated nonpoint
sources may exist within a watershed.
Both types of sources, however, may trade
with each other.
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Local planning departments and other
agencies with permitting authority often
have wide-ranging choices of what BMPs
and restoration requirements they include
in permits. Minimum standards establish
baseline conditions for permits. Beyond
those, local officials typically specify
conditions based on a balance between
environmental protection considerations
and economic development objectives.
Local officials concerned about balancing
economic impacts typically seek ways to
minimize compliance costs while
maintaining target levels of environmental
protection. Many local governments
accept off-site options after permittees
show that on-site options are economically
or technically less desirable or infeasible.
Some jurisdictions also offer permittees the
option to pay a fee to support public and
private environmental restoration projects
in lieu of on-site action, particularly where
on-site actions are less beneficial to the
ecosystem or watershed than a more
holistic approach.
Since many local governments have
experience administering permits that
allow for off-site BMPs and restoration or
fees in lieu of on-site action, implementing
nonpoint/nonpoint source trading is not a
new concept. Those interested in
expanding existing options for such
nonpoint/nonpoint source trades should
first review ordinances, memoranda of
agreement, management plans, and other
relevant documents to determine whether
revisions are necessary to allow more
frequent consideration of off-site or fee-in-
lieu contributions.
Quasi-Regulatory and Voluntary
Management Programs
A variety of quasi-regulatory approaches
create incentives for nonpoint/nonpoint
source trading and a framework for
implementation of trades. These
approaches include nonpoint source
management plans, cost-share agreements,
and load allocations (LAs) that result from
TMDL development.
Management plans that address nonpoint
source pollution are often developed for
watersheds, jurisdictions, special areas, or
specific source categories. Plan sponsors
encourage voluntary BMP implementation
through a variety of mechanisms, including
low interest loans, direct grants, cost-
sharing, technical assistance, outreach and
public education, provision of benefits
contingent on BMP implementation (e.g.,
program eligibility, financial support), and
linking other regulatory and economic
decisions to implementation.
A TMDL or other watershed project that
identifies contributing sources and
develops target loads also may provide
incentives to trade. TMDLs develop LAs
to allocate portions of the total load to
selected nonpoint sources. LAs are
implemented through state and local
nonpoint source control programs that vary
in their reliance on regulatory requirements
and voluntary measures to achieve loading
reductions.
Wetland Mitigation Banking
The CWA section 404 permit program
regulates discharges of dredged or fill
material into waters of the United States,
including wetlands. The section 404
program relies on compensatory mitigation
to offset unavoidable impacts to wetlands
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and aquatic resources. Mitigation typically
involves the restoration, creation,
enhancement, or, in exceptional
circumstances, preservation of wetlands.
Federal guidance on wetland mitigation
"banking" encourages the consolidation of
small, fragmented mitigation projects into
large, contiguous sites that are more
beneficial to the environment. Units of
restored, created, enhanced, or preserved
wetlands are expressed as "credits," which
may subsequently be withdrawn to offset
impacts, or "debits," incurred at a project
development site.
While traditionally used to offset wetland
losses, a mitigation bank also can be used
to compensate for other impacts to aquatic
resources, such as point and nonpoint
sources of pollution, where wetlands in the
mitigation bank serve to enhance or protect
water quality. In this way,
nonpoint/nonpoint trades may take place
within the context of wetland mitigation
banking.
8.2 Economic Issues
Like other types of trading, cost and cost-
effectiveness are primary economic
considerations for nonpoint source trades
between on-site BMPs and off-site
alternatives. There is a significant
distinction in costs for nonpoint source
control, however, that affects
nonpoint/nonpoint trades: costs for
nonpoint source controls are highly
dependent on site-specific characteristics.
Awareness of site-specific factors that
influence BMP cost, and likewise cost-
effectiveness, allows identification and
comparison of specific BMP options.
These factors, which include physical site
conditions, nature of BMP required, scale
of BMP implementation or restoration
efforts, availability of cost-sharing, and
presence of transaction costs, are
discussed below.
Before addressing each of these factors,
though, it is important to note that nonpoint
sources and communities in which they
exist may have different objectives.
Nonpoint sources are primarily concerned
with minimizing costs for BMP
implementation and typically are
concerned about cost-effectiveness only
where performance standards are
applicable. Communities sponsoring
trading also are interested in providing cost
savings to nonpoint sources, but not at the
expense of environmental goals. They are
more concerned with achieving
environmental goals as cost-effectively as
possible. Reconciling stakeholder
objectives and providing clear incentives
are critical to designing successful trading
programs.
Physical Site Conditions
Trading provides nonpoint sources with
opportunities to select the least costly BMP
implementation option that will achieve
their environmental objective. This may
involve taking an action off-site that is less
expensive than it would be on-site. It also
may involve selecting a different, less
expensive off-site BMP that is appropriate.
BMP suitability depends on site conditions,
so options and costs vary from site to site.
The cost of a specific BMP varies with
local physical conditions, such as slope,
soil type and permeability, vegetative
coverage, micro-climates, land uses, size of
drainage area, and depth to bedrock. This
is especially true for structural BMPs
because their design, construction,
operation, and maintenance must be
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tailored to site conditions. The terms
structural and nonstructural refer to two
types of BMPs. Structural BMPs are those
which require construction efforts or
physical changes to a site. Nonstructural
BMPs do not change physical site
conditions. Instead, they change how
humans use a site.
Nature of BMP Required
Measures available to control nonpoint
source pollution include a range of
physical structures and natural systems, as
well as nonstructural behavioral changes
and protection efforts. Often, nonstructural
BMPs are less expensive than structural
BMPs to implement because they involve
less engineering design, site preparation
(e.g., grading), and construction, all of
which can be relatively expensive. Thus, a
site that would require structural BMPs to
achieve desired loading reductions can
arrange a trade that uses less expensive off-
site nonstructural BMPs.
Even though nonstructural BMPs tend to
be less expensive than structural BMPs,
they can be costly when they require land
purchases or other resource-intensive
actions. Alternative techniques, such as
conservation easements, are often available
to supplement or replace expensive land
purchases and other actions.
Scale of BMP Implementation
Nonpoint/nonpoint source trading can
provide opportunities to take advantage of
economies of scale (which occur when
average unit cost decreases as scale
increases). Larger BMPs and restoration
projects are generally less expensive per
unit than smaller ones of the same type.
Certain kinds of costs, such as those related
to design and equipment, are relatively
stable regardless of size, and smaller
projects have fewer units (e.g., feet, cubic
feet, acres) over which to spread such
costs. However, proximity to existing
activities and effective scheduling of
resources can make small-scale BMPs
more cost-effective.
Several types of trading arrangements help
nonpoint sources take advantage of
economies of scale. Many involve
piggybacking or pooling. Piggybacking
describes arrangements where a nonpoint
source contributes additional funding to
expand a project's scope beyond what
would have been implemented without the
trade. Pooling describes arrangements
where several nonpoint sources responsible
for implementing individual BMPs or
mitigating wetland losses implement a
single project together. Exhibit 8.3
illustrates these concepts.
Both approaches offer advantages to
nonpoint sources, project sponsors,
resource managers, and watersheds by
lowering unit costs and increasing the
frequency and size of well-designed and
managed restoration projects. These
approaches also can reduce or eliminate
transaction costs associated with trade
identification, evaluation, implementation,
and monitoring.
Availability of Cost-Sharing
Several nonpoint source management
programs offer assistance for BMP
implementation in the form of cost-sharing,
direct grants, loans, and technical
assistance. Cost-sharing opportunities are
especially prevalent in agricultural
programs, and other situations in which
affordability of BMPs is a concern. The
availability of cost-sharing plans for certain
types of nonpoint sources may make them
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EXHIBIT 8.3: Two EXAMPLES OF POOLING AND PIGGYBACKING :
FEE-BASED WETLAND MITIGATION PROGRAMS IN MARYLAND AND LOUISIANA
The Maryland Department of Natural Resources (DNR) may accept fee-based compensation for
mitigation requirements if it determines that creation, restoration, or enhancement of nontidal
wetlands is not feasible. In most cases, monetary compensation is acceptable if the size of the
nontidal wetland loss is less than one acre and mitigation is not feasible on-site. DNR determines
the mitigation acreage requirements as a function of the size of the permitted impact and an
established mitigation ratio—3:1, 2:1, or 1:1. Per acre mitigation fees are determined based on the
cost to buy land in the affected county, plus design, construction, and monitoring costs. (In 1993,
they ranged from $11,000 to $52,000 per acre.) The fee option enables DNR to collect and pool
compensatory mitigation fees from small development impacts to fund larger nontidal wetland
restoration, creation, and enhancement projects. DNR presented the fee option as a mechanism not
only to reduce the administrative burden on the regulatory process, but also to serve as a means of
fulfilling its responsibility to mitigate for impacts of less than 5,000 square feet, for which it does
not require individual mitigation projects.
The Nature Conservancy *s Louisiana field office (LNC) administers a program in which it accepts
fees in compensation for unavoidable losses of wetlands stemming from development activities
located in southeastern Louisiana. LNC uses compensation fees for off-site preservation and long-
term management activities of degraded pine flatwood wetlands. In all cases, the U.S. Army Corps
of Engineers (Corps) determines whether fee-based compensatory mitigation is acceptable after
potential impacts have been avoided, unavoidable impacts have been minimized, and feasible on-site
mitigation measures have been determined to be impracticable. The Corps also determines the
amount of acreage that must be mitigated through a standardized process that quantifies the overall
natural quality of the wetlands in the area. Compensatory fees payable to the trust fund take into
account the appraised ecological value of the developed property and the estimated loss of
ecological value as a result of the development. Valuation calculations are primarily the Corps *s
responsibility.
more likely to install BMPs. It also will
make some BMPs subsidized with cost-
share funds less expensive to the nonpoint
source than other BMPs. Thus, these
sources may be good candidates for off-
site partners in trading programs.
Transaction Costs
Nonpoint/nonpoint source trading involves
some transaction costs that are different
from those identified with other trading
types. The major difference stems from
the fact that nonpoint sources tend to be
less conspicuous—by definition they are
diffuse. They are also typically smaller
and more numerous. These tendencies can
make identifying suitable trades costly. In
addition, a nonpoint source can experience
transaction costs in evaluating off-site
options. Transaction costs vary based on
factors including:
• Ability to identify other nonpoint
sources.
• Number and proximity of off-site
options.
• Similarity of nonpoint source
candidates.
• Complexity of physical conditions at
area nonpoint sources.
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• Availability of preexisting data at off-
site sources.
• Efforts required to compare off-site
options to on-site options.
Local governments and state agencies
involved in nonpoint source pollution
management can help reduce transaction
costs by supplying information about
potential trading partners. Nonprofit
environmental organizations also might be
able to direct interested parties to candidate
nonpoint source trading partners.
Additionally, watershed management,
growth management, and local
comprehensive plans often identify
unaddressed nonpoint source pollution
problems.
8.3 Data-Related Issues
Nonpoint/nonpoint trading may require
several types of data. Pollutant loads and
water quality data provide an indication of
the ability of BMPs to control nonpoint
source pollution and enhance watershed
ecology. Economic information enables
cost comparisons between BMP options,
while geographic data helps understand the
types and distribution of land uses that
contribute to nonpoint source pollution in
watersheds.
Pollutant Loads and Water Quality
Monitoring Data
In many places, nonpoint/nonpoint trading
relies on creative strategies, simple
techniques, and approximations to identify
opportunities and evaluate results because
the quantity and quality of pollutant
loading and water quality data vary
considerably. Unlike point sources,
nonpoint source loads are not typically
monitored at the source. When loads are
measured at the water's edge, it is often
difficult to attribute loads to specific near-
shore and upland sources.
Data may be of sufficient quantity and
quality to support trading where data
collection and analysis efforts exist as part
of other programs. As a result, data
quantity and quality is a site-specific issue
that requires careful consideration. In
urban areas, ambient monitoring conducted
for stormwater programs and by point
sources as part of their NPDES permit
requirements can provide useful
information for nonpoint/nonpoint source
trading. In urban and rural areas, U.S.
Geological Survey monitoring stations also
provide some data. Other sources of data
include:
• TMDL waterbody analyses, especially
where load allocations are made.
• Section 319 monitoring programs.
• National Estuary Program estuaries.
• Great Lakes, Chesapeake Bay, and
Gulf of Mexico programs.
• Federal, state, regional, and local
special management areas.
• Nonpoint source-specific agencies and
programs.
• Demonstration and pilot projects.
• Academic studies.
In the absence of site-specific data,
nonpoint/nonpoint trading can be
supported by a variety of techniques that
are available to estimate BMP pollution
control efficiencies. These techniques
range from simple runoff and soil loss
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equations to more complex ecosystem
modeling and simulations.
These techniques have been applied with
good results to structural BMPs, such as
infiltration basins, vegetative filter strips,
sediment barriers, and detention ponds.
Their applicability to nonstructural BMPs,
such as street cleaning, air pollution
control, public education, and land use
planning, is still an emerging science. As a
result, relatively few data are available that
characterize the effectiveness of
nonstructural BMPs.
Nonpoint/nonpoint source trading can be
initiated with the best available data, using
estimates if necessary. As trading occurs,
managers can conduct periodic evaluations
to determine if program design or
administration adjustments are warranted.
Additionally, as trading evolves,
monitoring improvements and other
advances can be used to increase the data
precision and enhance environmental
results.
Economic and Geographic Data
Economic and geographic data related to
nonpoint sources are typically available
from state and local government agencies,
special regional and university-based
programs, and federal publications. Cost
estimates for BMP implementation in
specific areas are not always available, but
a variety of sources provide estimates of
incremental unit costs and describe how to
adjust such general estimates for source,
location, climate, and other site-specific
factors.
Maps and other records indicating location
of potential trading partners and existing
BMPs are generally available from state
and local planning departments. These
same departments, universities, or regional
governmental and watershed organizations
sometimes have geographic information
systems that can produce detailed maps
showing, for example, zoning, land use,
soil conditions, and topography.
8.4 Technical and Scientific Issues
Nonpoint source pollution occurs when
rain, snowmelt, or irrigation return flows
move over and through the ground,
transporting pollutants from the land to
surface water. Nonpoint source pollution
also results from atmospheric deposition
(i.e., pollution from rain or airborne
contaminants) and hydrologic modification
(e.g., channelization and channel
modification, dams, and streambank and
shoreline erosion). Nonpoint sources
contribute to water quality problems
associated with nutrients, pesticides,
metals, organics, bacteria, low dissolved
oxygen, and suspended sediment.
The way in which nonpoint source
pollution occurs raises several scientific
issues that must be considered to undertake
nonpoint/ nonpoint trades. These issues
include:
• Natural watershed conditions (local
soils and precipitation, for example).
• Effectiveness of BMPs.
• Spatial, temporal, and chemical
differences among nonpoint source
loads.
Natural Conditions
Since nonpoint source loads are highly
dependent on natural, random, and mostly
uncontrollable events, understanding and
predicting the results of trades may be
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difficult. Climatic events, such as
precipitation, wind, and temperature,
greatly affect delivery of nonpoint source
loads. Geologic and hydrologic
conditions, including surface soil types,
underlying geologic structure, and
watershed hydrology, also influence
nonpoint pollution.
Nonpoint/nonpoint trading programs
require flexibility to handle the variability
of nonpoint source loads. For example,
above-average rainfall might cause
increased nonpoint loads, even after BMPs
have been implemented through a trading
program. This situation does not
necessarily reflect ineffective BMPs. Use
of scientific models or other analytical
tools can help program administrators
understand the effects of random
watershed conditions and verify the
effectiveness of trading programs.
Effectiveness of BMPs
The effectiveness of a BMP at a particular
site is subject to a variety of factors that
interact in sometimes complex and/or
hidden ways. Some factors are human-
influenced, while others are natural or
otherwise uncontrollable. They include:
• Proper installation, operation, and
maintenance.
• Suitability of BMP selection and design
for source and pollutants.
• Physical site conditions such as slopes,
soils, and water table.
• Climate, including precipitation,
temperature, and wind.
Because such variability exists, available
estimates for BMP effectiveness are
usually expressed in the form of ranges or
averages. But measuring the effectiveness
of non-structural BMPs is more
problematic than measuring the
effectiveness of structural BMPs.
Effectiveness can be expressed in terms of
reduced loads, improved water quality,
and/or other benefits such as habitat or
flood protection. Scientific models are
also used to evaluate potential
effectiveness of BMPs under a range of
conditions. Departments of agriculture and
local planning departments are two
potential sources of BMP effectiveness
information along with Guidance
Specifying Management Measures For
Sources Of Nonpoint Pollution In Coastal
Waters (USEPA, Office of Water, 840-B-
92-002, January 1993).
One way to address such variability is to
index pollutant loading reductions to a
baseline year, as was done for the Lake
Dillon Program. By doing this, program
managers would not penalize BMPs that
removed relatively small amounts of
pollutants during dry periods or over-credit
BMPs that removed significant amounts
despite poor performance during heavy
rainfall conditions.
Side effects are an important consideration
in evaluating and comparing trading
options. For example, management
practices that intercept pollutants leaving a
source (e.g., installation of infiltration
basins) may reduce runoff, but also may
increase infiltration to groundwater. Such
BMPs may not be suitable for trading in
areas with high groundwater tables.
Again, flexibility is the key for
administrators of nonpoint/nonpoint
trading programs to manage variability.
Just as they account for variability in
natural conditions, trading programs must
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account for variations in BMP
effectiveness.
Spatial, Temporal, and Chemical
Considerations
Spatial, temporal, and chemical differences
and uncertainties can exist among loads
from nonpoint sources. This can be true
within as well as across source categories.
Estimating relative impacts of load
reductions from one nonpoint source
compared to that from another helps
predict the potential effects of trading on
water quality.
Nonpoint/nonpoint source trading shifts
additional load reductions from one site in
a watershed to another site. As noted
above, nonpoint source loads are site-
specific and vary according to a number of
factors. Thus, changing the spatial
configuration of nonpoint source loads to
waterbodies can produce results for water
quality that are difficult to predict.
Substituting reductions in nonpoint source
loads from one site for another also can
change the timing of loads to waterbodies.
The major reason for these changes in the
temporal arrangement of loads is that
discharges from different nonpoint sources
occur at very different rates. For example,
a sharply sloped, paved urban area can
discharge much higher quantities of runoff
than a flat, vegetated septic system field
during a single rain event. Thus, trading
may alter the rate at which selected
pollutants are discharged, producing
uncertain effects on water quality.
In addition to effects from spatial and
temporal configurations of nonpoint source
loads, trading can change the overall
chemical composition of loadings. This
facet of nonpoint/nonpoint trading occurs
for two reasons: (1) different nonpoint
sources produce different types of
pollutants; and (2) the same pollutant from
different types of nonpoint sources may
produce different reactions in receiving
waters.
Some nonpoint source loads are associated
with dissolved constituents (e.g., those
carried by irrigation return flows and
leaking septic systems). Others are
associated more closely with solid phase
constituents (e.g., urban runoff and soil
erosion losses from cropland). Trades that
affect the proportion of various
constituents in nonpoint loads can
significantly modify water chemistry.
Managing Load Differences
Given the fluctuating nature of nonpoint
source loads, nonpoint/nonpoint trading
programs can be relatively difficult to
quantify and more uncertain than other
types of programs. Various methods for
managing this uncertainty, however, are
available to water quality authorities and
other stakeholders in a trading program.
These methods help to ensure that water
quality objectives are achieved.
One approach is to compare nonpoint
source loads using average loads over a
specific time period, such as a season,
year, or low-flow period. Average loads
for various nonpoint sources can highlight
the relative magnitude of spatial, temporal,
and chemical differences.
TMDL margins of safety are another
approach to ensure achievement of water
quality objectives in trade situations by
setting aside a portion of pollutant
allocations. Margins of safety may reflect
uncertainty about the relative effectiveness
of nonpoint source controls where trading
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is an option. Using margins of safety to
structure individual nonpoint/nonpoint
trades can decrease the uncertainty
associated with load reductions from
nonpoint source controls.
Exchange rates, or trading ratios, define the
reduction in pollutant loading at one site
needed to match reductions in loading at
another. Trading ratios can be used for
nonpoint/nonpoint trades where loading
reductions are less certain at one site than
at another (or result in less water quality
improvement). In such situations, a
nonpoint source purchases more than one
unit of off-site load reductions for every
unit of credit received. This "extra"
reduction acts as an insurance policy to
make sure that expected water quality
improvements actually occur.
8.5 Institutional Issues
Institutional support for nonpoint/nonpoint
source trading is key to successful trades.
Institutions involved can be as numerous
and diverse as the types of nonpoint
sources in a watershed. Typically,
management of nonpoint sources is based
on the economic sector (e.g., farming,
forestry, etc.) and/or jurisdiction (e.g., city,
county, special district).
The result is often a patchwork of
oversight and assistance, which requires
coordinated efforts among institutions.
Overlaps occur frequently where two or
more institutions are involved with the
same nonpoint sources in the same areas.
Just as frequently, different institutions can
be involved in nonpoint source
management on adjacent parcels, but not
coordinate their activities. Further, gaps in
coverage exist for selected categories in
some areas.
Identifying Supporting Institutions
Listing the types of nonpoint sources
located in a trading area helps identify
those institutions which could play a role
in supporting trading. Although specific
institutional structures vary from state to
state, and even at the local level, Exhibit
8.4 lists agencies and departments that
typically manage different types of
nonpoint sources.
Any organization involved with nonpoint
sources that might be trading candidates
should be invited to participate in early
discussions about trading. Other
stakeholders can benefit from their
knowledge and expertise about particular
nonpoint sources and BMPs. Additionally,
such participation ensures that nonpoint
trading is examined as broadly as possible
before eliminating any sources or locations
from consideration.
Once it becomes clear which nonpoint
sources are likely to be trading partners
(e.g., agriculture with agriculture, septic
with agriculture), institutions not currently
involved with those sources opt out of
playing a significant role in trading.
Nevertheless, keeping them informed
about trading developments provides
opportunities for them to identify future
trading possibilities.
Coordinating Institutions
Achieving sufficient coordination among
participants may be particularly
challenging for nonpoint source trading.
Many organizations involved in nonpoint
source management work with specific
nonpoint sources; communication among
the organizations is limited. Therefore,
when trading partners are similar with
respect to category, activity, location, and
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EXHIBIT 8.4: INSTITUTIONS THAT MANAGE VARIOUS TYPES OF NONPOINT SOURCES
Nonpoint Sources
Agricultural runoff
Silvicultural runoff
Urban runoff and
construction activities
Septic systems*
Residential urban runoff
Marinas and recreational
boating*
Hydrom odification
Institutions
Natural Resource Conservation Service, state agriculture or soil and
water
conservation agencies, water conservation districts
National Forest Service, state forestry agencies
State and local permitting authorities, including land use planning and
zoning departments/boards
State and local public health departments
State and local environmental protection departments, consumer
protection
and education offices
U.S. Coast Guard, state and local natural resource offices
U.S. Army Corps of Engineers, delegated Section 404 states, local
governments, navigation districts
* Although nonpoint sources, these can fall under regulation by the NPDES program.
jurisdiction, coordination is relatively easy;
when trading partners are dissimilar with
respect to these factors, coordination is
more challenging.
Coordination challenges often can be met
with minimal additional effort.
Stakeholders can identify a lead
organization to facilitate coordination and
clarify responsibilities.
Candidates for this role include
organizations with permitting authority or
with management responsibility for areas
where traded BMPs will be implemented,
as well as umbrella institutions such as
watershed organizations and regional
planning commissions. Nonprofit
environmental organizations also typically
are involved with many different sources.
Other mechanisms to enhance coordination
include work groups, task forces, and
information sharing. Exhibit 8.5 illustrates
roles in one nonpoint/nonpoint trading case
study.
8.6 Administrative Issues
In most areas, regulatory and
nonregulatory nonpoint source
management programs provide a
framework for trading. Trading is most
successful when it is integrated into
existing regulatory and management
frameworks, making changes or adding
new responsibilities when necessary.
Nonpoint/nonpoint source trading may
require the following types of
administrative support:
• Establishing guidelines for trading
(e.g., eligibility, trading ratios).
• Information management and
dissemination.
• Facilitation and brokering.
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EXHIBIT 8.5. INSTITUTIONAL ROLES IN A
POTENTIAL SELENIUM TRADING
PROGRAM
In a study examining the feasibility of using
economic incentives to control nonpoint
source pollution from subsurface farm
drainage in California's Central Valley, the
Environmental Defense Fund (of a) proposed
a program that relies on trading. The
Regional Water Quality Control Board
would specify a TMDL for selenium in the
San Joaquin River and then assign
allocations (essentially LAs) to regional
drainage districts, or directly to water
districts (in the absence of a regional
district) in the form of discharge permits.
The regional districts would then allocate
LAs among contributing water and drainage
districts. The trading program would provide
an additional opportunity to adjust load
allocations. Through trades, districts could
achieve a cost-effective distribution of
pollution reduction responsibility (which
may change from year to year) and resolve
any equity issues resulting from the initial
allocation. The regional drainage districts
would assist member districts by identifying
potential trades, recording transactions, and
enforcing permit limits.
Source: Plowing New Ground: Using
Economic Incentives to Control Water Pollution
from Agriculture Environmental Defense Fund
(T. Young and C. Congdon), 1994, pp 126-127.
• Tracking and documentation.
• Technical assistance and outreach.
• Coordination among participants.
Administrative needs differ for
nonpoint/nonpoint trades that involve at
least one permitted party compared to
trading strictly among unregulated
partners.
Administration When One Party Is
Regulated
When at least one party to nonpoint trading
operates under the conditions of a state
requirement or local ordinance, trading can
be fully or partially administered through
the applicable requirements.
Usually, construction, operating, and other
types of requirements that cover nonpoint
sources include the following information
that is useful to support trading:
• Name and address, and site address if
different.
• Required BMPs (identified as
performance- or design-based),
performance standards, and
mitigation/restoration.
• Location of BMP/restoration project if
off-site.
• Special off-site conditions (e.g., two
acres off-site equal one acre on-site,
monitoring, reporting).
• General conditions for compliance.
• Inspection rights.
• Enforcement measures.
If programs already offer off-site options
under certain circumstances (and in effect
have a trading program),
nonpoint/nonpoint trading can be
administered easily through this existing
option. If off-site options are currently
unavailable, areas considering trading can
look to other jurisdictions offering off-site
options as models. It might be appropriate
to supplement existing requirements with
additional site-specific information to
ensure that water quality managers and
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nonpoint source owners are aware of
trading activities.
When BMPs are implemented at different
sites than they would be in the absence of
trading, authorities and nonpoint sources
can involve appropriate organizations in a
variety of ways to facilitate trading and
maximize effectiveness. Options to
involve other organizations include sharing
information, engaging them in identifying
trading opportunities, and assigning them
responsibility for oversight, monitoring,
and/or technical assistance.
Administration When Both Parties Are
Unregulated
Trades involving unregulated nonpoint
sources may generally rely on existing
technical and financial assistance networks
to help administer trading. In many areas,
assistance is available to nonpoint sources
that implement BMPs voluntarily.
Trading is easier to administer between
nonpoint sources covered by the same
program. Cross-source trading is more
difficult to administer since partners may
be unfamiliar with each other, and different
programs may be incompatible.
8.7 Accountability and Enforcement
Trading programs function differently
depending on the regulatory status of
partners involved. For example, when
regulated nonpoint sources trade with each
other, permitting authorities want to be
sure that each party to a trade fully meets
applicable permit conditions. Permitting
authorities can specify trading
arrangements as permit conditions for
nonpoint sources involved in trading.
Where regulated nonpoint sources trade
with unregulated nonpoint sources, permits
could specify that regulated parties are
responsible for off-site BMP
implementation. This provides the permit
authority control over water quality.
Alternatively, nonpoint source
owners/managers or third parties can
accept responsibility for BMPs through
contracts or other agreements.
One way nonpoint/nonpoint trading can
increase the effectiveness of BMPs is by
targeting implementation at a place and/or
source where the level of accountability
and enforcement is higher than it is on-site.
BMP effectiveness is dependent, in part,
on proper installation and maintenance.
This includes holding nonpoint sources
accountable when implementation is
poorly executed and enforcing that
accountability.
Nonpoint Source Accountability and
Enforcement Are Limited
One distinguishing feature of nonpoint/
nonpoint source trading is that pollutant
control requirements are almost always
technology-based or performance-based, as
opposed to water quality-based. Nonpoint
sources satisfy requirements by
implementing and maintaining required
BMPs. If BMPs are properly implemented
and maintained but do not provide the
expected level of pollutant control,
nonpoint sources are generally not required
to take additional measures.
Other limitations also may decrease the
accountability of nonpoint sources
involved in trading. Many regulatory
programs have insufficient resources to
conduct inspections to ensure that BMPs
and restoration projects are properly
installed and maintained over time. As a
May 1996 Draft
8-15
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result, full advantage is not always taken of
existing enforcement authority.
Additionally, when problems are
identified, it may be impractical or
infeasible to initiate enforcement actions
for a number of reasons (e.g., business
closure ). Even when enforcement occurs,
remediation can take a long time.
Sometimes, the only leverage managers
have over nonpoint sources that install or
maintain BMPs improperly is to reduce or
eliminate certain technical assistance,
financial support, or eligibility for other
programs.
Several approaches, listed in Exhibit 8.6,
can be used to enhance existing
accountability and enforcement for
nonpoint/nonpoint trading. Accountability
is also discussed in more detail in Chapter
7.
8.8 Worksheet/Checklist
The following checklist outlines key
questions to consider in implementing a
nonpoint/nonpoint source trading program.
It is not necessary for each of these
questions to be answered favorably for
trading to succeed. The chances for
success will be greatest, however, if all
interested parties are aware of these issues
and take them into account as they pursue
the potential benefits of a trading program.
EXHIBIT 8.6: APPROACHES FOR ENHANCING
ACCOUNTABILITY AND ENFORCEMENT
• Select sites where BMPs are visible and
easily monitored.
• Select sources where a commitment to
operation and maintenance exists.
• Require the posting of a performance
bond.
• Execute contracts or agreements that
specify responsibilities and enforcement
consequences.
• Vest accountability in the off-site
landowner.
• Vest accountability in a third party.
• Monitor BMP performance periodically
to detect problems and provide
assistance.
• Use economic, political, public relations,
and other incentives to ensure full
implementation.
• Provide interested volunteers with
information on BMP location
maintenance.
May 1996 Draft
8-16
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WORKSHEET FOR EVALUATING SUCCESS OF NONPOINT/NONPOINT SOURCE TRADING
Legal and Regulatory Conditions
General:
Is nonpoint/nonpoint source trading implemented within the context of state or local
regulations and management plans?
Specific:
Are certain types of nonpoint sources required to implement specific BMPs to control
pollutant discharges?
Are local or state permits flexible enough to allow trading among nonpoint sources?
Do trades comply with the conditions in permits?
Are there unregulated nonpoint sources available to trade with regulated sources?
yes
no
yes
no
yes
no
yes
no
yes
no
Economic Conditions
General:
Can nonpoint sources save or make money by trading (i.e., are there economic incentives
to trade)?
Specific:
• Do total incremental costs for BMPs, which include direct incremental costs and
transaction costs, differ among nonpoint sources?
Do cost differentials among nonpoint sources allow one discharger to implement BMPs
more cheaply than another?
Are transaction costs less than cost savings from a trade?
Do cost savings from trading outweigh the uncertainties that nonpoint sources face under
trading schemes?
Is there a sufficient supply of BMP implementation for sale, ras well as a reasonable
demand to buy BMP credits?
yes
no
yes
no
yes
no
yes
no
yes
no
yes
no
Data Availability Conditions
General:
Are the data necessary to implement a trading program available or estimable?
Are there enough data to understand pollution quantities and flows within the watershed
(e.g., have water quality authorities conducted a TMDL that includes load allocations)?
Can regulatory authorities monitor water quality under trading?
Can nonpoint sources and regulatory agencies calculate or estimate the water quality
effects of BMPs?
Can nonpoint sources or regulatory agencies calculate or estimate the costs of
implementing various types of BMPs?
Can a regulatory agency calculate the average cost of all BMPs for a watershed, if a
banking system is planned?
Can nonpoint sources estimate transaction costs that they would have to pay to conduct
trades?
yes
no
Specific:
yes
no
yes
no
yes
no
yes
no
yes
no
yes
no
-------
Administrative and Institutional Conditions
General:
• Are governmental authorities and potential trading participants capable of administering yes
a trading program? no
Specific:
• Do governmental authorities have enforcement mechanisms to ensure trades are being yes
implemented correctly? no
• Are governmental authorities with expertise in different types of nonpoint sources yes
available to help administer trading programs? no
• Is a governmental agency capable of operating a bank or fund for purchasing BMPs, if a yes
banking-style trading program is desired? no
• Are responsibilities clearly defined for administering institutions and nonpoint sources yes
taking part in trading? no
• Is the scope of administrative infrastructure compatible with the amount and complexity yes
of the trading that is expected? no
• Is accountability for implementation and success of BMPs clearly established? yes
no
• Can the agency responsible for enforcing trading provisions give necessary feedback to yes
parties responsible for water quality? no
May 1996 Draft
8-18
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GLOSSARY
Acute: A stimulus severe enough to rapidly induce an effect; in aquatic toxicity tests, an effect observed
in 96 hours or less typically is considered acute. When referring to aquatic toxicology or human health,
an acute effect is not always measured in terms of lethality.
Advanced Wastewater Treatment: Any treatment of sewage that goes beyond the secondary or
biological water treatment stage and includes the removal of nutrients such as phosphorus and nitrogen
and a high percentage of suspended solids. ( See: primary, secondary treatment.)
Agricultural Pollution: Farming wastes, including runoff and leaching of pesticides and fertilizers;
erosion and dust from plowing; improper disposal of animal manure and carcasses; crop residues; and
debris.
Anti-degradation: Policies that are part of each state's water quality standards. These policies are
designed to protect water quality and provide a method of assessing activities that may impact the
integrity of the waterbody.
Assimilative Capacity: The capacity of a natural body of water to receive wastewaters or toxic
materials without deleterious effects and without damage to aquatic life or humans who consume the
water.
Benefits: A good, service, or attribute of a good or service that promotes or enhances the well-being of
an individual, an organization, or a natural system.
Best Management Practices (BMPs): Schedules of activities, prohibitions of practices, maintenance
procedures, and other management practices to prevent or reduce the pollution of waters of the United
States. BMPs also include but are not limited to treatment requirements, operating procedures, and
practices to control plant site runoff, spillage or leaks, sludge or wastewater disposal, or drainage from
raw material storage.
Bioaccumulation: The process by which a contaminant accumulates in the tissues of an individual
organism. For example, certain chemicals on food eaten by a fish tend to accumulate in its liver and
other tissues.
Bioavailable: The state of a toxicant such that there is increased physicochemical access to the toxicant
by an organism. The less the bioavailability of a toxicant, the less its toxic effect on an organism.
Categorical Pretreatment Standard: A technology-based effluent limitation for an industrial facility
discharging into a municipal sewer system. Analogous in stringency to Best Availability Technology
(BAT) for direct discharges.
Chronic: A stimulus that lingers or continues for a relatively long period of time, often one-tenth of the
life span or more. Chronic should be considered a relative term depending on the life span of an
organism. The measurement of a chronic effect can be reduced growth, reduced reproduction, etc., in
addition to lethality.
Clean Water Act (CWA): The Clean Water Act (formerly referred to as the Federal Water Pollution
Control Act or Federal Water Pollution Control Act Amendments of 1972), Public Law 92-500, as
amended by Public Law 96-483 and Public Law 97-117, 33 U.S.C. 1251 et seq.
Glossary -1
-------
Coastal Zone: Lands and waters adjacent to the coast that exert an influence on the uses of the sea and
its ecology, or whose uses and ecology are affected by the sea.
Combined Sewer Overflow: Discharge of a mixture of stormwater and domestic waste when the flow
capacity of a sewer system is exceeded during rainstorms.
Concentration-Based Limit: A limit based on the relative strength of a pollutant in a wastestream,
usually expressed in milligrams per liter (mg/1).
Continuous Discharge: A discharge that occurs without interruption throughout the operation hours of
the facility, except for infrequent shutdowns for maintenance, process changes, or other similar
activities.
Control Authority: A POTW with an approved pretreatment program or the Approval Authority in the
absence of a POTW pretreatment program.
Conventional Pollutants: Statutorily listed pollutants understood well by scientists. These may be in
the form of organic waste, sediment, acid, bacteria, viruses, nutrients, oil and grease, or heat.
Created Wetland: A wetland intentionally created from a non-wetland site to produce or replace
natural habitat (e.g., a compensatory mitigation project). These wetlands are normally considered waters
of the United States or waters of the state. (See restoration, enhancement, constructed wetland.)
Designated Uses: Those water uses identified in state water quality standards that must be achieved and
maintained as required under the Clean Water Act. Uses can include cold water fisheries, public water
supply, irrigation, and others.
Direct Runoff: Water that flows over the ground surface or through the ground directly into streams,
rivers, and lakes.
Discharge Monitoring Report (DMR): The EPA uniform national form, including any subsequent
additions, revisions, or modifications, for the reporting of self-monitoring results by permittees. DMRs
must be used by approved states as well as by EPA.
Discharge: Flow of surface water in a stream or canal or the outflow of groundwater from a flowing
artesian well, ditch, or spring. Can also apply to discharge of liquid effluent from a facility or to
chemical emissions into the air through designated venting mechanisms.
Ecosystem: A biological community together with the physical and chemical environment with which it
interacts.
Effluent: Wastewater, treated or untreated, that flows out of a treatment plant, sewer, or industrial
outfall.
Effluent Guidelines: Technical EPA documents that set effluent limitations for given industries and
pollutants.
Effluent Limitation: Restrictions established by a state or EPA on quantities, rates, and concentrations
in wastewater discharges.
Enhancement: In the context of restoration ecology, any improvement of a structural or functional
attribute.
Glossary -2
-------
Feedlot: A confined area for the controlled feeding of animals. Tends to concentrate large amounts of
animal waste that cannot be absorbed by the soil and, hence, may be carried to nearby streams or lakes
by rainfall runoff.
Groundwater: The supply of fresh water found beneath the earth's surface, usually in aquifers, which
supply wells and springs. Because groundwater is a major source of drinking water, there is growing
concern over contamination from leaching agricultural or industrial pollutants and leaking underground
storage tanks.
Heavy Metals: Metallic elements, such as mercury, lead, nickel, zinc, and cadmium, that are of
environmental concern because they do not degrade over time. Although many are necessary nutrients,
they are sometimes magnified in the food chain and in high concentrations can be toxic to life.
Indirect Discharge: A nondomestic discharge introducing pollutants to a publicly owned treatment
works.
Industrial User (IU): A source of indirect discharge that does not constitute "discharge of pollutants"
under regulations issued pursuant to section 402 of the Clean Water Act.
Irrigation Return Flow: Surface and subsurface water that leaves a field following the application of
irrigation water.
Irrigation: Applying water or wastewater to land areas to supply the water and nutrient needs of plants.
Land Application: Discharge of wastewater onto the ground for treatment or reuse. (See: irrigation)
Landfills: 1. Sanitary landfills are disposal sites for nonhazardous solid wastes spread in layers,
compacted to the smallest practical volume, and covered by material applied at the end of each operation
day. 2. Secure chemical landfills are disposal sites for hazardous waste, selected and designed to
minimize the chance of release of hazardous substances into the environment.
Leachate: Water that collects contaminants as it trickles through wastes, pesticides, or fertilizers.
Leaching can occur in farming areas, feedlots, and landfills and can result in hazardous substances
entering surface water, groundwater, or soil.
Leachate Collection System: A system that gathers leachate and pumps it to the surface for treatment.
Load Allocation (LA): The portion of a receiving water's loading capacity that is attributed either to
one of its existing or future nonpoint sources of pollution or to natural background sources. Load
allocations are best estimates of the loading, which can range from reasonably accurate estimates to
gross allotments, depending on the availability of data and appropriate techniques for predicting the
loading. Wherever possible, natural and nonpoint source loads should be distinguished. (40 CFR
130.2(g))
Loading Capacity (LC): The greatest amount of loading that a water can receive without violating
water quality standards.
Margin of Safety (MOS): A required component of the TMDL that accounts for the uncertainty about
the relationship between the pollutant loads and the quality of the receiving waterbody (C WA section
303(d)(l)(C)). The MOS is normally incorporated into the conservative assumptions used to develop
TMDLs (generally within the calculations or models) and approved by EPA either individually or in
state/EPA agreements. If the MOS needs to be larger than that which is allowed through the
conservative assumptions, additional MOS can be added as a separate component of the TMDL (in this
case, quantitatively, a TMDL = LC = WLA + LA + MOS)
Glossary -3
-------
Mass-Based Standard: A discharge limit that is measured in a mass unit such as pounds per day.
Mitigation: Actions taken to avoid, reduce, or compensate for the effects of environmental damage.
Among the broad spectrum of possible actions are those which restore, enhance, create, or replace
damaged ecosystems.
Monitoring: Periodic or continuous surveillance or testing to determine the level of compliance with
statutory requirements and/or pollutant levels in various media or in humans, plants, and animals.
National Pollutant Discharge Elimination System (NPDES): The national program for issuing,
modifying, revoking and reissuing, terminating, monitoring, and enforcing permits, and imposing and
enforcing pretreatment requirements, under Sections 307, 402, 318, and 405 of the Clean Water Act.
Nonpoint Source: Diffuse pollution sources (i.e., without a single point of origin or not introduced into
a receiving stream from a specific outlet). The pollutants are generally carried off the land by
stormwater. Common nonpoint sources are agriculture, forestry, urban, mining, construction, dams,
channels, land disposal, saltwater intrusion, and city streets.
Permit: An authorization, license, or equivalent control document issued by EPA or an approved state
agency to implement the requirements of an environmental regulation; e.g., a permit to operate a
wastewater treatment plant or to operate a facility that may generate harmful emissions.
Point Source: Any discernible confined and discrete conveyance, including, but not limited to, any
pipe, ditch, channel, tunnel, conduit, well, discrete fissure, container, rolling stock, concentrated animal
feeding operation, landfill leachate collection system, vessel, or other floating craft from which
pollutants are or may be discharged. This term does not include return flows from irrigated agriculture
or agricultural stormwater runoff.
Pollutant: A contaminant in a concentration or amount that adversely alters the physical, chemical, or
biological properties of the environment. The term includes pathogens, toxic metals, carcinogens,
oxygen-demanding materials, and all other harmful substances. With reference to nonpoint sources, the
term is sometimes used to apply to contaminants released in low concentrations from many activities that
collectively degrade water quality. As defined in the federal Clean Water Act, pollutant means dredged
spoil; solid waste; incinerator residue; sewage; garbage; sewage sludge; munitions; chemical wastes;
biological materials; radioactive materials; heat; wrecked or discarded equipment; rock; sand; cellar dirt;
and industrial, municipal, and agricultural waste discharged into water.
Pollution: Generally, the presence of matter or energy whose nature, location, or quantity produces
undesired environmental effects. Under the Clean Water Act, for example, the term is defined as the
man-made or man-induced alteration of the physical, biological, chemical, and radiological integrity of
water.
Pretreatment: The reduction of the amount of pollutants, the elimination of pollutants, or the alteration
of the nature of pollutant properties in wastewater to a less harmful state prior to or in lieu of discharging
or otherwise introducing such pollutants into a publicly owned treatment works.
Primary Treatment: A basic wastewater treatment method that uses settling, skimming, and (usually)
chlorination to remove solids, floating materials, and pathogens from wastewater. Primary treatment
typically removes about 35 percent of biochemical oxygen demand (BOD) and less than half of the
metals and toxic organic substances.
Privately Owned Treatment Works: Any device or system that is (a) used to treat wastes from any
facility whose operator is not the operator of the treatment works and (b) not a POTW.
Glossary -4
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Public Comment Period: The time allowed for the public to express its views and concerns regarding
action by EPA (e.g., a Federal Register notice of a proposed rule-making, a public notice of a draft
permit, or a Notice of Intent to Deny).
Publicly Owned Treatment Works (POTW): Any device or system used in the treatment (including
recycling and reclamation) of municipal sewage or industrial wastes of a liquid nature that is owned by a
state or municipality. This definition includes sewers, pipes, or other conveyances only if they convey
wastewater to a POTW providing treatment.
Restoration: Return of an ecosystem to a close approximation of its condition prior to disturbance.
Riparian Areas: Areas bordering streams, lakes, rivers, and other watercourses. These areas have high
water tables and support plants that require saturated soils during all or part of the year. Riparian areas
include both wetland and upland zones.
Riparian Vegetation: Hydrophytic vegetation growing in the immediate vicinity of a lake or river close
enough so that its annual evapotranspiration represents a factor in the lake or river regime.
Riparian Zone: The border or banks of a stream. Although this term is sometimes used
interchangeably with floodplain, the riparian zone is generally regarded as relatively narrow compared to
a floodplain. The duration of flooding is generally much shorter, and the timing less predictable, in a
riparian zone than in a river floodplain.
Secondary Treatment: The second step in most publicly owned waste treatment systems, in which
bacteria consume the organic parts of the waste. It is accomplished by bringing together waste, bacteria,
and oxygen in trickling filters or in the activated sludge process. This treatment removes floating and
settleable solids and about 90 percent of the oxygen-demanding substances and suspended solids.
Disinfection is the final stage of secondary treatment. (See: primary, tertiary treatment.)
Septic System: An on-site system designed to treat and dispose of domestic sewage. A typical septic
system consists of a tank that receives waste from a residence or business and a system of tile lines or a
pit for disposal of the liquid effluent (sludge) that remains after decomposition of the solids by bacteria
in the tank; must be pumped out periodically.
Sewer: A channel or conduit that carries wastewater and stormwater runoff from the source to a
treatment plant or receiving stream. "Sanitary" sewers carry household, industrial, and commercial
waste. "Storm" sewers carry runoff from rain or snow. "Combined" sewers handle both.
Stormwater: Stormwater runoff, snowmelt runoff, and surface runoff and drainage; rainfall that does not
infiltrate the ground or evaporate because of impervious land surfaces but instead flows onto adjacent
land or watercourses or is routed into drain/sewer systems.
Stream Restoration: Various techniques used to replicate the hydrological, morphological, and
ecological features that have been lost in a stream due to urbanization, farming, or other disturbance.
Surface Runoff: Precipitation, snowmelt, or irrigation water in excess of what can infiltrate the soil
surface and be stored in small surface depressions; a major transporter of nonpoint source pollutants.
Surface Water: All water naturally open to the atmosphere (rivers, lakes, reservoirs, ponds, streams,
impoundments, seas, estuaries, etc.) and all springs, wells, or other collectors directly influenced by
surface water.
Technology-Based Limitations: Industry-specified effluent limitations applied to a discharge when it
will not cause a violation of water quality standards at low stream flows. Usually applied to discharges
into large rivers.
Glossary -5
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Technology-Based Standards: Effluent limitations applicable to direct and indirect sources that are
developed on a category-by-category basis using statutory factors, not including water quality effects.
Tertiary Treatment: Advanced cleaning of wastewater that goes beyond the secondary or biological
stage, removing nutrients such as phosphorus, nitrogen, and most biochemical oxygen demand (BOD)
and suspended solids.
Total Maximum Daily Load (TMDL): The sum of the individual wasteload allocations (WLAs) for
point sources and land allocations (LAs) for nonpoint sources and natural background. If a receiving
water has only one point source discharger, the TMDL is the sum of that point source WLA plus the LAs
for any nonpoint sources of pollution and natural background sources, tributaries, or adjacent segments.
TMDLs can be expressed in terms of mass per time, toxicity, or other appropriate measure that relates to
a state's water quality standard. If best management practices (BMPs) or other nonpoint source pollution
control actions make more stringent load allocations practicable, WLAs can be made less stringent.
Thus, the TMDL process provides for nonpoint source control trade-offs. (40 CFR 130.2(1))
Total Maximum Daily Load (TMDL) Process: The approach normally used to develop a TMDL for a
particular waterbody or watershed. This process consists of five activities, including selection of the
pollutant to consider, estimation of the waterbody «s assimilative capacity, estimation of the pollution
from all sources to the waterbody, predictive analysis of pollution in the waterbody and determination of
total allowable pollution load, and allocation of the allowable pollution among the different pollution
sources in a manner that ensures that water quality standards are achieved.
Toxic Pollutants: Materials that cause death, disease, or birth defects in organisms that ingest or absorb
them. The quantities and exposures necessary to cause these effects can vary widely. Those pollutants
listed by the Administrator under section 307(a) of the Clean Water Act.
Wasteload Allocation (WLA): The portion of a receiving water's loading capacity that is allocated to
one of its existing or future point sources of pollution. WLAs constitute a type of water quality-based
effluent limitation (40 CFR 130.2(h)).
Water Quality Criteria: Levels of water quality expected to render a body of water suitable for its
designated use. Composed of numeric and narrative criteria. Numeric criteria are scientifically derived
ambient concentrations developed by EPA or states for various pollutants of concern to protect human
health and aquatic life. Narrative criteria are statements that describe the desired water quality goal.
Criteria are based on specific levels of pollutants that would make the water harmful if used for drinking,
swimming, farming, fish production, or industrial processes.
Water Quality Standard: A law or regulation that consists of the beneficial designated use or uses of a
waterbody or a segment of a waterbody and the water quality criteria that is necessary to protect the use
or uses of that particular waterbody. Water quality standards also contain an anti-degradation policy.
The water quality standard serves a twofold purpose: (a) it establishes the water quality goals for a
specific waterbody and ( b) it is the basis for establishing water quality-based treatment controls and
strategies beyond the technology-based levels of treatment required by sections 301(b) and 306 of the
Clean Water Act, as amended by the Water Quality Act of 1987.
Water Quality-Based Effluent Limitations: Effluent limitations applied to dischargers when mere
technology-based limitations would cause violations of water quality standards. Usually WQBELs are
applied to discharges into small streams.
Water Quality-Based Permit: A permit with an effluent limit more stringent than one based on
technology performance. Such limits may be necessary to protect the designated use of receiving waters
(e.g., recreation, irrigation, industry or water supply).
Glossary -6
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Water Quality-Limited Segments: Those water segments which do not or are not expected to meet
applicable water quality standards even after the application of technology-based effluent limitations
required by sections 301 (b) and 306 of the Clean Water Act (40 CFR 130.29Q). Technology-based
controls include, but are not limited to, best practicable control technology currently available (BPT) and
secondary treatment.
Waterbody Use: A waterbody or a segment of a waterbody can have many uses. Typical uses include
public water supplies, propagation of fish and wildlife, recreational purposes, agricultural use, industrial
use, navigation, and other such uses. EPA does not recognize waste transport as an acceptable use.
Watershed Protection Approach (WPA): The U.S. EPA«s comprehensive approach to managing
water resource areas, such as river basins, watersheds, and aquifers. WPA has four major
features—targeting priority problems, stakeholder involvement, integrated solutions, and measuring
success.
Watershed-Scale Approach: A consideration of the entire watershed, including the land mass that
drains into the aquatic ecosystem.
Watershed: A drainage area or basin in which all land and water areas drain or flow toward a central
collector such as a stream, river, or lake at a lower elevation.
Wetlands: An area that is saturated by surface water or groundwater with vegetation adapted for life
under those soil conditions, as in swamps, bogs, fens, marshes, and estuaries.
Glossary -7
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APPENDIX A—EFFLUENT TRADING IN WATERSHEDS
POLICY STATEMENT
-------
EFFLUENT TRADING IN WATERSHEDS
POLICY STATEMENT
Purpose
In response to President Clinton's Reinventing Environmental Regulation
(March 1995), EPA strongly promotes the use of effluent trading to achieve water
quality objectives and standards. This statement communicates EPA's policy on
effluent trading in watersheds, discusses the benefits of trading, presents an
explanation of several types of effluent trading, and outlines how EPA will be
encouraging trading. This policy is Agency guidance only and does not establish or
affect legal rights or obligations. It does not establish a binding norm and is not finally
determinative of the issues addressed. Agency decisions in any particular case will be
made by applying the law and regulations on the basis of specific facts when permits
are issued.
Policy
EPA will actively support and promote effluent trading within watersheds to
achieve water quality objectives, including water quality standards, to the extent
authorized by the Clean Water Act and implementing regulations. EPA will work
cooperatively with key stakeholders to find sensible, innovative ways to meet water
quality standards quicker and at less overall cost than with traditional approaches
alone. EPA will assure that effluent trades are implemented responsibly so that
environmental progress is enhanced, not hindered.
Benefits
EPA's support of watershed-based trading is anchored to a strong commitment
to achieve and maintain water quality standards. EPA believes that trading is an
innovative way for community stakeholders (e.g., regulated sources, non-regulated
sources, regulatory agencies and the public) to develop more "common sense"
solutions to water quality problems in their watersheds. Effluent trading potentially
offers a number of economic, environmental and social benefits:
Economic Benefits:
Reduces costs for individual sources contributing to water quality
problems.
Allows dischargers to take advantage of economies of scale and
treatment efficiencies that vary from source to source.
Appendix A-l
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Reduces overall cost of addressing water quality problems in the
watershed.
Environmental Benefits:
Achieves equal or greater reduction of pollution for the same or less
cost.
Creates an economic incentive for dischargers to go beyond minimum
pollution reduction and also encourages pollution prevention and the
use of innovative technologies.
Can reduce cumulative pollutant loading, improve water quality,
accommodate growth and prevent future environmental degradation.
Can address the broader environmental goals within a trading area, e.g.,
ecosystem protection, ecological restoration, improved wildlife habitat,
endangered species protection, etc.
Social Benefits:
Encourages dialogue among stakeholders and fosters concerted and
holistic solutions for watersheds with multiple sources of water quality
impairment.
Explanation of Different Types of Effluent Trading
Trading supplements the current regulatory approach. It is a method to attain
and/or maintain water quality standards, by allowing sources of pollution to achieve
pollutant reductions through substituting a cost-effective and enforceable mix of
controls on other sources of discharge. As the Agency improves its understanding of
the opportunities afforded by watershed-based decision making, EPA will provide
information for additional forms of trading.
To take advantage of trading, a point source must be in compliance, and remain
in compliance, with applicable technology-based limits. Intra-plant trades must also
have a technology-based floor, while the technology floor for pretreatment trading is
determined by the categorical standards. EPA expects that most trades will be covered
by Total Maximum Daily Loads (TMDL) or similar watershed-based analysis.1
1 A TMDL provides the water quality analysis and planning process for determining the specific pollution
reductions that are necessary to attain or maintain water quality standards. Under section 303 (d) of the CWA,
States establish TMDLs for impaired waters. The TMDL process includes legal requirements for public
participation and implementation through NPDES permits.
Appendix A-2
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The items to be traded are the pollutant reductions or water quality
improvements sought. Under trading, a source that can more cost-effectively achieve
greater pollutant reduction than is otherwise required would be able to sell or barter the
credits for its excess reduction to another source unable to reduce its own pollutants as
cheaply. To ensure that water quality standards are met throughout a watershed, an
equivalent or better water pollutant reduction would need to result from a trade.
Below are proposed definitions for several different types of effluent trading
approaches. These definitions are preliminary and do not reflect the full range of
feasible trades:
Intra-Plant Trading:
Pretreatment Trading:
Point/Point Source Trading:
Point/Nonpoint Source Trading:
Nonpoint/Nonpoint Source Trading:
A point source is allocated pollutant
discharges among its outfalls in a cost-
effective manner, provided that the combined
permitted discharge with trading is no greater
than the combined permitted discharge
without trading in the watershed.
An indirect industrial point source(s) that
discharges to a publicly owned treatment
works arranges, through the local control
authority, for additional control by other
indirect point sources beyond the minimum
requirements in lieu of upgrading its own
treatment for an equivalent level of reduction.
A point source(s) arranges for other point
source(s) in a watershed to undertake greater
than required control in lieu of upgrading its
own treatment beyond the minimum
technology-based treatment requirements in
order to more cost-effectively achieve water
quality standards.
A point source(s) arranges for control of
nonpoint source discharge(s) in a watershed
in lieu of upgrading its own treatment beyond
the minimum technology-based treatment
requirements in order to more cost-effectively
achieve water quality standards.
A nonpoint source(s) arranges for more cost-
effective control of other nonpoint sources in
Appendix A-3
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a watershed in lieu of installing or upgrading
its own control.
How EPA Will Be Encouraging Trading
EPA is developing a framework for watershed-based effluent trading, as well as
information exchange workshops, and limited technical assistance for trading projects
in specific areas. Watershed-based trading will be implemented on a voluntary basis
under existing Clean Water Act (CWA) authorities. There will be substantial public
outreach effort to obtain stakeholders' recommendations and insights on draft portions
of the framework prior to implementation.
Finally, while EPA believes that the potential of trading is largely untapped, the
usefulness of trading will depend on the site-specific water quality conditions in any
given situation. The framework will describe situations which EPA believes are most
appropriate for watershed-based trading, and those that are generally inappropriate.
EPA plans to distribute a draft trading framework in February, 1996 and hold a
series of stakeholder meetings. For more information call Mahesh Podar at (202)260-
7818, fax (202)401-3372 or send an Email message to herzi.hawa@epamail.epa.gov
ortuano.theresa@epamail.epa.gov.
Attachment
s/
Robert Perciasepe
Assistant Administrator for Water
Steven A. Herman
Assistant Administrator for Enforcement and Compliance Assurance
Jonathan Z. Cannon
General Counsel
Appendix A-4
-------
Attachment
EXPERIENCE TO DATE
Trading is being explored, developed or implemented in a number of
watersheds throughout the country. Some examples are below:
Project/Location
Fox River, WI
Dillon Reservoir, CO
Boulder Creek, CO
Tar-Pamlico, NC
Arkansas Nature Conservancy
Maryland Nontidal Wetlands
Iron and Steel
Rhode Island electroplaters
Chehalis River Basin, WA
Boone Reservoir, TN
Wicomico River, MD
Honey Creek Watershed, OH
South San Francisco Bay, CA
Long Island Sound, NY
Cherry Creek, CO
Tampa Bay, FL
Chatfield Basin, CO
Focus
BOD, nutrients
phosphorus
ammonia,
nutrients
nitrogen,
phosphorus
wetlands
wetlands
BOD, TSS, zinc, and
lead
metals
BOD
nutrients
phosphorus
phosphorus
copper
dissolved oxygen
phosphorus
nitrogen, TSS
phosphorus
Type of Trading
point/point
point/nonpoint; nonpoint/nonpoint
point/nonpoint
point/nonpoint
nonpoint/nonpoint
nonpoint/nonpoint
intra-plant
pretreatment
point/nonpoint
point/nonpoint
point/nonpoint
point/nonpoint
point/point
Point/nonpoint
point/nonpoint; point/point
point/point; point/nonpoint;
nonpoint/nonpoint
point/nonpoint
Appendix A-5
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APPENDIX B—ISSUES FOR FUTURE CONSIDERATION
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ISSUES FOR FUTURE CONSIDERATION
Intra-Plant Trading to Meet Technology-Based Requirements
This framework establishes the principle that sources must meet applicable
technology-based requirements before they are eligible to participate in trades. Below
is an example of the only instance where EPA has allowed trading to meet technology-
based requirements. It is unclear whether future effluent guidelines will allow this
form of intra-plant trading.
INTRA-PLANT TRADING IN THE IRON AND STEEL INDUSTRY
In establishing effluent limitation guidelines for the iron and steel industry, EPA
employed the same procedures it uses in setting technology-based requirements for other
industries. Unlike guidelines for other industries, effluent limitation guidelines for the
iron and steel industry permit a facility to trade discharge allowances among multiple
outfalls. Under these regulations, a facility that reduces pollutant discharges beyond
technology-based requirements at one or more outfalls need not meet technology-based
requirements at other outfalls, provided that total discharges of pollutant(s) involved in
such trades are less than would be discharged under normal uniform technology-based
requirements. This flexibility is designed to allow facilities to reduce their total pollution
control costs, provided that they can simultaneously achieve better overall pollution
control.
EPA regulations have placed the following specific conditions on intra-plant trading in the iron
and steel industry:
1. Resultant discharges comply with applicable state water quality standards.
2. Each outfall is assigned specific, fixed effluent limitations for pollutants affected.
3. Process wastewaters associated with certain iron and steel industry operations are
excluded from trades since trades involving these wastewaters could inadvertently result
in a net increase in quantity of toxic pollutants discharged.
4. The net allowable discharge of traded pollutants is less than the discharge that would be
allowed without the trade. The minimum necessary reduction is approximately 15
percent for total suspended solids and oil and grease, and 10 percent for all other
pollutants.
A recent EPA study identified 10 iron and steel plants that took advantage of the intra-plant
trading rule. These facilities applied trading to wastewater discharges from a range of steel plant
processes, including trades of both conventional pollutants and metals. Estimates of the reduction
in pollution control expenditures attributable to trading are available for only seven of these
facilities. The present value of the cost savings realized at the seven facilities between 1983 and
1993 is approximately $123 million( 1993 dollars). Estimated savings ranged from $3 million at
an East Chicago plant to $69 million at a Gary, Indiana, facility. Moreover, the permits for each
of these facilities established discharge limits more stringent than ordinary technology-based
requirements. At the Gary plant, for example, the permitted daily average discharge of
total suspended solids (TSS) under trading was 2,575 pounds per day lower than would
have been allowed under a standard permit. Trades at other iron and steel facilities have
established more stringent permit limits for lead, zinc, and oil and grease, as well as TSS.
In each case, trades also resulted in significant cost savings.
Source: The Use and Impact of Iron and Steel Industry Intra-Plant Trades , prepared for
the Office of Policy, Planning, and Evaluation, USEPA, March 1994.
-------
Cross-Pollutant Trading
EPA does not currently envision a situation in which "cross-pollutant" trading could
work under current regulatory conditions and technical limitations. Most (if not all)
trades to date have involved the same pollutant, such as nitrogen for nitrogen or
phosphorus for phosphorus. A few communities are investigating cross-pollutant
trading involving different pollutants, such as nitrogen for phosphorus or nitrogen for
zinc.
Sufficient data are often unavailable to enable assessment of the impacts of different
pollutants, and therefore the relative value of pollutant load reductions. Without such
assessment, though, water quality managers are unable to predict the effects of trading.
In the future, when environmental benefits can be thoroughly demonstrated, EPA will
consider the use of cross-pollutant trading.
CROSS POLLUTANT TRADES? CLEANING UP ORPHAN
NONPOINT POLLUTION SOURCES FOR CREDIT
Stakeholders in Colorado *s Clear Creek Basin are examining point/nonpoint source trading
opportunities that could include cross-pollutant trading. Under the proposed program, point
sources could "adopt" (clean up) orphan nonpoint sources in exchange for pollutant loading
reduction credits. Orphan sources fall outside current regulations or have no identifiable
owner or operator. Abandoned mines and areas of habitat destruction are two examples of
orphan sites that are prevalent in the watershed. Such trades could involve translating
reductions of one pollutant or habitat benefits into reduction credits for another pollutant.
Because there are multiple constituents of concerns some stakeholders believe that cross-
pollutant trading could achieve significant environmental improvements. Consider the
example of an industrial facility that faces additional nutrient loading reductions. If cleaning
up an orphan mine site, where loadings contain significant amounts of metal but few
nutrients, could provide nitrogen or phosphorus credits, the point source would probably be
more interested in the trade than if only metals credits were available. Cross-pollutant
trading might require the development of an index or series of trading ratios that would
convert one pollutant or water quality benefit into credits that are desirable to regulated point
sources. Cross-pollutant trades are being considered across (and within) such categories as
nutrients, metals, sediment, habitat, instream flow, and wetlands. The feasibility study is
one of several initiatives sponsored by the National Forum on Nonpoint Source Pollution
Appendix B-2
-------
APPENDIX C—EXAMPLES OF EXISTING AND
POTENTIAL FUTURE TRADING PROGRAMS
-------
Examples of Existing and Potential Future Trading Programs
Table 1. Existing Programs.
Program/Location
What's Being Traded
Trade Type(s)
Arkansas Nature Conservancy, AK
wetlands
nonpoint/nonpoint
How Is It Set Up?
U.S. Army Corps of Engineers (USAGE) permittees pay
compensatory mitigation fees to The Nature
Conservancy. The Conservancy applies these fees to
wetland acquisition and enhancement projects. A
mitigation ratio is based on types of wetlands.
Who's Involved?
USAGE, Little Rock District
(501-324-5296); Arkansas
Nature Conservancy (501-
663-6699).
Status
At least 6 trades had occurred
as of 3/93.
Boulder Creek, CO
ammonia, nutrients
point/nonpoint
The City of Boulder contributed to a riparian enhancement
project (including riparian zone restoration and restoration
of instream habitats) to alleviate an un-ionized ammonia
problem and defer expensive modifications at its POTW.
Studies had shown that POTW upgrades alone would be
insufficient to reach water quality standards due to the
degraded condition of the creek. See TMDL Case Study
#8 (EPA-841-F-93-006; fax requests for document to
NCEPI, 513-569-7186).
Denver Regional Council of
Governments (303-455-
1000); EPA Region 8 (Bruce
Zander 303-312-6846). Also
the City of Boulder and the
Colorado Dept. of Health.
Short-term results look
promising; monitoring is in
place to assess long-term
effects.
Cherry Creek, CO
phosphorus
point/nonpoint
Point sources can earn wasteload allocation credits by
installing, operating, maintaining, and monitoring nonpoint
source phosphorus controls. Before trading may begin,
urban nonpoint source loadings must be reduced by half.
Denver Regional Council of
Governments (303-455-
1000); EPA Region 8 (Bruce
Zander 303-312-6846). Also
the Colorado Water Quality
Control Commission.
Implementation of the program
has been delayed because
nonpoint source loadings are
not yet halved and loadings
are still below the maximum
limit.
Dade County, FL
wetlands
nonpoint/nonpoint
Clean Water Act section 404 permittees impacting
wetlands in specific areas have the option to pay a fee to
satisfy mitigation requirements. Funds go into a Wetlands
Mitigation Trust Fund that supports improvements in the
East Everglades.
USAGE, Jacksonville District
(904-232-3943); Dade
County (305-372-6789).
Also the Florida Department
of Environmental Resource
Management, and
Everglades National Park.
As of 3/93, the fund had
received over $400,000.
Fox River, Wl
BOD, nutrients
point/point
Point sources were allowed to trade effluent allocations,
but only under limited circumstances: the facility buying
reductions must be new, expanding, or not able to meet
discharge limits even with use of required technology.
Trades where cost-savings is the sole objective are
prohibited. Trades are effective for a minimum of one
year, and a maximum of the time left on the permit.
Wsconsin Department of
Natural Resources (608-
266-2621).
The program was first
implemented in 1981, but only
one trade has occurred since
that time.
-------
Examples of Existing and Potential Future Trading Programs
Program/Location
What's Being Traded
Trade Type(s)
Laguna de Santa Rosa, CA
nutrients
point/nonpoint
How Is It Set Up?
The City of Santa Rosa ships treated wastewater to area
dairies and farms for application to pasture and some
food crops. The city initially paid dairies to take the water;
no payments are currently made due to the desirability of
the water for the farms. This allows the city to avoid
discharging during summer months and is also beneficial
to the dairies.
Who's Involved?
EPA Region 9 (Dave Smith
415-744-2012). Also the
City of Santa Rosa, local
dairies and farms, North
Coast Regional Water
Quality Control Board.
Status
The city has upgraded to
tertiary treatment, and a
TMDL was completed for
Laguna de Santa Rosa in
1994. Wastewater transfers
continue and are recognized
in the citys NPDES permit,
but these transactions are not
recognized as "formal" trades.
Lake Dillon, CO
phosphorus
point/nonpoint, nonpoint/nonpoint
At Lake Dillon (previously known as Dillon Reservoir),
Colorado, the four wastewater treatment plants
discharging to the lake can receive credit for phosphorus
load reductions by purchasing nonpoint source
reductions. Currently, nonpoint/nonpoint trades are the
main focus of the program
Northwest Colorado Council
of Governments (970-468-
0295); EPA Region 8 (Bruce
Zander 303-312-6846). Also
the Denver Water Board.
Program began operation in
1984. Improvements in plant
treatment efficiencies and
slower-than-anticipated
growth resulted in few
point/nonpoint source trades.
Maryland Nontidal Wetlands
Compensation Fund, MD
wetlands
nonpoint/nonpoint
The Maryland Department of Natural Resources (MD
DNR) accepts payment in lieu of mitigation under certain
circumstances from Clean Water Act section 404 and
state permittees. Fees are deposited into a trust fund that
pays for larger restoration projects conducted by the
Department and its contractors.
MD DNR (410-974-
2985/3016)
As of 3/93, the state had
completed 15 fee-funded
projects and fee deposits
reached approximately
$200,000.
Ohio Wetlands Foundation, OH
wetlands
nonpoint/nonpoint
The Ohio Wetlands Foundation, a private nonprofit
organization, provides a mechanism to aggregate Clean
Water Act section 404 mitigation requirements and create
larger wetlands habitats. Eligible permittees pay fees to
the foundation in lieu of on-site or other off-site mitigation.
The Foundation administers fees through a trust.
Ohio Wetlands Foundation
(614-228-6647); U.S. Army
Corps of Engineers,
Huntington District (304-529-
5487). Also the Ohio
Homebuilders Association
and Ohio Department of
Natural Resources.
As of 3/93, the Foundation had
not yet collected any fees but
was constructing wetlands
ahead of fee receipt.
Pine Flatwoods Wetlands Mitigation
Trust, LA
wetlands
nonpoint/nonpoint
The Louisiana Nature Conservancy (LNC) accepts fees
from Clean Water Act section 404 permittees as
compensation for unavoidable wetland losses. LNC uses
the fees to support off-site preservation and activities for
long-term management of degraded pine flatwoods
wetlands.
USAGE, New Orleans
District (504-862-2250); LNC
(504-338-1040). Also the
Louisiana Departments of
Natural Resources and
Wldlife and Fisheries, and
theUSFishandWIdlife
Service.
As of 3/93, LNC had collected
over$100,000 under this
program and was about to
make its first purchase.
-------
Examples of Existing and Potential Future Trading Programs
Program/Location
What's Being Traded
Trade Type(s)
Providence, Rl
salt (deicing chemicals)
point/nonpoint (drinking water)
How Is It Set Up?
The Providence, Rhode Island, Water Department is
paying the city's Department of Transportation $60,000 a
year to use alternative deicing chemicals in the supply
source recharge area. The alternative chemicals are
lower in sodium content than those typically used. As a
result, the Water Department is able to meet sodium
standards without resorting to additional in-plant
treatment.
Who's Involved?
Providence Department of
Transportation (401-421-
7740); Providence Water
Department (401-521-6300).
Status
Ongoing.
Tar-Pamlico River Basin, NC
nitrogen
point/point, point/nonpoint
In North Carolina's Tar-Pamlico River Basin, a group of
wastewater treatment plants can receive credit for
nitrogen loading reductions by paying $56 per kilogram of
desired reduction into an Agricultural Cost Share Fund
that supports best management practices in the basin. In
comparison, the dischargers estimated that technological
upgrades would have provided nitrogen reductions at a
cost of between $250 and $500 per kilogram. Notably,
the point sources are treated as if they were a single point
source (the "bubble" approach) for purposes of
implementing the trading program. See TMDL Case
Study #12 (fax requests for document to NCEPI, 513-569-
7186).
Tar-Pamlico Basin
Association (919-551-1500);
NC Dept. of Environment,
Health and Natural
Resources (919-733-5083);
and the Environmental
Defense Fund (919-821-
7793).
The program began operating
in 1992 and has provided
incentive for point sources to
increase operations and
maintenance efficiency. The
ability of point sources to
reduce loads below the limit
through plant operational
improvements resulted in few
trades until recently.
Vicksburg District, U.S. Army Corps of
Engineers, MS
wetlands
nonpoint/nonpoint
The Vicksburg District accepts fees from Clean Water Act
section 404 permittees in lieu of compensation under
certain circumstances. Funds support wetland restoration
and enhancement projects. Past fee recipients include
Ducks Unlimited, The Nature Conservancy, and other
public agencies involved in environmental efforts in
Louisiana and Arkansas.
USAGE, Vicksburg District
(601-631-5276)
As of 3/93, 7 permittees had
participated and contributed
over $150,000.
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Examples of Existing and Potential Future Trading Programs
Table 2. Programs Under Development/Consideration.
Program/Location
What's Being Traded
Trade Type(s)
Chatfield Basin, CO
phosphorus
point/nonpoint
What's Being Considered?
Who's Involved?
Status
Modeling is under way to determine TMDL, potential
responsibilities, and trading potential.
EPA Region 8 (Bruce
Zander 303-312-6846).
Under development.
Chehalis River Basin, WA
pollutant(s) to be determined
point/nonpoint, nonpoint/nonpoint
The Chehalis River was identified as a candidate for
trading in study done for the Washington Department of
Ecology by Apogee Research, Inc. (1992). A
subsequent scoping effort collected additional information
(economic, regulatory, political, etc.) and confirmed
potential for trading. A TMDL for the segment under
consideration has recently been completed, and trading
opportunities remain uncertain.
Washington Department of
Ecology (360-407-3600).
Other stakeholders include
the Chehalis River Council
and three county
conservation districts.
Trading opportunities will
depend on how wasteload and
load allocations are
developed.
Chesapeake Bay tributaries, MD
nitrogen, phosphorus
point/nonpoint, nonpoint/non point
Under the state of Maryland's nutrient reduction strategy
developed for each major tributary to the Chesapeake
Bay, some tributary plans include effluent trading as a
potential option. A pilot project to examine trading
opportunities among six POTWs discharging to the Lower
Potomac River was begun but not completed.
Maryland Department of the
Environment (410-631-
3680); EPA Chesapeake
Bay Program (410-267-
5700).
Tributary-specific and site-
specific issues are still being
analyzed to determine trading
opportunities.
Clear Creek, CO
pollutant(s) to be determined
point/nonpoint
Stakeholders are considering a program where point
sources would "adopt" abandoned nonpoint sources
(primarily mines) and clean up the sites, or otherwise
reduce loadings in exchange for credits that could be
applied to effluent discharge permits. Stakeholders are
initially considering all types of trading, including cross-
pollutant and banking scenarios.
Clear Creek Watershed
Forum (303-692-3513); EPA
Region 8 (Holly Fliniau 303-
293-1603). Other
stakeholders include the
Colorado Dept. of Health
and Coors.
Stakeholders recently
completed a consensus-
building process regarding the
trading concept. Next steps
will involve more detailed
scientific and economic
analysis.
Little Deep Fork
DO, phosphorus
source(s) to be determined
An intensive water quality study was conducted as part of
a TMDL development project and some potential for
trading was identified. The area is generally cattle
country, with some cropland, and urban areas.
Preliminary analysis indicates animal BMPs may
potentially be implemented in lieu of, or to delay, POTW
upgrades.
Indian Nations Council of
Governments (Richard
Smith 918-584-7526);
Oklahoma Conservation
Commission (Phillip
Moershel 405-842-8744).
The TMDL is ongoing. Water
quality managers are currently
characterizing nonpoint
source loading and developing
and implementing BMPs.
Trading is scheduled to be
considered after results of
these efforts are evaluated.
-------
Examples of Existing and Potential Future Trading Programs
Program/Location
What's Being Traded
Trade Type(s)
Sacramento River, CA
metals
Source(s) to be determined
What's Being Considered?
Who's Involved?
Status
Stakeholders are discussing the potential for trading to
address metals loading issues in the Sacramento River
above the City of Sacramento. Interest is primarily due to
high metals loadings from abandoned mines and
agricultural chemicals relative to municipal and
stormwater loadings.
EPA Region 9 (Dave Smith
415-744-2012). Also the
City of Sacramento and the
Central Valley Regional
Water Quality Control Board.
The current focus is to set up
a regional monitoring program
to better assess metals
loading sources and potential
controls. Rough loading
estimates exist. Trades are
unlikely to occur before 1997.
San Joaquin River, CA
selenium
point/point, point/nonpoint
The Environmental Defense Fund (EOF), the state of
California, EPA, and agricultural interests have
investigated options for using tradable discharge permits
to find least- cost solutions to selenium discharge control
problems related to Central Valley irrigated agriculture
operations. See EDF-s "Plowing New Ground" report for
details.
EOF (Terry Young 510-658-
8008). Also irrigation
districts, Central Valley
Water Resources Control
Board, EPA, and the Natural
Resources Defense Council.
Trading may be a year or two
away. EOF has received
another grant to help market
trading. The proposal to
reopen San Luis Drain, an
agricultural tailwater drainage
structure that discharges to
San Joaquin River, will impact
trading issues. The proposed
program might be a vehicle for
setting up load reductions and
drainage districts.
South San Francisco Bay, CA
copper
point/point, point/nonpoint
Three POTWs and a stormwater management agency
were directed by the Regional Water Board to negotiate
how to obtain a 900 Ib/yr copper loading reduction needed
to attain a TMDL The 900 Ib goal is in addition to
individual wasteload allocations already set for each
POTW and the stormwater utility. The four parties were to
report back to the Board regarding how the reduction
target would be met and to identify specific responsibilities
for actions.
EPA Region 9 (Dave Smith
415-744-2012). Also the
Cities of San Jose, Palo Alto,
and Sunnyvale; the Santa
Clara Valley Nonpoint
Source Pollution Control
Program; and the San
Francisco Regional Water
Quality Control Board.
Parties have negotiated a
Memorandum of Agreement
and are now working on a
stormwater source
assessment to fill in
information gaps on
stormwater load reduction
feasibility.
-------
Examples of Existing and Potential Future Trading Programs
Program/Location
What's Being Traded
Trade Type(s)
Tampa Bay, FL
nitrogen, total suspended solids
point/point, point/nonpoint,
nonpoint/nonpoint
What's Being Considered?
Who's Involved?
Status
Several trading initiatives are under consideration. In
one, stakeholders may develop a trading program to
supplement the allocation of nitrogen loads under a
pollutant loading reduction goal. In another, the City of
Tampa is considering a trading scheme under which
some stormwater retrofit requirements placed on
redevelopment projects in specific sections of the city
would be waived. In exchange, either the city or the
developer would contribute funds to a "stormwater bank"
that would pay for larger projects elsewhere in the city.
An offset program for specific tributaries also is being
considered, in which new and expanding point sources
would be required to partially or fully offset their N and/or
TSS loads through trading with other point or nonpoint
sources.
Tampa Bay National Estuary
Program (813-893-2765).
Other stakeholders include
Tampa Bay Regional
Planning Council; City of
Tampa; and other industrial,
municipal, and agricultural
interests.
Trading is under
consideration; implementation
will depend on a variety of
scientific, economic, and
political issues.
Truckee River, NV
nitrogen and flows
point/nonpoint
A not-yet-signed agreement among the U.S. Department
of the Interior (DOI), EPA, the state of Nevada, Reno-
Sparks municipal government, and the Pyramid Lake
Paiute Tribe will provide for DOI and Reno-Sparks to each
pay $12 million per year to acquire water rights to be
dedicated to instream flow down to Pyramid Lake. In
exchange for city water purchases, Nevada would revise
a TMDL and permits to allow increased nitrogen
discharge to take advantage of increased assimilative
capacity associated with flow augmentation. Reno-
Sparks is seeking a State Revolving Fund (SRF) loan to
finance water purchases. In a related effort, EPA
provided a grant to the University of California-Berkeley to
study the potential use of economic incentives for
pollution control for the Truckee River.
EPA Region 9 (Dave Smith
415-744-2012, Cheryl
McGovern 415-744-2013);
University of California at
Berkeley (510-643-5364).
Also DOI, Nevada Division of
Environmental Protection,
Reno-Sparks, Indian tribes.
The details of this program are
still being worked out. The
tribe is concerned that the city
wants to allocate all of the
increased assimilative
capacity to its wasteload
allocation (despite paying only
half the cost) and prefers to
keep much of the loading
capacity in reserve
unallocated. Some concerns
about model accuracy and
whether the river is now
complying with water quality
standards also exist.
Yakima River Basin, WA
pollutant(s) to be determined
pource(s) to be determined
Battelle-s Pacific Northwest Laboratory is working with
stakeholders in the basin to address pollutant and water
quantity issues, and trading pollutants and/or water rights
may be part of the solution. In an unrelated study
commissioned by the Washington Department of Ecology,
the Yakima River was identified as a candidate for
point/nonpoint source trading (See Chehalis River above).
Battelle (509-372-4342).
Other stakeholders include:
the WA Department of
Ecology, the Bureau of
Reclamation the Yakama
Indian Nation; and a
watershed council.
Modeling capabilities are
under development and
preliminary analysis is under
way.
-------
Examples of Existing and Potential Future Trading Programs
Table 3. EPA Studies.
Program/Location
What's Being Traded
Trade Type(s)
Boone Reservoir, TN
nutrients
point/nonpoint
What's Being Considered?
Who's Involved?
Status
This study examined the cost-effectiveness of both point
and nonpoint source controls (Sobatka, 1989). The study
concluded that the most cost-effective means of
controlling phosphorus, nitrogen, and BOD involved a
combination of point and nonpoint source controls.
Several agricultural BMPs were among the least
expensive choices, followed by upgrades at selected
POTWs. BMPs for unconfined animals, urban BMPs, and
septic tank renovations were among the most expensive.
EPA Office of Policy,
Planning, and Evaluation
(202-260-5363) sponsored
the study. Study conducted
in conjunction with
Tennessee Valley Authority.
No program developed.
Wicomico River, MD
phosphorus
point/nonpoint
This case study simulation estimated the potential cost
savings from point/nonpoint source trading in the
Wicomico Basin (Industrial Economics, 1987). The
results demonstrated that trading offers potentially
significant cost savings and water quality benefits.
EPA Office of Policy,
Planning, and Evaluation
(202-260-5363) sponsored
the study.
No program developed.
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APPENDIX D—REFERENCES
-------
REFERENCES
USEPA. 1984. Technical Guidance Manual
for Performing Waste Load Allocations - Book
11 Streams and Rivers - Chapter 1 Biochemical
Oxygen Demand/Dissolved Oxygen. EPA
440/4-84-020. U.S. Environmental Protection
Agency, Office of Water, Washington, DC.
USEPA. 1984. Technical Guidance Manual
for Performing Waste Load Allocations - Book
II Streams and Rivers - Chapter 2
Nutrient/Eutrophication Impacts. EPA 440/4-
84-021. U.S. Environmental Protection
Agency, Office of Water, Washington, DC.
USEPA. 1984. Technical Guidance Manual
for Performing Waste Load Allocations - Book
II Streams and Rivers - Chapter 3 Toxic
Substances. EPA 440/4-84-022. U.S.
Environmental Protection Agency, Office of
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USEPA. 1984. Technical Guidance Manual
for Performing Waste Load Allocations - Book
IV Lakes and Impoundments - Chapter 2
Nutrient/Eutrophication Impacts. EPA 440/4-
84-019. U.S. Environmental Protection
Agency, Office of Water, Washington, DC.
USEPA. 1984. Technical Guidance Manual
for Performing Waste Load Allocations - Book
VII: Permit Aver aging. EPA 440/4-84-023.
U.S. Environmental Protection Agency, Office
of Water, Washington, DC.
USEPA. 1987. Technical Guidance Manual
for Performing Waste Load Allocations - Book
IV Lakes and Impoundments - Chapter 3 Toxic
Substances Impacts. EPA 440/4-87-002. U.S.
Environmental Protection Agency, Office of
Water, Washington, DC.
USEPA. 1991. Guidance for Water Quality-
based Decisions: The TMDL Process. EPA
440/4-91-001. U.S. Environmental Protection
Agency, Office of Water. Washington, DC.
USEPA. 1991. Technical Support Document
For Water Quality-based Toxics Control.
EPA/505/2-90-001. U.S. Environmental
Protection Agency, Office of Water.
Washington, DC.
USEPA. 1992. A Quick-Reference Guide:
Developing Nonpoint Source Load Allocations
forTMDLs. EPA 841-B-92-001. U.S.
Environmental Protection Agency, Office of
Water. Washington, DC.
USEPA. 1992. Incentive Analysis for Clean
Water Act Reauthorization: Point
Source/Nonpoint Source Trading for Nutrient
Discharge Reductions. Prepared for the EPA
Offices of Water and Policy, Planning, and
Evaluation, April 1992.
USEPA. 1992. Technical Guidance Manual
for Performing Waste Load Allocations - Book
III Estuaries - Part 1 - Estuaries and Waste
Load Allocation Models. EPA 823-R-92-003.
U.S. Environmental Protection Agency, Office
of Water, Washington, DC.
USEPA. 1992. Technical Guidance Manual
for Performing Waste Load Allocations - Book
III Estuaries - Part 2 - Application ofEstuarine
Waste Load Allocation Models. EPA 823-R-
Appendix D-l
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92-003. U.S. Environmental Protection
Agency, Office of Water, Washington, DC.
USEPA. 1992. Technical Guidance Manual
for Performing Waste Load Allocations - Book
III Estuaries - Part 3 - Use of Mixing Zone
Models in Estuarine Waste Load Allocations.
EPA 823-R-92-004. U.S. Environmental
Protection Agency, Office of Water,
Washington, DC.
USEPA. 1992. Technical Guidance Manual
for Performing Waste Load Allocations - Book
III Estuaries - Part 4 - Critical Review of
Coastal Embayment and Waste Load Allocation
Modeling. EPA 823-R-92-005. U.S.
Environmental Protection Agency, Office of
Water, Washington, DC.
USEPA. 1993. Guidance Specifying
Management Measures For Sources of
Nonpoint Pollution In Coastal Waters. EPA
840-B-92-002. U.S. Environmental Protection
Agency, Office of Water. Washington, DC.
USEPA. 1992. Compendium of Watershed-
Scale Models for TMDL Development. EPA
841-R-92-002. U.S. Environmental Protection
Agency, Office of Water. Washington, DC.
USEPA. 1993. Guidance Specifying
Management Measures For Sources of
Nonpoint Pollution in Coastal Waters. EPA
840-B-92-002. U.S. Environmental Protection
Agency, Office of Water, Washington, DC.
for the U.S. Environmental Protection Agency,
Office of Policy, Planning, and Evaluation,
Washington, DC.
USEPA. 1994. Water Quality Standards
Handbook. Second Edition. EPA 823-B-94-
005a. Office of Water, U.S. Environmental
Protection Agency, Washington, DC.
USEPA. 1995. Revised Draft Lake Michigan
Lakewide Management Plan For Toxic
Pollutants. Draft. U.S. Environmental
Protection Agency, Region 5, Chicago, Illinois.
USEPA. 1995. Watershed Protection: A
Project Focus. Draft U.S. Environmental
Protection Agency, Office of Water.
Washington, DC.
USEPA. 1995. Watershed Protection: A
Statewide Approach. EPA 841-R-95-004. U.S.
Environmental Protection Agency, Office of
Water. Washington, DC.
USEPA. 1995. Final Water Quality Guidance
for the Great Lakes. U.S. Environmental
Protection Agency. Federal Register, Thursday
March 23, 1995. 40CFRParts9, 122, 123,
131, 132.
Young, T. and C. Congdon. 1994. Plowing
New Ground: Using Economic Incentives to
Control Water Pollution from Agriculture.
Environmental Defense Fund. pp. 126-127.
USEPA. 1994. President Clinton's Clean
Water Initiative. EPA 800-R-002. U.S.
Environmental Protection Agency, Office of
Water. Washington, DC.
USEPA. 1994. The Use and Impact of Iron
and Steel Industry Intra-Plant Trades., prepared
Appendix D-2
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