United States
Environmental Protection
Agency
Policy, Planning,
And Evaluation
(2128)
EPA 231-R 98-003
May 1 998
Sharing The Load:
Effluent Trading For
Indirect Dischargers
1\ Passaic Valley
Sewerage Commissioners
New Jersey
Department
Environmental Protection
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SHARING THE LOAD:
Effluent Trading for Indirect Dischargers
Lessons from the New Jersey Chemical Industry Project-
Effluent Trading Team
Final Report
May, 1998
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TABLE OF CONTENTS
PREFACE i
ACKNOWLEDGMENTS ii
INTRODUCTION AND SUMMARY CHAPTER 1
The Effluent Trading Pilot 1-1
Summary of Key Findings 1-3
Benefits of Trading 1-3
The Trading Process 1-3
Transferability of Trading to Other POTWs 1-4
Organization of this Report 1-5
HISTORY OF PVSC'S LOCAL LIMITS AND
IMPLEMENTATION OF EFFLUENT TRADING CHAPTER 2
THE BENEFITS OF TRADING CHAPTER 3
Environmental Benefits 3-2
Benefits to Industrial Facilities 3-2
Sellers 3-3
Buyers 3-3
Cooperative Pretreatment 3-4
Benefits to POTWs 3-4
ELEMENTS OF A SUCCESSFUL TRADING PROGRAM CHAPTER 4
Background on Trading 4-1
Components of a Trading Program 4-2
Local Limits 4-2
POTW Regulations 4-2
Environmental Improvement 4-3
Sellers 4-4
Buyers 4-4
Process of Developing a Trade 4-4
Identifying Trading Partners 4-4
Calculating Trading Quantities 4-4
Trading Negotiations 4-5
Trading Agreements 4-6
Approving the Trade 4-6
Other Elements of Trading 4-7
Timing the Development of a Trading Program 4-7
POTW Credibility 4-7
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TABLE OF CONTENTS
(continued)
ORGANIZATIONAL AND SOCIOLOGICAL
ASPECTS OF TRADING CHAPTER 5
Uncertainties of Trading 5-1
Overcoming Uncertainties 5-2
Price Negotiations 5-3
Completing a Trade 5-4
Improving the Climate for Trading 5-4
APPROACHES FOR PROMOTING TRADING
WITHIN A POTW SERVICE AREA CHAPTER 6
Outreach to Potential Traders 6-1
Lack of Information on Trading Programs and Potential Traders 6-2
Small Volume Dischargers 6-4
TRANSFERABILITY OF TRADING TO OTHER POTWS CHAPTER 7
Appendix A: Rules and Regulations Concerning Discharges to the
Passaic Valley Sewerage Commissioners Treatment Works
Appendix B: How to Calculate Effluent Trading Quantities for PVSC Local Limits
Appendix C: Trading Agreement Guidance
Appendix D: Introductory Letter to PVSC Industrial Permittees
Appendix E: Trading Pilot Questions and Answers
Appendix F: Comparison of SO2 Trading and Effluent Trading of Local Limits
Appendix G: Glossary of Effluent Trading Terms
LIST OF EXHIBITS
Exhibit 1-1: Communities in the PVSC Service Area 1-2
Exhibit 2-1: The Local Limits and Threshold Values of Metals Regulated by PVSC 2-3
Exhibit 3-1: Benefits of Trading 3-1
Exhibit 4-1: Specific Elements of the Trading Agreement 4-6
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PREFACE
The Environmental Protection Agency's Industry Strategies Division is working with the New
Jersey Department of Environmental Protection, US EPA Region 2, and a Stakeholder group made
up of industry, environmental group, union, and community representatives on a project with the
batch chemical manufacturing industry in New Jersey. The New Jersey Chemical Industry Project
is an effort to assess current environmental protection strategies on a sector basis and develop better
approaches.
The project started by asking what inspires companies to achieve — or keeps them from
achieving — better environmental performance. From this information, the Stakeholder group
developed a list of 45 issues for possible pilot projects to test new environmental protection
strategies. The Effluent Trading Pilot was developed as one of four pilot projects selected by the New
Jersey Chemical Industry Project Stakeholder group. The other pilots selected by the group include:
reuse of "waste" materials across facilities, compliance assistance, and flexible track for good
environmental performers.
A subset of the Stakeholder group formed the Pilot Team for the Effluent Trading Pilot, along
with several additional experts who were invited to participate. The Pilot Team worked together to
facilitate trading of local effluent pretreatment limits within the Passaic Valley Sewerage
Commissioners' treatment area. This report documents the lessons learned from establishing a trade
of pretreatment limits, as well as providing information on the structure and background of the trade.
It is hoped that this information will be helpful to others seeking to establish effluent trades, especially
among industrial dischargers.
For more information about the New Jersey Chemical Industry Project and the Effluent
Trading Pilot, contact:
Catherine S. Tunis
EPA Office of Policy, Planning and Evaluation
401 M Street SW (2128)
Washington, D.C. 20460
telephone: (202)-260-2698
tunis.catherine@epamail.epa.gov
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ACKNOWLEDGMENTS
This project benefited from the dedication, enthusiasm, creativity, and technical knowledge
of the participants in the Effluent Trading Pilot Team of the New Jersey Chemical Industry Project.
Through the efforts of the Pilot Team, the expertise and perspectives of industry, regulatory agencies,
and environmental groups have been incorporated throughout the definition, implementation, and
documentation of this pilot project. The Pilot Team would like to thank the Passaic Valley Sewerage
Commissioners for implementing effluent trading in their service area, as well as Robert J. Davenport,
the Commissioners' Executive Director, for encouraging his staff to participate in this project and
allowing them to invest the time necessary to complete it successfully.
This report was drafted by several Pilot Team members, including Frank D'Ascensio, Passaic
Valley Sewerage Commissioners; James Murphy, New Jersey Department of Environmental
Protection; Eric Ruder, Industrial Economics, Inc. (lEc); Suzette Apis, lEc; and Harriet Greenwood,
lEc. In addition, the following Pilot Team members contributed their ideas and suggestions for
improvement: Barry Bochner, Fabricolor, Inc.; Joseph Gentile, CasChem; Wayne Tamarelli, Dock
Resins Corporation; Daniel Watts, New Jersey Institute of Technology; and Ella Fillippone, Passaic
River Coalition. We would also like to thank the EPA staff members who contributed to this report,
especially those from the Office of Policy, Planning and Evaluation, Industry Strategies Division and
Emerging Strategies Division; Office of Water, Permits Division and Assessment and Watershed
Protection Division; and Region 2, Division of Environmental Planning and Protection and Division
of Enforcement and Compliance Assistance. The success of this pilot project is a result of valuable
contributions from the entire Pilot Team. A complete list of the Pilot Team members can be found
on page iii.
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NEW JERSEY CHEMICAL INDUSTRY PROJECT
THE EFFLUENT TRADING PILOT TEAM
New Jersey Chemical Industry Project Stakeholders
Barry Bochner
Frank D'Ascensio
Joe Gentile
Stan Siegel
Wayne Tamarelli
Catherine Tunis
Daniel Watts
Fabricolor, Inc.
Passaic Valley Sewerage Commissioners
CasChem
EPA Region 2, Division of Environmental Permitting and Protection
Dock Resins Corporation
US EPA, Office of Policy, Planning, and Evaluation
New Jersey Institute of Technology
Additional Participants
Suzette Apis
Mary Belefski
Patrick Bradley
Ella Filippone
Harriet Greenwood
Richard Kashmanian
Jim Murphy
Mahesh Podar
Eric Ruder
Edward Schlueter
Theresa Tuano
Virginia Wong
Industrial Economics, Incorporated
US EPA, Office of Water
US EPA, Office of Water
Passaic River Coalition
Industrial Economics, Incorporated
US EPA, Office of Policy, Planning, and Evaluation
NJ DEP, Bureau of Pretreatment and Residuals
US EPA, Office of Water
Industrial Economics, Incorporated
EPA Region 2, Division of Environmental Permitting and Protection
formerly, US EPA, Office of Water; currently, US Peace Corps
EPA Region 2, Division of Enforcement and Compliance Assistance
in
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INTRODUCTION AND SUMMARY CHAPTER 1
The Effluent Trading Pilot
The Effluent Trading Pilot project explored the use of a "trading" mechanism as a means for
companies to meet local pretreatment limits for the level of metals in the effluent they discharge to
a Publicly-Owned Treatment Works (POTW). Trading allows industrial permittees to achieve the
required overall additional reductions in pollutant levels more economically. Controlling metals levels
in effluent can be very expensive. Yet when the control measures are instituted, a facility may be able
to reduce the levels of metals in its effluent more than is required. For some facilities, instituting the
control measures would be so expensive that they would have to shut down some production
processes or go out of business. Trading allows facilities within the same POTW service area to
work together to control the discharge of metals in a manner that is less expensive for all parties. A
company that has instituted control measures that have brought its metals levels down below the local
limits can "sell" these excess reductions. One or more companies with effluent levels in excess of the
local limits can buy the reductions as a means of complying with the local limits. A buying company
and a selling company negotiate a price for the metals credits, and the permits of the trading partners
are adjusted to reflect the amount of credits sold in the trade.
The Passaic Valley Sewerage Commissioners (PVSC) operate a large treatment plant in
Newark, NJ that treats the domestic and industrial wastewaters of northeastern New Jersey. The
heavily industrialized service area encompasses all of the land draining into the Passaic River from
the Great Falls in Paterson to Newark Bay. This area consists of 47 municipalities in portions of
Passaic, Bergen, Essex, and Hudson counties with a total population of about 1.3 million. There are
306 major industrial plants within the PVSC service area. In order to meet local pH and heavy metals
limits, approximately 236 of these facilities need to treat their effluent prior to discharging it to the
PVSC sewer system. Exhibit 1-1 shows the communities within the PVSC service area.
The Pilot Team worked with PVSC and its industrial permittees to establish a trade of local
pretreatment limits for metals. To accomplish this, the Pilot Team facilitated the process of
identifying potential trading partners and negotiating a trading agreement. The pilot project began
in November 1996. The Pilot Team first contacted each of the industrial dischargers in the PVSC
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service area to ask if they would be interested in working with other facilities to establish trades.
Interested companies were invited to a meeting at which the framework for trading was described and
questions concerning trading were answered. The Pilot Team continued to assist these companies
in their efforts to establish trades over the next several months and eventually oversaw the drafting
and approval of a trading agreement between two facilities that took effect on July 1, 1997.
Summary of Key Findings
Prior to this pilot project, no effluent trade was in place between companies discharging
effluent to a POTW. Because of this, the Pilot Team decided that an important aspect of this project
would be to document its experience establishing effluent trades. Through this report, the Pilot Team
hopes to share the lessons learned during this project concerning the benefits of trading, as well as
barriers to trading and approaches to overcoming them. This section highlights some of the key
findings of this effort to establish effluent trading. These and other findings are described in greater
detail in subsequent chapters of this report.
Benefits of Trading
Effluent trading among indirect dischargers within a sewer service district can produce a
variety of benefits for the environment, industrial facilities, and the POTW itself. Trading among
facilities in the PVSC service district benefits the environment because the rules and regulations
governing trading in this district require that trades incorporate an overall reduction in the amount
of pollutants discharged from participating facilities. Trading also provides greater flexibility to
facilities in meeting local limits. This flexibility encourages wider and more timely compliance with
local pretreatment limits and can lead to economic savings for facilities that buy and sell effluent
credits, which ultimately can help to sustain local economic conditions. The POTW benefits from
trading through an enhanced public image as a proactive and effective regulatory agency that is
concerned with ensuring that facilities meet local limits that are protective of the environment, while
alleviating any potential negative impacts of regulations on the local economy by allowing them to
pursue innovative compliance approaches.
The Trading Process
The Pilot Team spent considerable effort exploring the process of establishing trades to
identify both key steps in trading and some of the barriers that facilities face as they attempt to
establish trades. Several of these steps and barriers are highlighted below.
Need for local regulations authorizing trading — Trading of pretreatment
limits is possible only for local limits since there is no allowance for trading of
Federal (categorical) limits. However, in order for trading to occur in a given
POTW service district, the POTW must first incorporate trading into its rules
and regulations. As such, POTWs may want to consider issuing trading
regulations even if there appears to be little demand for it among their
industrial permittees at the current time. This will streamline the process
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should trading become a desirable compliance tool and allow facilities to
implement trades to meet local pretreatment requirements more quickly and
efficiently.
Timing of trading negotiations — The Pilot Team concluded that it is
most productive for the concept of trading to be introduced to the industrial
user community at the same time new local pretreatment limits are being
developed or existing ones are being revised. This allows potential trading
partners to begin discussions early on in the process of planning how they will
meet the new or revised limits. Early discussions can improve their ability to
develop and implement more economical and efficient approaches to
treatment that fully consider the potential for a coordinated approach to
pretreatment among several trading facilities.
Lack of information — This was identified as a significant barrier to
establishing trades under this pilot project. During the course of this effort, the
Pilot Team attempted to address this through conducting extensive outreach
to PVSC industrial permittees to inform them of the potential to use trading
as an approach to meeting the upcoming compliance deadline for PVSC's
local limits and to assist them in identifying suitable trading partners. The
experience of the Pilot Team suggests that the process of developing trades
in other POTW service districts would benefit from either establishing similar
trading teams or POTWs taking a larger role in promoting and facilitating
trading negotiations.
Transferability of Trading to Other POTWs
Through the Effluent Trading Pilot in the PVSC service district, the necessary measures and
factors to be considered when developing a trading program were identified, and a number of
stumbling blocks to moving a trading program from theory to implementation, along with solutions,
were documented. The following information should be useful in considering whether and how
effluent trading can be successfully extended to other POTW service districts.
• There is no magic number of permittees a POTW should have in order to
establish a trading program. Special circumstances, such as a shared need
among permittees for a similar type of treatment facility, can make trading
appropriate even for a POTW with a small number of permittees.
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The ability of a POTW to implement trades relies on three factors:
> Having technically-based defensible local pretreatment limits — This
allows a POTW to readily address any questions regarding the
adequacy or appropriateness of the local limits to which trading
applies.
*• Incorporating trading into its rules and regulations or sewer use
ordinance — POTWs can implement programs for trading local
pretreatment limits, but must first establish the proper legal authority
through their rules and regulations.
> Having or establishing a strong pretreatment enforcement program —
This provides incentives for industrial permittees to seek alternative
methods for achieving compliance and sends a clear message that they
will be held accountable for meeting the terms of their trades. It also
fosters public confidence that the POTW will effectively oversee
trades while continuing to protect human health and the environment.
Organization of this Report
The following chapters of this report document the benefits and challenges of establishing this
effluent trade and explore the transferability of trading to other POTWs. Chapter 2 provides
background on PVSC and its regulations that allow for trading to meet local limits. Chapter 3
summarizes the benefits of a trading program — for the environment, industry, and POTWs. Chapter
4 outlines the key elements that the Pilot Team feels are necessary for establishing a successful trading
program and provides more general background information on trading. The fifth chapter explores
various barriers that the Pilot Team had to overcome before the trade could be finalized, and Chapter
6 provides insights into how best to address these barriers and effectively promote trading in future
efforts. The final chapter, Chapter 7, addresses the transferability of trading to other POTWs, and
the components a POTW must have in place in order for trading to occur.
The appendices to this report provide materials used by the Pilot Team in designing and
implementing this project — PVSC's Rules and Regulations pertaining to trading, calculating effluent
trading quantities, guidance on developing a trading agreement, the introduction letter sent to
permittees, and questions and answers regarding effluent trading. Also included is a comparison
between effluent trading and the SO2 trading program and a glossary of effluent trading terms.
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HISTORY OF PVSC'S LOCAL LIMITS AND
IMPLEMENTATION OF EFFLUENT TRADING CHAPTER 2
POTWs are required to examine their operations in order to determine if local limits are
needed to protect against pass through, interference, and treatment plant upset. When PVSC decided
that it would beneficially reuse its biosolids (commonly referred to as sewage sludge), the agency
began the work necessary to adopt local limits that would allow it to achieve that goal by June 30,
1997.
PVSC hired a consultant in 1992 to conduct the necessary study so that the limits could be
adopted by 1994. At that time, the PVSC biosolids contained high levels of cadmium, copper, lead,
molybdenum and zinc, which required additional pretreatment. The levels of four other metals —
arsenic, chromium, mercury and nickel — were not of concern due to their low levels.
At PVSC, the effluent trading concept arose during the process of developing these local
limits. Trading was initially intended to address a specific, and seemingly unique, problem with a
large leather tanner in the PVSC district. This facility had previously installed a pretreatment system
that met the 1985 compliance date for the federal categorical limits for chromium. In fact, by using
this system it was able to consistently produce effluent with a chromium concentration half the 8 mg/1
federal limit for the tanning industry.
The first draft of the local pretreatment limits included a chromium limit of about 3 mg/1,
which was below the effluent concentration emanating from the tanner. If this had become the final
limit for chromium, the company would not have been able to meet it without extensive and costly
renovations to its existing pretreatment equipment. PVSC was very reluctant to require the company
to further reduce its chromium levels for two reasons: 1) the leather tanner had already installed
pretreatment equipment that decreased the chromium concentration in its wastewater discharge to
levels well below the applicable federal categorical limit; and 2) the total amount of chromium
contained in the wastewater flowing into the PVSC treatment plant could have been increased by a
factor of three and PVSC would still have been able to meet the chromium limit for beneficial reuse
of its biosolids.
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At one of the Pretreatment Advisory Committee meetings, a representative of the tanner, who
was a member of the Committee, asked if PVSC could develop an approach that would allow some
flexibility in establishing the facility's local limit. PVSC agreed to examine the issue and concluded
that effluent trading could allow flexibility in setting a local limit for a facility as long as the revised
limit did not exceed the federal categorical limit.
The trading concept was included in PVSC's local pretreatment limits rule, but it was only
after the rule became effective in 1994 that PVSC recognized this concept had a much wider
application. It is important to note that several circumstances in the PVSC case made the decision
to include effluent trading in the rule easier. First, chromium levels in PVSC's biosolids were already
very low. Second, the company in question was in compliance with a federal categorical limit. Third,
the company needed only a small incremental increase in its limit.
Through its innovative local limit development process, PVSC established two classes of
metal dischargers. All dischargers must meet the local limits, but those that discharge a metal at or
below a threshold value (set at background levels, which are slightly above the method detection
limit) qualify for a non-use certification. (Exhibit 2-1 presents the threshold values and the local limits
for the metals regulated by PVSC.) Companies that qualify under the new class of discharger are
required to sample their effluent only twice a year to show they remain under the threshold. As part
of this process, PVSC recalculated its local limits using a smaller regulated volume for each metal,
excluding the volume for companies qualifying for non-use certification.
This change in the structure of PVSC's limits resulted in a final local limit for chromium of
5.36 mg/1, which happened to be higher than the concentration discharged by the tanner. Thus, after
providing the impetus to develop an effluent-trading concept, the company responsible no longer
needed to trade.1 In fact, PVSC has recently withdrawn its local limit for chromium due to the
rescission of EPA's chromium biosolids limit based on the outcome of a legal challenge.
The Pilot Team's ability to facilitate a trade was greatly enhanced because PVSC had already
established trading as an accepted approach to meeting local pretreatment limits. The importance of
incorporating trading into a POTW's regulations is emphasized further throughout this report.
1 The impetus for PVSC to establish effluent trading could have come from the local limit for
any metal. The role of the chromium limit was simply a function of the specific concerns of a single
large tanning company.
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Exhibit 2-1
THE LOCAL LIMITS AND THRESHOLD VALUES OF
METALS REGULATED BY PVSC
Name of Metal
Arsenic (As)
Cadmium (Cd)
Chromium (Cr)
Copper (Cu)
Lead (Pb)
Mercury (Hg)
Molybdenum (Mo)
Nickel (Ni)
Zinc (Zn)
Monthly Average Limit
(mg/1)
0.15
0.19
Suspended as of 11/9/95
3.02
0.54
0.080
Suspended
5.9
1.67
Threshold Value
(mg/1)
-
0.005
Suspended as of 11/9/95
0.092
0.029
0.001
Suspended
0.02
-
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THE BENEFITS OF TRADING
CHAPTER 3
Trading of local pretreatment limits between indirect dischargers within a sewer service
district is beneficial to the environment, industrial facilities, and the POTW. The specific rules and
regulations governing trading in the PVSC service district are beneficial to the environment because
they require trades to incorporate an overall reduction in the discharge of chemicals from participating
facilities. Trading also benefits the environment by encouraging wider compliance with local limits
among facilities, and reducing incentives for facilities to locate in areas with less stringent limits,
thereby encouraging real reductions in loadings. The greater flexibility in meeting local limits
afforded by trading also can lead to economic savings for industrial facilities that buy and sell effluent
credits and help sustain local economic conditions. In addition, trading improves the effectiveness
of POTWs as regulators by providing increased opportunities for facilities to comply with local limits.
These benefits of trading are summarized in Exhibit 3-1 and described in greater detail throughout
the chapter.
ENVIRONMENTAL BENEFITS
PVSC regulations state that trades
must result in overall reduction of
pollutant discharges from
participating facilities.
Potential to realize economies of
scale in treatment systems (reduced
water, electricity, and treatment
chemical use).
Exhibit 3-1
BENEFITS OF TRADING
BENEFITS TO
INDUSTRIAL FACILITIES
Increased flexibility in achieving
environmental compliance.
Public recognition for good
environmental performance.
Financial Benefits:
(1) offset cost of installing
treatment system (sellers);
(2) avoid fines, reduce monitoring
costs, and may provide a more
inexpensive way to comply with
local limits (buyers).
BENEFITS TO POTWS
Improved relations with industrial
permittees.
Economic boost to community.
Enhanced public image of POTW.
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Environmental Benefits
PVSC's trading regulations have a requirement that 20 percent of the effluent credits sold in
a trade must be reserved, or "banked." Thus, there is a built-in mechanism for reducing the total
quantity of pollutants discharged by facilities that trade. For example, if one facility agrees to sell 2.5
Ibs./day of copper effluent credits, the buyer(s) can use only 80 percent of this amount or 2.0 Ibs./day.
The remaining 0.5 Ibs./day of copper effluent credits must be banked.
Some critics of effluent trading argue that it does not truly reduce discharges of industrial
pollutants even if there is a requirement to bank 20 percent of the traded effluent credits. For
example, if a facility that has already installed pretreatment equipment to meet the limits and is
currently discharging substantially below the limit is allowed to trade its excess reductions with a
facility that is currently above the limit, the total permitted discharges from these two facilities would
be higher than if the second facility were required to meet the limit through pretreatment or pollution
prevention measures. However, without the trade, the first company is free to increase its pollutant
loadings up to the limit at any time. Such an increase may occur as control technology equipment
ages and perhaps becomes less effective, or as a facility changes or expands its operations. Under
a trading agreement, though, this facility (the seller) is locked into a lower pollutant discharge level
based on the quantity traded. The trade will provide an incentive for a facility to maintain the
effectiveness of its control equipment or, in the case of expanding operations, to incorporate pollution
prevention or additional control measures to stay within this lower discharge limit. Thus, the 20
percent of the allotment banked is a secured reduction.
In addition to the 20 percent reduction in pollutant loadings, a trading program may also allow
companies to realize economies of scale associated with installing larger treatment systems at a single
facility rather than smaller ones at two or more facilities. These economies of scale can have a
positive effect on the environment. Companies may reduce their use of treatment chemicals, as well
as the generation of hazardous waste from their use. They also may reduce their use of electricity
and water.
Finally, trading encourages facilities to find creative and cooperative solutions to
environmental compliance as an alternative to "local limits shopping" — the practice of locating a
facility in an area with less stringent local pretreatment limits. In this way, trading can lead to real
reductions in loadings rather than a redistribution of loadings across jurisdictional boundaries.
Benefits to Industrial Facilities
Under conventional approaches to meeting local limits, each facility within a POTW service
district must install additional pretreatment equipment or institute pollution prevention measures to
achieve compliance with any new local pretreatment limits. Pretreatment trading is intended to
provide facilities added flexibility in meeting these local limits, which can lead to greater economic
efficiency and cost savings. In addition to direct economic benefits, facilities can benefit from
increased public recognition associated with a good environmental compliance record. As described
below, these benefits apply to both the sellers and buyers of effluent credits.
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Sellers
The primary benefit for a facility to sell effluent credits is financial. Selling excess reductions
can help a facility recover some of the costs associated with the installation and operation of
environmental controls or pollution prevention measures. The extent and nature of the financial
benefits depends on the specific circumstances of how a facility achieves the excess reductions.
Under one scenario, a facility can achieve excess reductions by intentionally designing its
pretreatment system with excess capacity to allow for future increases in production levels. If a
facility does not actually increase its production for some period of time, it may have excess
reductions to sell. In this case, entering into a trading agreement until it needs the full treatment
capacity would allow a facility to recoup some of the additional cost associated with the greater
degree of treatment.
A facility also may achieve excess reductions unintentionally through its effort to design and
operate a system to meet the local limits with an ample cushion to allow for operational fluctuations.
For example, a facility may over-engineer a treatment system in an effort to account for uncertainty
over how well the system will perform. Some of this serendipitous excess could be sold to help offset
the capital investment or operating costs associated with upgrading the pretreatment system.
Alternatively, the potential for trading excess reductions could serve as an incentive for a
facility to explore and ultimately implement creative approaches to pretreatment that can achieve
greater reductions. Similar to the two previous scenarios, the seller who institutes control measures
and achieves excess reductions beyond those required to meet the local limits can recover a portion
of its treatment costs by selling some or most of these reductions. To the extent that the price
obtained for the excess reductions exceeds the incremental costs of achieving them, the seller gains
financially.
Buyers
There are many benefits of trading for the buyer of metal credits. Below, we highlight a few.
By increasing its level of compliance with local limits, the buyer benefits from avoiding fines
and reducing monitoring costs. The reduction in monitoring costs results from the need to collect
and analyze fewer effluent monitoring samples. PVSC permittees are generally required to monitor
their discharge on a monthly basis. Typically, a facility samples its discharge early in the month. If
the sample meets the local limits, no additional sampling is necessary for the remainder of the month.
But if the initial sample exceeds the local limits, the facility needs to take additional samples to
determine if the monthly average discharge levels meet the local limits. Thus, purchasing additional
effluent credits as a "cushion" can reduce the number of monitoring samples taken by a facility. In
addition to these direct cost savings, the facility will benefit from the public recognition for improved
compliance.
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Like sellers, the primary benefit of trading for buyers is financial. Buying excess reductions
from another facility can provide a more cost-effective means of meeting local limits. The
presumption is that a facility will choose to purchase credits when it can obtain them at a price less
than the cost of developing and installing its own pretreatment upgrade. This may be particularly true
if a facility is close to meeting the local limits, but has occasional exceedances due to fluctuations in
its processes or production levels. The incremental cost of reducing its discharge or restricting its
production to meet the local limits may be greater than the cost of purchasing a "cushion" that will
allow it to operate comfortably within the local limits.
Cooperative Pretreatment
When facilities are able to negotiate a trade prior to installing pretreatment equipment
measures, they may be able to achieve even greater financial savings. This can occur because facilities
will be able to evaluate both what control measures should be used and at which of the trading
facilities they should be installed. This will allow them to choose the most economical control
strategy.
Benefits to POTWs
Effluent trading benefits POTWs and the community at large in several ways. First, allowing
trading as an approach to meeting local limits can improve relations between a POTW and its
industrial permittees (IPs). POTWs demonstrate increased willingness to work with IPs in developing
more economical approaches to meeting local limits, and the process of establishing and negotiating
viable trades introduces an element of cooperation into the relationship between POTWs and IPs,
which can lead to reduced litigation and legal expense for both parties.
Second, trading can provide an economic boost for a community by alleviating constraints that
POTW local limits may impose on operations at existing or new facilities. This may be especially true
when a POTW needs to revise local limits due to a changing industrial base or to meet more stringent
criteria. An existing IP may have already made substantial expenditures to meet federal or current
local limits and be unable to afford the additional cost of complying with the revised local limits (e.g.,
installing additional pretreatment equipment, etc.) and remain competitive. Similarly, a new IP may
not be able to afford the level of pretreatment needed to meet the local limits. In either of these cases,
the reduced compliance costs associated with trading could help to increase or maintain the economic
base of the community. Thus, it may be beneficial to the community for the POTW to incorporate
effluent trading into its regulations.
Third, effluent trading also enhances the public image of a POTW as a proactive and effective
regulatory agency. Through incorporating trading into its local regulations, a POTW shows that it
is concerned with ensuring that facilities meet local limits that are protective of the environment, while
alleviating any potential negative impacts of regulations on the local economy by allowing them to
pursue innovative compliance approaches.
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As evidenced by the strong support this pilot received from the stakeholder group for the New
Jersey Chemical Industry Project, effluent trading can provide a more efficient way to protect the
environment, an outcome that benefits everyone.
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ELEMENTS OF A SUCCESSFUL TRADING PROGRAM CHAPTER 4
In this chapter, general background information on trading is presented with a focus on the
necessary components of a successful trading program to meet local pretreatment limits such as the
one developed in this project. These components include adopting POTW regulations to allow
trading, the requirements for being a buyer and a seller, and improving the environment. The chapter
also outlines several key steps in developing trades, including calculating the trading quantities, the
elements of a trading agreement, and trading negotiations and pricing. This chapter concludes with
a discussion of the timing for developing a trading program relative to instituting new or revising
existing local limits, and the importance of the POTW's compliance and enforcement record in
establishing an effective trading program. Since this is apparently the first trade completed between
facilities in a POTW service area, it is hoped that the experience gained through this effort will help
guide others in developing and implementing successful trading programs.
Background on Trading
This project focuses on trading local limits between facilities that are indirect dischargers. Yet
trading can also occur between facilities that discharge directly into a body of water (direct
dischargers). Direct dischargers (point sources) can also trade with non-point sources, such as farms.
Usually the same pollutant must be traded and among direct dischargers, nutrients are the most
commonly traded class of pollutants. For the PVSC local limits, metals were traded, copper for
copper, zinc for zinc, etc.
Trading of local limits is allowed by EPA and encouraged as a way to meet local pollutant
limits. Trading of Federal (categorical) limits is prohibited, however. These Federal limits are
technology-based pretreatment standards and are applicable to specific industry groups. Many
POTWs impose additional local pretreatment limits. These limits serve a variety of purposes,
including protecting the quality of specific bodies of water, preserving the integrity of the POTW's
treatment system, and improving or maintaining biosolids quality. For more information on trading,
see the Draft Framework for Watershed-Based Trading,1 or visit EPA's Office of Water trading web
site.2
1 US EPA, Office of Water (4102), EPA 800-R-96-001, May 1996.
2 http://www.epa.gov/docs/owow/watershed/trading
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Components of a Trading Program
Local Limits
The cornerstone of effluent trading of local pretreatment limits is defensible local limits,
developed on a sound technical basis. Solid data on current pollutant levels in biosolids and local
receiving water bodies, pollutant loadings, fate and transport, as well as target levels for achieving
goals for both ambient water quality and biosolids reuse are necessary for calculating defensible local
limits. Details on setting local limits can be found in Chapter 7 of this report, Transferability of
Trading to Other POTWs.
POTW Regulations
When local limits are developed, the regulations issued by the POTW should include a specific
allowance and encouragement for facilities to consider the use of effluent trading as a means of
meeting the upcoming local pretreatment requirements. PVSC did this in Section B-104 of its Rules
and Regulations (see Appendix A). The PVSC rules state:
trading is a permissible way to meet local limits of heavy metals;
the buyer and seller must submit documentation of an acceptable trade to
PVSC for approval; and
• the trade must meet certain conditions, including:
- the minimum amount that can be purchased or sold;
- the minimum increment that can be purchased or sold;
- only 80% of amount purchased can be used;
- a buyer can purchase credits for a single metal from only one seller,
but can purchase different metals from different sellers;
a seller can sell surplus reductions of a metal to multiple purchasers
(up to ten); and
- the amounts traded must be converted to average concentration values
for the traders' permit limits.
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The general permit provisions of PVSC's rules also provide procedures to address situations
where a trade fails or is canceled. If a facility buys credits from a company, and the company goes
out of business unexpectedly, the buying facility would lose the purchased credits. PVSC rules and
regulations would allow the buyer a reasonable time to come into compliance. This would apply also
if the seller were to discontinue the production process from which the metal reductions came.
During this pilot project, PVSC revised its regulations to meet the needs of some smaller
businesses by decreasing the minimum amount and increment that can be purchased or sold and
increasing the number of purchasers with which a seller can trade.3
POTWs may want to consider issuing regulations that allow pretreatment trading even if they
do not believe that trading is in demand in their service area at the current time. Industrial facilities
and government agencies sometimes differ on the importance they place on various factors that affect
decisions relating to trading. This can lead to different opinions of the attractiveness or feasibility of
specific approaches to controlling pollution. Issuing regulations now to allow trading to occur within
a POTW service area will streamline the process should trading become a desirable compliance tool
for the POTW's IPs. This will allow facilities to meet local pretreatment requirements more
efficiently.
Environmental Improvement
PVSC's regulations stipulate that a buyer can use only 80 percent of the metals purchased.
This banking of credits not only provides for an immediate benefit to the environment, but also
provides an additional measure of assurance that trading will not cause increased pollutant
discharges.4 An explanation of this concept is provided in Chapter 3, The Benefits of Trading.
Trading could be a way for facilities to come into compliance with new local limits more
quickly through buying effluent credits, leading to more timely environmental protection. The
possibility of trading could also motivate facilities that wish to be sellers to take more effective metals
reduction measures. Increased rates of trading will lead to increased banking of metal credits and
improved environmental conditions.
3 PVSC's rules adopted on September 30, 1994 set the minimum amount that could be traded
at 1.0 pounds per day, the minimum increment was 0.5 pounds per day, and a seller could sell credits
for a particular metal to as many as five buyers ("user sites"). On July 18, 1997, PVSC revised these
amounts to a 0.1 pound per day minimum amount, 0.05 pound per day minimum increment, and a
seller could sell credits for a particular metal to as many as ten buyers.
4 This reduction of traded pollutant loadings represents an added environmental benefit of the
PVSC trading regulations. It is not required, however, and POTWs should apply these extra
reductions carefully to avoid constraining opportunities for trades. (Draft Framework for Watershed-
Based Trading, EPA 800-R-96-001, May 1996, pp. 6-10)
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Sellers
A seller of metal(s) credits in this effort is a facility that has had levels of one or more metals
in its discharge that were formerly above those allowed by the applicable new PVSC local limits and
has instituted control measures that have brought its levels down below these limits to achieve
reductions greater than needed to comply with the new requirements. The reduction may have come
from installation of end-of-pipe control equipment, but not from discontinuing the process that
produced the metals discharge. In addition, the use of pollution prevention that leads to reductions
in metals discharges can also qualify a facility to be a seller. Thus, in order to be a qualified seller,
the selling facility must have taken some positive action to reduce the metal(s) in its effluent. This
reduction must have been instituted since September 1994, the date when PVSC passed its new local
pretreatment rule, and must be documented.
Buyers
A buyer is a facility that has metal(s) discharges that may exceed the new local limits, and
would like to meet its new requirements by purchasing a seller's excess reductions of that metal.
Process of Developing a Trade
Identifying Trading Partners
The Pilot Team conducted an outreach effort to ask facilities if they were interested in
participating in the pilot. PVSC then helped each interested facility evaluate its qualifications for
trading. Since that time, PVSC has worked to update its capabilities to process and retrieve analytical
data on discharges by its Industrial Permittees (IPs) and thus can now more easily identify qualified
trading partners. Other POTWs with either fewer IPs — and a knowledge of each IP's processes —
or the ability to process and retrieve detailed data on discharges by its IPs may be able to identify
qualified trading partners more readily and contact these IPs directly to determine their interest in
trading. Absent this information, an outreach campaign like the one used in this pilot can be
employed. Refer to Chapter 6, Approaches for Promoting Trading within a POTW Service Area.,
for further discussion.
Calculating Trading Quantities
As potential trading partners are considering how much of a credit to purchase or sell, they
should consider how their current or planned production levels will affect compliance with the local
limits, and how much of a "cushion" they will need. They should consider their ability to lower their
pollutant discharge levels themselves through pollution prevention or simple and inexpensive
technological improvements, the stability of their processes and possibility of an upset, changing
market conditions and production levels, and the requirement that part of the purchased pollutant
credit would be banked. Both buyers and sellers need to consider their own business needs when
calculating the amounts to be traded so that they can comfortably operate within their adjusted permit
limits.
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Because PVSC local limits (and permit requirements) are expressed as concentrations and the
metals credits traded are in pounds per day, it is necessary to convert from the effluent concentrations
and volume of the seller to determine the quantity of each metal that can be sold. A buyer also needs
to convert from the pounds per day of each metal purchased (minus 20 percent) back to a
concentration level based on its discharge volume. To facilitate this step in developing trades, the
Pilot Team provided each prospective trading partner with a series of sample calculations. These
sample calculations are provided in Appendix B.
Trading Negotiations
In developing a trading agreement, traders must negotiate in good faith. Yet it is quite
possible for potential trading partners to approach negotiations with different assumptions on the type
(and cost) of treatment that is appropriate, what costs should be shared, timing of the trade, and price.
During the trading negotiations, the trading partners in this pilot discovered that they had little
information to guide their negotiations. Because this type of trade had apparently never been done
before in the United States, there was no precedent for various aspects of the agreement, including
pricing, timing, and renewal terms. In addition, fewer than twenty potential trading partners had
expressed an interest in trading and this included only two potential sellers. This meant that the
market for metal(s) credits within the PVSC service area was small and poorly defined, and the
trading partners had to think through the ramifications of each option and determine how to address
the issues on their own.
The trading partners in this pilot worked together to identify each other's assumptions about
the components of their agreement. Of particular importance were the issues that affected price. One
issue was whether the buyer should share in the research and development costs, especially since this
trade was negotiated and completed after the seller had researched and installed state-of-the-art
equipment and the buyer had no involvement in choosing the equipment and evaluating whether it
was possible to find a less-costly option. In retrospect, it is recommended that trading partners begin
discussions very early in the process of preparing to meet new local limits, so that they have the
opportunity to work together to develop the most cost-effective methods. For more information, see
the "Timing" section below.
The Pilot Team agreed that it was not the role of regulatory agencies to influence price and
that the price could range from the marginal cost to the seller of further reducing its metals discharge
to the cost the buyer would need to incur to reduce its discharge levels to comply with the new limits.
Yet, beyond that, the trading partners realized that there were a number of ways one could think
about trading and the resulting "appropriate" price could vary considerably. If the seller has already
installed pretreatment measures, the income from selling the extra reductions could be considered a
windfall gain (minus transaction costs of negotiations and legal fees). Buyers used this perspective
to argue that the price should be fairly low. By purchasing metal(s) credits, the buyer, however,
would be avoiding the cost (and risk) of installing and maintaining equipment (or other metals
reduction measures) and minimize the possibility of exceeding the pretreatment limit. Thus, the
sellers saw the value of purchased metal(s) credits to buyers as quite high, implying that the price
should be high. It was also noted that the transaction could be viewed as a cost-sharing arrangement,
assuming the selling price per metals credit would be close to the total cost of researching and
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installing new equipment divided by the number of credits "produced." This approach could still lead
to differences over the "appropriate" price if the parties had differing views of appropriate technology
and the associated costs differed significantly.
Trading Agreements
Specific Elements of the Trading Agreement
Standard Contractual Information
- Date
Names and addresses of parties
Assignability
Jurisdiction
Signature
Statements Specific to Trading
Seller has taken positive treatment or pollution prevention
measures to reduce pollutant effluent loadings
Seller and buyer are complying with other POTW
requirements
Intent to trade
Details of the Trade
Type and amount of metal traded
Effective dates of trade
New calculated permit limits (accounting for the amount
traded and 20 percent baseline)
Consideration to be paid and terms of payment
Procedure for terminating the contract (if needed)
Trading agreements are legally
binding contracts between trading
partners. The Pilot Team provided
guidance to the potential trading partners
to help them prepare trading agreements.
This guidance noted that each agreement
should contain the amounts to be traded
(considering the 20 percent banking and
their "worst case" operating conditions),
the price and terms of payment, the time
frame of the agreement, timing of
renewals and adjustments, provisions for
either party to end the agreement, and
enough information on how each party
would fulfill its obligations so that PVSC
could evaluate the environmental
credibility of the agreement. This
guidance is presented in Appendix C.
The specific elements of the trading
agreement signed under this pilot project
are outlined in Exhibit 4-1.
Approving the Trade
Once the trading partners have negotiated the trade and developed a trading agreement, the
details of the trade set forth in this agreement should be reviewed by the POTW to ensure that the
partners. Specifically, the POTW should confirm that the seller has implemented appropriate
treatment or pollution prevention measures to reduce the amount of the traded pollutant in its
effluent, both trading partners are in compliance with other POTW requirements and can reasonably
comply with the terms of the agreement (i.e., the permit limits resulting from the trade). Once the
POTW approves the trade, it adjusts the permit limits of the trading partners, lowering the limit for
the seller by the amount of the trade and raising the limit for the buyer by the amount of the trade
minus the 20 percent that is banked.5
5 Each of the trading partners is then responsible for meeting its own adjusted permit level.
Thus, one partner would not be penalized if the other trading partner has a violation. If one partner
consistently fails to meet the permit levels set under the trade, PVSC may adjust the trade agreement
and the associated permit limits.
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Other Elements of Trading
Timing the Development of a Trading Program
The Pilot Team concluded that it is most productive for the concept of trading to be
introduced to the industrial user community at the same time new local limits are being developed or
existing ones are being revised. That way trading partners can begin discussions early on in the
process of planning how they will meet the new or revised limits. For example, it may be more
economical to install additional treatment at one facility than at another, or certain types of treatment
may be more economically feasible when trading is employed than when each facility institutes its own
controls. Facilities may wish to explore the feasibility of joint ventures to evaluate and employ
control measures. This early discussion would allow facilities to find the most economical ways of
complying with their limits.
If a POTW has established trading in its regulations, the concept of trading could also be
introduced during enforcement actions as an alternative to the facility installing more pretreatment.
Trading may also allow a facility to come into compliance more quickly.
POTW Credibility
A strong compliance and enforcement program is an important factor in successfully
implementing effluent trading because it sends the message to industrial users that they will be held
accountable for carrying out the terms of their trading agreements, and serves to assure the public that
the POTW can be trusted to effectively administer the program. As such, it is critical that the POTW
has accurate and complete data to support its compliance and enforcement efforts and to enhance the
credibility of its established local pretreatment limits. The POTW should have good records of the
flow and pollutant loadings of each industrial permittee, a regular inspection system with complete
documentation, and a record of prompt and effective enforcement of violations.
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ORGANIZATIONAL AND SOCIOLOGICAL
ASPECTS OF TRADING CHAPTER 5
This chapter discusses some of the organizational and social factors observed during the
process of developing a trade in the PVSC service area. The Pilot Team believes that many of these
factors are likely to affect other trades. Given the current organizational structures, roles, and
practices among facilities and POTWs, and how these may change while using trading to reduce
pollutant levels, it is important to understand these factors and their effect on trading local
pretreatment limits to reduce uncertainties and develop a successful trading program.
Although trading has been allowed under PVSC's rules since September 1994, there were no
substantive trading negotiations until more than two years later in February 1997 when the NJ
Chemical Industry Project started to facilitate trading. The first trade occur in July 1997. This lack
of trading activity can be largely attributed to the many uncertainties that posed barriers to trading.
How could a company identify other potential trading partners? How would those companies react
if another company, especially a competitor, asked to make a deal with them on reducing pollution
through effluent trading? What would a trading agreement look like? What effect would trading
have on company operations? If one of the trading partners had a process upset or went out of
business, how would that affect the permit of the other partner?
Uncertainties of Trading
Trading of local pretreatment limits was such a new concept to companies that they seemed
quite puzzled about how it would work. This confusion went beyond the basic mechanics of trading.
• Many companies, especially small companies, have only enough resources to
keep up with the minimum requirements from the various agencies they deal
with. The relationships companies have with regulatory agencies are generally
straightforward: find out what the requirements are and comply with those
requirements or risk being fined or worse. They did not think they had the
resources to learn about a new approach, which seemed foreign.
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• Most companies never discuss their operations with other companies. The
need to guard proprietary information and avoid any suspicion of collusion is
a strong disincentive for cooperation. Could a company disclose the minimum
information necessary to effect a trade without disclosing confidential business
information?
• Some companies wondered if raising their profiles would attract increased
scrutiny or criticism. How would the POTW react to companies involved in
a trade? Would there be any increased inspections? How would environmental
groups and the general public react to trading? Would they see trading as a
benefit or a threat to environmental quality?
• Companies sophisticated enough to understand the trading approach still
wondered how they could put the pieces together to implement a trade.
Searching the POTW files to find suitable trading partners, approaching
companies they did not know to educate them on trading and ask them to
consider negotiating a trade, as well as figuring out all the attendant details,
seemed insurmountable.
What about timing? Facilities that could be sellers were already meeting the
new limits while the potential buyers were "under the gun" to meet the new
requirements. Would the timing of trading negotiations, just months before
the compliance deadline for the new requirements, affect their ability to
negotiate a fair agreement?
In addition, the regulatory agencies initially perceived their roles as developing and
disseminating information about trading and its advantages (a role for EPA) and developing and
promulgating rules to allow trading (a role for PVSCs). No agency saw hands-on facilitation of the
trading process as its role. This added to the companies' perception that they would need to make
a substantial effort if they wanted to trade, and they would have to do it alone.
These uncertainties, associated with every step toward effecting a trade, added to the
perceived costs of trading.
Overcoming Uncertainties
The NJ Chemical Industry Project's Effluent Trading Pilot was able to overcome these
uncertainties and help facilities to successfully complete a trade. Working in partnership with PVSC,
NJ DEP, and EPA Region 2, the EPA-sponsored pilot project facilitated the process of identifying
potential trading partners and negotiating a trading agreement. The project manager sent a letter (see
Appendix D) to each of the industrial dischargers in the PVSC service area, asking if
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they would be interested in working with others to establish trading. Meanwhile, the Pilot Team
worked out the details of what would be needed to help companies complete a trade. The interested
companies were invited to a meeting where the group discussed:
• the process of developing a trade;
• what is and is not acceptable under PVSC rules;
• what to consider when developing a trading agreement;
• the review and approval process for trades;
• how the "banking" of effluent credits would work;
• how discharge permits would be changed to reflect trades; and
• how their permits would be affected by changes to a trading partner's status.
Many of these issues were addressed in a set of "questions and answers" developed by the Pilot Team
(see Appendix E). After the meeting, each company was later sent a list with the names and phone
numbers of all interested companies.
Still some barriers persisted. Many companies were unsure what the repercussions of trading
would be. Some companies chose not to participate because they thought trading might provide a
business advantage to their competitors. The minimum allowable amounts that could be traded were
too high for many small companies. In response, PVSC reduced the minimum trading quantity and
increment to allow smaller companies with less metals in their effluent to participate.
Price Negotiations
As previously discussed in Chapter 4, negotiations over the price of the trade were
complicated — each company had a different view of what was fair. Some companies called EPA
asking for guidance on price. The Pilot Team agreed that it would be inappropriate for a regulatory
agency to influence the price of a trade. EPA agreed to look into hiring a neutral mediator if that
became necessary, but it did not — the partners reevaluated their accounting and were able to forge
an agreement.
One factor that affected the price negotiations was assumptions about what costs the trading
price should cover. One of the sellers had researched and installed state-of-the-art equipment to
reduce pollutant levels in its effluent, and believed the price should cover part of that development
cost. Buyers believed they should not pay development costs, especially since they had no say in
what control technology was used. Furthermore, they felt that their incremental costs of meeting the
local limits outright would be less than the seller's development costs. All of the trading partners
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agreed that discussions about trading as a way to reduce pollutant levels should begin early — soon
after local limits are found to be necessary — to allow them to develop the most cost-effective control
approaches.1
Completing a Trade
The approaching June 30, 1997 deadline for meeting the new local limits placed more pressure
on the potential buyers than the seller. The seller was already meeting the new local limits. The
buyers were above the new limits, or below the new limits but close enough that they desired a
"cushion" to cover process fluctuations. The buyers still had to find a way to ensure that they would
be able to meet the new local limits by the June 30 compliance deadline.
In the end, two companies were able to negotiate an agreement. In describing the
negotiations, the trading partners noted that they had known each other prior to initiating the tracking
process and this was a great help in reaching an agreement. Once PVSC reviewed and approved the
agreement, PVSC modified the discharge permits for each company, effective July 1, 1997. Some
additional companies may find that trading can be used to allow a cushion for fluctuations in their
processes and production levels. Trading may also be an attractive alternative for companies that find
they cannot meet the new local limits by other means.
Improving the Climate for Trading
Although the Pilot Team was successful in facilitating trading of local limits within the PVSC
service area, it seems like only a small proportion of the companies that could meet their local limit
requirements through trading actually considered doing so. Why are so few companies participating?
How can we improve participation?
Are there actions that regulatory
agencies can take to increase the number of
facilities using effluent trading to meet local
limits? Yes. For example, the Pilot Team can
disseminate the lessons they learned from the
Effluent Trading Pilot as is being done in this
report and through articles and conferences.
EPA can disseminate the lessons of this pilot
to its Regional Pretreatment Coordinators and
encourage them to take steps to increase the
opportunity for trading in their Region, and
can also encourage states and POTWs. States
Is It Easier to Trade in Air?
It seems that trading has caught on much
more for air SO2 emissions trading than
for water effluent trading. What are the
differences between these programs? The
most important difference seems to be the
level of hands-on negotiations. See
Appendix F for a comparison of some key
differences between SO2 trading and
trading localpretreatment limits.
1 For more information on the trade negotiations, please refer to Chapter 4, Elements of a
Successful Trading Program.
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can get the word out to POTWs. POTWs can write their rules to allow trading and then get the word
out to their industrial users. As discussed above, many of the barriers to trading stem from
uncertainties and fears of the implications of trading, not just the basic mechanics. Knowledge can
help to reduce those fears.
Should additional "Effluent Trading Teams" be established in POTW service areas across the
country to foster trading as the NJ Chemical Industry Project Pilot did? Maybe. That would be a
decision to be made in each local area. Local trading teams would be most effective in promoting
trading at times when new or revised local limits are being developed and implemented. Each team,
consisting of members from the local POTW, the state, and industry, could set out a process and
guidance for trading within the POTW service area. (See materials used in this pilot in Appendices
B, C, D and E.) Teams also could get the word out to local industrial users to let them know trading
is an option for meeting their local limits and how they can participate, and disseminate lists of
potential trading partners. Once the basic procedures are set and the information is sent out, the
teams' role would be to answer questions and facilitate solutions to any problems that arise.
While the basic mechanics of effluent trading are relatively simple, it is important to recognize
that trading requires organizations to think differently and alter their well-established relationships.
These organizations are made up of people, and changing the way people operate and relate to each
other will take some time and effort. Yet it is possible to do so and achieve the benefits that change
can provide.
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APPROACHES FOR PROMOTING TRADING
WITHIN A POTW SERVICE AREA CHAPTER 6
In the course of designing and implementing the Effluent Trading pilot, it became clear that
the facilities' lack of familiarity with the concept of effluent trading was a significant barrier to
establishing a successful trading mechanism.
Thus, in the initial stages of the pilot, the team was faced with several issues related to
encouraging the concept of trading, including:
What would be the process of informing potential traders that trading is
allowable within the current regulatory framework?
• How do we identify potential traders within a given sewer service district?
• How do we link potential buyers to sellers?
Outreach to Potential Traders
The Pilot Team conducted extensive outreach to PVSC industrial permittees to address these
issues and facilitate the trading process. This outreach included sending a letter inviting PVSC's
industrial permittees (IPs) to participate in a pilot project on trading local limits — either as a
potential trader or an advisor — and convening a meeting of 20 potential traders in February 1997
based on the response to this letter.1 Following the meeting, the pilot team compiled and distributed
a list of facilities that indicated some interest in trading. This list of potential traders included
JThe letter encouraged companies to participate in the pilot as advisors if they did not think
of themselves as potential traders, but were simply interested in learning more about trading or in
contributing their ideas on how to structure or encourage it.
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information on how to contact the facilities and indicated each facility's interest in the project — i.e.,
buyer or seller, specific metal and amount needed to buy or available to sell. Potential traders utilized
this information in initiating trading negotiations with other participating facilities.
The Pilot Team maintained contact with all potential traders to provide assistance in
expediting any trading negotiations. In some instances, potential traders had additional questions
about the trading requirements; these conversations served as a good forum for continued information
exchange. The Pilot Team provided potential buyers with important information on the requirements
of trading and sellers and, in turn, potential traders provided the pilot team with updates on any
trading negotiations.
At present, a buyer and seller have signed a trading contract for the exchange of copper
credits. In addition, the Pilot Team expects that other facilities may pursue trading as a compliance
strategy once they evaluate how effective their pretreatment equipment is in meeting the local limits.
Some facilities may find that trading can provide a needed cushion between their pollutant discharge
level and the local limits that allows for routine fluctuations in their processes and production levels.
Others may find that they have achieved excess reductions by installing pretreatment upgrades and
may wish to recoup some of their capital investment or operating costs by selling credits to other
facilities. Companies also may discover that there are economy-of-scale benefits in developing a
cooperative approach to pretreatment.
Despite this success, Pilot Team members have expressed concern that perhaps additional
outreach measures and an increased focus on small volume dischargers would have attracted
additional PVSC industrial permittees to the concept of effluent trading. Some of the Pilot Team's
thoughts on ways to more effectively promote trading in future efforts are outlined below.
Lack of Information on Trading Programs and Potential Traders
The lack of information on trading programs is a significant barrier to facilities using effluent
trading as an approach to meet their local discharge limits. In the case of the Effluent Trading Pilot,
many PVSC permittees were unaware of existing PVSC regulations that allow trading. This was true
despite the fact that PVSC had modified its regulations in 1994 to allow it, and had sent a copy of
the modified rule and a fact sheet to each of its permittees. EPA's outreach letter to PVSC permittees
served as an additional introduction to effluent trading for these facilities.
The Pilot Team has emphasized that additional outreach measures are needed to increase
awareness of existing trading programs and assist in gathering data on potential traders. Appropriate
types of outreach to potential traders may include mailings, press releases, and articles in trade
journals. These types of outreach, when used in combination, may be more effective than the single
outreach letter used in this pilot.
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As part of an outreach program, it would be important to develop and distribute guidance on
trading. These materials could include:
A list of qualifications for buyers and sellers.
A technical guide on trading explaining the regulations and how to calculate
trading amounts.
• Common questions and answers about trading.
Lack of information about other potential traders is also a barrier to establishing trades.
Potential traders have claimed that limited access to appropriate discharge monitoring data hinders
their efforts to find partners. Although discharge monitoring data are available to the public, they
are available only from the regulatory agencies (e.g., POTWs). Examining discharge monitoring data
from a POTW is a time-intensive process, and potential traders regard this activity as a significant
barrier to pursuing effluent trading options.
Presently, PVSC is in the process of developing a database that will include discharge
monitoring data. This database may help facilities within this sewer district locate potential trading
partners more easily, but not all POTWs or municipalities will have such extensive computerized
records. One possible approach to improving the ability of facilities to find trading partners is to
establish information clearinghouses that potential traders could contact to help identify potential
trading partners within a particular sewer service area.
While increased access to monitoring data can help identify potential traders, these data are
not always sufficient for this purpose. For example, these data can identify which facilities exceed
a local limit and may be in need of purchasing effluent credits; however, the monitoring data for a
facility that has already installed pretreatment or pollution prevention measures will show low
pollutant discharges without providing any indication that the facility may be an eligible seller of
effluent credits.
A possible solution to the limitations imposed by the nature of monitoring data involves the
POTW playing a larger role in identifying potential sellers in one of two ways. First, POTW staff
may be familiar with the compliance history of many of the facilities in the service district and, thus,
have an initial indication of which ones have achieved excess reductions through the installation of
pretreatment or pollution prevention measures and are potential sellers. Second, a POTW can
actively promote the availability of trading and help buyers and sellers more readily identify
themselves.
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Small Volume Dischargers
Small volume dischargers face additional barriers to establishing trading agreements. Small
volume dischargers are often small companies that lack the resources to research and negotiate trades.
Despite the Pilot Team's outreach efforts, only a few small volume dischargers actively pursued
trading negotiations with a seller of metal credits. Small volume dischargers contacted as part of this
pilot project expressed their interest in purchasing a small amount of metal credits (e.g., 0.1 pounds
per day of copper). Some of these facilities have purchased new pollution control equipment that has
not yet been proven to meet the new discharge limits. Therefore, purchasing a small amount of metal
credits would provide these facilities with some cushion to ensure that they are in compliance. The
need to purchase only a small amount of metal credits is also a result of their low effluent volumes -
in some cases less than 5,000 gallons per day.
Small volume dischargers have also encountered some difficulty in pricing. It is difficult to
obtain favorable pricing for small quantity trades because of the transaction costs.2 Also, because
price information remains proprietary, potential traders do not have ample guidance for price
negotiations. While this is true for both large and small companies, it seems to be a larger concern
for small companies.
A brokerage service or consortium approach may help overcome these barriers. A trading
broker could offer services of locating potential trading partners and conduct price negotiations with
potential trading parties. In a consortium approach, a seller of credits could form a comprehensive
trading arrangement among a group of facilities within a sewer service district. These techniques
could serve as an incentive for small volume dischargers to seriously pursue trading negotiations.
Another potential solution to barriers encountered by small volume dischargers is for the
POTW to assume a more active role in brokering or promoting trades. POTW staff are aware of
discharge monitoring information for all IPs within their sewer service district and understand the
regulations pertinent to potential trades. Therefore, POTWs may be well positioned to encourage
trading by facilitating efforts to search for trading partners. For example, when new limits are
proposed, POTWs could distribute information on which IPs might be interested in trading. This
information could also be distributed to facilities that apply for new hookups to the POTW as a means
of introducing them to trading. In addition, the POTW could provide this information as part of its
enforcement response to violations.
2 Possible transaction costs include management costs of negotiating a trade and the legal
costs to prepare a contract.
6-4
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TRANSFERABILITY OF TRADING TO OTHER POTWS CHAPTER 7
Trading pretreatment limits within POTWs' service areas is a positive step toward developing
common sense solutions to water quality problems. In the PVSC service area, an effluent trading
pilot project offered a flexible means to implement and enforce local pretreatment limits. However,
can trading programs be instituted at other POTWs? What groundwork must be established? What
serves as the foundation for such a project?
Establishing an effluent trading program is not restricted to those agencies with an EPA- or
State-approved industrial pretreatment program (considered delegated local agencies, or DLAs).
POTWs not having an approved industrial pretreatment program may also establish a trading
program. Many of these agencies, however, do not have a sufficient number of industrial permittees,
nor do they have the personnel necessary to develop such a program. As a result, non-DLAs wishing
to establish an effluent trading program should consult with their Approval Authority prior to
instituting a trading program.
Although PVSC was a good candidate for the pilot project due to its diverse and large number
of industrial permittees, there is no "magic number" of permittees a POTW should have in order to
establish a trading program. Special circumstances, such as a shared need among permittees for
similar treatment facilities, or complementary needs (e.g., Permittee A over-treats for copper but
needs more zinc treatment, while Permittee B over-treats for zinc but needs more copper treatment)
make trading appropriate for even a very small POTW. However, a program generally has a better
chance to succeed if there are more industrial permittees — more permittees means more potential
trading partners, both buyers and sellers. Any POTW interested in a trading program may find it
worthwhile to first determine if the number and diversity of its industrial permittees would support
a successful program. Even where there is no current need for trading, a POTW could establish the
trading framework within its rules and regulations for possible future consideration.
The ability of POTWs to incorporate trading as part of their activities relies on many issues,
including:
• having technically-sound, defensible local pretreatment limits;
• incorporating trading into its rules and regulations or sewer use ordinance;
and
7-1
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• having or establishing a strong pretreatment enforcement program.
Because trading only applies to local limits, developing technically-sound, defensible local
limits is a core element in establishing an effluent trading program. With technically-sound limits,
POTWs can more easily address questions regarding the appropriateness and/or adequacy of any
existing local limits, the basis for limits, and whether limits ensure the POTW's compliance with its
own operating permit criteria.
Under federal regulations at 40 CFR 403.8(f)(4), POTWs are required to develop local
pretreatment limits or demonstrate that such limits are not necessary. They are also required to re-
evaluate local limits once every five years in accordance with 40 CFR 122.21(j)(4). The local limits
must protect the treatment plant from pass-through and interference, and must enable the treatment
plant to comply with the remainder of its environmental criteria (e.g., biosolids quality, worker health
and safety, quality of receiving waters, etc.).
When developing local limits, POTWs must determine their maximum allowable headworks
loading (MAHL), and, subsequently, the maximum allowable industrial loading (MAIL). With this
information, a POTW can utilize different allocation methods and can allow trading to occur,
provided the MAIL is not exceeded. Disbursement of available MAIL has generally been achieved
utilizing a uniform allocation methodology (i.e., the same concentration limit for all industrial
permittees). These concentrations are then incorporated into the POTW's sewer use ordinances or
rules and regulations and included, where appropriate, within the control mechanisms (i.e., permits)
issued to the industrial permittees. It is important to note, however, that a trading program can be
established regardless of whether the limits within the rules and regulations or sewer use ordinance
are concentration-based or mass-based.
Another important factor in establishing an effluent trading program is the incorporation of
proper legal authority into local agency rules and regulations or sewer use ordinances. At a minimum,
the legal authority to establish a trading program must:
• enable a POTW to allow buying and selling among its permittees;
require POTW review and approval of documentation relative to the
transactions (excluding portions of the contracts that contain monetary
information);
allow POTWs to modify the discharge permits of participating parties; and
• detail the criteria of trading actions (minimum trading quantities and
increments, usable quantities/banking, number of trading partners, etc.).
A modification to include this legal authority into the rules and regulations or sewer use ordinances
may be considered a "substantial modification" under 40 CFR 403.18, and may require Approval
Authority review.
While an effluent trading program allows a user to meet its required effluent limits without
necessarily having to install pretreatment upgrades, a regulatory perspective must also be considered:
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What happens if a facility is in noncompliance with its discharge limits? The answer lies in the
development of a strong enforcement program to adequately deter noncompliance similar to what is
in place without trading. A strong pretreatment enforcement program may result in both the
delegated local agencies and the industrial permittees seeking alternative methods for achieving
compliance. This may generate more interest in developing effluent trading programs.
While local limits, legal authority, and enforcement constitute major components of
establishing a trading program, other factors must also be considered for those POTWs contemplating
such a program. Some of these include:
• having the personnel/resources to initiate the permit modifications necessary
to reflect the trade, including complying with the public notice requirements;
determining the pollutants to be traded;
determining the role of the local agency with respect to the trading activities
(e.g., identifying potential trading partners, acting as brokers);
• understanding the industries and the types of discharges entering into the
collection system; and
being accountable to the Approval Authority to ensure proper implementation
and enforcement of any modified limits.
POTWs have discretionary authority with respect to establishing an effluent trading program
within their sewer service areas. Through the PVSC pilot, the necessary measures and factors to be
considered when developing a trading program have been identified, and the stumbling blocks relative
to moving the program from theory to implementation have been documented. As such, other
POTWs wishing to establish a trading program will greatly benefit from the lessons learned from this
pilot.
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NEW JERSEY CHEMICAL INDUSTRY PROJECT
Appendix A
RULES AND REGULATIONS CONCERNING DISCHARGES TO THE
PASSAIC VALLEY SEWERAGE COMMISSIONS TREATMENT WORKS1
Section B-104 Emission Trading
B-104.1 Subject to the restrictions defined in subsections B104.2 and B104.3, PVSC
may permit users to sell or purchase quantities of heavy metals regulated by
the Local Limits. Emission trading shall not be approved if it results in a user
exceeding a categorical limit. The objective of emission trading is to minimize
unnecessary pretreatment and thus reduce the generation of hazardous waste,
but on a very limited basis.
B-104.2 A request to participate in emission trading shall be submitted by both the
buyer and the seller. Both users shall submit documentation acceptable to
PVSC that both parties agree to abide by the regulations contained in this
Section. PVSC will review the request and at its discretion, will approve or
deny the request. A request for emission trading shall not be permitted to
avoid enforcement, but may be included in actions to achieve compliance.
B-104.3 In order for a request to be considered, it must meet all of the following
criteria which apply:
a. Minimum purchase or sale -0.1 Ibs. per day.
b. Minimum increment purchase or sale - 0.05 Ibs. per day.
c. Usable quantity - purchaser shall use only 80% of purchased quantity,
the balance being reserved for future needs.
d. A buyer may purchase more than one heavy metal, but shall purchase
the entire quantity of a particular heavy metal from only one seller.
e. A seller shall not sell the same heavy metal to more than ten user sites.
f A buyer may purchase different heavy metals from different sellers.
The quantities traded shall be converted to average concentration values using
the average annual discharge volume from that outlet affected by the trade.
PVSC reserves the right to adjust the concentration value based upon its
analyses of changes in regulated flow volume.
Source: Appendix B: Pretreatment Limitation #1 Local Limits from the "Rules and
Regulations Concerning Discharges to the Passaic Valley Sewerage Commissions Treatment Works."
A-l
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NEW JERSEY CHEMICAL INDUSTRY PROJECT
Appendix B
HOW TO CALCULATE EFFLUENT TRADING QUANTITIES
FOR PVSC LOCAL LIMITS
I. Information that you need to know about your facility:
A. PVSC local limit — for example, the effluent limit for copper is: 3.02 mg/L
B. Current copper concentration in effluent: mg/L
C. Current volume of effluent: MOD [millions of gallons per day]
Note: You may want to consider worst case scenarios for volume and concentration to ensure that
your post trading effluent limit allows for the variability of your operations.
II. For Buyers: Steps for calculating how much copper you need to purchase:
1. Calculate the difference between the local copper limit and your facility's
current copper discharge concentration to determine the needed increase in
the effluent limit (on a concentration basis).1
For example: if a chemical facility currently operates at a 5.20 mg/L copper
discharge concentration, the additional allotment needed would be:
5.20 mg/L - 3.02 mg/L = 2.18 mg/L
'A company has flexibility to trade as long as its discharge effluent concentration remains
below the federal categorical limit (see 40 CFR Chapter I subchapter N). According to 40 CFR
Chapter I subchapter N part 413, electroplaters discharging >38,000 L/day (~ 10,000 gal/day) can
discharge copper at a maximum concentration of 4.5 mg/1. For example, an electroplater with an
effluent stream of 0.15 MGD can discharge a maximum of 6.07 Ib/day of copper.
Under 40 CFR Chapter I subchapter N part 414 subpart K, Organic Chemicals, Plastics and
Synthetic Fibers (OCPSF) — facilities are not held to any categorical standards for copper, but must
adhere to categorical standards for lead and zinc.
B-l
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2. Convert the additional needed allotment from concentration basis (mg/L) to
mass basis (Ib/day) using the following equation:
concentration (mg/L) * volume (MOD) * 8.344 (factor) = mass (Ib/day)
For example: if your facility's average annual effluent discharge rate is
150,000 gal/day (or 0.150 MGD), the additional allotment needed on a mass
basis would be:
2.18 mg/L * 0.150 MGD * 8.344 = 2.73 Ib/day
3. In calculating how much copper allotment to purchase, you need to account
for "banking" 20 percent of the purchased amount.
2.73 Ib/day •*• 0.80 = 3.41 Ib/day
4. According to the proposed changes to PVSC's regulations, buyers must
purchase metal credits at a minimum amount of 0.10 Ib/day and at minimum
increments of 0.05 Ib/day. Therefore, the amount your facility needs to
purchase would be:
3.45 Ib/day
III. For Sellers: Steps for calculating post trade adjusted concentration limit
1. Calculate the actual permitted quantity that your facility can discharge based
on the local limit and your facility's discharge volume as follows:
local limit (mg/L) * volume (MGD) * 8.344 (factor) = allowable discharge (Ib/day)
For example: if your facility has an average annual discharge rate of 200,000
gal/day (or 0.20 MGD), the amount of copper it can discharge and still be in
compliance is:
3.02 mg/L * 0.20 (MGD) * 8.344 (Factor) = 5.04 (Ib/day)
B-2
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2. Assuming that your facility sells 3.45 Ib/day to the buyer in the example
above, its adjusted discharge limit after the trade would be:
5.04 Ib/day - 3.45 Ib/day = 1.59 Ib/day
3. Convert this mass based limit to a concentration based limit as follows:
mass limit (Ib/day)
= concentration limit (mg/L)
volume (MOD) * 8.344 (factor)
For example: if, as in step 1 above, your facility has an average discharge rate
of 200,000 gal/day (or 0.20 MOD) the adjusted discharge limit (on a
concentration basis) after the trade would be:
1.59 (Ib/day)
= o.95 mg/L
0.20 (MGD) * 8.344 (factor)
IV. Additional calculation example for buyers needing to purchase a small amount of metal
credits
(NOTE: Please refer to steps 1 to 4 of Part II of this document for specific instructions for
calculating the amount of metal credits to purchase.)
Facility Scenario:
PVSC Local Limit for Copper = 3.02 mg/1
Current Copper Discharge Concentration = 3.07 mg/1
Average Annual Effluent Discharge Rate = 150,000 gal/day or 0.150 MGD
1. Difference between local copper limit and your facility's current copper
discharge concentration:
3.07 mg/1 - 3.02 mg/1 = 0.05 mg/1
B-3
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2. Convert additional needed copper allotment from concentration basis (mg/1)
to mass basis (Ib/day).
0.05 mg/1 * 0.150 MGD * 8.344 = 0.06 Ib/day
3. Account for banking 20 percent of the needed copper allotment.
0.06 Ib/day * 0.80 = 0.08 Ib/day
4. Account for regulatory requirement to purchase minimum amount of 0.10
Ib/day at minimum increments of 0.05 Ib/day. Therefore, the amount of
copper needed for your facility to purchase is:
0.10 Ib/day
V. Additional calculation example for a facility selling small allotments to 6 facilities with
a large allotment to one facility
Buyers' Information:
Amount of copper purchased by Small Buyer 1: 0.15 Ib/day
Amount of copper purchased by Small Buyer 2: 0.20 Ib/day
Amount of copper purchased by Small Buyer 3: 0.10 Ib/day
Amount of copper purchased by Small Buyer 4: 0.10 Ib/day
Amount of copper purchased by Small Buyer 5: 0.10 Ib/day
Amount of copper purchased by Small Buyer 6: 0.10 Ib/day
Amount of copper purchased by Large Buyer: 3.45 Ib/day
Total Copper sold by Seller: 4.20 Ib/day
Seller's Scenario:
PVSC Local Limit for Copper = 3.02 mg/1
Average Annual Effluent Discharge Rate = 200,000 gal/day or 0.20 MGD
(NOTE: Please refer to steps 1 to 3 of Part III of this document for specific instructions in
calculating the post-trade concentration-based discharge limits.)
B-4
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1. Allowable discharge for seller:
3.02 mg/1 * 0.20 (MGD) * 8.344 = 5.04 Ib/day
2. Total amount of copper credits sold is 4.20 Ib/day. Therefore, the adjusted
discharge limit after the trade is:
5.04 Ib/day - 4.20 Ib/day = 0.84 Ib/day
3. Concentration limit after the trade is:
0.84 Ib/day
= 0.50 mg/1
0.20 (MGD) * 8.344
B-5
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NEW JERSEY CHEMICAL INDUSTRY PROJECT
Appendix C
TRADING AGREEMENT GUIDANCE
Trading Agreements for this Pilot Project should be legal contracts between trading partners.
Some aspects of the agreement will relate to the business and market relationship between the parties
and some will relate to the parties' ability to meet their pollutant discharge limits as adjusted by the
trade. While each company will need to consider its own situation in developing the business aspects
of the trade, the environmental and compliance aspects of the trade will need to be reviewed and
approved by the Passaic Valley Sewerage Commissioners (PVSC).
After approving the agreement, PVSC will amend each partner's permit discharge levels to
raise the discharge limit(s) of the metal(s) traded for the buyer and reduce the discharge limit(s) for
the seller.1 Once the agreement takes effect, each party must adhere to its adjusted discharge limits;
any discharges above these adjusted limits will be considered permit violations. A violation by one
party would not affect the other party's compliance status.2 Both buyer and seller will be subject to
the normal monitoring and reporting compliance requirements at the new levels. Companies may also
be required to certify in their monthly reports that they are still adhering to their trading agreements.
The price of metals traded will be negotiated by the trading partners. The role of the agencies
is to ensure that the trades are conducted in an orderly, enforceable, and environmentally sound
manner, not to influence the price paid for metals credits. Prices normally would range anywhere
between the marginal cost to the seller of reducing its metal discharges (marginal cost per unit times
the number of units needed) to the cost the buyer would need to invest to reduce its discharges to
below the new local limits.
PVSC rules state that a seller can sell excess allotments of a particular metal to as many as
ten buyers, while a buyer must purchase all credits for a particular metal from a single seller. For
different metals, a buyer can purchase credits from different sellers — for example, a buyer can
1 Metals that can be traded among PVSC's industrial permittees under this framework include
cadmium, copper, lead, mercury, nickel, and zinc. Several metals can be traded by the same
companies; however, each individual trade must be for the same pollutant: copper must be traded for
copper, zinc for zinc, etc.
2 If one party consistently violates its permitted discharge levels, PVSC may adjust the trade
agreement and the associated discharge limits.
C-l
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purchase copper credits from one seller and zinc credits from another seller. PVSC will consider
allowing a consortium of companies to enter into trading agreements if this is practical. Each trading
agreement must be approved by PVSC.
The time frame of the agreement can be set by the parties. Considerations should include the
timing of the discharge permits of the parties, the transaction costs of negotiating and documenting
new trading agreements, and the amount of flexibility needed to respond to changing business
conditions.
Trading partners may want to consider terms for altering or ending the trading agreement if
that becomes necessary due to changing business conditions in the future. Partners should allow each
other enough time to find alternative means to meet their discharge limits. If a seller were to
unexpectedly go out of business or discontinue the production process from which the excess metal
reductions came, the buyer would lose the purchased credits. In this unexpected case, PVSC rules
and regulations would allow the buyer a reasonable time to come into compliance.
Your agreement(s) should address at least the following points:
• Each agreement must contain enough information on how each party will
meet its adjusted discharge limits to allow PVSC to evaluate the trading
arrangement and determine that the parties have the capability to fulfill their
discharge obligations under the agreement.
• The amounts of metals traded should be specified. Remember the minimum
amount for a trade is one-tenth of a pound per day with amounts above that
in 0.05 pound increments. 10 units must be purchased for every 8 needed.
Also, to be prudent, you should use your worst case scenarios to calculate
the amount of metals credits you can sell or will need to buy — any discharge
above your adjusted permit limit will be a violation of your permit.
• The price should be specified as well as the terms of payment.
• If the agreement is with multiple partners, it should specify how the
obligations of each partner will be met.
• The time frame of the trading should be set, as should the timing of agreement
renewals and adjustments. Provisions should be made for ending the
agreement, if desired or necessary, which allow adequate time for the other
partner(s) to find alternative means to meet their discharge limits.
Please note: PVSC retains the right to review and raise or lower local discharge limits as needed. The
usual notification that accompanies regulatory changes will be given. Parties of trading agreements
may adjust their agreements to meet these new limits as needed within the time frames specified in
the regulatory change notice.
C-2
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Appendix D
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
* WASHINGTON, D.C. 20460
December 30,1996
OFFICE OF
POLICY, PLANNING AND EVALUATION
Dear PVSC Permitee:
The Environmental Protection Agency is currently working with the New Jersey Department of
Environmental Protection, Passaic Valley Sewerage Commissioners (PVSC), and a Stakeholder group of
batch chemical producers, environmentalists, trade associations, academics, unions, and community
representatives on a project to assess current environmental protection strategies and to develop better
approaches.
Our project in New Jersey is a cooperative effort, with an open and honest atmosphere where we
can develop approaches that improve efficiency and environmental results, focusing on substance rather
than political debate or divisiveness. First, we asked Stakeholders for their views of what works and what
doesn't work in the current system, and what they would like to see as improvements. From a list of 45
possible new approaches, the Stakeholders chose to focus on four as pilot projects. One of these is
trading local POTW discharge limits. Trading refers to agreements that affect the allocation of pollutant
loads among facilities that discharge wastewater to POTWs.
The Trading group has decided to focus on trading copper and to attempt to set up trading among
facilities in the PVSC service area. This concept has already been established and is permitted by PVSC
rules and regulations. We hope that trading will make it easier and more efficient for participating
facilities to meet PVSC's copper local limits and, because 20 percent of the allocation that is traded will
be banked, also improve the environment Through this effort, we hope to learn how trading may be
expanded to other chemicals and to other POTW service areas.
We would like to invite you to work with us, either as a potential trading partner for copper or
other metals or as an advisor to help identify and resolve issues related to trading local limits. Because
the compliance deadline for PVSC's local limits for copper discharges is June 30,1997, we would like to
hear from you concerning your interest in effluent trading as soon as possible, no later than January 17,
1997.
If you would like to participate in this project, get more information, or even to just give your
opinion, you may call me at 202-260-2698, fax at 202-260-0174, write to me at US Environmental
Protection Agency, 401 M St, SW (mail code 2128), Washington, DC 20460, or email to me at
tunis.cathehne@epamail.epa.gov.
Thank you for your help with this project
Catherine S. Tunis
Project Manager
R*cyctedffl«eyclabl« .Printed with V«g«abto OH B«Md Inks on 100% ftecyctod Pip*- (40% PostconsunMr)
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NEW JERSEY CHEMICAL INDUSTRY PROJECT
Appendix E
TRADING PILOT
QUESTIONS AND ANSWERS
Q1: What is the purpose of effluent trading of local pretreatment limits?
Al: Basically, it is to allow industrial facilities that discharge into a sewer system to achieve the
required overall additional reductions in pollutant levels more quickly and economically.
Effluent trading of local pollutant limits is encouraged by US EPA as a means of helping to
achieve pollution reduction more efficiently. In this pilot project, we are looking at copper
and other metals. Controlling metals levels in effluent can be very expensive. Yet when the
control measures are instituted, a facility can often reduce the levels of metals in its effluent
more than is required. For some facilities, instituting the control measures needed to meet
new local limits would be so expensive that they would have to shut down some production
processes or go out of business. Trading allows facilities within the same POTW service area
to work together to control the discharge of metals in a manner that is less expensive for all
parties. Trading in the Passaic Valley Sewerage Commissioners (PVSC) system is also good
for the environment, since 20% of the allowable metals credits that are traded will be
"banked," and not discharged.
Q2: What is a seller?
A2: A seller of credits is a facility that has had metals levels in its discharge that were above those
allowed by the applicable local limits and has instituted control measures that have brought
its metal levels down below the new local limits to achieve excess reductions in metals beyond
the new requirements. The metals reduction may have come from installation of end-of-pipe
control equipment, but not from discontinuing the process that produced the metal discharge.
In addition, the use of pollution prevention that leads to true reductions in metals discharges
may also qualify a facility as a seller.
Q3: What is a buyer?
A3: A buyer is a facility that has metal discharges that exceed the new local limits, and would like
to meet its new requirements by purchasing a seller's excess reductions.
E-l
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Q4: What if a facility never discharged any metal and its discharge level of metals is below the
local limits? Can it be a seller?
A4: No. The new local limits were set because PVSC must lower the levels of metals in the
biosolids (sludge) produced by PVSC's sewage treatment. Thus, in order to be a qualified
seller, the selling facility must have taken some positive action to reduce the metal in its
effluent. This reduction must have been instituted since September 1994, when PVSC passed
its local limits rules, must be able to be documented, and cannot come from discontinuing the
production process that caused metals in the facility's effluent.
Q5: What metals can be traded?
A5: The metals that can be traded are arsenic, cadmium, copper, lead, mercury, nickel, and zinc.
(The local limits for chromium and molybdenum have been suspended; Federal categorical
limits for these metals are still in effect.) Trading regulations require trading the same
pollutant, e.g., trades would have to be copper for copper, zinc for zinc, etc.
Q6: What is the minimum amount of metal that can be traded?
A6: PVSC rules allow trading a minimum of one-tenth pound per day with five-hundredths pound
per day increments. PVSC rules also indicate that the minimum trading quantities for any
particular company must be detectable in the facility's effluent.
Q7: Facility permit discharge limits within the PVSC service area and the new local limits are
expressed in concentrations—how can the facilities buy and sell metals discharge credits by
mass?
A7: The concentrations of both the buyer's and the seller's effluent are converted to a mass
quantity in pounds per day using the average annual discharge volume from the outfalls
affected by the trade. A new concentration limit would be calculated based on the trading
agreement. PVSC reserves the right to adjust these concentrations.
Q8: How will trading affect the facilities' discharge permits?
A8: Permits of the trading partners would be adjusted to reflect the amount of credits sold in the
trade. Based on the self-certification of the trading partners, the discharge limits of the seller
would be lowered from the new local limit by the amount sold and the discharge limits of the
buyer would be raised from the local limit by 80% of the amount purchased. Both buyer and
seller would be subject to the normal monitoring and reporting compliance requirements at
the new levels. Facilities may also be required to certify in their monthly reports that they are
still adhering to their trading agreements. Discharging a traded metal above a facility's
adjusted permit discharge limit would represent a permit violation.
E-2
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Q9: What does a trading agreement look like?
A9: A trading agreement is a legally binding contract between buyer(s) and seller(s) that must be
reviewed and approved by PVSC. The agreement will have to meet the requirements of
PVSC rules and regulations (Sections B-103 and B-104).
Q10: How much would it cost to buy a copper (or other metal) credit?
A10: That is negotiated between the trading partners. The cost would probably be somewhere
between the marginal cost to the seller of providing the reductions and the cost the buyer
would pay to institute its own additional control measures.
Ql 1: What if a facility buys credits from a company, and then the company goes out of business
unexpectedly? What will happen to the purchased credits?
Al 1: The buying facility would lose the purchased credits. PVSC rules and regulations would
allow that facility a reasonable time to come into compliance. This would apply also if the
seller were to discontinue the production process from which the metal reductions came.
Q12: Does a facility have to buy all the credits it needs from one seller? OR Does a selling facility
have to sell its excess allotments to one company?
A12: PVSC rules state that a seller can sell excess allotments of a particular metal to as many as
ten buyers, while a buyer must purchase all credits for a particular metal from a single seller.
If a buyer purchases credits for more than one metal, credits for each metal can be purchased
from a different seller. PVSC has tried to make the trading requirements flexible enough so
that companies could enter into agreements with more than one company if this is practical.
Q13: How do selling facilities find buyers? OR How do buying facilities find a seller?
A13: PVSC invited all the facilities that expressed an interest in trading to a meeting, introduced
them to each other, gave them information on developing a trade, provided a list of interested
trading partners, and encouraged them to negotiate. Any additional facilities interested in
trading can contact PVSC for information on other potential trading partners.
Q14: What if a facility can't find a buyer or seller? Will PVSC, DEP, or EPA guarantee that credits
will be available or that facilities can sell credits that they have?
A14: No, that is the role of the market. Communication between facilities will be key to
establishing and maintaining an efficient trading program.
E-3
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Q15: My question isn't answered here. How can I find out more?
A15: Callus.
Catherine Tunis, US EPA, Manager of the NJ Chemical Industry Project, 202-260-2698
Frank D'Ascensio, PVSC, Manager of Industrial & Pollution Control, 973-817-5710
Jim Murphy, NJ DEP, Principal Engineer of Bureau of Pretreatment and Residuals, 609-
633-3823.
Q16: What if I have a problem, complaint, suggestion, or compliment about trading?
A16: Tell us! This project is intended to help us learn about the good and bad points of applying
new approaches in the real world. We may not be able to fix every problem but your
comments will help us evaluate the value of trading to industry and the environment.
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NEW JERSEY CHEMICAL INDUSTRY PROJECT
APPENDIX F
COMPARISON OF SO2 TRADING AND EFFLUENT TRADING OF LOCAL LIMITS.
There are a number of significant differences between the SO2 Trading program and trading
local effluent discharge limits. Most of these differences appear to work in favor of making the
completion of an effluent trade more difficult. The table below presents some of these differences.
Exhibit F-l
COMPARISON OF AIR SO2 TRADING AND EFFLUENT TRADING
Issue
Degree of Effort to
Find Trading
Partners
Style of Negotiations
Scope of Trading
Type of Trader
Business
Environment of
Trader
Type of Pollutant
SO2 Trading
Most trading is handled by
brokers that identify both
buyers and sellers.
Relatively "arms-length."
Most trading is handled by
brokers.
Nationwide.
Mostly large utility companies.
Fairly stable demand for
uniform product.
One pollutant: SO2 emissions.
Trading of Local Effluent Pretreatment
Limits
Companies must find trading partners
among other companies in the POTW
service area.
Very "hands-on." Companies must
negotiate each trade, requiring more
management resources and seeming to
divulge more facility details.1
Same POTW service area. 2
Large, medium and small companies in all
sectors. The key is the type and amount of
pollutant in effluent.
Some traders operate in very dynamic,
competitive markets with changing
products, customer demand, and changing
production levels.
Many pollutants in effluent can be traded.
However, each individual trade must be for
the same type of pollutant (e.g., copper for
copper). In addition, the amount of a
pollutant credit needed or available for sale
can affect the success of the trade.
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Exhibit F-l (continued)
COMPARISON OF AIR SO, TRADING AND EFFLUENT TRADING
Issue
SO2 Trading
Trading of Local Effluent Pretreatment
Limits
Timing
Credits can be purchased
retrospectively. The facility
knows exactly how much SO2
must be purchased.
Credits must be purchased/sold
prospectively. Facility must project its
production and operations and ensure it has
sufficient credits to stay within the effluent
local limits.
Continuous, ongoing market.
The same pollutant is traded
each year in January.
Most of the need for trading arises at
irregular intervals, i.e., when new local
limits are needed.
Price Transparency
Prices are fairly public and
well known among traders
through an established trading
market.
Price for each trade is negotiated separately
and is private between traders due to the
absence of a well established trading
market.
1 While effluent pretreatment trading may seem to require companies to divulge more information about
their company operations than many company officials would like, our trading partners reported that they
in fact did not need to reveal many details of their operations. On the other hand, the two trading
partners felt more comfortable revealing details because they knew each other as individuals and had
done business in the past. This increased level of personal comfort may have improved the chances of
reaching a successful trade.
2 This may increase the chances that trading partners know each other and feel comfortable negotiating
trades.
F-2
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Appendix G
GLOSSARY OF EFFLUENT TRADING TERMS1
Approval Authority
The Director in an NPDES State with an approved State Pretreatment Program or the
appropriate EPA Regional Administrator for a State that has not received approval for its
Pretreatment Program.
Approved/Authorized Program or Approved State
A State or interstate program which has been approved or authorized by EPA under Part 123
of the Federal Water Pollution Control Act, as amended, 33 U.S.C. 1251 et. seq.
Banking Credits
Under the PVSC regulations, a portion of the amount traded (20 percent) cannot be
discharged; instead, it is "banked" or reserved, resulting in an immediate environmental improvement.
Best Available Technology (BAT)
A level of technology based on the very best (state of the art) control and treatment measures
that have been developed or are capable of being developed and that are economically achievable
within the appropriate industrial category.
Categorical Pretreatment Standards
Limitations on pollutant discharges to POTWs promulgated by EPA in accordance with
Section 307 of the Clean Water Act, that apply to specific process wastewater discharges of
particular industrial categories [40 CFR § 403.6 and 40 CFR Parts 405-471].
Concentration-based Limit
A discharge limit based upon the relative strength of a pollutant in a waste stream, usually
expressed as the mass of pollutant per unit volume of effluent (e.g., mg/1).
1 Many of these definitions were obtained from the Introduction to the National
Pretreatment Program, second draft, February 1998.
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Detection Limit
The minimum concentration of an analyte (substance) that can be measured and reported with
a 99% confidence that the analyte concentration is greater than zero as determined by the procedure
set forth in 40 CFR Part 136, Appendix B.
Direct Discharger
A nondomestic discharger introducing pollutants directly to surface waters.
Indirect Discharger
A nondomestic discharger introducing pollutants to a publicly owned treatment works
(POTW).
Industrial Permittee (IP)
A source (e.g., a facility) permitted to discharge pollutants to a POTW.
Industrial User (IU)
Any nondomestic source (e.g., a facility) discharging pollutants to a POTW. This includes
both sources that are substantial enough to require permits (Industrial Permittees) and sources that
do not require permits.
Interference
A discharge which, alone or in conjunction with a discharge or discharges from other sources,
both: (1) inhibits or disrupts the POTW, its treatment processes or operations, or its sludge
processes, use or disposal; and (2) therefore is a cause of a violation of any requirement of the
POTW's NPDES permit (including an increase in the magnitude or duration of a violation) or of the
prevention of sewage sludge use or disposal in compliance with ... [applicable] statutory provisions
and regulations or permits issued thereunder (or more stringent State or local regulations).
Local Limits
Conditional discharge limits imposed by municipalities upon industrial or commercial facilities
that discharge to the municipal sewage treatment system (i.e., POTW).
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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 air deposition, agriculture, forestry, mining, construction,
dams, channels, land disposal, saltwater intrusion, and city streets.
Mass-Based Allocation
An approach to allocating the maximum allowable industrial loading (MAIL) by the POTW
among its IPs.
Maximum Allowable Headworks Loading (MAHL)
The maximum daily mass of a particular pollutant that a POTW can receive from all sources
while still protecting against pass through and interference.
Maximum Allowable Industrial Loading (MAIL)
The total daily mass of a particular pollutant that a POTW can accept from all permitted
industrial users and ensure the POTW is protecting against pass through and interference. Calculated
by applying a safety factor to the MAHL, and discounting by domestic wastewater loading.
Pass Through
A discharge which exits the POTW into waters of the United States in quantities or
concentrations which, alone or in conjunction with a discharge or discharges from other sources, is
a cause of a violation of any requirement of the POTW's NPDES permit (including an increase in the
magnitude or duration of a violation).
Point Source
Any discernible, confined, and discrete conveyance, including but not limited to any pipe,
ditch, channel, tunnel, conduit, well, discrete fixture, container, rolling stock concentrated animal
feeding operation vessel, or other floating craft from which pollutants are or may be discharged.
Pollutant
Dredged spoil, solid waste, incinerator residue, filter backwash, sewage, garbage, sewage
sludge, munitions, chemical wastes, biological materials, radioactive materials (except those regulated
under the Atomic Energy Act of 1954, as amended (42 U.S.C. 2011 et seq.)), heat, wrecked or
discarded equipment, rock, sand, cellar dirt, and industrial, municipal and agricultural waste
discharged into water.
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Pretreatment
The reduction of the amount of pollutants, the elimination of pollutants, or the alteration of
the nature of pollutant properties in wastewater prior to, or in lieu of, discharging or otherwise
introducing such pollutants into a POTW.
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 which is owned by a State or municipality. This
includes sewers, pipes or other conveyances only if they convey wastewater to a POTW providing
treatment.
Upset
An exceptional incident in which there is unintentional and temporary noncompliance with
permit limits because of factors beyond the reasonable control of the discharger. An upset does not
include noncompliance caused by operational error, improperly designed treatment facilities,
inadequate treatment facilities, lack of preventive maintenance, or careless or improper operation.
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