United States Region 10
Environmental Protection Agency (EMI-163)
EPA910-B-03-003
July 2003
Water Quality Trading
Assessment Handbook:
EPA Region 10's Guide to Analyzing
Your Watershed
I
;
III
Prepared Under EPA Contract 910-B-03-003
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.Water Quality Trading Assessment Handbook
Preface
Water quality trading can be a business-like, cost-effective, local solution to problems
caused by pollutant discharges to surface waters. Generally, water quality trading (WQT)
involves a party facing relatively high pollutant reduction costs who compensates another
party to achieve a less costly, pollutant reduction with the same or greater water quality
benefit. The concept of using "market-based" innovations is not entirely new, but there
have been relatively few successful trades in the U.S. While trading is not a panacea, it
can be a useful tool for water quality enhancement in the right circumstances and some
dischargers will welcome the flexibility it can provide.
All markets evolve to help fulfill the demands of consumers. Consumers provide
producers an opportunity to earn a profit for altering their behavior and attending to the
market's constantly changing demands for goods and services. Until a consumer
decides she "needs" a soda, and is willing to pay someone to produce it, there is no
market for sodas.
Total Maximum Daily Loads (TMDLs) are the leading market drivers for WQT markets
today because they potentially create the "need" to alter behavior by reducing pollutant
loadings discharged to waterways. TMDLs and similar frameworks are sometimes
described as "budgets" for the introduction of pollutants into watersheds. Scientific
studies estimate the volume of discharge a specific watershed, or segment of the
watershed, can assimilate without exceeding the water quality standards enacted to
protect the watershed's designated beneficial use(s). This "pollutant budget" is then
allocated across point sources and non-point sources located in the watershed. The
allocation of discharge limits forces sources in the watershed to analyze current practices
to see if they need to alter their discharging behavior and the associated costs to do so.
The United State Environmental Protection Agency's (EPA's) Region 10 office has taken
an active role in exploring the mechanics of water quality trading and developing water
quality trading markets in hopes of lowering the cost of improving water quality. For
example, working with the Idaho Department of Environmental Quality and a wide variety
of stakeholders, Region 10 has been helping dischargers to the Lower Boise River create
the detailed knowledge, regulatory framework, and techniques for cooperation needed to
achieve phosphorus reductions through trades. Region 10 has also supported trading in
the Middle Snake River by preparing model NPDES permits that would facilitate trading
by the City of Twin Falls and a local business. In Washington and Oregon, Region 10 is
supporting assessments to identify opportunities for individual trades or broader trading
markets.
Careful analysis is required to identify watersheds with the combination of characteristics
to support cost-effective trading. Region 10 encourages stakeholders to be active in
identifying potential new trading markets. To that end, this Handbook is designed to
provide you, the watershed participant, with an efficient means to assess your
watershed's water quality trading potential and the attractiveness of trading for particular
dischargers.
Such an assessment involves several types of analysis. Water quality specialists may
need to call on specialists in engineering, finance, and/or regulatory interpretation. This
Handbook is intended to help you identify what you need to know, with whom you need to
consult, and where you may find the information you need.
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Water Quality Trading Assessment Handbook,
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, Water Quality Trading Assessment Handbook
Table of Contents
Introduction -\
Pollutant Suitability 4
Purpose 4
Approach 4
What is needed for a pollutant to serve as a "tradable commodity" that dischargers can
buy and sell in a given watershed? 5
The Six Step Suitability Analysis '.'.. 5
Step One: Create a Watershed Discharge Profile 6
Step Two: Identify Type/Form of Pollutant Discharged by Sources 9
Step Three: Determine the potential environmental equivalence of different
discharge points 12
Step Four: Determine the potential for aligning the timing of load reductions and
regulatory timeframes among dischargers 16
Step Five: Determine if the supply of and demand for pollution reduction credits is
reasonably aligned within the watershed 18
Step Six: Review the results of Steps One through Five to Complete the Pollutant
Suitability Determination 20
Financial Attractiveness 22
Purpose 22
Approach 22
What Makes Water Quality Trading Financially Attractive? 23
Stage 1: Calculating Incremental Cost of Control for a single source 24
Stage 2: Examining the Watershed 30
Stage 3: Analyzing the Results 32
Market Infrastructure 40
Purpose 40
Approach 40
Considerations: Market Sizing 42
What Is Driving the Market? 42
What Are the Essential Functions of a Water Quality Trading Market? 43
1. Defining marketable reductions 43
2. Communicating among buyers and sellers 44
3. Ensuring environmental equivalence 44
4. Defining and executing the trading process 45
5. Tracking trades 46
6. Assuring Compliance with Clean Water Act and state/ local requirements.... 47
7. Managing transaction risk among parties to a trade 47
8. Providing information to the public and other stakeholders 48
Current Market Models 49
A Private, Non-profit Co-operative Facilitating Pre-Approved, Dynamic Trading 49
A Public Authority Banking and Managing Phosphorus Credits 54
A Nitrogen Credit Exchange 59
Stakeholder Readiness 65
Purpose 65
Approach 65
Identifying and Prioritizing Potential Participants 65
Recruiting Essential Participants 68
Benefits of Water Quality Trading 68
1 Likely Participant Needs and Interests Relating to Water Quality Trading 69
Stakeholder Participation in Market Infrastructure 72
Glossary 75
iii
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Water Quality Trading Assessment Handbook.
Appendix A 77
Water Quality Trading Suitability Profile for Phosphorus ". 77
Trading Suitability Overview 77
Key Trading Points 77
Appendix B 81
Water Quality Trading Suitability Profile for Temperature 81
Trading Suitability Overview 81
Key Trading Points 82
Appendix C 86
Water Quality Trading Suitability Profile for Sediments 86
Trading Suitability Overview 86
Key Trading Points 87
Appendix D 91
Capital Cost Annualization Factors .91
Appendix E 93
Participant Pollutant Management Options Characterization 93
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.Water Quality Trading Assessment Handbook
Introduction
In January 2003, the United States Environmental Protection Agency issued a Water
Quality Trading Policy enabling and supporting the adoption of market-based programs
for improving water quality. The policy acknowledges that the progress made towards
restoring and maintaining the chemical, physical, and biological integrity of the nation's
waters under the 1972 Clean Water Act (CWA) and its National Pollutant Discharge
Elimination System (NPDES) permits has been incomplete.1 When the policy was
issued, 40 percent of rivers, 45 percent of streams, and SOpercent of lakes that had been
assessed in the United States failed to support their designated uses.2 Faced with CWA
statutory obligations to achieve their watershed's designated uses, stakeholders have
been looking for innovative, supplementary ways to achieve federal, state, tribal, and
local water quality goals. The policy specifically enables and endorses the use of "water
quality trading" to accelerate compliance.
Water quality trading can be a cost-effective solution to local problems caused by
pollutant discharges to surface waters. A party facing relatively high pollutant reduction
costs might elect to compensate another party who can achieve an equivalent, though
less costly, pollutant reduction with similar water quality benefits. The flexibility offered by
water quality trading is one of its strongest selling points
This Handbook is designed to provide you, the watershed participant, with an efficient
means for assessing your watershed's potential to capitalize on this innovative "trading"
policy. The viability of trading, as discussed in this Handbook, depends on conditions
discussed in EPA's Water Quality Trading Policy, including: a market structured around
the current CWA regulatory framework; voluntary participation; a suitable pollutant; and
public participation.
Today, several trading markets are already helping to reduce the cost of improving water
quality. Experience with these markets offers insights into the opportunities and
challenges trading may present in your watershed. Experience teaches that success in
water quality trading markets will be influenced by several factors, including:
• the pollutant in question;
• the physical characteristics of the watershed;
• the cost of pollution control for individual dischargers;
• the mechanisms used to facilitate trading; and
• the ability and willingness of stakeholders to embrace and participate in trading.
This Handbook will help you assess the environmental, economic, and technical factors
that will influence your ability to create and sustain a water quality trading market. During
the assessment, you will focus on each of the individual factors that make trading viable.
As these factors are examined, you will organize disparate types of information into a
comprehensive view of relevant local conditions. You will need to obtain some
information from other stakeholders in your watershed. Your efforts will be much simpler
if most stakeholders speak a common language. This Handbook will help provide that
common language, giving you a methodology for organizing critical information into a
logical, easy-to-follow format.
1 Water Qualify Trading Policy (EPA, January 2003)
2 Ibid.
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Water Quality Trading Assessment Handbook.
The first chapter of the Handbook—Pollutant Suitability—addresses whether a "common"
or "tradable" commodity exists that is important to the water quality goals for the
watershed. Certain pollutants and watershed conditions are more suitable for trading
than others. Pilot projects in Region 10 and elsewhere have demonstrated that nutrients
can be successfully traded. Less information is available about trading other pollutants.
After reading the Pollutant Suitability chapter and examining your own pollutant
characteristics and watershed conditions, you will be better able to decide whether to
pursue trading.
The second chapter—Financial Attractiveness—addresses how to evaluate the
economics of a pollution trading market through consideration of the financial viability of
potential individual and aggregate trades. The financial attractiveness of trading depends
on whether the incremental costs of trading are less than the incremental costs of control
options otherwise available to an individual. Incremental cost (essentially a hybrid of
marginal and average cost) is the average cost of control for the increment of reduction
required to meet compliance obligations. Incremental cost represents a good
approximation of the upper-bound of a source's willingness to pay others within their
watershed to alter their discharging behavior. For trading to be financially attractive, the
difference in incremental costs between dischargers must, at a minimum, be sufficient to
cover trade transaction costs and offset any sense of increased (non-compliance) risk.
Assessing the incremental cost spreads associated with specific transactions provides
information on whether trading - in practice - will be financially attractive to potential
market participants. After reading the Rnancial Attractiveness chapter, exploring the
example provided, and employing the tools/methodologies discussed, you will be able to
make a more informed decision about whether to pursue trading.
The Market Infrastructure chapter will help you determine whether the market
infrastructure needed to facilitate trading can be built. The analysis will not provide a
specific blueprint for creating a market, but will highlight likely challenges and identify
ways in which your watershed can benefit from lessons learned in other markets. After
reading the Market Infrastructure chapter, exploring the examples provided, and
reflecting on the lessons from the first two chapters of the Handbook, you will better
understand the watershed's unique market infrastructure needs, possible mechanisms
suited for the watershed, and the commitment level likely needed to create a market.
Finally, the Stakeholder Readiness chapter addresses the level of stakeholder interest
and support needed to pursue water quality trading. If you decide to pursue trading
opportunities, you will need to work with other potential participants and stakeholders in
the'watershed. They may need to be convinced that the time they spend exploring
opportunities will lead to worthwhile, currently unavailable options. Parties with the
greatest potential to produce and/or consume reductions are necessary participants. In
addition, there must be a reasonable level of support from non-discharging stakeholders,
including citizen's groups and regulatory authorities concerned with water quality issues
in the watershed. After reading this chapter, you should have a better understanding of
how to engage other stakeholders.
The Handbook offers common themes that are important to your assessment and market
creation efforts. Among these is the recognition that water quality trading involves a
variety of risks and market development costs. Potential trade participants will face the
possibility that, despite their hard work, the market they desire will not emerge. Friction
around regulatory issues may emerge as the federal, state, and local regulatory
framework, as well as necessary stakeholder involvement, add costs or complicate
market design. After the market emerges and trading begins, transaction costs will be
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.Water Quality Trading Assessment Handbook
associated with information gathering, trade execution, and compliance efforts. The
attractiveness of pollution trading markets will be affected by these cost and uncertainty
factors. Higher development and transaction costs, market uncertainty, and regulatory
impediments can suppress market activity to the point where trading will not occur.
Lessons learned from other markets and discussed in this Handbook will help you assess
whether costs and friction can be managed in your watershed to support a viable market.
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Water Quality Trading Assessment Handbook,
Pollutant Suitability
Purpose
This chapter is intended to help you assess your watershed and associated pollutants for
water quality trading potential. The first step is to review the pollutant characteristics and
the watershed conditions. Certain pollutants and watershed conditions are more suitable
for trading than others.
This chapter considers:
• What factors determine a pollutant's suitability for water quality trading in a particular
watershed?
« Do the watershed conditions and pollutant characteristics warrant consideration of
water quality trading in the watershed?
Pilot projects have demonstrated that nutrients, such as phosphorus and nitrogen, can be
successfully traded. Less information is available about trading other pollutants, although
pilot projects have explored sediment, ammonia, and selenium trading. The EPA Water
Quality Trading Policy specifically supports nutrient (e.g., total phosphorus and total
nitrogen) and sediment trading. However, the policy indicates that other pollutants, such
as metals and pesticides, will require more scrutiny to ensure that trading can lead to
meeting water quality standards. EPA will support trading of these pollutants only under
limited conditions as part of a pilot project. For temperature, total dissolved gas,
BOD/Ammonia, and bacteria, this Handbook cannot provide a clear "yes" or "no" answer,
but this chapter should suggest whether to continue consideration of water quality trading
using the following chapters.
Approach
This chapter discusses conditions needed for a pollutant to serve as a commodity that
can be bought and sold in a trading system. Common commodities, like wheat, can be
traded easily because buyers and sellers understand and can clearly compare the
characteristics of the product. For example, with wheat, all market participants have a
common understanding of the meaning of a bushel of hard, red winter wheat. For water
quality trading opportunities to exist, dischargers in a watershed must establish a
common understanding of the commodity that is being bought and sold, including the
effects of trading on water quality.
The chapter then suggests a process for analyzing the suitability of trading a particular
pollutant in a particular watershed. To enrich your understanding of the conditions that
enable trading, the Handbook employs a hypothetical watershed to illustrate key points
and highlight potential trading opportunities.
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.Water Quality Trading Assessment Handbook
What is needed for a pollutant to serve as a "tradable
commodity" that dischargers can buy and sell in a given
watershed?
A condition for water quality trading is identification of a pollutant commodity that can be
sufficiently controlled, measured, and traded by sources (possibly including both point
and nonpoint sources) in the watershed or targeted market area. The four key trading
suitability factors - Type/Form, Impact, Time, and Quantity - are related to inherent
pollutant characteristics, watershed conditions, and the compliance regime.
» Type/Form: Potential trading partners must not trade "apples and oranges."
Generally, they must identify a single pollutant, in a common form. For example,
dischargers could trade Total Phosphorus, but might not be able to trade soluble for
non-soluble forms of phosphorus. In some cases, different pollutant types (e.g., Total
Phosphorus and Dissolved Oxygen) can be traded using a defined translation ratio
based on the quantities of each that have an "equal" overall effect on water quality.
• Impact: There must be environmental equivalence between the discharge points of
purchase and sale to ensure that the water quality impact will be at least equivalent
to, if not in excess of, established water quality-based requirements. For example,
participants must predict the water quality effects of a one pound phosphorus
reduction as required by a TMDL at one point in a watershed compared to a
reduction of one pound (or more or less) at another point downstream.
• Time: Participants must consider and work to align two time dimensions to support a
trade. First, purchased reductions must be produced during the same time period
that a buyer was required to produce them (e.g., during the permit compliance
reporting period or during the same season when the permit limit was applicable).
Second, TMDL compliance deadlines must reasonably align as sources consider
their options for meeting future reduction obligations.
• Quantity: Overall supply and demand must be reasonably aligned. The total
amount and increments of reductions available must reasonably align with the needs
of potential purchasers.
For water quality trades to occur, potential trading partners must be able to align all four
suitability factors.
The Six Step Suitability Analysis
This section will help you examine the four trading suitability factors. For each factor -
Type, Impact, Time, and Quantity - this section provides additional background
information and examples in the form of six steps. Each step involves a series of
questions to evaluate whether potential trading partners will.be able to establish a
tradable commodity. To help answer the questions, the inherent characteristics of a
number of common pollutants are provided. Appendices A, B, and C contain this
information. Stakeholders should also consider TMDLs, implementation plans, NPDES
permit language, and other local assessments and requirements to evaluate specific
sources or conditions in your watershed.
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Water Quality Trading Assessment Handbook.
STEP ONE: CREATE A WATERSHED DISCHARGE PROFILE
The purpose of this step is to characterize the pollutant(s) of concern that are discharged
in the watershed or defined trading area. You will use this information in later steps to
evaluate suitability and, in the next chapter, the financial attractiveness of trading. During
this step, it will be important to understand the type/form, location, and quantity of
pollutants being discharged from point and non-point sources.
One way to display this information is to use a simple chart, as in Figure 1.1. You will
complete only certain columns during this step; in subsequent steps you will gather more
information to fill in additional columns. In the example that follows, this same format is
used to create a profile for the sources in a hypothetical watershed.
Figure 1.1: Template for Creating a Watershed Discharge Profile
Name ol
Discharge
Source.
Diversion,
Agricultural
Drain, or
Tributary
Source 11
Source 12
Diversion t1
Return *1
Source <3
Discharge
Location
River Mite
Form ol Pollutant
As !
Addressed by i As
TMDL I Discharged
™------"T-'— ---'™"--'—~" —*— • - -•
!
i
1
i
Timing
Discharge
(e.g..
seasonal, Obligation
cyclical, etc.) : (Regulatory)
i
Quantity
I Total
Baseline Current : Target Reduction
Load' Load' i Load' Needed*
(Ibs /day) (IbsVday) .; (bs./day) (lbs./day)
• •- - -
i
I |
1 \
•' The Baseline Load is the amount ol discharge used to develop a TMDL. During TMDL development, a specific year or flow rate is
type any chosen to characterize the discharge behavior of point and non-point sources. This information can be found in the TMDL.
iThe Current Load is the amount of pollutant discharged as you analyze the w atershed for trading viability. The Target Load is the
arnounl of pokitant discharge allocated to each source in the TMDL. The Total Reduction Needed is the difference betw een the
Current Load and the Target Load.
You can typically find information to complete the chart in the text of a TMDL, in the
TMDL implementation plan, or from other sources in the local watershed. For example,
information about quantities discharged by point sources is contained in TMDL analyses
and in the relevant NPDES permits (permit numbers are often listed in the TMDL). The
TMDL will typically describe quantities discharged during a selected baseline period (e.g.,
1995), current discharges (or "loads"), and the TMDL's specified waste load allocation for
each point source based on a calculation of what is required to meet desired instream
concentrations and achieve water quality standards. Additional guidance is provided in
the following chapter (Financial Attractiveness) about calculating quantities associated
with projected future growth. For nonpoint sources, TMDLs generally do not provide data
about each individual source, but estimate quantities from selected reaches, inflows, or
tributaries. Additional information about cropping patterns and agricultural practices in
each area will be needed to estimate current loads from individual sources.
This profile offers a coarse initial screen for water quality trading viability. For example, if
there are no major point sources in the watershed that are required to reduce pollutant
loads, or if only a small number of widely dispersed sources discharge small quantities of
the pollutant of concern, trading may not be viable. On the other hand, a watershed that
includes a point source with large reduction obligations and many other closely clustered
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. Water Quality Trading Assessment Handbook
sources of the same pollutant may present opportunities for water quality improvements
and other environmental benefits at lower cost through trading.
The questions below will help create a profile of pollutants being discharged into the
watershed. It is important to gather as much of this information as possible because you
will need it in later steps to evaluate suitability more specifically with regard to pollutant
type/form, impact, time, and quantity.
For each source of the selected pollutant in the watershed:
• What is the geographic location of the discharge (by river mile)?
• What form of the pollutant is discharged (and/or controlled) by the source?
• What quantity of the pollutant does the source discharge? If possible, this should
include current loads and allocated loads from the TMDL, along with any seasonal or
other cyclic load variability considerations.
Overview of Happy River Basin
To demonstrate haw you will use the information gathered to assess trading opportunities, a
hypothetical watershed, the Happy River Basin, is presented below.
A number of segments along the Happy River currently experience nuisance aquatic growth
conditions. A TMDL for phosphorus has recently been completed for the main stem of the river,
providing Waste Load Allocations for the permitted point sources and Load Allocations for the
nonpoint sources and tributaries. The TMDL indicates that, to achieve water quality standards, the
concentration of phosphorus in the water column must be at or below .07 milligrams per liter
along the entire river with monitoring stations established for compliance purposes. Eight sources
of phosphorus discharge in the basin.
• Herb's Farm, a family-owned farm growing a range of crops, is located on an irrigation
district controlled return flow which enters the Happy River at RM (river mile) 570.
• Pleasantville POTW (publicly owned treatment works), a municipal wastewater treatment
plant owned and operated by the City of Pleasantville, is located at RM 567.
• Acme Inc., a food processing facility, is located four miles up Nirvana Creek, a tributary to
the Happy River. The creek currently meets water quality standards and is not subject to a
TMDL; therefore, Acme has not received a Waste Load Allocation. However, the Happy
River TMDL provides a Load Allocation requiring a reduction in the phosphorus loads
entering Happy River from Nirvana Creek. The creek's confluence with the Happy River is
atRM547.
• Hopeville POTW, a municipal wastewater treatment plant, owned and operated by the City of
Hopeville, is located at RM 546.
• AAA Corp., a sugar mill owned and operated by a multinational corporation, is located three
miles up Lucky Creek, a tributary to Happy River. AAA Corp. is required to meet a Waste
Load Allocation provided in the Lucky Creek TMDL, which was finalized two years ago.
Lucky Creek enters the Happy River at RM 544 and has been given an allocation at its
confluence with the main stem.
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Water Quality Trading Assessment Handbook...
Easyville Dam, owned by Peaceful Power Company, is located downstream, at the end of
Lake Content, a fifty-mile long reservoir, which is the pool behind Easyville Dam. The dam
does not produce phosphorus. However, the power company has been given a load allocation
under the TMDL to improve depressed levels of dissolved oxygen (DO) in the reservoir. The
Dam sits at RM 490.
Laughing Larry's Trout Farm, a privately owned aquaculture facility, is located at River Mile
489, below the Easyville Dam.
Figure 1.2: Schematic Map of Happy River Basin
Return 25%
Pleasantvilie POTW
Easy/ills D?m
Laughing Larry's
Trout. Farm
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,,, Water Quality Trading Assessment Handbook
Figure 1.3: Chart of Sources with Location, Pollutant Form, and Quantity Information
Name of Discharge Source, Diversion,
Agricultural Drain, or Tributary
Drain A—Herb's Farm
Pleas antv ills
Acme Inc. (Nirvana Creek Confluence)
Hopeviile
A"AArCofp7"(Lucky Creek Confluence)
Ortho Company
Laughing Larry's Trout Farm
Discharge
Location
River Mile
570 '
567
547
" 546"
"'544
541
439
Forn of Pollutant
As Addressed by
TMDL
Total Phosphorus
Total Phosphorus
Total Phosphorus
Total PhospTiorus
Total Phosphorus
Total Phosphorus
Totafphosphorus
Quantity
; Total
Baseline : Current Target Reduction
Load* Load" Load' : Needed
(lbs./day); (IbsJday) ; (Ibs./day) (IbsVday)
"632 753 527 226
760 791 633 158
492 547 410 137
"60 62 "50"" 12
199 " 195 166 29
786 1645 655 990
185 250 154 96
•Note: Nirvana Creek and Lucky Creek have received allocations at their confluene w itn Happy River. The Baseline, Current,
and Target Loads displayed are for the actual point of discharge to the tributary and are derived from the discharges'
environmental impact at the confluence w ith Happy River.
STEP TWO: IDENTIFY TYPE/FORM OF POLLUTANT DISCHARGED
BY SOURCES
The purpose of Step Two is to help evaluate whether sources are discharging the same
type and/or form of pollutant. Type/Form is the first of the four factors that must be
aligned among dischargers for trading to be viable. Sources must first determine that
there is a common type of pollutant to be traded (e.g., phosphorus, sediments, or
temperature). Types of pollutants may or may not be sufficiently correlated to allow
trading. Even if sources are discharging the same type of pollutant, the form of pollutant
as discharged may differ from source to source. Current practice requires that pollutant
trading systems use an identified controllable pollutant common to all potential market
participants. This establishes a "common currency" with which market participants can
evaluate offers of behavior change from others.
A. Determine if sources are discharging the same form of pollutant as
regulated by the TMDL.
Using the information developed in Step One, identify the form of pollutant addressed in
the TMDL, and the form discharged by each identified source. In some cases, the form-
suitability determination may be simple. If the TMDL has provided the majority of
dischargers an allocation expressed as the same form of the pollutant (e.g., Total
Phosphorus), then potential trading participants will have a solid match. For example,
phosphorus loading is often regulated in TMDLs because excessive phosphorus
concentrations encourage nuisance aquatic growth, reduce dissolved oxygen levels, and
result in violations of water quality standards. In many cases, TMDLs provide load
allocations for Total Phosphorus, rather than soluble or non-soluble forms because Total
Phosphorus can be easily measured in monitoring samples.
Although Total Phosphorus is the pollutant form being measured, most sources
discharge a combination of phosphorus forms (e.g., soluble or non-soluble). However,
certain pollutants, including phosphorus, may pose difficulties even if the TMDL assigns
allocation of a single pollutant form to all dischargers. (See Appendix A for more
information.) For example, if individual dischargers have load characteristics that vary
widely (e.g., one primarily discharges soluble phosphorus while another primarily
discharges non-soluble sediment attached phosphorus) then a trade between the two
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Water Quality Trading Assessment Handbook...
may not be environmentally equivalent. As trading opportunities are considered in a
watershed, it will be important to understand the actual forms of the pollutant being
discharged by each source to assure that trades represent an equivalent impact on water
quality.
The following questions are intended to help assess whether the pollutant can be treated
as a "tradable commodity" based on commonality of the form of the pollutant being
discharged.
• What is the form of pollutant addressed in the TMDL? For each pollutant, does the
TMDL provide load allocations for more than one form?
• Do sources discharge the same form of the pollutant? If not, what form is
discharged?
• What are the impacts of concern for this pollutant and do they vary by the different
forms (if any) discharged?
In answering these questions, if you find that, 1) the TMDL provides load allocations for a
single pollutant form; and 2) sources in a watershed discharge and measure that same
form—you are in a strong position to continue the trading analysis. If this is the case,
proceed to Step Three, to evaluate the potential for establishing environmental
equivalence. If this is not the case, use the next set of questions in Step Two (B) to
consider whether you can establish translation ratios between different pollutant types or
forms.
B. Determine if there are opportunities to trade between different forms of
the same pollutant, or between different types of pollutants.
This section considers circumstances in which different forms or types of a pollutant
might be involved in a water quality trade. For example, if the TMDL provides load
allocations for different forms (e.g., chemical compounds) of the same pollutant, you
would need to assess the potential for establishing a translation between them. In some
instances, such a translation can make it possible to trade more than one form of
pollutant by defining the ratio at which the two forms may be exchanged with an "equal"
effect on water quality. Without a reliable, scientifically defensible translation basis, it
may be impossible to trade different forms of a pollutant.
In some cases, trading can even occur between two different types of pollutants if there is
sufficient information to establish translation ratios that describe how they interrelate. For
example, reductions in upstream nutrient levels can improve downstream dissolved
oxygen levels or biochemical oxygen demand. The EPA Water Quality Trading Policy
supports cross-pollutant trading for oxygen-related pollutants when translation ratios can
be established.
The following questions should be answered if you are considering trading more than one
form of the same pollutant, or if you are considering trading two different types of
pollutants. (This will also help you identify situations where a TMDL provides load
allocations for a single form, but sources actually discharge very different forms that have
different impacts on water quality.) Establishing translation ratios requires adequate
data and analysis about how pollutants behave under specific watershed conditions. If it
appears that the data or analysis cannot be developed, water quality trading opportunities
will be limited.
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.Water Quality Trading Assessment Handbook
If different forms are being discharged, is there sufficient information to establish a
translation basis between those different forms of the pollutant?
Is the pollutant measured/regulated directly or by using an indicator of its indirect
effects on water quality? Has a basis for translating direct regulatory limits to indirect
effects been established?
Is there a typical causal relationship between this pollutant and others? Has a
specific translation relationship been established between two pollutants within this
watershed?
Type/Form: Exploring Potential Trading Opportunities Between
Dischargers
The hypothetical TMDL provides Total Phosphorus load allocations for all dischargers located on
the main stem of the Happy River. Lucky Creek, where AAA Corp. discharges, has a phosphorus
TMDL in place and AAA is subject to a WLA. Because these dischargers have allocations for the
same form of phosphorus, and their loads have reasonably similar form characteristics, they will
be sufficiently matched to proceed with further consideration of trading.
The following examples of potential trades illustrate how pollutant form and type play a role in
assessing the viability of trading in a watershed.
Plcasantville POTW and HopevUle POTW. The discharges from the two POTWs located at
Pleasantville and Hopeville contain a similar combination of both soluble and non-soluble
attached forms of phosphorus. Because the discharges will be measured using the same form of
phosphorus (Total Phosphorus) and the actual forms discharged are also very similar, trading
opportunities between these two sources can exist.
Herb's Farm and Pleasantville POTW. Herb's Farm is the only farm located on the irrigation
district drain flowing into the Happy River at RM 570. Although the phosphorus entering the
river through this agricultural drain is likely to be primarily the non-soluble sediment attached
form, Total Phosphorus will be the form measured to monitor compliance with the TMDL load
allocations. The discharge from the Pleasantville POTW, which contains a different combination
of actual phosphorus forms than the Herb Farm drain, will also be measured and reported in units
of Total Phosphorus. Although both dischargers will be measuring and reporting the same form
of phosphorus, this trade might raise concerns because these sources are discharging different
combinations of phosphorus forms. However, in practice, the trade is not likely to create localized
impacts, and trading opportunities between these two sources can exist.
Easyville Dam and Hopeville POTW. Easyville Dam has a load allocation for dissolved oxygen
(DO), not for Total Phosphorus (TP). Phosphorus loading in the Happy River above the dam
contributes to nuisance aquatic growth in the reservoir, which is the major cause of violations of
water quality standards related to DO. Hopeville POTW has a waste load allocation for Total
Phosphorus. The operators of the dam have expressed interest in substituting upriver TP
reductions for more direct DO enhancement efforts in the reservoir (e.g., direct oxygenation) to
meet its allocation. A clear causal relationship does exist between phosphorus loading and DO
levels, and the TMDL modeling provides a basis for developing a translation ratio to support TP to
DO trading. If a reliable translation ratio can be established between the two types and the two
sources, trading opportunities between these two sources can exist. In the absence of such a
11
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Water Quality Trading Assessment Handbook.
translation ratio, however, Easyville Dam would lack the basis for trading in the Happy Basin
market.
Figure 1.4, Chart of Sources with Type of Pollutant in TMDL, and Type of Pollutant actually
discharged.
Name of Discharge Source, Diversion,
Agricultural Drain, or Tributary
Herb's Farm
Pleas ant ville
Acme Inc. (Nirvana Creek Confluence)
Hopeville
AAA Corp. (Lucky Creek Confluence)
Ortho Company
Laughing Larry's Trout Farm
Location
River Mile
570
567
547
546
544
541
489
Form of Pollutant
As Addressed by
TMDL
: As
Discharged
(% Soluble/
\ % Non-
! Soluble)
Total Phosphorus
Total Phosphorus
Total Phosphorus
Total Phosphorus
Total Phosphorus
Total Phosphorus
Total Phosphorus
: 30/70
90/10
! 100/0
90/10
; 100/0
: 100/0
i 50/50
STEP THREES DETERMINE THE POTENTIAL ENVIRONMENTAL
EQUIVALENCE OF DIFFERENT DISCHARGE POINTS
The purpose of Step Three is to evaluate the location of potentially tradable discharges
and relevant receiving water conditions to determine whether the environmental impact is
equivalent. Environmental impact is the second of the four factors that must be aligned
for trading to be viable. Your Step One watershed discharge information will give you the
location of the pollutant discharges. Participants must be able to establish that the trade
would result in the same (or better) environmental improvement in the receiving water if
pollutant loadings are reduced in the seller's discharge rather than in the buyer's.
Two related factors influence environmental equivalence. First, the fate and transport
characteristics of a pollutant (e.g., how it behaves in a river system) must be considered.
Second, the unique conditions of the watershed must be evaluated. The pollutant's
concentration or presence and its effects on water quality may vary greatly as it moves
from upstream to downstream. For example, a pound of phosphorus discharged into a
river can "disappear" as it travels down a river through uptake by aquatic plants, settling
out, and/or water diversion for agricultural or other uses. This can diminish the
environmental value of a purchased pollutant reduction as it travels downstream.
Purchasers therefore may be required to buy more total loading reduction from other
sources than would have been required at their discharge point. Some trading systems
use pollutant "equivalence ratios", or similar mechanisms, to establish the necessary
environmental equivalence relationships. In these systems, each source or trade
transaction is assigned a ratio to account for the effects of inputs, withdrawals, and
diversions between the seller's and buyer's discharge points and all relevant compliance
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.Water Quality Trading Assessment Handbook
points. These ratios depend on pollutant parameter stability as well as the distance, river
hydrology, and other relevant environmental conditions.
In general, the greater the geographic distance between discharge points, the greater the
chance of high volume pollutant uptake and settlement, and/or complex hydrology in the
receiving waters between those points. Therefore, sources in close geographic proximity
are more likely to be able to establish a straightforward environmental equivalence
relationship. In some cases, the influence of diversions and tributaries may be too great
to establish reliable impact relationships.
How Ratios Are Used to Establish Environmental Equivalence
Most trading systems use equivalence ratios, or similar mechanisms, to adjust for the complex
fate and transport characteristics of pollutants and variable watershed conditions. In these
systems, each source or trade transaction is assigned a ratio to account for the effects ol
inputs, withdrawals, and other effects on the pollutant between the seller and buyer's discharge
points, and any other monitoring points, to assure the equivalent environmental impact from
pollutants present in the water column. Ratios allow trading partners to adjust the amount ol
reductions to assure trades create environmentally equivalent outcomes at the point(s) ol
environmental concern. Ratios are often based on each source's location along the river,
tributary, or agricultural drain in relation to other market participants and/or designated instream
compliance points. They can also be based on other site location factors that reflect the
potential for further diversion and reuse of water below the point of discharge. Other site
location factors for nonpoint sources include soil type and permeability, slope, vegetation,
amount of rainfall, etc. Some demonstration programs use separate ratios to account for rivei
location and other site location factors. Others use a composite ratio that accounts for all
factors.
The example of phosphorus helps illustrate why equivalence ratios are needed. A pound ot
phosphorus discharged upstream may not arrive as a pound of phosphorus at a given point
downstream. Some may be lost as the stream is diverted for agricultural use or for other water
supply needs. Phosphorus can also drop out of the water column and be deposited as
sediment, transmitted to groundwater through infiltration, or taken up by plants along the way.
The ratio reflects the best estimate of the effect of a reduction that will be realized at the buyer's
discharge point, or other compliance points. For example, a 3:1 ratio indicates that for every
three pounds of phosphorus released by a discharger, one pound will reach and have an
environmental effect on water quality at the critical monitoring point. River location ratios are
often calculated using modeling. Often, modeling (such as mass balance calculation) has
already been used for TMDL development.
Appendices A, B, and C of this Handbook provide information about the inherent
characteristics of selected pollutants that is relevant to how they may behave in receiving
waters. You will also need to collect information about relevant conditions in your specific
watershed, such as the locations and volumes of major inflows and outflows. If necessary
data or reliable models are lacking, or pollutant fate and transport characteristics are very
complex, uncertain, or unknown, conditions for trading may not be favorable.
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Water Quality Trading Assessment Handbook.
Localized Impacts
Some potential trades that could result in a general water quality improvement in a broad area
may also result in acute, localized impacts. Trades that create "hot spots" ~ localized areas
with high levels of pollution within a watershed - should be avoided. The following factors
should be considered.
• Characteristics of the Pollutant-
> Each pollutant poses different risks to local water quality.
• Watershed conditions-
> Areas that have no additional assimilative capacity for the relevant pollutant may
show localized impacts if loads are increased.
> Areas with low flows and/or a high capacity for retentiveness will be more likely to
show localized impacts.
The presence of other pollutants will affect the potential tor localized impacts.
• Type of trade-
> Downstream trades (i.e., a source compensates a source downstream to
overcontrol its discharge) have greater risks of localized impacts because if the
buyer's discharge exceeds its TMDL allocation, loads in the stream segment
. between the sources may be too high.
Upstream trades (i.e., a source compensates a source upstream to overcontrol its
discharge) present lower risks because overcontrol by the upstream discharge/
will result in improvements to water quality beyond those specified in the TMDL in
the segment between the sources.
• Use of monitoring-
> Monitoring programs designed to support trading should identify potential
localized impacts and provide for control regime modifications to mitigate impacts.
Answering the following questions will help you assess the potential environmental
equivalence between discharges. Information to help answer these questions can be
found in the Watershed Discharge Profile developed in Step One, in Appendices A, B,
and C, and in relevant TMDLs.
• Where are the discharges of the relevant pollutant?
• Where are the major hydrologic inflows and outflows?
• What are the general fate and transport characteristics of the pollutant?
• How do river conditions, such as flow rate and temperature, affect the behavior and
impact of the pollutants?
• Is there a potential for localized impacts? Under what conditions?
• What options need to be considered for establishing environmental impact
equivalencies for different areas of the river?
Water quality trading is one of several tools available to implement TMDLs. Trading
requires understanding the effect of pollution reductions by sources at different points in
the watershed. Trades that result in localized impacts and fail to meet water quality
standards are not acceptable. It is possible to use predictive models to estimate the
environmental equivalence of different discharges, but water quality monitoring will be an
essential element in any trading program to ensure that water quality goals are achieved.
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.Water Quality Trading Assessment Handbook
Environmental Equivalence: Exploring Potential Trading
Opportunities Between Dischargers
Information on the general fate and transport characteristics of phosphorus is provided in
Appendix A. With that information in mind, you are ready to take a closer look at the specific
conditions in the Happy River Basin watershed to assess the potential environmental equivalence
and trading opportunities among dischargers.
The following examples of potential trades illustrate how environmental equivalence can play a
role in assessing the viability of trading.
Herb's Farm and Pleasantville POTW
Herb's Farm is the only identifiable source located on an agricultural drain that empties into the
Happy River at RM 570. The Pleasantville POTW discharges nearby, only three miles
downstream. Because of swift flowing water, no other intervening diversions or returns, and little
plant life between the two sources, the equivalence ratio between the two dischargers is close to
1:1. (Trades involving other sources will require calculation of separate ratios.) Because of the
low equivalence ratio between Herb's Farm and Pleasantville POTW, opportunities for water
quality trading between these two dischargers can exist.
Pleasantville POTW and Hopeville POTW
The Hopeville POTW is located over 21 miles from the Pleasantville POTW. Between Hopeville
and Pleasantville is one major agricultural diversion, which diverts 75 percent of the flow of the
river. Because of the diversion and resulting slower river flow, as well as plant uptake and other
factors, trades between Hopeville and Pleasantville will have a 5:1 ratio.
There are two potential options for trading between die POTWs. One option is an "upstream
trade," in which Pleasantville overcontrols phosphorus reductions beyond its waste load allocation
to create reduction credits. In this case, Hopeville would purchase reduction credits from
• Pleasantville. However, because of the 5:1 ratio, Hopeville would need to purchase five pounds of
reductions at Pleasantville to achieve an equivalent reduction of one pound of phosphorus at its
plant. (This may or may not be cost effective for Hopeville.) Pleasantville would then reduce its
phosphorus discharges beyond its waste load allocation and water quality in the 21 mile segment
would be improved beyond that specified by the TMDL. This trade should also result in improved
water quality in the river segment below Hopeville.
Another option is a "downstream trade," in which Hopeville reduces its phosphorus discharge
beyond its TMDL allocations and Pleasantville purchases reduction credits from Hopeville. In
this example, Pleasantville would not meet its TMDL waste load allocation and this will result in
no phosphorus reduction in the 21 mile segment between the two dischargers. However, water
quality downstream of Hopeville would improve as a result of its overcontrol. A downstream
trade such as this would satisfy the TMDL only if the water quality impairment occurs in the river
segment below Hopeville and not between Pleasantville and Hopeville. It is possible that,
Pleasantville's TMDL waste load allocation was established to reduce its contributions to
impairments below Hopeville. However, except in such unique circumstances, the elevated
concentrations of phosphorous in the 21 mile segment between the sources is likely to cause
unacceptable localized adverse impacts.
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Water Quality Trading Assessment Handbook.
Laughing Larry's Trout Farm is located downstream of Lake Content, the reservoir behind
Easyville Dam. A reliable location ratio has not been established for the trout farm that would
allow it to trade with any dischargers located upstream. The complexity of the river ecosystem
increases significantly in this area of the Basin as water flows through the reservoir. The slower
moving water promotes aquatic plant growth and higher retentiveness of phosphorus in this area.
The fate and transport characteristics of phosphorus and the complexity of the watershed
conditions make it difficult to predict how phosphorus reductions above the dam will affect water
quality at locations below the dam. This high level of uncertainty will likely prevent development
of a ratio allowing Laughing Larry's to trade in the Happy River market area.
STEP FOURS DETERMINE THE POTENTIAL FOR ALIGNING THE
TIMING OF LOAD REDUCTIONS AND REGULA TORY TIMEFRAMES AMONG
DISCHARGERS
Timing is the third factor that must be in alignment for trading to be viable. In Step Two,
you considered the variability among discharges in terms of the forms of a pollutant or
types of pollutants. In Step Three, you considered the variability of geographic locations
in the watershed. In this step, you will consider how discharges from different sources
vary across time and the implications of this variability for the viability of trading. Three
timing dimensions must be considered. Alignment of all three is needed to match trading
partners.
Load variability: A discharger's load is likely to vary from time to time. You will need to
identify only major load variations that occur over the course of the year, not minor
fluctuations in discharges. For example, some POTWs reduce discharges to zero by
substituting land application during summer months. Some agricultural nonpoint sources
have significant reductions of nutrient loadings during the winter months. One important
consideration is whether the load allocations in the TMDL are seasonal or annual.
Potential trading partners must meet TMDL timing requirements and also link up with
other sources with similar discharge timing. Because of the effects of temperature and
sunlight, for example, winter nutrient loadings have very different environmental impacts
from summer loadings.
Compliance determination variability: Because of the different considerations in
establishing appropriate NPDES permit limits, as well as other factors such as the cost of
monitoring, the temporal specifications for discharge monitoring and compliance
determinations vary among dischargers (e.g., some have monthly limits, others have
daily limits, and some have both). To be viable, a trade must be consistent with the time
periods that are used to determine compliance with permit limitations or other regulatory
requirements. For example, a point source with a permit that requires compliance with
monthly average limitations will be able to trade only with a discharger who can
demonstrate monthly reductions. .
Compliance deadline variability: For a viable trade, dischargers' compliance deadlines
must be reasonably aligned. For example, a potential purchaser may need to meet
pollutant reduction requirements in 24 months. It may take twelve months to fund, install,
and fully implement the pollution control technology needed to meet those requirements.
Such a potential purchaser cannot wait 18 months while a potential reduction provider
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.Water Quality Trading Assessment Handbook
verifies its own obligations, selects its mitigation option, and calculates any surplus
reductions available for purchase. In some cases, potential market participants may
have different compliance deadlines because they are located in nearby tributaries with
different TMDL implementation schedules.
Much of the information required to assess time dimension variability in Step Four will be
found in the TMDL and NPDES permit language specific to each watershed and source.
Appendices A, B, and C also include a discussion of the typical range of regulation for
each pollutant.
Answering the following questions will help determine the potential alignment of
schedules in terms of seasonal requirements, metrics for pollutant limits, and deadlines
for compliance. If participants are unable to align all three dimensions of time, trading
may not be viable. It is not necessary for all sources in the watershed to align their
compliance schedules; however, a sufficient number must be aligned to support one or
more beneficial trades.
• Permit and TMDL Compliance Periods-
> Does the TMDL establish seasonal allocations or year-round reductions?
> What units of time are used to define and monitor compliance with relevant
permit limits?
> What time period is used by non-permitted dischargers (e.g., nonpoint
sources) to measure and, where applicable, report discharges? (Hourly,
daily, weekly, annually?)
> Do any sources have significant seasonal or other cyclical load variability?
• TMDL Compliance Deadlines-
> Has a TMDL implementation schedule been established? If so, do
compliance schedules among major dischargers reasonably match up?
> Are there other compliance deadlines (e.g., permit requirements based on
national effluent guidelines) that must be considered?
Timing: Exploring Trading Opportunities Between Dischargers
Three types of timing issues present challenges to potential trading partners in the Happy River
Basin. The following examples illustrate issues relating to (1) seasonal load variability, (2)
compliance determination variability, and (3) compliance deadline variability.
Herb's Farm and Pleasantville POTW (load variability)
Pleasantville POTW operates year-round, with some minor variation in the amount of phosphorus
in its discharge. Herb's Farm contributes to phosphorus loading in the river only during the
growing season. In the winter, when farmland is frozen over, the farm contributes very little
phosphorus.
If the TMDL required year-round load reductions to meet Pleasantville's waste load allocations,
Herb's Farm would not be able to produce reductions for the entirety of the relevant time period.
However, the Happy River phosphorus TMDL is typical of other phosphorus TMDLs and
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Water Quality Trading Assessment Handbook,
establishes only seasonal load allocations which are applicable between April and September.
Therefore, opportunities for trading between these two dischargers can exist.
Hopeville POTW and Pleasantville POTW (compliance determination variability)
In this hypothetical, both POTWs are regulated by NPDES permits with limits expressed in
similar temporal terms (e.g., monthly averages). These closely matched limits help support water
quality trading opportunities between the POTWs.
AAA Corp. (compliance deadline variability)
AAA is located on Lucky Creek, a tributary to the Happy River. Lucky Creek has its own
separate TMDL and implementation plan. AAA was given a waste load allocation under the
Lucky Creek TMDL. The Lucky Creek and Happy River TMDL plans have different compliance
deadlines, so there is a potential timing misalignment If the TMDL for Lucky Creek had not yet
been completed, AAA might not be able to participate in the trading market with Happy River
dischargers. However, because the Lucky Creek TMDL has been completed, AAA currently has
sufficient knowledge about its requirements. With this knowledge, they may be able to align the
timing of their compliance efforts in order to participate.
STEP FIVES DETERMINE IF THE SUPPL Y OF AND DEMAND FOR
POLLUTION REDUCTION CREDITS IS REASONABLY ALIGNED WITHIN THE
WATERSHED
The watershed discharge information developed in Step One should include quantities of
the relevant pollutant discharged by the sources in the watershed. In this Step, that
information will be analyzed to determine whether supply and demand are reasonably
aligned. For trading to be viable, the quantity of reductions that can be supplied must
meet or exceed the quantity of reductions needed to ensure compliance.
Demand for reductions is driven by current and future loads (what dischargers are
currently discharging or expect to discharge in the future), as compared to target loads
(what the TMDL allows sources to discharge). For individual nonpoint sources,
estimates of these quantities are not normally specified in the TMDL, and so will need to
be calculated, using aggregated nonpoint discharge data from the TMDL along with other
information, such as data developed by soil conservation districts. The TMDL will provide
information about current and target loads from inflows and tributaries. Methodologies for
calculating historical, current, and target loads for individual non-point sources along
each inflow and tributary may differ from watershed to watershed and from state to state.
These calculations may have a high degree of uncertainty, but can produce a valuable
rough understanding of the supply and demand dynamics in the watershed.
Supply is dictated by a discharger's ability to "overcontrol," or reduce its discharges below
the target load specified by the TMDL. The volume of reductions achieved beyond TMDL
obligations represents the stock of potential surplus reductions available for exchange
with other parties. The increments, or range, of reductions demanded and supplied will
determine whether a match is possible. The quantity of reductions that may be supplied
is determined by the efficacy of control techniques and management methods available
to sources. These techniques and methods include altering industrial product production
levels or land management practices, substituting inputs such as raw materials and
agricultural chemicals, or investing in new technology.
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.Water Quality Trading Assessment Handbook
In the next chapter, the financial feasibility of various control options are examined as a
factor in projecting supply and demand. At this stage, answering the following questions
will help develop an initial understanding of the supply and demand dynamics in the
watershed. If it appears that the supply of reductions can reasonably meet the demand,
then trading may be a viable tool to address water quality problems.
• For each relevant discharger, what are the quantities of current/future loads
compared to target loads?
* For each discharger, what is the capacity to provide reductions beyond applicable
required TMDL load allocations (i.e., do they have the technical capacity to generate
overcontrol)?
Supply and Demand: Exploring Trading Opportunities Among
Dischargers
It is often difficult to project the balance of supply and demand for reductions. In the Happy Basin
hypothetical, you have a general idea of the total amount of reductions needed by all sources to
meet TMDL load allocations. In the next chapter on Financial Attractiveness, the Handbook will
examine how differing costs of control options may make some sources likely buyers and others
likely sellers. But even at this stage, some early supply and demand patterns begin to emerge.
The following examples illustrate how supply and demand plays a role in assessing the viability of
trading.
Acme Inc. and Hopeville POTW (Supply and Demand in Balance)
Hopeville has projected that it will need to reduce phosphorus discharges by 12 pounds per day to
meet TMDL target allocations. (See Figure 1.5, Chart of Sources with total reductions needed by
Happy River dischargers.) Hopeville may consider purchasing reduction credits from Acme Inc.
rather than investing in control technology that is projected to produce considerably greater
pollutant loadings reductions than it needs. To meet its load allocation, Acme also expects to
install control technology with potential to overcontrol, thus generating potentially saleable
reduction credits. Other dischargers in the Basin also have potential to generate a sufficient
supply of reduction credits to meet Hopeville's demand.
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Water Quality Trading Assessment Handbook.
Ortho Industries, located at River Mile 541, is a major discharger of phosphorus. To meet its
TMDL waste load allocations, Ortho will need to reduce its discharges by about 990 IbsVday.
Ortho is considering an on-site control option that will meet its allocation. It is also considering
purchasing reductions from other dischargers in the Basin. For cost reasons, Ortho has decided to
focus on a "one size fits all" control technology package. There is no available alternative that
would allow for a blended strategy that includes the use of both a less effective, less costly
technological treatment control option and purchased reductions from other dischargers. Ortho
must choose trading or on-site control. As Ortho considers purchasing reductions from other
dischargers, it will need to project whether the potential supply of reductions will meet its demand
(i.e., enable it to comply fully with its waste load allocation). The calculated ratios needed to
ensure environmental equivalence are likely to at least double the reduction needed, increasing
Ortho's demand to approximately 2000 IbsVday. Using Figure 1.5, Chart of Sources, you can
calculate that it will be almost impossible for the remaining dischargers in the Basin to create a
sufficient supply of reduction credits to meet Ortho's demand. Even if all other sources reduced
their phosphorus discharges to zero, the supply of reduction credits generated by such overcontrol
would total only about 1900 IbsVday. Ortho can see that trading will not be an option for its
compliance plan because the supply of reductions cannot meet its demand.
STEP SIX: REVIEW THE RESULTS OF STEPS ONE THROUGH FIVE
TO COMPLETE THE POLLUTANT SUITABILITY DETERMINATION
Before moving on to the next chapter, review the outcome of the suitability analysis in the
five steps above. Pollutant suitability requires a high potential that all four suitability
factors will be in alignment for at least two market participants. If any one of the five
Pollutant Identification steps (i.e., watershed discharge profile, type/form, location, timing,
and supply/demand) show low potential for alignment, the pollutant is probably not
suitable for water quality trading in this watershed. Unless the pollutant has a medium to
high potential for all four factors, further analysis to assess water quality trading of this
pollutant in your watershed is probably not warranted. However, the user may wish to
consider whether other pollutants discharged by sources in the watershed may have
potential trading.
Rgure 1.5, Complete Discharge Profile with all pertinent information
Name of Discharge Source, Dims ion.
Agrculural Drain, of Tributary
Herb's Farm
Pfeastntvle
Acme he. (Nirvana Creek Conlkience)
Hopevh
AAA Corp. (Luck/ Creek Confluence)
Ortho Company
Laugfthg Larry's Trout Farm
Location
River Mle
570
567
547"
546
544
541
489
Form of Potjtant
; As
Discharge
d
(Soluble/N
As Addressed by ; on-
TMDL Soluble)
Total Phosphorus : 30/70
Total Phosphorus 90/10
Total Phosphorus ' 100/0
Total Phosphorus • 90/10
Total Phosphorus 100
Total Phosphorus : 100
Total Phosphorus 50/50
Timing
Discharge (e.g..
seasonal Obfgafon
cyclical, etc.) (Regulatory)
Seasonal June-Sept-
Year-round June-Sepl
Year-round June-Sept
Year-round June-Sepl
Year-round June-Sept.
Year-round June-Sept.
Seasonal June-Sepl
Quantity |
Total
Basebie . Current Target Reduction
Load' • Load* Load1 Needed'
(fcsJday) (bs Jday) (Ibs./day) (fes.ttay)
632 r 753 527 226
760 791 633 158
492 > 547 410 137
60 62 50 12
199 • 195 166 2»""~|
786 1645 655 990
185 : 250 154 96 |
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.Water Quality Trading Assessment Handbook
Outcome of Six Step Suitability Analysis
Of the seven Happy Basin sources identified at the beginning of the Six Step Suitability analysis,
five appear to reasonably meet the four suitability factors; while two appear to be unlikely trading
participants because they cannot match a key trading suitability factor with other sources.
• Laughing Larry's is located downstream of the Easyville Dam. Its location involves complex
factors that prevent definition of a reliable relationship with other dischargers to ensure
environmentally equivalent water quality improvements. (Trading Suitability Factor:
Environmental Equivalence)
• Ortho Company will require more pollution reductions than could possibly be generated from
all the sources in the basin when likely trading ratios are factored in. Its demand far outstrips
potential supply. (Trading Suitability Factor: Supply/Demand)
In the next chapter, the remaining five sources will be further examined to assess if trading will be
financially attractive for dischargers in the Happy River Basin.
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Water Quality Trading Assessment Handbook.
Financial Attractiveness
Purpose
Financial attractiveness is the second major consideration in assessing water quality
trading potential in your watershed. This chapter reviews the financial relationships
affecting the viability of trading. The potential economic gains associated with trading
are influenced by factors specific to the watershed as well as factors external to the
watershed. Because the relevant financial relationships are often nuanced and dynamic,
this section can offer only the foundation needed to begin examining current financial
relationships in the watershed and their sensitivity to different assumptions. This chapter
will help answer the following questions:
• What makes water quality trading financially attractive?
» How can I measure financial attractiveness?
• Where can I find the data?
• What could the analysis mean for my watershed?
• What should I do next?
After reading this chapter, considering the examples provided, and employing the tools or
methodologies discussed, the watershed participant will be able to screen out unlikely
trading scenarios and make an informed decision as to whether further pursuit of
pollutant trading is warranted. Although this chapter discusses detailed calculations, a
rigorous analysis will not typically lead to a definitive answer. However, the reader will be
able to locate an individual trade's position along a relative continuum of financial
attractiveness, from "high" to "low". This chapter will also help improve the reader's
ability to discuss water quality trading with other watershed participants by creating a
common "language" to describe their needs and issues. In watersheds across the
country, people are talking with one another and developing new, non-traditional ways to
"trade" and solve their problems. Understanding the financial challenges potential trading
partners face can help you identify such opportunities in your watershed.
Approach
This chapter reviews the primary drivers of financial attractiveness and describes the
steps for conducting an analysis to assess those drivers in a specific situation. First, the
Handbook suggests investigating a discharge source for which the necessary data are
relatively accessible. The investigation includes building a basic model assessing the
source's current and future costs for controlling the relevant pollutant(s). With this basic
understanding of the financial considerations for one source, the reader is encouraged to
compile data for other sources in the watershed. Data collection strategies and data
formatting are considered. Finally, this chapter details the factors that influence the
strength of financial attractiveness and how to incorporate them into an analysis.
Possible barriers to a viable trading market are discussed. Certain types of trades will
present themselves as relatively straightforward, easy to execute, and financially
beneficial to all parties. Other potential trades will be more difficult and may not result in
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.Water Quality Trading Assessment Handbook
cost savings. For example, two point sources of phosphorus, located a quarter-mile
apart, and facing large differences in their control costs likely will uncover a compelling
case for trading. On the other hand, two sources at opposite ends of a complex
watershed, attempting to control temperature, and sharing only moderately different
control costs are unlikely to obtain any advantages from trading. The ability to
differentiate scenarios systematically will help watershed participants use trading wisely
as a tool to improve water quality at lower cost. Throughout this chapter, the Happy
River Basin hypothetical will be used to illustrate the analytical process and some of the
common barriers.
The economic models, financial models, and analysis techniques provided in this chapter
are, by design, very basic. They will help you screen your watershed for financial
attractiveness at a very general level and provide you with the basic ability to gauge
whether you have low, medium, or high financial opportunities. Pilot projects have
indicated that conducting more precise and in-depth analysis will typically involve a
substantially increased level of effort and will quickly move outside the realm of readily
available data. The tools provided in this chapter have been well tested, do not require
sophisticated economic modeling skills to implement, and are fully sufficient for basic
screening purposes. More precise analysis will typically require in-depth interaction with
individual discharge sources and may quite quickly encounter barriers related to
proprietary business information. As a result, this more in-depth work will often be best
conducted by individual sources in the context of specific trade negotiation activities.
What Makes Water Quality Trading Financially
Attractive?
The financial attractiveness of pollution trading is created by differences in the pollution
control costs faced by individual dischargers. These differences may make it possible to
improve water quality at lower cost overall by allowing pollution dischargers facing high
control costs to pay dischargers with lower cost control options to "overcontrol" their
discharges. "Overcontrol" as used herein means reducing a pollutant discharge below
the target load specified by the watershed's market driver (typically a TMDL). The volume
of reduced discharge below obligations represents the stock of potential surplus
reductions available for exchange with other parties. Pollution overcontrol creates a
"product" with buyers and sellers in a potentially competitive market that can encourage
innovation and efficiency untapped by a conventional regulatory regime.
To assess trading viability, a common measure is needed to assess the costs each
discharger will face to comply with its requirements. Chapter One explained the need to
identify a tradable commodity. Moving on to calculate the cost of producing the
commodity in the form of surplus pollution reductions will show whether the relative cost
efficiency of some dischargers' control options can lead to economically efficient trades.
Some pilot projects have used "incremental cost of control" as the common measure.
Incremental cost of control is calculated as the average cost of control for the increment
of reduction required for an individual source to achieve compliance. For example, if a
discharger needs a 5 Ibs./day reduction to comply but the only reasonably available
technology costs $10 million and produces a 20 ibs./day reduction, then the incremental
cost associated with the 5 lbs./day reduction is substantial relative to the average cost of
reductions. Traditional average cost would divide costs by 20 Ibs./day; incremental
analysis divides the costs by 5 lbs./day and would be four times higher than average
cost. As discussed earlier, incremental cost represents a good approximation of the
upper-bound of a source's willingness to pay others within their watershed to alter their
discharging behavior.
23
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Water Quality Trading Assessment Handbook.
STAGE 1: CALCULATING INCREMENTAL COST OF CONTROL FOR
A SINGLE SOURCE
The first step to assess financial attractiveness is to calculate the incremental cost of
control for each pollution source. You may have ready access to needed data for at least
one source. (Gathering information from other sources is discussed later.) The following
data are needed to calculate incremental cost of control:
• The source's current load;
• The source's TMDL (or equivalent) target load;
« The source's projected load on its required compliance date if no controls are
implemented;
• The source's projected long-term future load (considering anticipated growth and
other relevant factors);
• Annualized cost of the control option(s) including capital investment and annual
operating and maintenance (O&M) costs; and
• Expected reductions achieved by the control option.
Calculating the incremental cost then involves the following tasks.
Taskl: Calculate Required Reductions
A facility's future discharge will be influenced by any changes in demand for the facility's
primary services or products (e.g., municipal sewage treatment, industrial production, or
agricultural production). For a publicly owned wastewater treatment plant, discharge will
likely vary as local population increases and/or the number and activity level of industrial
users changes. Industrial sources may discharge more as production rises. An increase
(or decrease) in discharge (and resulting reductions needed to maintain compliance) will
affect needed reductions, incremental cost of control and, potentially, the financial
attractiveness of trading in the watershed.
The reductions needed to comply equal the discharger's target pollutant waste load
minus its current loads and any expected future loading increases. Both the projected
load at the compliance date and the projected long-term future load should be calculated.
Compliance dates and capital budgeting interact with changing demand to influence
discharge control choices; therefore, multiple timeframes may require examination. The
motivation for cost savings will materialize when a looming compliance date presents the
possibility of enforcement and penalties if discharges are not reduced. Currently, NPDES
permits implement TMDLs for point sources and typically give sources three to five years
to control their discharge. This normally gives dischargers a window of opportunity to
evaluate their options, select the best alternative, and implement it. In the Happy River
Basin hypothetical, the NPDES permit holders have five years to comply.
Water pollution control technology often represents a significant, fixed, long-term capital
investment. If a discharge increases beyond the existing control technology's ability to
maintain compliance during its useful life, new investments may be required in the future.
24
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.Water Quality Trading Assessment Handbook
Sources therefore need to examine the implications of their available options over an
extended period.
in the hypothetical, the sources project discharge volumes in five years for compliance
requirements and in ten years for capital budgeting needs. Future discharge levels can
be difficult to estimate. For the purposes of analysis, it may be best to create several
scenarios with different levels of anticipated growth. Past pilot projects have used a
system of "High," "Moderate," and "Low" growth trends. Current pollutant loadings may
be estimated to increase at a constant rate over a specified period to estimate future
loads and future required reductions.
Hopeville's Incremental Cost of Control
Projecting Hopeville's Needed Reductions
The Hopeville POTW currently discharges, on average, 4.1 million gallons of wastewater per day.
Routine sampling results show that the Total Phosphorus (TP) concentration in the effluent is 2.99
milligrams/liter. Converting gallons into liters and milligrams into pounds, the POTW's current
TP load is 62 lbs./day3. POTW managers believe their system could face demand increases
between 1 percent and 8 percent, on average, over 10 years. Hopeville believes that a reasonable
assumption is that moderate population and industrial growth will increase its TP load 3 percent
annually over the next five years to 72 Ibs./day. The TMDL assigns Hopeville a waste load
allocation, or Target Load, of 50 lbs./day and this is an enforceable compliance requirement in its
permit. The following table summarizes needed reductions at today's current discharge, five years
from now at the time permit compliance is required, and ten years in the future assuming 1
percent, 3 percent, and 8 percent annual growth.
As shown in the table, Hopeville needs to consider a wide range of potential reductions to meet its
permit under the TMDL. At current discharge levels, the POTW needs to reduce TP discharge by
12 lbs./day. Five years from now, when failing to comply has real economic consequences,
Hopeville will need to have reduced its TP discharge by between 16 and 42 lbs./day, depending on
demand for its services. Looking further into the future, Hopeville will need to generate between
19 and 84 IbsVday of TP reductions to remain in compliance. For the purposes of examining
financial attractiveness, you will focus on reductions needed in five years for compliance and
assume that Hopeville will experience moderate growth. Therefore, the assumption is that
Hopeville wiD be generating 72 lbs./day of TP and will have to reduce that discharge by 22
lbs./day in five years.
31lb = 453592.37 milligrams and 1 gallon =3.785411784 liters
VI
25
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Water Quality Trading Assessment Handbook.
Figure 2.1, Hopeville's POTW Load Projections
Current
Discharge
62
62
62
62
62
62
62
Hopeville POTW Load Projections
(lbs./day)
! Annual Target !
J Growth TP Load Load I
Current Baseline
! 0% 62 50 I
5 years (Compliance Date)
\ 1.0% J___ 66 1 50 i
j 3.0% 72 ! 50
j 8.0% ! 92 50
10 years (Capital Budgeting)
I 1.0% | 69 50
j 3.0% J33 50
I 8.0% j 134 ! 50
Reduction
Needed
12
16
22
42
19
33
84
Task 2: Examine Control Technology Options
The next task is to examine available technologies' ability to control the pollutant
discharge and the associated costs. Multiple technologies and mitigation approaches
may be available to each source to help address water quality impairments. The cost
and efficacy of control options varies. Usually, more control equals greater cost.
Moreover, current control technology often achieves reductions by removing pollutants in
large increments. Some control technologies will, therefore, produce the needed
reduction increment and a (significant) additional increment for little or no additional cost.
As control needs increase past the technology's ability to control pollution, the facility may
need to invest in more control and/or take the next "technology step."
HopeviDe's Technology Options
Hopeville's wastewater treatment engineers have identified three technologies that could reduce
phosphorus discharge from their POTW and offer a range of control. Advanced Primary
Treatment (APT) is capable of removing 16 Ibs7day. After an investment in APT, the next "step"
is Biological Nutrient Removal which would remove an additional 24 Ibs^day. Finally, additional
aeration basins and secondary clarifiers would eliminate 55 IbsVday of additional total
phosphorus.
Task 3: Calculating Incremental Reductions Needed for Compliance
When a technology step (or combination of steps) fails to generate, at a minimum, the
total reduction needed, a source may be forced to consider investment in an additional
technology step, even though this would produce more reductions than are needed To
evaluate its options, Hopeville generated the following table for its 5-year projection.
26
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.Water Quality Trading Assessment Handbook
Figure 2.2, Hopeviile's POTW 5-Year Projection
Step 1 ""
Step 2
"Step" 3
Step 1
Step 2
Step 3
Step 1
Step 2
Step 3
Hopeville POTW 5-Year Projection
(I jjs;/da y )
Low Growth
i ; ; : ) : Incremental
! i ! i ; i Reductions
; ; • Total Cumulative Needed
Annual ; TP Target , Reduction Reduction Reduction for
Growth ; Load ' Load : Needed Achieved Achieved ' Compliance
1.0% ; 66 50 ; 16
16160
22 38 " N/A
""" ' " " 30 ; 68 "N/A
Moderate Growth
t - • i Incremental
i < ; : ' : Reductions
\ ' • Total : Cumulative Needed
Annual \ TP Target ) Reduction i Reduction : Reduction ; for
Growth Load i Load ; Needed I Achieved Achieved Compliance
3.0% : 72 50 22 r
; : i'e " :' ' " 16 e
." '22 ' 38' : N/A
: r " 30 "68 N/A
High Growth
, Incremental
> Reductions
; ; iTotal ' . Cumulative ', Needed
Annual >TP ;Target sReduction Reduction Reduction for
Growth lLoad iLoad ;Needed Achieved ; Achieved Compliance
8.0% = 92 •: 50 : 42 :
' : IS i 16 ' 26
! 22 ; 38 , 4
" "" ""; " 3~6~~ ' 68' " ; N/A
Hopeviile's Incremental Reductions Needed for Compliance
Under low growth assumptions, Hopeville faces a reduction need of 16 lbs./day. As the table
demonstrates, APT generates 16 Ibs^day of reductions, the exact volume of reductions required by
the TMDL. If the POTW implemented this control technology, compliance would be reached and
there would be no incremental reductions needed. However, under moderate growth estimates, the
TMDL would require Hopeville to reduce its discharge by 22 lbs./day. The difference between
the reductions achieved with APT (16 lbs./day) and the total reductions needed (22 lbs./day )
would equal 6 lbs./day. These represent the incremental reductions needed for compliance.
Similarly, under high growth assumptions, implementing APT and Biological Nutrient Removal
would generate 38 lbs./day of reductions, while Hopeville would be required to reduce its TP
discharge by 42 lbs./day. Under these assumptions, the POTW would fall short of compliance and
need 4 lbs./day of incremental reductions.
27
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Water Quality Trading Assessment Handbook.
Task 4: Calculating Annualized Control Costs
To estimate the anticipated annualized cost of each control option, you will need to total
the annualized capital cost and the annual O&M cost.
• Annualized capital cost is the total cost (including associated finance charges)
incurred for installing a control option divided by the control option's useful life.
• Annual O&M cost should include but not be limited to monitoring, inspection,
permitting fees, waste disposal charges, repair, replacement parts, and
administration.
The following worksheet describes the calculations4:
Calculation of Annualized Control Costs
Cost of Installing Control Option
Time Period of Financing (Expressed as years)
Interest Rate for Financing (Expressed as a decimal)
Annualization Factor*
(2)
__
CosTTCalculate (1)x(2)]
Annual Cost of Operation & Maintenance"
Total Annual Cost of Control [(3)+(4)J
!(*)
* Appendix D contains the Annualization Factor for a range of interest
rates and time periods
" For recurring costs that occur less frequently than once a year, pro rate <
he cost over the relevant numbers of years (e.g., for pumps replaced
once every three years, include one-third of the cost in each year).
The appropriate interest rate will depend on the facility's ability to access financing.
Public treatment works may have access to grants and revolving funds designated for
water quality infrastructure improvements. Currently, the EPA and state funded Clean
Water State Revolving Fund issues loans at rates between 0 percent and market rates,
with approximately 2.5 percent being average. In some circumstances, certain private
entities are also eligible for loans from these below market funds. Borrowers from the
capital markets currently face interest rates of approximately 6 percent.
As previously mentioned, the models and tools in this chapter provide you with general screening capabilities.
In certain cases, an investment made in control technologies may be phased in over several years. This
potentially affects your annualized cost calculation. When analyzing a phased investment, the precision of your
analysis will increase by appropriately modeling each phase of the project and summing the individual results in
a logical manner.
28
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.Water Quality Trading Assessment Handbook
Hopeville's Annualized Control Costs
Hopeville is analyzing its control costs based on installing APT. The equipment costs $332,468 to
install (1) and will be financed through a municipal bond backed by Hopeville's water and sewer
fees over a 10-year period (n). Currently, similar bonds issued by comparable municipalities pay
4.5 percent (i). The Annualization Factor for a 10 year financing period at 4.5 percent is .1264 (2);
therefore the annualized Capital Cost equals ($332,468) multiplied by (0.1264) or $42,024 per
year (3). The O&M costs for this option are estimated to total $14,008 (4) annually. Therefore it
will "cost" the POTW $56,032 each year to control then- discharge and maintain compliance by
investing in APT.
Task 5: Calculating Incremental Control Cost
The final task is to divide annualized costs by the incremental reductions needed for
compliance. This should be done for each relevant time period (e.g., 5 years and 10
years) under each growth scenario. Hopeville analyzed its three options for the POTW
and produced the following table for its five-year projection.
Figure 2.3, Hopeville's POTW 5-Year Projection Including Costs
Hopeville POTW 5 Year Projection
(JbsJday)
Control
Option
Step 1
Step 2
Step 3"
Control
Option
Step 1
"Step 2'
Step 3
Control
Option
Step 1
Step 2
Step 3
\ - Total
Annual: Target! Reduction ,
Growth TP Load: Load ; Needed i
1.0% ; 66 ; 50 ; 16 i
;-- : ; ;
: ; Total ,
Annual! i Target; Reduction
Growth iTP Load: Load i Needed ;
3.0% 72 50 ; 22
; } Total
Annual' Target; Reduction
Growth TP Load Load : Needed
8.0% 92 50 42
Reduction
Achieved
16
22
30
Reduction
Achieved
16
22"
30
Reduction
Achieved
16
22
30
Low Growth
Incremental
; i Reduction
Cumulative Needed
Reduction ', for
? Achieved I Compliance
: i 16
> 16 i 0
38 : N/A
i 68 i N/A
Medium Growth
i Incremental
'. Reduction
Cumulative Needed
! Reduction ; for
: Achieved i Compliance
; 22
16 r "6
38 " N/A
68 "N/A"
High Growth
: 'Incremental
, Reduction
^Cumulative- Needed
' Reduction for
Achieved Compliance
42
16 26
" "38" 4
68 N/A
Control Increment \
Capital/O&M
Incurred
: Annualized >
$56,032 :
: $219,622 ;
"$339,456 i"
Control Increment
: Capital/O&M ;
: Incurred >
'. Annualized ;
: $56,032
'[""" $219,022
" $339,450
Control Increment ;
Capital/O&M '.
Incurred
Annualized
356,032
$219,022
$339,450
Incremental
Control
Cost
$9.59
N/A
N/A
Incremental
Control
Cost
N/A
$10001
N/A
Incremental
Control
Cost
"N/A
"N/A""
S232.50
Average
Control
: COSt
; $9.59
'• $27.28
: $31.00
{ Average
' Control
Cost
$9.59
$2728
$31.00
: Average
Control
Cost '
$9.59
$27.28
$31.00
29
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Water Quality Trading Assessment Handbook.
Hopeville's Incremental Control Cost
As noted earlier, Hopeville's "Step 1" control option generates the exact number of reductions
needed for compliance under low growth assumptions. Therefore, die incremental control cost for
Step 1 is equal to $56,032 (the annualized cost) divided by 16 IbsVday (the incremental reduction
needed for compliance with no additional control) or $9.59/lb./day.5 If the city experiences
medium growth over die next five years, Step 1 will fall 6 Ibs7day short and force Hopeville to
implement both Step 1 and Step 2. The incremental control cost for Step 2 is equal to $219,022
(the annualized cost of Steps 1 and 2) divided by 6 lbs./day (the incremental reduction needed for
compliance using Step 1 control) or $100.01/lb7day. However, Step 1 and Step 2 togedier would
not produce compliance under a high growth scenario. Consequendy, die incremental control cost
would be $339,450 (die annualized cost of Steps 1, 2, and 3) divided by 4 IbsVday (die
incremental reduction needed for compliance using Steps 1 and 2) or $232.50/lb7day.
STAGE 2: EXAMINING THE WATERSHED
As already discussed, the goal of water quality trading is to take advantage of differences
in incremental control costs among sources in a watershed by allowing facilities facing
higher costs to compensate those who can produce reductions at lower cost, thereby
producing the same (or more) environmental benefit with less overall cost to society.
Analyzing incremental costs for all dischargers in a watershed may be seen as a
premature segmentation of the market into high cost reduction producers (likely buyers)
and low cost pollutant reducers (likely sellers). However, at this time, the main focus of
analysis should be to characterize the size of the incremental control cost differences
present in your watershed. The differences in incremental control costs may be
consumed by other financial and market factors that are discussed in Stage 3. At this
time, you are concerned only with identifying the range of differences present based on
different growth assumptions.
Compiling Information from Other Sources
The potential advantages of trading may motivate a variety of actors, both public and
private, to investigate trading opportunities in the watershed. Analyzing trading potential
therefore may involve compiling information from many sources, including family farms,
POTWs, and publicly traded corporations. These potential market participants, while
under pressure from the same market driver (e.g., the need to meet a TMDL allocation),
may have different motivations for discussing water quality trading. In addition,
incentives to share information with outsiders, like regulators or environmental groups,
may vary. Engendering trust and being creative may help in acquiring needed data. (For
example, Appendix E is a sample data sheet distributed to pollutant sources participating
in a pilot project. This information was then compiled into spreadsheets used for a
market assessment.)
s Most pilot projects have chosen to denominate their costs in dollars/pound/day. Accordingly the table divides
the annualized control cost by 16 Ibs. and 365 days. $56,032/16 lbs./365=$9.59.
30
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.Water Quality Trading Assessment Handbook
Public Point Sources
Ability to gather the needed control cost information for POTWs or other public point
source dischargers is likely enhanced by public disclosure and information laws. Citizens
are often entitled to obtain a wealth of information including planning documents and
discharge data from individual industrial dischargers to the public system. Often, public
facilities have required planning cycles for projecting future demands for service and
preparing to cost-effectively manage community infrastructure needs. In addition,
working directly with the POTW to obtain the pertinent information may help develop
relationships beneficial to future trading efforts.
Private Point and Non-point Sources
Soliciting information from private sources is more challenging. Creating a water quality
trading market is an unconventional approach to improving water quality which explicitly
depends on the potential benefits of trading in a given watershed. In conventional
markets, cooperation evolves during the exchange of goods and services when buyers
indicate their willingness to pay and sellers exhibit their willingness to accept.
Consequently, in a traditional market, information sharing is usually limited to negotiating
a specific transaction. Analyzing the financial attractiveness of water quality trading
requires sharing information prior to negotiating trades. The desired information includes
potential reduction costs, which could give competitors clues about a facility's future
strategic plans. Wide dissemination of this information could reduce competitive
advantages currently enjoyed by the local facility. In addition, detailed information on
cost, market supply, and market demand for pollutant reductions may allow other market
participants to capture larger shares of trade benefits. Therefore, both the information
required to develop the watershed trading financial analysis and the results of that
analysis may be perceived as potentially leading to financial losses.
Private entities may be understandably reluctant to provide information considered
business sensitive. It is even possible that some entities may attempt to secure
bargaining power by providing inaccurate cost information. This could allow them to buy
reductions at a price lower than their willingness to pay or selling reductions at prices
higher than their actual willingness to accept. Although these incentives may muddy the
financial analysis, private sources are unlikely to game themselves out of participating in
a water quality trading market.
Sources for Non-Point Source Cost/Pollutant Reduction Information
In many cases, non-point sources have access to information resources pertinent to their
likely costs. If they are unwilling or unable to share the information, non-point cost and
pollutant reduction information will likely have to be pieced together from a variety of
sources. Some trading pilot projects, like Tar-Pamlico in North Carolina, have completed
studies and published them on the Internet. Other information sources include the U.S.
Department of Agriculture's Natural Resource Conservation Service, Agricultural
Research Service, and agricultural extension programs at colleges and universities.
Putting the Information Together
As more dischargers are included in an analysis, complexity increases. The key to
organizing the information is to ensure an "apples to apples" comparison. As discussed
in the previous chapter, annual and seasonal TMDL allocations are often implemented
through NPDES permit limits with daily, weekly, or monthly compliance metrics. In the
hypothetical, as in many pilot phosphorus trading projects, the pollutant is measured in
31
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Water Quality Trading Assessment Handbook.
pounds per day. Although translating between any two metrics is possible, you should
verify that the analysis employs a common numerator and denominator for all sources.
The format used below to analyze incremental cost of control in the hypothetical has
been used in pilot trading programs. It is always wise, however, to tailor the format for the
analysis according to the needs and skills of watershed participants.
A Financial Snapshot of the Happy River Watershed
Combining the Deeded Data
Hopeville and its fellow sources exchanged the needed information and produced the following
spreadsheet, cataloging each source's incremental control cost in five years under a moderate
growth scenario. Sources are listed from upriver to downriver and all possible technology steps
for each source are listed.
Figure 2.4, Happy River Watershed Combined Analysis
Medium
— ;. _ .„ . _ 5 Year Projection
; Annual -: TP -Target
Facility ^Growth ; Load ^ Load
Pleacantvllle 3.0% 917 633
Step I : ! i
step 2 : ;
Herb i Farm • 3.0% i 873 < 527 .
Stop 1 i !
Step I , ( I f
Acme Inc. ; 5.0% 698 410 .
-s""".. _ : i J. i
Step! .|I)
Steps ; i i s
I I
Total ; | Total
Reduction i Reduction {Reduction
Needed \ Achieved ! Achieved
284 i
i 662 I 682
! 107 i 769
346 I t
! 91 ; 91 '
< 623 • 714 '-
288 i 506 1 506 r
; 16 f 16 ;
J_ 2* !_ 40 i
'- 55 i 95 *
incremenlal : Control
Reduction : Increment ; ;
Needed j CapitaVOlU ! !
for i Incured : Incremental >
Compliance ' Annuabad < Control Colt i
N/A
i t 2,074,297 i
i t 5.222.364 :~
(20.01 i
N/A t
)
255 TT 49".823~: N/A~ i
N/A
N/A~~
6
N/A
N/A
i S 464.444 '
i S 6.308.251
: S 56,032 i
I t 219,022
: t 339.450
S4.S9 •
S60.01 !
N/A ~!
(100.01
N/A
Average
Contra)
Cost
(8.58
$133.72
~(T.50
J2.04
S34.16
(9.59
"(27.28
(31.00
Potential
Surplus
Reductions
Available to
Market
378
485
None
368"
218
None
18
73
STA GE 3m ANAL YZING THE RESUL rs
Task 1: Identifying Potentially Viable Trades
The format used to compile incremental control cost information for the hypothetical
watershed allows watershed participants to analyze a one-to-one pollution reduction
purchasing relationship. The next step is to identify potentially viable trades. As
demonstrated in the 5-Year Medium Growth Projection, the incremental control costs
(S/lb), in descending order, are:
32
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.Water Quality Trading Assessment Handbook
• Hopeville $100.01;
• Acme $60.01;
• Pleasantville $20.01;
• AAACorp. $14.99; and
• Herb's Farm $4.99.
Because trading allows facilities facing higher reduction costs to compensate those with
lower reduction costs, sources theoretically would consider trading with any source below
them on the list. Using this simple assumption, the following nine possible transactions
appear to be financially attractive:
• Hopeville compensates Acme Inc. to overcontroi;
• Hopeville compensates Pleasantville to overcontroi;
• Hopeville compensates AAA Corp. to overcontroi;
• Hopeville compensates Herb's Farm to overcontroi;
• Acme compensates Pleasantville to overcontroi;
• Acme compensates AAA Corp. to overcontroi;
• Acme compensates Herb's Farm to overcontroi;
• Pleasantville compensates AAA Corp. to overcontroi;
• Pleasantville compensates Herb's Farm to overcontroi; and
• AAA Corp. compensates Herb's Farm to overcontroi.
Task 2: Detailed Analysis
Although the Preliminary Analysis may identify potential trades, assessing financial
attractiveness on this basis alone requires making several assumptions. (The previous
chapter discussed how unlikely some of these assumptions may be.) For example, one
would have to assume that:
• The effectiveness of the control technology selected is not variable;
• Reductions in ail locations in the watershed are environmentally equivalent;
• Transaction costs are zero;
• Reductions are certain to occur; and
• The timing of all reductions will coincide with compliance mandates.
The financial attractiveness of a trade is subject to deterioration as these and other
complicating factors are included in the analysis. Pilot project experience indicates that
an organized analysis is needed to add the relevant additional considerations as an
overlay to the preliminary analysis. These additional considerations (discounts, ratios,
transaction costs, and risk) are best investigated in ascending order of complexity. As
each consideration is added to the analysis, the stakeholder can decide whether further
effort to create a trading market is warranted. If the incremental cost differences become
very small, thereby substantially reducing financial attractiveness, watershed participants
33
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Water Quality Trading Assessment Handbook.
may decide that trading is not viable. If a reasonable level of financial attractiveness
remains, additional factors can be considered.
Uncertainty Discount Adjusted Incremental Control Cost
Two types of pollutant reductions have been identified in pilot projects and the literature—
measured reductions and calculated reductions. Certain control technologies result in
easily measured water quality improvements; ongoing monitoring effectively quantifies
the actual reductions achieved. In some cases, however, measuring a control option's
impact on pollutant loading is either infeasible or very costly. Reductions for these
control options are often estimated based on scientific modeling for the watershed.
Loading reductions from Best Management Practices (BMPs) used by non-point sources
are most likely to be calculated.
BMPs perform differently based on a variety of site specific factors that may not be
included in the model, introducing the chance for variable and unpredictable results. In
pilot projects, the relatively variable and unpredictable performance of BMPs has been
handled by discounting the associated estimated reductions available for trade. The
uncertainty discount ensures that estimate errors in the BMP reduction equation (derived
from the model) will not jeopardize the environmental equivalence between different
types of pollutant reduction methods. The size of the discount will likely be driven by
local conditions with input from stakeholders. To measure the uncertainty discount's
effect on the financial attractiveness of individual trades, you will need to recalculate the
source's incremental cost of control using the discounted reductions.
Analyzing the Happy River Watershed
Pleasantville and Herb's Farm ,
Herb's Farm can use its Step 1 and 2 control options — sediment ponds and constructed wetlands -
to control discharges from its fields and trade the overcontrol to Pleasantville. Research shows
that, on average, these options could reduce phosphorus loadings from the farm by 623 lbs./day.
At an annualized cost (based on the length of the growing season when the farm can generate
reductions) of $464,444 the incremental control cost for Step 1 is $4.99/lbVday6. However,
reductions by Herb's Farm are likely to vary based on its unique (and sometimes unknown)
characteristics. It would be too costly to measure the actual phosphorus reduction achieved on a
daily basis. Potentially, stakeholders could ask that an uncertainty discount factor be applied to
the projected reductions achieved. A 50 percent discount would mean, in effect, that the farm
must produce 2 Ibs. of projected reductions for every 1 Ib. it wishes to trade. Consequently, from
Pleasantville's perspective, the total cost of achieving its needed increment of control through
trading will increase because it will need to purchase more credits to achieve an environmentally
equivalent reduction. The price per pound of reduction increases from $4.99 to $9.98, modestly
eroding the financial attractiveness of a trade between Herb's Farm and Pleasantville.
"Hie cost per pound per day is based on the same incremental costs analysis performed for Hopeville. As per
Figure 2.4, Herb's Farm Step 1 reduces discharge by 91 Ibs. The farm would need an additional increment of
255 Ibs. to comply with the TMDL. As such, to calculate the incremental control cost, the annualized cost for
Steps 1 and 2 ($464,444) must be divided into 255 Ibs.
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Environmental Equivalence Ratios
The water quality impact of a pollutant discharge varies depending on its location in the
watershed. As discussed in the previous chapter on Pollutant Suitability, a discharge's
impact depends on the pollutant's fate and transport as well as hydrologic conditions in
the watershed. Environmental equivalence ratios must sometimes be established to
ensure that the overall pollutant load does not impair beneficial uses of the river at
specific monitoring points. But ratios can be distributed within a market to find the least
cost pathway to achieving the load goal.
Pilot projects have used different environmental equivalence ratio methodologies ranging
from the simple to highly complex. Some have used a simple fixed ratio (i.e., 2-1) for all
trades. Others have created an index system based on a mass balance model that
accounts for inputs, withdrawals, and groundwater infiltration. In these systems, a
compliance point downstream is used to index the fate and transport of the pollutant from
upstream sources. Dividing Source A's index by Source B's index determines the ratio of
reductions Source A would have to buy from Source B.
Because these ratios can compare environmental equivalence only between two
sources, it is difficult to present a comprehensive analysis of their effects on the financial
attractiveness of trading for the whole watershed in a single spreadsheet. Watersheds
with a large number of sources can be extremely complex. Ten potential trading sources
would involve 54 trade permutations, many of which are not likely to prove viable. The
goal of your analysis should be to identify "Alpha Trades," those with potentially
significant financial gains, and, therefore, strong financial attractiveness even after
environmental equivalence ratios are introduced. As suggested by the previous chapter,
Alpha Trades are not likely to involve sources separated by significant distances or
sources with significant water diversions in the stream segment separating them.
Alpha Trades that may merit analysis in the Happy River Watershed are:
• Hopeville compensates Pleasantville to overcontrol;
• Hopeville compensates Herb's Farm to overcontrol;
• Pleasantville compensates Herb's Farm to overcontrol; and
• Acme Inc. compensates Pleasantville to overcontrol.
Environmental equivalence ratios can have a profound effect on financial attractiveness.
As the ratio between buyer and seller increases, the volume of purchased reductions to
maintain compliance increases, driving the cost per unit of purchased reduction higher.
Conversely, as the ratio between buyer and seller gets smaller, cost per unit of
purchased reduction falls. The following hypothetical illustrate various key nuances of
this relationship.
Hopeville, Pleasantville, and Herb's Farm
Hopeville faces incremental control costs of $100/lb. Pleasantville is able to control for $20Ab.
creating an incremental control cost difference of $80/lb. Financial attractiveness appears high
assuming the reductions have an equivalent effect on water quality. However, as a mass balance
model indicates, the long distance between the two sources and an intervening river diversion
between create an environmental equivalence ratio of 5.0. Therefore, Hopeville must purchase 5
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Ibs. of reductions from Pleasantville for every 1 Ib. of its own required reduction. The cost to
Hopeville of a one pound reduction purchased from Pleasantville increases from $20 to $100,
completely eroding any potential gains from the trade.
In contrast, Herb's Farm is able to overcontrol for $5/lb., creating an incremental control cost
difference between Hopeville and the farm of $95flb. The river diversion creates an
environmental equivalence ratio of 3.0 between the POTW and me farm. Therefore, Hopeville
must purchase 3 Ibs. of reductions from Herb's Farm for every 1 Ib. of its own required reduction.
In this case, the unit cost to Hopeville of a one pound reduction purchased from the farm increases
from $5 to $15. The difference between Hopeville's cost of controlling one pound of phosphorus
or purchasing the environmental equivalent from the farm is ($100 minus $15) $85. This appears
to be a highly attractive potential trade.
Pleasantville's close downstream proximity to Herb's Farm means that almost every pound of
phosphorus the farm can remove from the river achieves more environmental benefits than if
Pleasantville made the pollutant reductions itself. Mass balance modeling shows that Pleasantville
needs to purchase only six-tenths (0.6) of a pound of overcontrol for every pound of reduction it
needs. The cost to Pleasantville per pound of equivalent reduction purchased from the farm would
be $3 rather than $5.
Acme and Pleasantville
Environmental equivalence ratios in downstream trades can reverse the relationship between
higher and lower incremental control cost sources. Acme's index to the compliance point at the
confluence of its tributary and the mainstem is (0.9). The large diversion downstream of
Pleasantville means only a portion of the discharge from its facilities remain in the mainstem of
the river at the compliance point Pleasantville has received an index of (0.25). In this case,
Pleasantville would need to buy a little over a quarter of a pound (0.25/.9=.2777) of reductions
from Acme for every one pound of required reductions at its facility to lower the watershed's
Total Phosphorus at the compliance point. This means the unit cost to Pleasantville of a one
pound reduction purchased from Acme is approximately $16.66/lb. $3.34 less than the $20/lb.
Step 1 would achieve at Pleasantville's own facility. Therefore, in this case, the lower cost
producer of reductions may find it beneficial to purchase reductions from a higher cost source.
Transaction Costs
Transaction costs influence the financial attractiveness of a trade. Transaction costs
represent all the resources needed to affect the trade, including information gathering,
negotiation, execution, and monitoring. For a trade to be developed, at least one party
must expend resources (usually time and effort) assessing the potential viability of the
trade and communicating findings to the other party. To achieve the necessary "meeting
of the minds," discussions with the other party and additional key stakeholders (i.e.,
regulatory agencies and local interest groups) must be undertaken. These negotiations
may involve staff time, travel expenses, and legal fees. Costs are later incurred in
monitoring compliance with trade agreements and maintaining communications with
stakeholders.
It may be helpful to consider transaction costs in your financial attractiveness analysis.
Transaction costs are highly variable, depending on such factors as the volume of
trading, the infrastructure needed to facilitate trading, and the number and types of
participants involved. Regulatory agencies may have significant influence on the relevant
variables, and are therefore key controllers of transaction costs. Trading system
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designers must be attentive to the transaction costs they design into each trading
arrangement. Failure to adequately take account of financial realities by controlling
transaction costs can diminish or even eliminate the potential benefits of trading.
Several common tools can be used to estimate transaction costs. For example, Full
Time Equivalents (FTEs) can be used to represent the salary and personnel overhead
expenses of employees typically performing functions related to the trading market. In
addition to assessing and negotiating a trade, employees will need to meet monitoring
and reporting obligations related to the trade. New equipment needed for effluent and
instream monitoring and data management may be needed and/or fees for laboratory
analysis may be incurred. All these transaction costs of trading, along with the
annualized capital and O&M cost for each control technology step, increase incremental
control cost. To the extent that you are able to include these in your annualized costs,
the precision of your in incremental control costs estimates will increase.
Risk
Risk is the final factor to consider in assessing the financial attractiveness of a trade. The
first consideration is that efforts to create a trading system may or may not result in an
approved trade. As already discussed, designing a water quality trade can be difficult
and highly complex. The costs involved can be substantial. During initial design and
negotiation, watershed participants are likely to reassess the chances of success
continuously and will discount the value of a potential trade accordingly. For a trade to
be viable, potential participants must believe that the financial benefits of the trade will be
large enough to justify bearing the market risk. The timeliness and predictability of the
decision processes prior to the first trade are therefore key leverage points to mitigate
market risk and facilitate trading.
The other dimension of risk is trade risk. In a water quality trading market, one party
must rely on other party(s) to fulfill its obligations. Agreed upon terms of a trade may or
may not be performed by the parties. If agreed upon reductions are not achieved and
NPDES permit requirements are thereby violated, the purchaser of those reductions may
face legal enforcement and monetary penalties. In the context of water quality trading,
trade risk represents the expected cost of non-compliance and the perceived probability
that such non-compliance will occur. Currently no entity provides third-party insurance
policies for water quality trading. Because they must self-insure, watershed participants
will value trade risk subjectively and mitigate for it by discounting the price paid for
available reductions.
The subjective valuation of trade risk limits your ability to estimate the trade risk
markdowns watershed participants are likely to demand when negotiating a trade. At this
point in your analysis, it may prove beneficial to discuss trade risk and the associated
discounts with other watershed participants. Risk markdowns may be considerable in
light of the large noncompliance penalties authorized by the Clean Water Act and the
uncertainties surrounding trade risk.
As you begin to examine risk and transaction costs, you may wish to review the likely
incremental cost differences between parties after uncertainty discounts and location
ratios are considered. If a substantial difference remains, it is likely that risk and
transaction costs will erode only a portion of the remaining financial attractiveness of a
trade. If uncertainty discounts and location ratios have already significantly eroded the
difference in incremental control costs, the remaining financial attractiveness may well be
entirely consumed by transaction costs, market risk, and the buyer's trade risk
markdown.
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Implications of Transaction Costs, Risk, and Market Design
Transaction costs and risk can be mitigated to some extent through thoughtful market
design. Chapter 4 more fully describes the building blocks and key functions of a market
and offers specific advice on how to tailor a market to its watershed's unique
characteristics. Many stakeholders may be involved, each with different needs. A highly
constructive stakeholder will focus on designing a market that meets, at a minimum, two
goals: 1) reduced risk and 2) lower transaction costs. Transaction costs are largely
associated with collecting and communicating information and obtaining agreements and
regulatory approvals. To the extent that trading arrangements are transparent and
frictionless, costs and risks associated with communication and understanding can be
reduced. Similarly, transparency and the free flow of information create stable
expectations and outcomes for market participants. With fewer lurking "unknowns",
participants will feel less vulnerable in the marketplace and their required risk discount
may shrink.
Other Important Factors
As you can see, the financial attractiveness of water quality trading may be highly
nuanced by the considerations already addressed. Other factors may arise in your
watershed based on its unique characteristics. The following are just two examples of
watershed-specific considerations.
Market Size
Because pollution control technologies often produce reductions in large blocks, the
water quality trading marketplace may be "lumpy". Depending on how much reduction a
potential buyer needs relative to what technology can deliver, this can limit or enhance
financial attractiveness. If a discharger needs one pound per day of reductions to
comply, but the only available control technology is very expensive and will produce
reductions well in excess of one pound per day, then that discharger's willingness to pay
another party for that one pound of reduction could be very strong. On the other hand, if
the same discharger needs 200 Ibs./day, they will only be willing to purchase reductions if
the entire 200 Ib. reduction is reliably available. If that 200 Ib. reduction is available only
from diffuse sources with small individual surplus reductions, the associated transaction
costs and risks may be so significant that trading is not viable.
Missing the Market
The ratio of fixed to variable costs associated with control options, combined with the
timing of reduction demand and supply, will affect the financial attractiveness of a trade.
If the discharger's control option involves relatively high fixed costs, the incremental costs
of control will differ dramatically before and after investment in that control option. Before
investment, a potential reduction purchaser will calculate the incremental cost of control
as the combination of the amortized fixed and the annual variable costs of control. Once
the discharger invests in high fixed-cost controls, those fixed costs are "sunk" and he will
calculate the incremental cost of control based only on his annual variable costs. As a
result, any trades that were financially attractive before the investment, will have a greatly
diminished incremental cost differential after the investment and may actually represent a
negative financial return.
It is especially important to consider the fixed/variable cost profile in cases where supply
will lag behind demand. In such situations, the potential reduction purchaser will need to
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comply (i.e., meet demand) by creating its own reductions, at least initially. If this
discharger needs a high fixed cost control strategy to create these reductions, the
financial attractiveness of any potential future trade will be altered, probably diminished.
In effect, the parties will have missed the market unless potential reduction suppliers
have low incremental control costs that can compete with the discharger's lowered
incremental control costs after its large fixed cost investment. In some cases, a
discharger can use a high variable cost control strategy to create the reductions needed
initially without incurring large fixed costs. In such cases, the discharger may still find it
financially attractive to purchase reductions from another party in order to avoid
continued implementation of its short-term, variable-cost control strategy (or in order to
create, additional margins for growth).
Alternative Scenarios
In light of the various factors influencing financial attractiveness and market participation,
a watershed participant would be wise to assess market resiliency under alternative
assumptions. This is especially important relative to the two factors that are likely to
exhibit variability due to quantification difficulties and/or subjectivity—transaction costs
and perceived risk. Spreadsheet programs allow for easy scenario playing, including:
removing individual participants from the market; changing environmental equivalence
ratios; or projecting alternative TMDL reduction requirements. Examining alternative
scenarios may reveal, for example, that a large source unable to garner all reductions it
needs from other watershed participants may decide to invest in controls and thereby
eliminate almost all of the demand in the watershed, rendering trading unlikely or
impossible due to insignificant remaining demand. You may discover other factors that
could erode control cost differences beyond the level at which trading remains financially
attractive. Identifying the most sensitive factors in your watershed will help you build a
more robust understanding of trading viability in your watershed as well as highlight
specific relationships to keep in mind as you move forward and design your market.
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Market Infrastructure
Purpose
The first two chapters of this Handbook addressed the viability of trading based on
pollutant suitability, watershed and discharger characteristics, and the financial
attractiveness of likely trades. This chapter considers the infrastructure required to
enable trading. This chapter will help answer the following questions:
• What functions must a water quality trading market perform?
• Why is each function important to the success of water quality trading?
• What mechanisms have been used to perform these functions in demonstration
trading projects?
• What are the considerations in selecting appropriate mechanisms and integrating
them into a market?
After reading this chapter, considering the examples provided, and reflecting on what you
have learned in the previous chapters, you will better understand the watershed's unique
market infrastructure needs, market mechanisms best suited for the watershed, and the
commitment that may be needed to create a market. This Handbook does not provide a
specific blueprint for creating a market, but does highlight challenges you will face and
identify ways to benefit from lessons learned in other watersheds. With this information
you will be better able to decide whether trading is viable and tailor a market to your
watershed's unique needs.
Approach
All viable markets, whether trading water pollutant reductions or widgets, must efficiently
create benefits for its participants. "Markets" are social constructs facilitating interactions
among parties interested in exchanging goods or services. Research indicates that
successful markets evolve to reduce costs associated with:
• identifying others willing to purchase or supply goods or services;
» comparing the goods or services offered by other parties;
• negotiating the terms of an exchange of goods and services; and
» enforcing the terms of the exchange.
A market is more likely to be successful if it has rules, procedures, and norms allowing
parties to participate at a cost acceptable to everyone involved. Viable water quality
trading (WQT) markets are no different from conventional markets in this regard.
However, WQT markets are unconventional in the sense that they exchange goods
(pollutant loading reductions) that are created primarily by (i.e., have value because of)
regulations and administrative procedures. As such, WQT markets may require different
and/or additional infrastructure to ensure environmental equivalence and practical
enforceability, while providing the opportunity for cost savings.
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This chapter of the Handbook will introduce you to the primary functions of a viable WQT
market. These functions are to ensure that, along with satisfying the efficiency criteria for
conventional markets, WQT markets provide for environmental equivalence and practical
enforceability.
Market development and transaction costs, as well as risks associated with various
uncertainties, play an ongoing role in encouraging or suppressing market activity. These
considerations, which collectively represent the degree of "friction" individual transactions
face in the marketplace, should remain central to all infrastructure design decisions.
Failure to manage market friction effectively will substantially constrain and may entirely
stifle otherwise environmentally equivalent and financially attractive trades.
As discussed in the previous chapter, potential WQT market participants may be
challenged by a variety of market development costs, including those associated with
analyzing the viability of trading in the watershed, developing and selecting options for
market infrastructure, convening interested parties to discuss trading perspectives and
options, and creating the infrastructure. Market development uncertainty- the risk that
a market may not emerge - compounds these challenges.
In addition to market development costs, transaction costs include information
gathering, trade execution, and compliance monitoring efforts undertaken while trading is
underway. These transaction costs will be driven largely by the procedures, trade
execution methods, and tracking infrastructure established by the market for the
watershed. Transaction uncertainty due, for example, to an unclear basis or time-
frame for regulatory approvals will compound these costs. A market that needs trade-by-
trade regulatory approval, for example, will be relatively costly and uncertain. There will
be a constant risk that any particular trade will not materialize or will not receive
regulatory approval in time to satisfy a source's capital budgeting and/or compliance
deadline constraints.
High market development costs/uncertainty combined with high transaction
costs/uncertainty produce substantial overall market friction. High market friction will limit
activity to only very, very financially attractive trades. The market's infrastructure will
contribute to or reduce this friction. Therefore, the infrastructure designer's goal is to
create the smoothest transaction path consistent with regulatory requirements and water
quality improvement goals.
WQT markets are intended to provide for improved water quality at a lower societal cost.
In most situations, market drivers are primarily concerned with attaining environmental
goals and allow trading only as one option to further that effort. Federal, state, and local
laws and the need for stakeholder involvement may require complex infrastructure
mechanisms (monitoring regimens, auditing practices, public participation opportunities,
etc.) that increase costs and may restrict and/or complicate market infrastructure design.
For purposes of this analysis, you may think of these considerations as "regulatory
friction". When designing a WQT market you need to look for ways to minimize both
market friction and regulatory friction.
This chapter of the Handbook suggests ways to manage market and regulatory
imperatives to encourage efficiency and increase the likelihood that trading will occur. To
this end, three WQT models will be discussed based on how each model performs
particular functions. Building on the information and analysis you were asked to develop
in the previous chapters, this additional information will help you design an appropriate
market infrastructure to perform the essential functions in your watershed. No particular
approach is prescribed, but this chapter offers options and criteria to evaluate them.
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Considerations: Market Sizing
This section is intended to help you find ways to substantially reduce market and
regulatory friction by appropriately sizing your market infrastructure to your watershed's
unique trading characteristics. The first two chapters of this Handbook, Pollutant
Suitability and Financial Attractiveness, help you develop a solid understanding of where
your watershed might be positioned along the water quality trading spectrum. At one end
of the spectrum is a watershed with a single viable trade between two point sources who
will experience modest financial benefits and are expected to sustain the trading
relationship for the foreseeable future. At the other end of the spectrum is a watershed
with an unknown number of viable trades among both point and non-point sources.
These trades would be for limited durations and require frequent negotiations and
approval, while potentially saving millions of dollars. For the watershed with only one
viable trade, a market infrastructure consisting of a web-based trading platform linked to
state agency databases would be unnecessary and so expensive that, if it were required,
it would likely make the trade unattractive. On the other hand, if participants in the large,
dynamic market were required to continually revise their NPDES permits to reflect every
new trading arrangement, the costs and uncertainty in the market would diminish or
eliminate the value of trading to many if not all of them. The following information and
examples illustrate ways to tailor your "overhead" costs to the potential size of the market
in your watershed.
What Is Driving the Market?
All markets evolve to help fulfill the demands of consumers. Consumers provide
producers an opportunity to earn a profit for altering their behavior and attending to the
market's constantly changing demands for goods and services. Until a consumer
decides they "need" a soda, and is willing to pay someone to produce it, there is no
market for sodas.
Total Maximum Daily Loads (TMDLs) are the leading market drivers for WQT markets
today because they typically create the "need" to alter behavior by reducing pollutant
loadings discharged to waterways.. TMDLs and similar frameworks are sometimes
described as "budgets" for the introduction of pollutants into watersheds. Scientific
studies estimate the volume of discharge a specific watershed, or segment of the
watershed, can assimilate without exceeding the water quality standards enacted to
protect the watershed's designated beneficial use(s). This "pollutant budget" is then
allocated across point sources and non-point sources located in the watershed, as well
as a federal mandated "margin of safety." The allocation of discharge limits forces
sources in the watershed to analyze current practices to see if they need to alter their
discharging behavior and the associated options and costs to do so.
Although the EPA Water Quality Trading Policy indicates, "[A]ll water quality trading
should occur within a watershed or a defined area for which a TMDL has been
approved," the EPA's 1996 Draft Framework for Watershed-Based Trading also
acknowledges trading may be possible in equivalent analytical and management
frameworks like the Lakewide Area Management Plans (LaMPs) and Remedial Action
Plans (RAPs) found in the Great Lakes. The Water Quality Trading Policy also supports
"pre-TMDL trading in impaired waters to achieve progress towards or the attainment of
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water quality standards," as well as "pre-TMDL trading that achieves a direct
environmental benefit relevant to the conditions or causes of impairment to achieve
progress towards restoring designated uses where reducing pollutant loads alone is not
sufficient or as cost-effective." This chapter assumes that your watershed has a TMDL,
or similar framework, driving your interest in creating a WQT market.
What Are the Essential Functions of a Water Quality
Trading Market?
Based on a review of the academic literature and the water quality trading projects
conducted to date, a WQT market has at least eight essential functions. Various
mechanisms can perform these functions. Market mechanisms are limited only by
participants' creativity, the regulatory environment, and the characteristics of the
watershed. In some cases, specific mechanisms may perform more than one function,
potentially increasing market efficiency.
The eight essential functions are:
1. Defining marketable reductions;
2. Communicating among buyers and sellers;
3. Ensuring environmental equivalence of trades;
4. Defining and executing the trading process;
5. Tracking trades;
6. Assuring compliance with relevant federal Clean Water Act and state and local
requirements;
7. Managing risk among parties to trades; and
8. Providing information to the public and other stakeholders.
The following discussions review briefly why these functions may be necessary for
conventional markets and why they are essential for WQT. How well a mechanism may
perform its function is discussed in light of market and regulatory friction.
1. DEFINING MARKETABLE REDUCTIONS
Conventional Market Function— In conventional markets, a "marketable" product or
service is anything that one individual is willing to compensate another individual to
produce. The marketability of a product or service may be influenced by personal need,
taste, and economic conditions. For example, a person may need shelter, may prefer to
live in a townhouse, and may find it financially advantageous to pay someone to build the
house rather than foregoing salaried employment to build it alone. A product may be
marketable to one person but not another. For example, some people need shelter,
prefer to live in treehouses, and have the skills and time to build it themselves. Such a
person might not be open to purchasing a townhouse.
Marketable Products in WQT Markets—TMDLs are intended to set a budget for local
pollutant discharges that ensures water quality standards, including designated uses, are
attained in a watershed. Discharge "overcontrol" is the marketable product and is
produced when the reduction of pollutant loadings goes beyond a discharger's regulatory
obligation. A WQT market must do two things to create a marketable product. First, the
market must identify the relevant pollutant control obligations. Overcontrol cannot exist
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until a regulatory framework sets the baseline obligations. Second, the market must
transform overcontrol into a marketable product by allowing that behavior to acquire
value. Value is acquired when a regulatory framework allows one source to offset its
discharge reduction obligations with overcontrol by other sources. As described in the
Financial Attractiveness chapter of this Handbook, the value of overcontrol is highly
dependent upon differences in incremental control costs. Minor differences will create
little, if any, value even if the regulatory framework allows offsets.
2. COMMUNICATING AMONG BUYERS AND SELLERS
Conventional Market Function—All conventional markets are first and foremost
communication systems. They provide participants with information on product
availability, variety, quality, quantity, and price. This information is used to:
• Identify parties willing to produce or consume goods;
• Compare the merits of similar offers; and
• Negotiate mutually beneficial terms of exchange.
Without a means to acquire the needed information, potential market participants would
be unable to benefit from each other's ability and willingness to produce goods and
services.
Communication's Unique Role In WQT Markets—A WQT market gives dischargers
who face pollutant control costs a forum for communicating with other sources to identify
environmentally equivalent discharge reductions potentially executable at a lower cost.
Because pollutant suitability and financial attractiveness are specific to the pollutant's
chemical properties, the watershed's physical characteristics, and the relevant economic
conditions, WQT markets must facilitate sharing information regarding a relatively
complex product—a certain type/form of pollution reduction, at a specific time and place,
for a predetermined duration, in a particular quantity, for a certain cost.
A good WQT market allows parties to leam what quantity of discharge reductions are
being offered and demanded, when they can/will be delivered, their duration, their likely
impact on water quality at the point of purchase/sale and all relevant compliance points,
and how much they will potentially cost to acquire. A WQT market is more likely to
succeed if ft allows participants to efficiently survey the details of all potential offers to buy
or sell overcontrol and identify those most beneficial to their unique needs. It is less
likely to succeed if it fails to disseminate the pertinent information and/or requires
participants to expend an inordinate amount of time, energy, and money to do so.
3. ENSURING ENVIRONMENTAL EQUIVALENCE
Conventional Market Function - Some market mechanisms allow consumers to
compare the characteristics and quality of products targeting similar needs. For example,
over the counter drug packaging must inform consumers of the drug's chemical
contents—including the relative volume of active ingredients. This allows consumers to
compare the likely effectiveness of various painkillers and cold remedies so they can
select the product that best meets their needs.
Equivalence in WQT Markets—As mentioned earlier, trading requires that the impact of
the purchased pollutant reduction is (at least) environmentally equivalent to the required
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reduction. Market participants and other stakeholders must be able to evaluate the
environmental equivalence of reducing pollutants at the points of purchase and sale. For
example, hydrologic conditions in the stream between the two trading points must be
evaluated because they can have a profound impact on environmental equivalence.
Demonstration WQT projects have used various mechanisms to perform the essential
market function of facilitating environmental equivalence assessments. One important
consideration is the higher cost of developing an accurate model versus setting ratios
based on a rule of thumb (i.e., 3 to 1). Although establishing ratios based on accurate
modeling and a wealth of ambient data may be the most scientifically precise approach,
your WQT program may not be viable unless less costly approaches can be found. The
potential participants may be willing to make a tradeoff in such a case. For example, a
rule of thumb ratio that is less expensive to develop can be set artificially high to ensure
equivalence with a margin of safety, even though this might drive up the cost per unit of
needed reductions. A good equivalence mechanism will keep the total cost of a specific
trade (i.e., costs to develop the ratio and the cost of needed equivalent reductions) to a
minimum. A poor mechanism will fail to control total costs.
4. DEFINING AND EXECUTING THE TRADING PROCESS
Conventional Market Function— Each conventional market has its own unique trading
process. The types of trading processes depend on the types of products and
participants involved. For example, in a simple retail exchange at the local convenience
store, a customer chooses a loaf of bread based on personal taste and posted prices,
pays the proprietor at the cash register, and leaves the store free to eat the bread or feed
it to the pigeons. A more complex trading process occurs when a party seeks to
purchase goods and services for construction of a new skyscraper. This process may
involve a request for proposals, bidding by several interested firms, financing the project,
selecting a general contractor, purchasing materials, subcontracting special elements of
the work, overseeing and inspecting physical construction, and agreeing on the level of
completion. Friction in conventional markets can be minimized if participants have a solid
understanding of the steps involved in a transaction, the order in which they need to be
completed, and each step's likely cost.
The Trade Process in WQT Markets—EPA's Water Quality Trading Policy supports
trading under different conditions (i.e., both within the context of a TMDL and prior to its
approval.) The policy does not prescribe specific processes that each market must
employ to complete a trade. Each WQT market may develop its own trading process.
The Trading Process" includes the steps all parties must take to complete a proposed
trading transaction that ensures full CWA practical enforceability and fully supports TMDL
requirements. These steps could include, but are not limited to:
• Negotiating a transaction;
• Accounting for environmental equivalence;
• Completing and conveying appropriate paperwork;
• Reviewing and approving trades;
• Installing control technologies or adopting pollutant management methods;
• Monitoring and verifying reductions;
• Reporting to appropriate regulatory agencies and other stakeholders;
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• Auditing reported information against regulatory obligations; and
• Taking enforcement actions, if necessary.
A good trading process covers these steps in the appropriate order while minimizing
uncertainty and costs associated with the trading transaction. A poor mechanism is
incomplete and adds to uncertainty and costs associated with the transaction so that
trading is potentially suppressed. This can happen if the steps don't generate enough
momentum towards trade completion: For example, if the process requires control
technology installation and monitoring to confirm reductions prior to allowing sale of such
reductions, dischargers may be reluctant to commit scarce resources to overcontrol. In
addition, redundancies in the process (i.e., steps that are revisited without adding
sufficient value) add to transaction costs and will erode the value of trading.
Some states considering trading and those with demonstration projects underway, have
developed "State Trading Documents" to describe the process the state will use to
formally recognize water quality trades. These documents usually do not prescribe
exacting protocols for individual trades, but provide general guidelines while maintaining
the state's ability to control water quality administration. Great care should be taken to
review your state's document (if it has one) and design the market within its guidelines.
5. TRACKING TRADES
Conventional Market Function—Most conventional markets track transactions. How
much information is gathered, who stores it, and its future use depend on the types of
transactions and the purposes for tracking. For example, when an individual purchases a
loaf of bread at the local convenience store, the store may track the amount paid, when
the transaction was completed, and what was purchased. This information may be saved
by the register or transmitted to a large database for all transactions completed in the
region. The information may be used to justify keeping that store open until 2 a.m., to
document sales tax collection, or to manage inventory. The customer receives a receipt
that can help reconcile their budget, obtain reimbursement from housemates, or enable a
return of damaged goods.
Why Trades Need to be Tracked in WQT Markets—Tracking trades in a WQT market
is necessary to ensure that trades are not double counted (i.e., one source does not sell
the same reductions to more than one buyer) and to provide an easy audit trail for
compliance assurance purposes. The two crucial pieces of information a water quality
trade tracking mechanism must include are volume of reduction and chain of custody. In
this context, chain of custody refers to the possession of the right to use the pollutant
reduction for regulatory compliance purposes. Keeping track of this information helps
ensure that the goal of the TMDL, improved water quality, is being advanced and that
practical enforceability is maintained. In addition, this information makes the creation and
ownership of individual reductions clear and traceable in the context of determining if
sources are complying with NPDES or other relevant permits.
A good trade tracking mechanism minimizes market and regulatory friction by keeping
transaction costs for chain of custody low, while providing regulators with easy and
prompt access to appropriate levels of transaction detail. Transaction costs can be kept
low by setting clear and consistent expectations for what information is required and
limiting the administrative burden on trading partners. Sizing the tracking system to the
market will help limit transaction costs. When regulators can access trade information
efficiently, they are less likely to intervene on particular trades or in the market system. A
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poor trade tracking mechanism will drive up the cost of administering individual trades to
the point where it erodes the value of trading. It may require trading partners or
regulatory agencies to perform non- value-added administrative tasks (i.e., completing
unnecessary paperwork, reconstructing market activity from inconsistent transaction
statements).
6. ASSURING COMPLIANCE WITH CLEAN WATER ACT AND STATE/
LOCAL REQUIREMENTS
Conventional Market Function—In some conventional markets, buyers and sellers
have regulatory obligations to entities outside the transaction. These obligations derive
from a variety of public policy goals including protecting the parties directly involved in the
trade and/or those with an indirect interest in the transaction's outcome. For example,
the Securities and Exchange Commission requires publicly traded companies to conduct
third-party audits of financial statements and report specific information annually to the
public. This reduces the opportunity to commit fraud and lowers investors' market risk.
Regulatory Obligations in WQT Markets—WQT processes must involve various
watershed participants, including important non-discharging stakeholders like regulatory
agencies. According to the EPA Water Quality Trading Policy, trading programs must be
developed in the context of regulatory and enforcement mechanisms, which
predominantly rely on discharge permits. Thus, the market, federal, state and local
regulations, and the agencies responsible for their enforcement are closely connected.
EPA's Water Quality Trading Policy, says that "mechanisms for determining and ensuring
compliance are essential for all trades and trading programs ... States and tribes should
establish clear, enforceable mechanisms consistent with NPDES regulations that ensure
legal accountability for the generation of (reductions) that are traded." EPA's 1996 Draft
Framework for Watershed-Based Trading suggests a market must meet conditions,
standards, and procedures for ensuring that agencies maintain their ability to enforce the
intent of a specific regulation. The appropriate regulatory agency(s) therefore will need a
process to authorize, evaluate, permit, verify, and audit trading programs or even
individual trades. Demonstration projects have performed this function in a variety of
ways.
A good regulatory compliance assurance mechanism minimizes the regulatory friction,
transaction costs, and transaction uncertainty associated with any potential trade by
achieving consistent approval decisions—in both outcome and timing—based on the data
needed to ensure environmental equivalence, prevent degradation, and preclude
localized impacts. A poor mechanism increases regulatory friction, transaction costs, and
transaction uncertainty by sending incorrect signals to the market regarding what is
expected of participants and then inconsistently processing the provided information.
7. MANAGING TRANSACTION RISK AMONG PARTIES TO A TRADE
Conventional Market Function—During the exchange of goods or services, a chance
always exists that the specific terms or the intent of a negotiated deal will not be fulfilled.
Conventional markets allow parties to identify this transaction risk, assign the burden of
the risk to the appropriate party, and provide the opportunity for recourse if it is needed.
Escrow deposits and performance bonds are examples of such risk mitigation
mechanisms.
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Water Quality Trading Assessment Handbook.
Managing Transaction Risk in WOT Markets—WQT markets involve three facets of
transaction risk:
• The risk that regulators will find that the discharge reductions negotiated under the
agreement do not conform to market rules;
• The risk that the specific discharge reductions negotiated under the agreement (for a
certain type/form, at a specific time, for a predetermined duration, in a particular
quantity) will not be produced; and
• The risk that reductions will fail to have the required impact on water quality.
The chapter on Financial Attractiveness explained the detrimental effects transaction risk
can have on trading. Insufficiently managed risk will induce participants to steeply
discount the price they are willing to pay for discharge overcontrol. This erodes the
financial benefits associated with trading and can potentially suppress market activity.
Risk management transaction costs (identifying and assigning risk) increase when
remedies for nonperformance of discharge reduction obligations are less certain and the
number of parties involved in enforcement issues (regulators, lawyers) increase and/or
they become adversarial.
A good transaction risk management mechanism identifies and assigns the three risks
associated with WQT to specific parties, and sets reasonable expectations about how
failure to fulfill terms of the agreement will be handled, including the size of the remedy.
As always, good mechanisms minimize transaction costs. A poor mechanism will create
high transaction costs and fail to account for all three transaction risks, assign the risk to
an inappropriate party, and/or create ambiguity over how a transaction "gone bad" will be
handled.
8. PROVIDING INFORMATION TO THE PUBLIC AND OTHER
STAKEHOLDERS
Conventional Market Function—Some conventional markets recognize that
commercial activity can directly or indirectly affect parties other than the traders. For
example, the Securities and Exchange Commission requires corporate managers to
notify the public when they decide to purchase or sell stock in the companies they
manage. Public dissemination of this information provides investors and securities
regulators with information relevant to investment decisions and public policy.
Public Information in WQT Markets—"The CWA and other federal, state, and local
water quality regulations require provision of opportunities for public participation,
including public notice and opportunity for comment. WQT markets, given this regulatory
framework, must therefore perform this essential function. WQT viability often depends
on the public participation process to generate understanding and trust among watershed
participants. Failure to do so could influence stakeholders to challenge the market
system or specific trades, potentially introducing uncertainty and eroding the value of
trading.
Although EPA's Water Quality Trading Policy supports, "public participation at the earliest
stages and throughout the development of water quality trading programs to strengthen
program effectiveness and credibility," informing the public about on-going operations
and trades may be even more important. Easy and timely .public access to transaction
information may increase market efficiency. Improving water quality takes sustained
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effort. An uninformed public may lose interest in a trading program, threatening its long-
term viability. Informed watershed participants are more likely to discover and/or support
new forms of trading. Some trading markets have produced trading opportunities that do
not conform to the market design's original vision of trading, but do provide real water
quality and economic benefits. Such opportunities evolve as watershed participants learn
more about each other's needs, and the needs of the watershed's ecosystem.
A good public information mechanism is transparent, easy to engage, and available to all
interested parties while controlling transaction costs. The EPA Water Quality Trading
Policy encourages electronic publication of information on:
» Boundaries of the watershed and trading areas;
• Discharge sources involved;
« Volume(s) of reductions generated and sold; and
« Price(s) paid for reductions.
Additional information may be important to participants in your watershed. The value of
satisfying all interests should be weighed against the cost of collecting, managing, and
distributing data. A poor public information mechanism will be resource intensive for both
the information distributors and its consumers. This leads to higher transaction costs and
can have serious regulatory friction consequences. As watershed participants work
harder to get information, their level of trust may diminish, thereby threatening the
market's stability.
Current Market Models
The remaining market infrastructure discussion focuses on three market models that are
in various stages of implementation in the United States. Each of these market models
responds to the unique needs of its watershed and market participants while handling the
essential WQT market functions discussed above. Each market model is discussed in
terms of the basic premise underlying the market, important mechanisms used to support
the system, and how the model performs certain WQT market functions. These models
illustrate significantly different approaches. After reviewing them, you will have a better
understanding of approaches potentially suitable for your watershed.
A PR/I/ATE, NON-PROFIT CO-OPERATIVE FACILITATING PRE-
APPROVED, DYNAMIC TRADING
In 1998, the Lower Boise River Water Quality Trading Pilot Project undertook design of a
WQT system for approximately 64 miles of river from Lucky Peak Dam to the mouth of
the Boise River. Market participants agreed they could make trading more robust,
flexible, and cost-effective by focusing on minimizing regulatory friction. Participants
identified seven design principles they felt were crucial to a viable market in their
watershed, including the following:
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Water Quality Trading Assessment Handbook.
« Avoid trade-by-trade changes to the TMDL;
• Avoid trade-by-trade changes to NPDES permits; and
• Minimize trade-by-trade agency review and approval.
To support these three design principles, watershed participants and regulatory
stakeholders worked together to design clear guidelines and requirements for trades that
would preclude the need for trade-by-trade review of most transactions. Public notice,
review, comment, and agency approval of these trading guidelines and requirements
were pivotal to this approach and created a model for dynamic trading. The key element
of the Lower Boise market that allows market participants to trade in this fashion is the
pre-approval of trade transactions through the issuance of a single new or modified
NPDES permit enabling trading.7
The Idaho Clean Water Cooperative, a private, nonprofit association of various
watershed participants, is charged with the day-to-day management of trading in the
Lower Boise River. The Co-op will rely on language in the TMDL, language in NPDES
permits, and a State Trading Document establishing the ground rules for creating and
verifying trade transactions to facilitate trading. The Co-op will be responsible for helping
connect buyers and sellers, developing and maintaining a trade tracking database, and
preparing monthly watershed-wide trade summaries. The Cooperative will provide an
important link among trading parties, the environmental agencies ensuring Clean Water
Act compliance, and the public. By maintaining the trade tracking database and regularly
disseminating transaction details, the association will also ensure that timely information
about trades is available to the public and the environmental agencies. As a non-
governmental organization, the Cooperative will be dedicated to supporting the trading
system as requested and agreed to by its members.
Water Quality Market Functions in the Lower Boise River
Defining marketable reductions—The Lower Boise market uses a common definition of
overcontrol (control below a source's TMDL defined allocation) to classify the reductions
that sources may sell. To enable non-point source market participation, market
stakeholders (including state and federal regulators as well as agricultural and technical
assistance agencies) created a list of Best Management Practices and construction
management, monitoring, and verification protocols that pre-qualify resulting reductions
for sale. The BMP List provides the basis for the straight-forward verification of the non-
point source generated reductions. This was done to eliminate the need for an
intermediary in any transaction and create the opportunity for direct participation of non-
point sources in dynamic trading. Non-point sources that can demonstrate they follow
the appropriate protocols have reductions automatically recognized as valid and fungible.
Communicating among buyers and sellers—Although the Co-op is charged with
connecting buyers and sellers, the mechanisms used to fulfill that role are currently
undefined. As the market manager, to which all sources must report certain information if
they choose to trade, the Co-op is uniquely situated to act as a "broker". This may entail
providing an electronic or physical bulletin board of bids and offers for reductions or may
evolve into a more formal matchmaking role where the Co-op introduces sources with
reduction needs to dischargers capable of addressing them. Both methods can help
As of the publication of this document, trading in the Lower Boise market has not been initiated. Several steps
and mechanisms have been created to enable tradipg, including the creation of the Idaho Clean Water Co-
operative, reporting forms, model NPDES permit language, model TMDL language, and the State Trading
Document
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participants identify trades that may meet their needs. The costs of communication in the
Lower Boise will be borne by both the Co-op and market participants.
Ensuring environmental equivalence—One significant barrier to dynamic, pre-
approved trading is the potential for adverse environment impact resulting from individual
trades. To lower the total cost of developing a ratio and the needed equivalent
reductions, the Lower Boise market will rely on the water quality model developed for
formulating the TMDL. This model provided each major discharger with an individual
index, allowing a source to relate their discharge's effect on water quality to discharges
by other sources. Use of an existing model keeps development costs to a minimum. In
addition, this model ensures that trading ratios used are consistent with the TMDL.
Relative to ratios based on a rule of thumb set artificially high to ensure equivalence, this
minimizes the number of reductions a source must purchase.
Assuring compliance with the Clean Water Act—The Lower Boise market supports
consistent approval decisions—in both timing (immediate) and outcome (if protocols are
followed). This limits friction in the market through use of specific mechanisms to marry
the pre-approval process to compliance assurance.
In this market, the pertinent TMDLs will contain base phosphorus waste load allocations
(WLAs) for point sources and a provision for trade-dependent WLA variability. Sources
will then receive a new or modified permit incorporating their WLA as a limit and, if
desired, a provision enabling a trade-dependent variable limit. As explained below, the
enabling provision will allow monthly changes to either the sources' discharge limits (the
amount of discharge both sources are allowed to put into the river) or the recognized
discharge volume (the amount of discharge counted against the limit) based on trading
arrangements.
In all point-source to point-source trades, the enabling provision automatically adjusts the
buyer's NPDES discharge limit up and the seller's NPDES discharge limit down, based
on the volume of reductions traded and their environmental equivalence ratio. If a source
exceeds its adjusted discharge limit during a reporting period, it is in violation of the CWA
and potentially subject to regulatory enforcement.
In non-point source to point source trades, the enabling provision gives the point source a
"credit" that can be applied against the point source's NPDES permit limit during that
reporting period. The credit is based on the volume of environmentally equivalent
reductions that have been traded from the non-point source(s) to the point source. A
point source violates the CWA if its actual discharge, adjusted for all reduction credits
acquired through trading during that period, exceeds its discharge limit. In this market,
EPA or the Idaho Department of Environmental Quality (DEQ) may invalidate credits
established by the non-point source reductions if they fail to meet BMP protocols and
retain full authority to enforce the corresponding point source's effluent limit without
crediting its discharge volume.
Point sources involved in a trade will use modified Discharge Monitoring Reports (DMRs)
to report to the EPA. Along with the modified DMR, each source will submit an individual
Monthly Trade Report created by the Co-op. DMRs and Trade Reports include actual
discharge, point source trades lowering or increasing their discharge limit, and non-point
source credits reducing their recognized discharge volume. The EPA uses this
information to assure CWA compliance.
Defining and executing the trading process—The Lower Boise stakeholders
developed a trading framework clearly defining the roles and responsibilities of all parties
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Water Quality Trading Assessment Handbook.
involved in a transaction (the buyer, the seller, the Co-op, and the regulatory agencies)
and the steps needed to "complete" a transaction. Two steps common to water quality
trades are handled automatically by certain mechanisms: 1) accounting for environmental
equivalence; and 2) reviewing and approving trades.
The framework allows market participants to negotiate trades on their own and provides
clear guidelines for paperwork submission, control technology or process installation, and
reporting protocols. Reduction monitoring and/or verification is generally assigned to
point sources, while the Co-op, Idaho DEQ, and EPA work together to audit trades and
assure regulatory compliance. EPA is responsible for regulatory enforcement actions.
Without trade-by-trade regulatory review, transactions could fail to maintain or improve
water quality. To prevent the need for trade-by-trade review without increasing
transaction costs or transaction uncertainty, the Lower Boise market uses three market
mechanisms to eliminate the potential adverse environmental effects of individual trades.
The use of known, published ratios lowers transaction costs because this eliminates the
need for potentially time and resource intensive discussion with regulators over individual
trades. The pre-qualified BMP list provides participants a clear understanding of what
reductions will be recognized, minimizing transaction uncertainty. To preclude localized
impacts, modified NPDES permits will include caps limiting the downstream trading
capacity of individual sources. This will ensure that individual trades do not produce
discharges in excess of the local assimilative capacity of the river segment between
trading sources.
How the Idaho Clean Water Co-operative tracks trades—In the Lower Boise, the
tracking system was designed to establish chain of custody, maintain accountability, and
provide the public with a means of readily tracking all reductions bought and sold. Key
elements of the trade tracking system are 1) a record keeping and reporting protocol, and
2) a trade tracking database. The system strives to minimize transaction costs by setting
clear and reasonable expectations for reporting. Regulatory friction is managed by
providing reasonably direct communication channels between participants, the Co-op,
and the regulatory agencies.
Trading parties are required to gather documentation and retain specific information
pertaining to trades and then report selected information to the Co-op using standardized
forms. For each point-source to point-source trade, a Trade Notification Form is required
to officially register the trade, transfer reductions from seller to buyer, and trigger the
enabling NPDES permit provision(s) to adjust allowable discharge limits. For trades
involving non-point sources, both a Trade Notification Form and a Reduction Credit
Certificate must be submitted by the point source to certify the non-point source reduction
and generate a credit against the point source's discharge volume. The Co-op will
maintain a trade tracking database as well as individual trade and account information
and produce a Monthly Trade Report for each source.
Managing risk among Lower Boise market participants—The Lower Boise market
manages the three risks associated with WQT through its trading framework and private
contracts. The market mitigates the risk that specific transactions will not be recognized
by regulatory authorities by including in the market driver (applicable TMDLs and
implementation plans), as well as the regulatory mechanism (NPDES permits), and the
state trading document, the explicit requirements for defining marketable reductions and
their proper conveyance to other sources. This information is publicly available, so
buyers and sellers of reductions jointly assume the risk that the paperwork documenting
their transaction is proper, and filed with the required entities.
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A defining feature of the Lower Boise market is how it manages the risk that an agreed
upon reduction will not be achieved. Water quality regulatory agencies in the Lower
Boise have limited or no authority over non-point sources' discharge behavior. Although
non-point sources are issued "load allocations" by the TMDL, they are not issued NPDES
(or state equivalent) permits that create CWA regulatory liability. Non-point sources
involved in creating the market wanted to maintain their independence from CWA
regulatory liability and still be allowed to participate in the market. Faced with supporting
point source trading while maintaining regulatory independence for non-point sources,
market designers decided that CWA liability would reside with NPDES permit holders,
while the liability for failing to produce purchased credits would be handled, particularly in
the case of non-point source trades, through private contracts.
In the Lower Boise WQT market, trading parties agree on the specific terms of a trade by
entering into a private contract that identifies the trading parties, reduction measures to
be undertaken, reduction amounts to be achieved, effective date, responsibilities of each
party, price and payment provisions, and remedies for failure to deliver reductions.
Although private contracts cannot shift regulatory liability from one source to another,
they can assign the financial liability of regulatory non-compliance to the seller of pollution
reductions. Subject to applicable contract law, the parties to the trade can decide
between them who will pay for damages in the event reductions are not delivered and the
purchasing source is consequently found to be violating its NPDES permit.
As in all markets, the water quality science is still imperfect and there is some risk that
the TMDL analysis was mistaken. The TMDL's waste load allocations, along with
associated trading may not be strict enough to achieve water quality standards, including
protection of the watershed's desired beneficial use. The TMDL allocations may
ultimately be ratcheted down by regulators if water quality improvement is insufficient.
Sources committing to discharge reduction strategies—whether through trading, control,
or a combination of the two—could find themselves looking for additional reductions after
making capital expenditures and/or purchasing/selling reductions. Private contracts help
manage this risk in two ways. First, the duration of individual trades is up to the parties.
This allows participants to manage uncertainty about future load allocations by choosing
the length of time they are willing to commit to a certain strategy. Private contracts can
also provide for a party to cancel its contractual obligations in the event that the trade
does not ensure compliance with future, more stringent TMDL allocations.
Private contracts in the Lower Boise allow parties to the trade to decide how great they
believe the risks are and who will bear them. Writing the contract may require legal
assistance, which may be relatively expensive for some non-point sources. It is
important to remember that the contract terms used to manage risk will be based on the
buyer's and seller's perceived risk. High perceived risk may result in large price
discounts and erode the financial attractiveness of trading.
Providing information to the public and facilitating their participation—The public
participation mechanism in the Lower Boise relies on transparency in the Co-op's
activities and in the issuance of relevant NPDES permits. This is extremely important
because pre-approved, dynamic trading in the Lower Boise requires market designers to
generate and maintain trust from non-discharging stakeholders and also satisfy CWA
public notice and comment procedures.
A point source wanting to trade remains subject to the standard NPDES permitting
process. The usual CWA public notice and comment procedures will give stakeholders
the opportunity to learn about and participate in the consideration of issues surrounding
market participation by a specific source. Where appropriate, the new or revised NPDES
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permits will then include language supporting trading. As already noted, .trade enabling
permit provisions will include: the authorization to trade; the adjustment of the discharge
limit or discharge volume; trading caps to prevent localized impacts; and trading
procedural requirements. Once a trade enabling permit has been issued, the source's
discharge limits and/or discharge volume may be adjusted without further administrative
process for each qualifying trade, thereby minimizing transaction costs and uncertainty.
The permit will be renewed according to the standard permit cycle schedule (e.g., once
every five years).
The Co-op will be responsible for making transaction information accessible to the public.
The marginal cost of providing the information—whether on demand or published at
regular intervals—will be minimal, as the trade tracking database already manages the
information likely to be requested. In the Lower Boise, non-discharging stakeholders
have an open forum to question and influence the permitted discharge limits and then
easy access to information keeping them informed of actual discharge behavior.
A PUBLIC AUTHORITY BANKING MID MANAGING PHOSPHORUS
CREDITS
In 1985 Cherry Creek Basin Water Quality Master Plan was created to manage
development's environmental impact on the Cherry Creek Reservoir in Colorado. In the
basin, point source and non-point source nutrient discharges cause eutrophication
problems that preclude attainment of the reservoir's designated uses. Rapid economic
development in the area was forecasted to strain the ability of local Publicly Owned
Treatment Works' (POTWs) to serve the burgeoning population without further degrading
water quality in Cherry Creek Reservoir. As dischargers of predominantly soluble
phosphorus, which is readily available biologically and promotes rapid algal growth,
seven utility districts operating POTWs were challenged to limit their phosphorus
contribution to the Cherry Creek reservoir. A Total Maximum Annual Load (TMAL) for
phosphorus discharged into the reservoir was set at 14,270 pounds. The wastewater
facilities received a total allocation of 2,310 pounds per year.
Two counties, four cities, and the seven utility districts reached an intergovernmental
agreement chartering a state empowered government entity, the Cherry Creek Basin
Water Quality Authority (the Authority), to develop and administer a water quality trading
program facilitating continued economic growth while minimizing adverse impact on
water quality in the basin. Although a pilot trading program has been in place for several
years, few trades have been completed. Recently, an effort has been made to elicit more
market activity. The Authority has been charged with designing a market in which
POTWs and other point source dischargers would be able to purchase "credits" included
in the POTWs' 2,310 pound phosphorus allocation while funding new phosphorus
reduction projects. These credits may increase an individual point source's TMAL
allocation and allow it to expand its services to new developments, which would
otherwise cause the POTW to exceed its Waste Load Allocation. The trading market
requires POTWs to fund phosphorus removal projects in exchange for an allocation of
additional phosphorus discharge.
In the Cherry Creek market, the Authority functions as a "Water Quality Bank" by owning
and allocating purchasable phosphorus credits associated with four non-point source
phosphorus control projects built by the Authority in the 1990's with taxes levied by the
Authority on watershed residents. These projects have reduced the net amount of
phosphdrus discharged, creating additional loading capacity in the reservoir. The credits
from these projects have been placed in the "Phosphorus Bank" from which POTWs may
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draw credits to meet their regulatory obligations. A total of 216 annual pounds of
phosphorus credits were allocated to the Phosphorus Bank by the TMAL.
The control technologies used in the non-point source projects include retention/detention
ponds, constructed wetlands, and shoreline stabilization above and beyond required
BMPs, leading to phosphorus discharge overcontrol. The Authority has total control over
these "Sale Credits" and decides who may purchase them. Funds raised from the sale of
Sale Credits will be used by the Authority to fund additional projects that will further
improve water quality.
The Authority also manages an additional 216 pounds of phosphorus credit allowances
that give POTWs the right to purchase reductions from non-Authority phosphorus
reduction projects and receive an increased WLA. The TMAL allocated the allowances to
a "Reserve Pool." POTWs wanting to increase their phosphorus allocation may construct
projects and/or compensate third-party landowners, local governments, or other POTWs
to do so for them. 8 Transfer Credits" tied to these reductions enable the Authority to
transfer a portion of the Reserve Pool phosphorus allocation to POTWs. A phosphorus
reduction project will be evaluated by the Authority before a specific agreement is
reached to use Transfer Credits. An approved project's reductions are registered with
the Authority and create 'Transfer Credits." A POTW may seek additional phosphorus
discharge capacity by compensating the owner of the Transfer Credits for their use. The
total number of credit allowances third-party projects may generate for redistribution to
the POTWs is currently capped at 216 pounds annually.
Important Market Functions in the Cherry Creek Basin
Defining marketable reductions—Marketable reductions in the Cherry Creek market
are defined as reductions accruing from the implementation of control technologies in
excess of those expected from the Mandatory Best Management Practices identified in
the Cherry Creek Reservoir Control Regulations. Mandatory BMPs include temporary
measures implemented to mitigate construction runoff (i.e., filter fences, re-vegetation,
and hay bales) and/or permanent water quality improvements required by drainage
criteria and land use regulations for all new development (i.e., detention ponds, swales,
and constructed wetlands).9
The Reserve Pool marketable reductions, as defined in the draft guidelines, evolve from
one of six different types of projects.
• Additions to Existing Development—Phosphorus removals from BMPs not
completed during land development prior to January 1,2000 are eligible for trading.
• Expanded or Retrofitted BMP Removals—Phosphorus removals from BMPs that
are added to land development undertaken prior to January 1, 2000 that result in
additional reductions are eligible for trading.
• Projects Beyond Required BMPs—Phosphorus removals from BMPs that result in
reductions in excess of the removals from required BMPs are eligible for trading.
• Cooperative Authority Projects—Phosphorus removals from Authority and third
party co-development projects are eligible for trading. Credits placed in the Reserve
Pool will be limited to the proportion constructed or funded by the third party.
* A more detailed description of these projects is provided below.
9 Phosphorus Credit Trading in the Cherry Creek Basin: An Innovative Approach to Achieving Water Quality
Benefits. Water Environment Research Foundation. Project 97-IRM-5A. 2000.
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Water Quality Trading Assessment Handbook.
• Engineered Authority Projects—Phosphorus removals from any non-point source
project for which the Authority completes preliminary engineering and design and
which the Authority agrees to third party construction of that project are eligible for
trading.
• Water Supply Operations—Phosphorus removals beyond the incidental reductions
from regular, normal operations are eligible for trading.
Not every pound of phosphorus overcontrol from a project may be associated with credit
allowances in the Reserve Pool. A project specific Trade Ratio" is applied to calculate
the volume of phosphorus reduction that results in credit allowances recognized by the
Authority and the regulatory agencies.
Defining and executing the trading process— Similar to other trading programs, the
Cherry Creek Authority and various stakeholders have developed a trading framework
clearly defining the roles and responsibilities of all parties (the buyer, the seller, and the
Authority) in reviewing reduction projects and trades and administering the allocations of
credits. Program evaluations have identified four steps that support these efforts in the
Cherry Creek basin.10 The fifth step described below provides for regulatory review and
transforms the trade into a regulatory obligation.
Project Evaluation and Approval—Authority constructed phosphorus reduction
projects have already been evaluated and their credits placed in the Phosphorus
Bank. Interested parties may nominate other projects for consideration by the
Authority. The technical specifications of the project, the estimated reductions,
reliability of the project operations, comments from Colorado's Water Quality Control
Division (WQCD), consistency with the Master Plan, trading guidelines, and control
regulations, and the effect on water quality are all considered by the Authority. Other
stakeholders may contribute input at a public meeting. The Authority's Board of
Directors votes to recognize the validity of the reductions.
Credit Calculation—After voting to include reductions in the Reserve Pool, the
Authority's Board of Directors determines the volume of credit allowances that will be
associated with the project based on projected reductions and a project specific
trading ratio.
Credit Allocation—Point sources looking to exceed their permitted discharge limits
may apply to acquire phosphorus credits from the Phosphorus Bank or credit
allowances from the Reserve Pool. Trades are reviewed based on the buyer's
history of regulatory compliance and operating abilities, as well as the trade's
conformance to the Master Plan and control regulations. Potential Sale Credit
applicants are also reviewed based on their "need" as defined by the Authority. A
Technical Advisory Team (TAG) reviews all trades and makes recommendations to
the Authority Board of Directors. The Board then approves or disapproves each
specific trade.
Trade Review—After a transaction is completed, the Authority retains the right and
obligation to review reduction performance and periodically adjust the number of
credits or credit allowances awarded to point sources based on actual reduction
performance.
NPDES Permitting—Prior to discharging phosphorus in excess of its existing
NPDES permit, the credit or credit allowance purchaser must be issued a new or
modified permit.
'Ibid.
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The trading guidelines used in the Cherry Creek market provide all participants with a
clear understanding of what's expected of market participants. Transaction costs are
likely to be relatively known prior to initiating a trade, as the information needed and the
process used to evaluate a trade are well defined. Market participants are also likely to
understand the transaction costs associated with the permitting process.
Ensuring environmental equivalence—The focus of water quality trading in this market
is to maintain the designated uses of the Cherry Creek Reservoir, not to improve water
quality within specific stretches of rivers or tributaries. Environmental equivalence is
therefore confined to the effect each sources' individual discharge has on the
concentration of phosphorus in the reservoir.
Each Reserve Pool transaction receives a trade ratio, which translates phosphorus
reductions into credit allowances, set between a minimum of 2-to-1 and a maximum of 3-
to-1. The trade ratio varies based on the relative load of soluble and non-soluble
phosphorus between the two parties and/or the attenuation of discharged phosphorus as
it moves through the watershed. For example, the ratio may be increased when the
credit allowance buyer is closer to the reservoir than the credit producer. This adjustment
is based on site-specific monitoring data, empirical modeling, and/or best available
scientific evidence to account for environmental equivalence. Institutional and scientific
uncertainty factors help ensure the ratios reflect actual benefits to the reservoir.
Communicating between buyers and sellers—Use of this market model influences the
transaction costs associated with trading partner identification, product comparison, and
deal negotiation and their effect on market efficiency. All available credits or credit
allowances are held or managed by the Authority. Buyers do not have to contact several
potential trading partners to find a mutually beneficial deal. This market model can
inherently limit interactions between certain buyers and sellers. The Authority explicitly
identifies and then selects trading partners allowed into part of the market by placing
reductions from specific projects into the Phosphorus Bank and allowing certain buyers,
based on Authority defined "need," to apply for the right to buy the Sale Credits. For the
Reserve Pool, the Authority only approves or disapproves the transfer of credit
allowances for individual transactions. The Authority has limited justifications for stopping
a transaction. As such, market participation in this segment of the market is not limited.
The Authority manages product comparison for Phosphorus Bank reductions by
quantifying their volume, applying a project specific trade ratio, and establishing the price
of credits. For these reductions, the authority sets the terms of the trade based on
authority funded costs of building, operating, and monitoring current and future
phosphorus reduction projects, as well as the costs of establishing and administering the
trading market. The Authority also manages product comparison for Reserve Pool trades
by quantifying available credit allowances based on the trade ratio. However, the
Authority does not price these allowances; price is negotiated by the parties to the trade.
Tracking Trades—The Authority is in a unique position to track trading activity because
it plays an active role in all transactions. In addition, trades are considered to last in
perpetuity, limiting the number of actual transactions that will take place during any given
period. The trading activity to date has imposed minimal tracking burdens on the
Authority. It is anticipated that the Authority will develop a trade tracking system as
trading activity increases. Most likely, a spreadsheet managed by the Authority will be
used to ensure that reductions and their associated credits or credit allowances are
traded to other sources only once. Trades approved by the Authority are documented in
Appendix A of the Cherry Creek Water Quality Authority Trading Program Guidelines.
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Compliance assurance with regulations in the Cherry Creek Basin—Although the
Authority administers the transfer of credits and credit allowances in the Cherry Creek
water quality market, transactions do not automatically alter a source's obligations to
federal, state, or local water quality regulations. In this watershed, Colorado's Water
Quality Control Division (WQCD) is responsible for administering NPDES permits. The
WQCD does not acknowledge Sale or Transferred Credits as immediately off-setting the
sampled, actual phosphorus discharge counting against the source's NPDES permit limit.
As stated in the Trading Guidelines, "It shall be the sole responsibility of the (credit buyer)
to obtain any approvals or modifications to their discharge permits necessary to allow
increased or modified phosphorus discharges." Therefore, a source wishing to use 10
pounds of Sale or Transfer Credits must go through the normal permit modification
process to increase their discharge by 10 pounds. Sources purchasing credits must work
with the WQCD to amend their NPDES permit limits, prior to discharging excess
phosphorus. Monitoring and reporting protocols for the POTWs are set out in their
individual NPDES permits and follow the standard reporting mechanisms used for
NPDES permitting.
Managing risk among parties trading in the Cherry Creek Market—As is common
with most water quality banks, Phosphorus Bank credits are made up of credits from
various projects co-mingled together. A quantity of credits sold out of the Phosphorus
Bank likely includes reductions from several projects that have different risks associated
with them. The Cherry Creek market model both actively and passively manages the risk
that reductions do not conform to market rules, the risk that specific reductions fail to
materialize, and the risk that reductions fail to have the required impact on the designated
uses of the watershed for these transactions. The risk management mechanisms are
largely a result of the banking model and the trading guidelines developed by
stakeholders specifically for Cherry Creek.
In this market, the Authority is delegated the responsibility of evaluating and allocating
credits and credit allowances by the regulatory and administrative agencies responsible
for watershed oversight. The Cherry Creek Authority, a water quality bank operated as a
quasi-govemment entity, plays an active role in defining marketable reductions. For both
Phosphorus Bank and Reserve Pool transactions, the Authority, per its charter, is only
allowed to allocate credits or credit allowances if reductions conform to market rules.
Therefore, the Cherry Creek Authority manages the buyer's risk of purchasing non-
marketable reductions by acting as a credit and credit allowance certif ier.
The Authority's certification role also helps manage the risk that the credits or credit
allowances purchased by the buyer are not connected to actual overcontrol. The
rigorous reduction certification during project approval coupled with the trade ratio
creates leeway between the desired environmental benefit and the reductions outlined in
the transaction agreement. In addition, rf phosphorus reduction projects begin to perform
poorly, the Authority may revoke or adjust the number of credit or credit allowances
downward. For Phosphorus Bank credits, if re-evaluation results in lowering the
reductions achieved (and therefore the credits), the Authority relies on surplus credits in
the trading pool that have not been allocated and sold to other sources to make up the
difference. If there are insufficient surplus credits in the Phosphorus Bank, the Authority
notifies all Phosphorus Bank credit holders that their credits have been reduced on a pro-
rata basis for three years. If additional credits become available from the Phosphorus
Bank during those three years, credits will be restored. After three years, the credit
reductions are permanent.
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Transaction risk management for Reserve Pool transactions, where the credit allowances
are merely "warehoused" by the Authority until a private deal is struck, is not as actively
managed by the Authority. The Authority also certifies these credit allowances.
However, Reserve Pool credit allowance purchasers, who have negotiated with a specific
reductions producer for specific reductions, cannot be awarded surplus Reserve Pool
credit allowances if reductions fail to materialize. They must negotiate another trade and
pay for additional allowances.
Finally, the market manages the risk that new development and use of reductions fail to
protect the designated uses of the waterbody. The TMAL driving the Cherry Creek
market has a periodic review schedule, during which the TMAL allocations may be
modified, up or down. Allocations may be adjusted to reflect the volume of phosphorus
being discharged into the reservoir or existing water quality. Therefore, the TMAL
allocation process manages the risk that reductions will fail to maintain designated uses
by ratcheting up and down the volume of phosphorus permitted into Cherry Creek
Reservoir by changing the allocation among POTWs and by adjusting the volume of
credits and credit allowances available for use.
Providing information to the public and other stakeholders—The on-going public
participation mechanism in Cherry Creek relies on standard public notice and comment
procedures commonly used for NPDES permits. In the Cherry Creek market, non-
discharging stakeholders have several opportunities to play an active role in trading
activity, including open forums to question and influence project evaluation, credit and
credit allowance allocation, and permit modification. For project evaluation and
allocation, the Authority is required to issue a public notice of its intent to review specific
proposals and listen to stakeholders attending that hearing. A similar procedure is used
during permit modification. These steps are necessary to create transparency and
engender trust in the trading system.
The Authority is responsible for making transaction information accessible to the public.
The marginal cost of providing the information—whether on demand or published at
regular intervals—will likely be minimal as the Authority already possesses or generates
all the pertinent information. Trades approved by the Authority are documented in
Appendix A of the Cherry Creek Water Quality Authority Trading Program Guidelines.
A NITROGEN CREDIT EXCHANGE
In 1990, Connecticut, the State of New York, and the federal EPA adopted a
Comprehensive Conservation and Management Plan (CCMP) for the Long Island Sound
National Estuary Program, known as the Long Island Sound Study (LISS). The CCMP
calls for the reduction of nitrogen to increase dissolved oxygen in Long Island Sound and
mitigate hypoxia damaging the Sound's ecosystem. The CCMP was designed to reduce
the total enriched nitrogen load coming from point and non-point sources by 58.5 percent
between 2000 and 2015. A TMDL, approved in April 2001, includes Waste Load
Allocations for point sources and Load Allocations for non-point sources in the
watershed. Connecticut chose to develop a trading program for the sources within its
borders to lower the cost of implementing the CCMP and the TMDL.
The main mechanism facilitating trading in Connecticut is a "General Watershed Permit."
Connecticut's program uses both its general state authority and its EPA delegated
NPDES permitting authority to issue a single General Permit for the nitrogen dischargers
it regulates in the watershed. The General Permit covers the nitrogen discharges of all
point sources willing to trade on a voluntary basis through a single permit. POTWs can
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have opt out of the General Permit and receive a traditional permit and implementation
schedule. However, all POTWs have chosen to take advantage of trading under the
General Permit. The General Permit sets a ceiling for annual, permitted, nitrogen
discharges at 2000 levels, and reduces the total nitrogen discharges allowed in each year
between 2000 and 2015 on a percentage basis. Individual point sources under the
permit (called sub-dischargers) are required to lower their proportional share of the
annual percentage reduction based on their normalized discharge in 2000.
Market designers faced two challenges. The Connecticut market area is predominantly
urban, with very few opportunities for low-cost nonpoint source controls. To achieve the
58.5 percent nitrogen reduction from all identifiable sources, Connecticut's 79 POTWs
located within the watershed were tasked with lowering their nitrogen discharge by
64percent from 2000 baseline levels. The second challenge involved several factors,
including the proximity of certain dischargers in western Connecticut compared to their
eastern counterparts, Connecticut's previous efforts to fund nutrient removal projects
near Long Island Sound, and the economic disparity between communities in western
and eastern Connecticut. The communities in western Connecticut are generally more
affluent and able to absorb the cost of implementing new control technology. They also
had been the focus of pre-trading nitrogen removal grants. Eastern Connecticut
communities are relatively less affluent. Market designers felt that the water quality
trading market models used in other pilot projects might lead to inequities across the
regulated communities, as affluent western communities would likely be able to generate
environmentally equivalent reductions by relying on previous control technology
investments and their larger tax bases. Under some market models, the generally poorer
eastern communities would then have to pay for available western reductions.
The trading program that evolved from this effort is best described as a "Nitrogen Credit
Exchange." Sources discharging less than their annual limit receive "credits" for
overcontrol. CTDEP is obligated by state law to purchase all nitrogen credits from these
sources. Facilities that exceed their limit are considered out of compliance. These
sources are allowed to purchase nitrogen credits from DEP to meet compliance
obligations. DEP is obligated by state law to sell the credits it purchases from
overcontollers to facilities that fail to comply.
Important Market Functions of the Connecticut Nitrogen Credit Exchange
Defining marketable reductions—Marketable reductions in Connecticut's Nitrogen
Credit Exchange are defined as reductions in excess of a point source's Waste Load
Allocation. As described in the February 2003 General Permit for Nitrogen Discharges
and Nitrogen Credit Exchange Program publication, by March 31 of each year, the
Nitrogen Credit Exchange Program (NCEP) and the Connecticut Department of
Environmental Protection (CTDEP) compile the calendar year monitoring data for each
individual source. The average nitrogen discharge for each month is calculated and the
end-of-pipe surplus or deficit is reported as a yearly average. Marketable reductions
emerge if the actual, sampled yearly average is less than the WLA for that year. A
"Nitrogen Equivalency Factor," based on a source's contribution of nitrogen to Long
Island Sound, is then applied to calculate the number of credits that the Nitrogen Credit
Exchange (NCE) buys from that source. Appendix 1 of the General Permit provides a
schedule of each sub-discharger's individual Annual Discharge Limit for Total Nitrogen as
well as a Nitrogen Equivalency Factor.
Defining and executing the trading process—Unlike the other two models discussed
in this section, Connecticut's trading process is stipulated in state law. Public Act No. 01-
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180 describes the processes used to transfer marketable reductions from POTWs
achieving overcontro! to POTWs out of compliance with their NPDES permit.
Trading in this market is executed through a multi-step process completed on an annual
basis. The first step is the setting of the annual discharge limits in the General Permit.
These limits, set by the Nitrogen Credit Exchange Board, are based on a 2000 baseline
for each POTW, reduction goals ensuring compliance with the TMDL by 2015, and the
projected nitrogen reductions to be achieved by control projects likely to be operating
during the year. The annual limits require each POTW to attain an equal percentage
reduction from its 2000 baseline.
POTWs unable to meet their new limits may elect to build nitrogen control projects.
Funding for projects is available on a competitive basis through the Connecticut Clean
Water Fund. Funding consists of a 30 percent grant with the balance loaned at 2 percent
interest. Alternatively, POTWs may choose to find alternative revenue sources.
Regardless of their approach to meet their annual regulatory obligations, POTWs monitor
and report their discharge throughout the ensuing year pursuant to language in the
General Permit.
At the end of the year, the Nitrogen Credit Exchange Board (NCEB), in conjunction with
the CTDEP, analyzes the discharge for individual dischargers for compliance with the
annual WLA. This analysis includes the calculation of credits produced by dischargers
able to overcontrol and the number of credits needed by POTWs failing to meet their
WLA. Credits are generated if the actual, sampled yearly average nitrogen discharge of
a particular POTW is less than its WLA for that year. The Equivalency Factor translates
the overcontrol into credits automatically purchased by the NCEP. Conversely, if the
actual, sampled yearly average is more than the WLA for that year, the POTW needs to
purchase credits. The Equivalency Factor translates the difference between actual,
sampled discharge and the WLA into the number of credits that the POTW must buy from
the NCE.
The NCEB then calculates the price of credits for both buyers and sellers. The dollar
value of credits is determined annually, based on the average capital and operating costs
of all nitrogen removal projects operating during that year and the total reductions
achieved by those projects during that year. This is the uniform price (per pound) buyers
are charged to reach permit compliance or sellers credited for their overcontrol. Those
POTWs exceeding compliance with their annual WLA receive a check for their credits.
Those POTWs out of compliance receive a bill for the total cost of all credits that would
bring them into compliance with the General Permit.
Ensuring environmental equivalence—The focus of water quality trading in this market
is to attain the designated uses of the Long Island Sound, not to improve water quality
within specific watersheds or basins that drain into the Sound. Environmental
equivalence is therefore confined to the effect each sources' individual discharge has on
the concentration of nitrogen in the Sound itself.
As part of the LISS, a peer-reviewed water quality model was developed to delineate the
impact nitrogen discharges in the large area covered by the TMDL has on oxygen
concentrations in Long Island Sound. This broke the area affected by the TMDL into six
different zones closely aligned with the major watersheds or basins and relates their
nitrogen to oxygen impacts. Some zones were further broken down into tiers. Further
modeling was done to relate nitrogen discharges within each of the identified zones or
tiers. The final step used to calculate environmental equivalence involved multiplying the
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two factors together to create an Equivalency Factor that relates the impact of all
individual discharges across the market to one another.
Communicating between buyers and sellers—The Connecticut water quality trading
model does not promote contact between individual dischargers. The NCEP manages
the transaction costs that would otherwise be associated with trading partner
identification, product comparison, and deal negotiation because redistribution of the cost
of nitrogen control is handled exclusively by the NCEP as it carries out its statutory
responsibilities. As previously discussed, the NCEP gathers information from regulated
dischargers, rewards POTWs for overcontrolling, and charges others for failing to comply
with their permit. This results in redistributing the cost of overcontrolling nitrogen
between the two groups.
NCEP administrators of the program need three sets of information to facilitate trading in
this market—discharge volumes, nitrogen reductions achieved by control projects, and
the cost of those control projects. Actual, sampled discharge volumes are collected by
CTDEP as part of its General Permit administration responsibilities.
The NCEP relies on funds from the purchase and sales of nitrogen credits for
administration of the NCEP. Currently, the NCEP is staffed by 2.5 FTEs assigned to
several programs throughout the CTDEP.
Tracking Trades—In the Connecticut market, trade tracking consists of analyzing
discharge, overcontrol, and cost redistribution. In this program, trading is an annual
process. By March 31 of each year, the NCEP notifies each individual facility regarding
their credit balance. After the credit checks and bills are paid or redeemed, the books are
"closed" for that year and the process begins again. The additional burden of trade
tracking (on top of the year-end analysis) borne by the NCEP entails collecting payments
from dischargers buying credits to reach compliance.
Assuring compliance with regulations in the Connecticut Market—Trading in the
Connecticut market takes place within the framework of the General Permit, which
regulates the annual discharge of nitrogen into Long Island Sound. The aggregated
General Permit discharge is set each year to ensure steady progress towards full
implementation of the TMDL in 2015, as well as providing a buffer in case total reductions
achieved fall below those anticipated in the annual allocation. Each individual discharger
is issued a WLA incorporating the annual reduction of the aggregated General Permit
and their baseline discharge in 2000.
Trading in this market is performed based on actual, sampled discharge performance.
Monitoring and reporting protocols for point source discharge are set out in the General
Permit and follow the standard reporting mechanisms used for NPDES permitting.
Sampling frequency and procedures are based on the volume treated by the POTW on a
daily basis. The collected chemical analysis samples are entered into a Nitrogen
Analysis Report (NAR) and Monthly Operating Report (MOR) and submitted to the
CTDEP. In addition, each POTW calculates a monthly mass loading of total nitrogen and
submits it to the CTDEP in a Discharge Monitoring Report (DMR). Each POTW is also
responsible for retaining a copy of all reports submitted to CTDEP as well as the data
used to generate those reports for at least five years.
POTWs failing to reach compliance must purchase credits from the NCEP by July 31st of
each year for their previous year's discharge. Failure to purchase credits by this date
results in non-compliance and opens the POTW to enforcement actions by the CTDEP.
K -S
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Managing risk among parties participating in the Nitrogen Credit Exchange
Program—In the Connecticut market, credits are based on the level of nitrogen
discharged during the year and the WLA. Implicitly, they can only be generated by the
sources subject to the General Permit, which are all POTWs. The authorizing legislation
(Public Act No. 01-180), the General Permit, and CTDEP publications, clearly describe
the process used to create the annual permitted limit, calculate discharge, and the
analysis used to compute the surplus or deficit of credits for compliance purposes.
Nitrogen credits are only available from the NCEP, making the program the de-facto
certifier of the credits and eliminating the risk of purchasing non-marketable reductions.
The Connecticut Nitrogen Exchange Program executes trading at the end of the year,
when actual discharge volumes and overcontrol are known. The NCEP is obligated by
state law to sell all the credits needed by all sources to meet their regulatory obligation
under the General Permit. This statutory requirement eliminates the risk to individual
dischargers that specific credits will fail to materialize, regardless of the actual supply that
year.
There are two risks created by this market model because of its reliance on cash
management and load allocations lower than TMDL implementation requirements to
maintain active participation from the POTWs . First is the risk that during the year the
POTWs, in aggregate, will create more credits than are needed to offset the POTWs that
fail to meet their regulatory obligations. As the NCEP is obligated by law to purchase all
credits and unable to sell them to other sources, the NCEP annually runs the risk of
subsidizing the surplus overcontrol. For example in 2002, the NCEP purchased
$2,757,323 worth of credits from 39 dischargers. The program sold $1,317,233 worth of
credits. The $1,440,110 deficit was paid for by NCEP funds.
The second risk is that during the year the POTWs, in aggregate, may fail to create
enough credits for other POTWs to maintain compliance. In years when the demand for
credits is larger than the supply, the NCEP receives a net infusion of cash because all
sources must purchase credits to meet compliance and the NCEP must sell them,
regardless of their actual availability. This infusion of cash is designed to pay off any
deficits from previous years when there is a credit surplus. Purchasing credits from the
NCEP relieves the POTW from regulatory consequences under the General Permit. The
annual allocations are low enough to maintain compliance with the TMDL
implementation. In addition, allocations may be adjusted in light of the previous year's
deficit or surplus and the projected control to be completed during the year. This helps
manage the annual deficits and surpluses, both control and dollars, while encouraging
additional nitrogen projects.
Finally, the market manages the risk that reductions generated and traded in the market
do not achieve the designated uses of the waterbody by providing for periodic review of
both TMDL allocations and the General Permit allocations. These are adjusted to reflect
actual progress towards the designated use. The TMDL driving the Connecticut market
includes a periodic review schedule, during which the TMDL allocations may be modified,
up or down. A change in the TMDL allocation could force a modification of the annual
allocations of the General Permit. Therefore, the TMDL and General Permit allocation
process manages the risk that reductions will fail to achieve designated uses by
ratcheting up and down the volume of nitrogen allowed to enter Long Island Sound.
Providing information to the public and other stakeholders—The on-going public
participation mechanism in Connecticut relies on traditional public notice and comment
procedures commonly used for NPDES permits. The NCEP is operated within the
framework of the General Permit, providing the opportunity for public comment for the
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permit when it was issued and when it is renewed. Public comment is only allowed on
the aggregated General Permit and not allowed for the WLAs for individual sub-
dischargers regulated.
In addition, the NCEP annually produces a publication listing the price of nitrogen credits
as calculated by the NCEB. Included with the report is a US Total Nitrogen Credit
Exchange Final Balance detailing the dollar value of the credits bought by the NCEP from
POTWs discharging less than their WLA as well as the dollar value of credits to be
purchased by facilities exceeding their WLA.
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Stakeholder Readiness
Purpose
. Water Quality Trading Assessment Handbook
The first three chapters of this Handbook suggested how to assess your watershed's
potential to create a viable water quality trading market based on pollutant suitability,
watershed and discharger characteristics, the financial attractiveness of likely trades, and
an understanding of the infrastructure required to enable trading. As you pursue further
consideration of trading opportunities, you will need to reach out to other potential
participants and stakeholders to begin exploring water quality trading opportunities in the
watershed. This chapter will help answer the following questions:
• Which other participants will be needed to create a viable water quality trading
market in your watershed?
• Do key participants have a reasonable level of interest in considering water quality
trading as a potential mitigation option?
After completing this section and reflecting on the lessons in the first three chapters of
this Handbook, you should have a better understanding of how to engage other
stakeholders in the watershed to discuss water quality trading opportunities. The previous
chapter on market infrastructure, may have helped you begin to identify parties to include
in discussions about water quality trading in your watershed. Because each situation will
present unique challenges, this chapter does not prescribe a specific path for you to
follow, but does offer tools to assist you in identifying and engaging the necessary
players.
Approach
This chapter recognizes that water quality trading requires the participation of certain
parties. In addition to dischargers, there are many other critical players that must be
engaged in development of a viable water quality trading system. Each watershed will
have a unique set of potential participants. This chapter suggests a two step approach
for engaging stakeholders. The first step involves identifying essential participants by
using tools such as a checklist of potential participants, a description of their roles, and a
series of questions that can help evaluate how the conditions in your watershed will
influence your priority list of participants. The second step is designed to improve your
understanding of the interests of priority participants so that you will be better prepared to
recruit them. It includes a review of key benefits of trading that can help you begin
discussions. It also suggests several likely stakeholder needs and interests and offers
tips for responding to them. Finally, this section gives with three examples of how trading
programs have provided for stakeholder participation.
IDENTIFYING AND PRIORITIZING POTENTIAL PARTICIPANTS
A wide range of parties may have an interest in participating in discussions about water
quality trading in your watershed. To begin the process of identifying key parties, you
should focus on the water quality problem that is being addressed. Looking at potential
solutions to the problem will help you identify those parties whose behavior needs to
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change. The first Chapters have prepared you for this phase by increasing your
understanding of the suitability of the pollutant, the conditions in the watershed, the
control cost differentials among dischargers, and the market infrastructure needs. In
identifying parties that need to work together to consider the viability of trading, each
category of participants can be important for different reasons.
Dischargers In the watershed. Dischargers include municipal and industrial point
sources, and nonpoint sources located in relevant urban and rural areas. You should
focus especially on any dischargers that need to achieve substantial reductions and may
be capable of overcontrolling their discharges. Dischargers make up the pool of potential
trading partners. As discussed in Chapter 2, it will be important to engage dischargers to
gather information to evaluate financial attractiveness. It will also be important to build an
understanding of the water quality challenges individual dischargers face to help identify
those that will be essential parties to viable water quality trades. For example, at an early
decision point in the Lower Boise River discussions, the group recognized that a viable
program could not be developed without the involvement of nonpoint sources from the
agricultural community. Other watersheds may need the participation of a major point
source facing imminent and more stringent permit limitations.
Federal, tribal, state, and local government. The participation of federal, tribal, state,
and local regulatory agencies in the watershed will be essential to assess whether and
how trading might fit within current regulatory requirements. EPA has federal oversight
responsibilities under the Clean Water Act (CWA) and also implements the NPDES
program in some states (e.g., Idaho and Alaska). Most states and some tribes have
delegated CWA authorities. Participation of NPDES permitting and TMDL development
authorities will be needed to interpret CWA requirements, formulate new rules where
possible and necessary, and, perhaps, to provide technical and scientific expertise.
Depending on the market's design, it is also likely that these agencies will need to
approve elements of the trading program. Other governmental agencies may need to be
involved because of their responsibilities for protecting fish and wildlife, regulating water
supply, managing irrigation projects, land management, or other activities affecting the
watershed. These agencies may also be able to provide valuable technical assistance.
Tribal governments may be interested for a variety of reasons, including potential impacts
on businesses they operate and their treaty rights to harvest fish and shellfish in the
watershed.
In addition to local government agencies that operate treatment plants which are NPDES
permitted point source dischargers, other agencies may operate water or power utilities
that impact water quality in the watershed. Other government agencies may need to be
involved because their activities contribute to nonpoint source runoff or storm water
discharges related to transportation, construction, or urban drainage systems.
Local businesses. Some local businesses will have a direct interest in water quality
trading because they are dischargers. Certain businesses may utilize public water
treatment facilities. As indirect dischargers, these businesses may face rate increases
resulting .from investment in control technologies and will have an interest in trading.
Affected businesses may include significant industrial water users, land owners, canal
companies, developers, recreation and tourism interests in the watershed, commercial
fishermen, and others.
Interest groups. Groups or associations representing affected businesses and local
governments will have an interest in discussions about trading in the watershed.
Examples of these groups include Farm Bureau chapters, water users associations, and
associations of local county officials or wastewater treatment authorities. Of critical
;*»«
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importance are active citizen environmental groups in the watershed. Many
environmental groups are watching trading efforts carefully to ensure that all CWA-
related substantive and procedural requirements are met and that TMDL water quality
objectives are fully supported by proposed water quality trades. Many environmental
group members are very knowledgeable about watershed conditions and challenges. In
addition, some watersheds have councils or watershed management organizations with
various planning and implementation responsibilities. It is important to include these
groups in market design.
College and university resources. Local colleges and universities may be good
sources of information and technical assistance to support trading development efforts.
As you consider which participants should be included, the first step is to identify the
range of potential participants. The checklist provided below will assist you in this effort.
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Water Quality Trading Assessment Handbook.
Checklist of Potential Participants
Dischargers in the watershed
Individual Point Sources (including wastewater and storm water dischargers)
Municipal
Industrial (Direct and Indirect)
Individua Nonpoint Sources
Urban entities
Farmland owners/operators
Canal companies
Irrigation districts
Forest land managers
Range land managers
Federal agencies
. 77?e Regional U.S. EPA Office
> U.S. Department of Agriculture
Natural Resource Conservation Service (NRCS)
Resource Conservation and Development Councils
Soil and Water Conservation Districts
U.S. Bureau of Reclamation (USBR) (related to irrigation activity)
U.S. Fish and Wildlife Service
National Marine Fisheries Service
State/Tribal Government
Department of Environmental Conservation (DEC, DEO, etc.)
Department of Pish and Game
Department of Water Resources
Court-appointed water master
Tribal Councils
Local Government
> Municipal utilities
• Water supply
• Power
• Cities
Counties
Local Businesses
o Significant industrial users (dischargers to POTW treatment systems)
o Developers
o Power companies
Interest Groups
o Associations
• Water users
• Local business (e.g., Farm Bureau)
• Local government
o Environmental Groups
o Watershed groups
Colleges and Universities (and other water quality research facilities in the area)
BENEFITS OF WATER QUALITY TRADING
In discussing water quality trading opportunities with potential participants, it may be
helpful to keep in mind the following benefits.
Water quality trading can result in significant cost savings. Water quality trading is a
business-like way to solve water quality problems by focusing on cost-effective, local
solutions. Typically, a party facing relatively high pollutant reduction costs compensates
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another party to achieve an equivalent, though less costly, pollutant reduction. Cost
savings for a municipality could result in lower sewage treatment bills to citizens. For an
industry, trading may translate into lower operating costs and/or more capital available for
productive investment enabling a stronger competitive position and more economic
opportunity in the community. For some sources, trading may be a source of revenue. In
the right circumstances, trading markets can help participants achieve needed water
quality improvements at the lowest possible cost to society.
Water quality trading provides flexibility to dischargers in meeting pollutant load
reductions. Trading opens up new options for meeting TMDL load allocations. Although
water quality trading cannot compensate for common technology based standards,
trading can be used to access the water quality improvements that are created by other
discharger's adoption of different technologies, expanding options for meeting TMDL
obligations. In addition to possible cost reduction benefits, trading provides opportunities
for creating new value to businesses and consumers through the use of creative ideas for
improving water quality in the watershed.
Water quality trading is voluntary. Successful trades will occur only if both parties
perceive they will gain benefits from the trade. Some dischargers, especially nonpoint
dischargers, are more likely to come to the table to discuss reductions in a voluntary
context. Voluntary approaches may lead to more effective and immediate water quality
improvements. Because most trading systems are designed to fit within existing
regulatory frameworks, trading typically will not create new regulatory control obligations.
Water quality trading provides incentives for overcontrol beyond current limits.
For point sources, trading provides financial incentives for installing pollution control
technology beyond TMDL waste load allocations because increments of pollution
reduction beyond TMDL allocations can be sold to other dischargers. Nonpoint sources
can be compensated for installation of best management practices that result in pollution
reductions beyond meeting their load allocations. Trading provides additional incentives
to create reductions where the incentives and disincentives (such as enforceable
requirements for nonpoint source management) are relatively weak or nonexistent. These
additional incentives can accelerate the rate of water quality improvements in many
areas.
Water quality trading places a greater emphasis on measuring water quality
outcomes and will provide additional data about the watershed. Trading will provide
additional information, through monitoring and specific nonpoint source screening criteria,
regarding water quality in and the dynamics of the watershed. This information will
provide a better understanding of watershed conditions and increase awareness of the
progress of water quality improvements.
Water quality trading can result in other ancillary environmental benefits. Trading
provides incentives to use control options such as wetland restoration, floodplain
protection, or other management practices that both improve water quality and provide
additional fish and wildlife habitat.
LIKELY PARTICIPANT NEEDS AND INTERESTS RELATING TO WATER
QUALITY TRADING
Even if participants understand the benefits of trading, they will have legitimate needs
and concerns that must be addressed. The following list of likely needs and interests
also includes some suggestions for responding to them.
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Lack of a Market Driver. Dischargers are likely to be interested in exploring alternative
pollution reduction options only if they are facing an imminent change to their regulatory
requirements.
Response: In the watersheds being evaluated for trading viability, the market
driver is the TMDL (or similar framework). The TMDL provides waste load
allocations for point sources and load allocations for nonpoint sources
dischargers that generally require new pollutant discharge reductions. The
allocations will result in new permit limits for point source dischargers and goals
for nonpoint sources. Watersheds with new TMDL's generally have a sufficient
incentive to explore trading as a possible cost-effective pollution control option.
Monitoring of nonpoint discharges will be costly, technically challenging, and will
lead to increased regulation. Some nonpoint dischargers may be concerned that
trading will require on-site monitoring to measure pollution reductions. Monitoring may be
perceived as intrusive, costly, unreliable, and a precursor to additional regulatory
requirements.
Response: Effective monitoring of nonpoint source discharges for trading
purposes is designed to determine the value of the pollution reduction credits
being generated. These credits, when established through monitoring, become a
valuable commodity that can be sold to willing buyers. Those who participate in
the discussions about trading in the watershed can help shape a monitoring
program that meets their needs. Depending on the market infrastructure
developed, the cost burden associated with monitoring can be assigned to an
appropriate party.
It is better to wait for regulators to enforce TMDL requirements than to proactively
expend resources designing a new, untested compliance strategy. Participation in
discussions about trading in the watershed could represent a significant investment in
time and resources. Unless participants see the potential benefits, they will be reluctant
to commit the resources and prefer to see greater emphasis on meeting TMDL load
allocations employing traditional approaches.
Response: Trading discussions among dischargers and regulators provides
new opportunities for meeting the TMDL requirements for improved water quality
that incorporates the concerns of local participants. Potential participants should
also be made aware of the key benefits of trading suggested above, especially
the opportunity trading provides for more effective and immediate water quality
improvements.
if trading results in more efficient pollution reduction, it could provide incentives
for additional development in the watershed. Participants often bring different
perspectives about the broad goals of water quality trading. Some groups may only
support trading if they believe it will achieve early reductions and improve water quality
beyond the requirements of the TMDL. They may not support the flexibility of trading if
they believe it will lead to growth and development in the watershed.
Response: It will be important to come to an early understanding about the
goals of water quality trading in the watershed. For example, is the goal for
trading to produce more cost-effective TMDL implementation or do stakeholders
expect trading to produce environmental improvements beyond those required by
the TMDL? In general, the focus has been on cost-effectiveness, while
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producing some ancillary benefits. There is no CWA requirement or EPA
guidance that requires trading programs to achieve environmental outcomes in
excess of TMDL requirements. However, there are water quality benefits from
more active engagement by nonpoint sources that leads to more immediate
improvements, additional habitat improvements, and increased instream flows,
rather than simply end-of-the-pipe traditional controls.
Trading reduces the degree of certainty in meeting water pollution reduction
targets. Some groups are concerned that trading does not include enough safeguards
to ensure that it will produce real reductions in the amount of pollutants entering the
watershed. They perceive that trading could sacrifice almost guaranteed, enforceable
reductions from point sources in return for uncertain, unenforceable nonpoint source
reductions elsewhere.
Response: Trading systems can be designed to use monitoring, specific
nonpoint source screening criteria, and other mechanisms to assure that only
verified reductions can be traded. They also use discounting factors to account
for the uncertainty of nonpoint management practices. Conservative river ratios
are also used to predict the amount of pollution that will reach downstream
compliance points.
Trading can create "hotspots," or localized areas with high levels of pollution
within a watershed. Concerns are often raised that a trading program may improve the
watershed's overall water quality, but may leave certain areas with highly degraded water
quality.
Response: Trading programs can be designed to avoid unacceptable localized
impacts by considering the characteristics of the pollutant, the watershed
conditions, the location of potential trading partners, the type of trades, the scope
of the trading area, and the use of effective monitoring programs in the design of
trading programs. Programs should consider specific mechanisms related to the
direction of trades (e.g., upstream versus downstream) and the use of caps and
ratios to avoid localized impacts. EPA's Water Quality Trading Policy supports
trades only in the same watershed or the boundary established by a TMDL. This
policy helps ensure that water quality standards are maintained or achieved
throughout the trading area and contiguous waters.
Trading provides less opportunity for public participation in pollution reduction
activities. There is rising public interest in watershed related activities. Citizen groups
are interested in becoming involved in decisions that affect local watersheds. These
groups will be concerned about whether trading will change conventional public
participation opportunities such as public notice and comment for NPDES permit
modifications. Representatives of these groups will want to be engaged in discussions
about the design and implementation of trading programs. Groups will be particularly
sensitive to issues relating to monitoring and enforcement.
Response: Participating in the early stages of a trading program development
provides a more meaningful opportunity for public involvement than responding
to an already developed proposal. Concerns about enforcement and monitoring
can be raised during program design. All public participation requirements
applicable during implementation must also be satisfied by the market according
to EPA guidance. However, it may be harder to influence the specifics of a
market approach once the details have been established. Early participation will
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help all parties understand the information and assumptions used in the market's
development
STAKEHOLDER PARTICIPATION IN MARKET INFRASTRUCTURE
Each of the three trading programs described in the Market Infrastructure chapter
provided for stakeholder involvement during the development stage. This section briefly
describes the range of stakeholder participants, the function and authority of the
stakeholder group and any other key opportunities for stakeholder involvement that were
provided during program development in two of those markets.
Lower Boise River Effluent Trading Demonstration Project
As described in the market characterization, participants in the Lower Boise River project
worked together to develop a trading program framework. The project was launched with
a state workshop to educate all attendees about the trading concept and to direct
participation in the Lower Boise. Participants included wide representation from federal,
state, and local agencies with water quality responsibilities, agriculture, municipalities,
industry, and the environmental community. Participants included: the Idaho Water
Users Association; the Idaho Farm Bureau; Pioneer Irrigation District; the Payette River
Water Master; the Canyon Soil Conservation District; the Idaho Soil Conservation
Commission; the Natural Resources Conservation Service; Idaho Rivers United; the Ada
County Highway District; the Association of Idaho Cities; the Cities of Boise, Meridian,
Nampa, and Middleton; the U.S. Bureau of Reclamation; the Southwest Idaho Resource
Conservation and Development Council; Micron; Simplot; American Wetlands; Idaho
Power Company; Idaho Division of Environmental Quality; US EPA; and the Boise State
University Environmental Finance Center.
Participants were supported by a contractor providing neutral facilitation, process
support, and various forms of analysis. Process support from neutral parties was
important for recruiting participation and managing the program development process to
allow EPA and Idaho DEQ to be involved as project participants.
As the participants worked together to pursue the development of a trading system, they
recognized that state and federal regulatory agencies would maintain their existing
authorities, but the group would develop and provide recommendations for their
consideration that would likely carry significant weight. The participants were divided
into three main teams: 1) the Framework Team, charged with developing the
mechanisms, rules, and procedures for dynamic trading in the watershed; 2) the Point
Source-Point Source Model Trade Team, responsible for developing a model trade
between two point sources; and 3) the Point Source-Nonpoint Source Model Trade
Team, tasked with developing a model trade between a point source and a nonpoint
source. Smaller workgroups were also formed to work through specific parts of the
trading system. These workgroups also provided an opportunity for stakeholder groups
to identify and resolve issues specifically related to their interests and needs. These
included the Agriculture Workgroup, the Ratios Workgroup, the Trading Framework
Workgroup, the Indirect Dischargers Workgroup, and the Association Workgroup.
Stakeholder participation was supported by a state-run small grants program, facilitating
production of materials for the workgroups. Idaho DEQ is also preparing for public
comment a state water quality trading guidance, model permit language for point source
to point source trading, and the BMP list for the Lower Boise project.
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Connecticut's Nitrogen Credit Exchange Program
As described in the Market Infrastructure section, a nitrogen trading program was
established in Connecticut as a means for attaining the nitrogen reduction requirements
outlined in the TMDL waste load allocations. Connecticut's program does not include
nonpoint sources of nitrogen discharge and is limited to the 79 municipal wastewater
treatment plants in the region. Because of this limitation to point sources, the range of
interested stakeholders was generally more restricted than other trading projects that
included rural and urban nonpoint sources.
Public involvement in the program has been provided through a traditional administrative
process of public workshops and hearings, through the legislative process required
during the passage of implementing legislation, and through ongoing monthly meetings of
the Nitrogen Credit Advisory Board. In addition, a number of individual meetings were
held with affected sources, cities and towns, and other interested parties.
Administrative Process
Prior to the development of the trading program, a series of six informational public
workshops were held in the region on the Waste Load Allocations proposed in the
nitrogen TMDL for Long Island Sound. Nitrogen trading was one of the options
discussed at the workshops for meeting the TMDL load allocations. These workshops
were attended by affected point sources, local communities, and local and national
environmental groups.
Another series of public workshops were held by the Connecticut Department of
Environmental Protection to increase public understanding of the General Permit for
Nitrogen Discharges and the Nitrogen Credit Exchange Program. Invitations and public
notices were issued for these workshops and they were attended by point sources and
other interested parties.
Following the informational meetings, a two day formal public hearing was held to receive
comments on the General Permit for Nitrogen. The agency formally responded to these
comments and made several changes to the General Permit.
Legislative Process
Several components of the program required enabling state legislation for
implementation. Legislation was introduced in the Connecticut General Assembly to
implement the Nitrogen Credit Exchange Program. Opportunity for stakeholder groups
and the general public to comment on the program were provided through the normal
legislative process, which included hearings in relevant legislative committees. As a
result of the legislative process, a number of changes were made to the proposed
program.
Nitrogen Credit Advisory Board
The legislation established a Nitrogen Credit Advisory Board to assist and advise the
Commissioner of Environmental Protection in administering the program. In addition to
three representatives of state agencies, the board includes nine public members. The
legislation requires that public members reflect a range of interests and experience and is
well balanced with regard td buyers and sellers of credits, large and small municipalities,
and representatives from different geographic regions of the state. In addition, members
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with experience in waslewater treatment, environmental law, or finance will be included.
The Board has been conducting monthly meetings that are open to the public.
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Glossary
Best Management Practice (BMP): A method that has been determined to be the most
effective, practical means of preventing or reducing pollution from non-point sources.
Designated Uses: Those water uses identified in state water quality standards that must
be achieved and maintained as required under the Clean Water Act. Uses can include
cold water fisheries, public water supply, irrigation, and others.
Discharge Monitoring Report (DMR): The EPA uniform national form, including any
subsequent additions, revisions, or modifications for the reporting of self-monitoring
results by permitees. DMRs must be used by approved stated as well as by EPA.
Discharge: Flow of surface water in a stream or canal or the outflow of groundwater
from a flowing artesian well, ditch, or spring. Can also apply to discharge of liquid from a
facility or to chemical emissions into the air through designated venting mechanisms.
Downstream Trade: A water quality trade in which one source compensates another
source downstream of its position within the watershed for producing an environmentally
equivalent pollutant reduction impact at all pertinent compliance points within the
watershed.
Effluent: Wastewater, treated or untreated, that flows out of a treatment plant, sewer, or
industrial outfall.
Incremental cost: The average cost of control for the increment of reduction required
for an individual source to meet compliance. For example, if a discharger needs a 5
Ibs./day reduction to comply with requirements but that drives a $10 million technology
investment that actually reduces 20 Ibs./day, then the incremental cost associated with
the 5 IbsVday is substantial relative to the average cost of reductions. Traditional
average cost would divide costs by 20 lbs./day; incremental analysis divides the costs by
5 Ibs./day and would be four times higher than average cost.
Indirect Discharge: A non-domestic discharge introducing pollutants to a publicly
owned treatment works.
Load Allocation: The portion of a receiving water's loading capability that is attributed to
either one of its existing or future non-point sources of pollution or to natural background
sources. Load allocations are best estimates of the loading which can range from
reasonable accurate to gross allotments, depending on the availability of data and
appropriate techniques for predicting loading.
National Pollutant Discharge Elimination System (NPDES): The national program for
issuing, modifying, revoking and reissuing, terminating, monitoring, and enforcing permits
and imposing and enforcing pretreatment requirements under Sections 307, 402, 318,
and 405 of the Clean Water Act.
Non-point 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 Ihe land by stormwater. Common nonpoint sources are agriculture, forestry,
urban mining, construction, dams, channels, land disposal, saltwater intrusion, and city
streets.
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Overcontrol: Taking steps to reduce pollutant discharge below the waste load allocation
for individual point sources or the load allocation for nonpoint sources.
Point source: Any discernible confined and discrete conveyance, including, but not
limited to, any pipe, ditch, channel, tunnel, conduit, well, discrete fissure, container, rolling
stock, concentrated animal feeding operation, landfill leachate collection system, vessel,
or other floating craft from which pollutants are or may be discharged.
Total Maximum Daily Load (TMDL): The sum of the individual waste load allocations
(WLAs) for point sources and load allocations (LAs) for nonpoint sources and natural
background. TMDLs can be expressed in terms of mass per time, toxicity, or other
appropriate measure that relates to a state's water quality standard.
Upstream Trade: A water quality trade in which one source compensates another
source upstream of its position within the watershed for producing an environmentally
equivalent pollutant reduction impact at all pertinent compliance points within the
watershed.
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Appendix A
Water Quality Trading Suitability Profile for Phosphorus
TRADING SUITABILITY OVERVIEW
The EPA Water Quality Trading Policy supports nutrient (e.g., total phosphorus and total
nitrogen) trading. Sources of phosphorus include background sources such as natural
springs, point sources such as municipal sewage treatment plants and food processors,
and non-point sources such as irrigated agriculture. Water quality trading pilot projects
across the country have demonstrated that phosphorus from these and other sources
can be successfully traded. These projects have found that phosphorus discharges and
in-stream concentrations can be readily measured at key points within a watershed, and
that the pollutant is relatively stable as it travels through river systems. As a result,
phosphorus dischargers will have a reasonable ability to establish environmental
equivalence relationships between themselves or between a discharger and a
compliance point.
TMDLs address phosphorus and nitrogen to control a number of water quality problems
including aquatic plant growth, low dissolved oxygen, and high pH. To establish
equivalence appropriately, trading parties will need to understand how their load
connects to the specific problem. Phosphorus and nitrogen are nutrients which are often
associated with eutrophication in fresh waters. Excessive phosphorus contributes to
exceeding the narrative water quality criteria established by many states relating to
nuisance aquatic plant growth, deleterious materials, floating, suspended, or submerged
matter, oxygen-demanding materials, or other similar standards. Excessive phosphorus
concentrations have both direct and indirect effects on water quality. Direct effects
include nuisance algae and periphyton growth. Indirect effects include low dissolved
oxygen, increased methylmercury production, elevated pH, cyanotoxins from blue-green
algae production, trihaiomethane production in drinking water systems, and maintenance
issues associated with domestic water supplies.
Most TMDLs recognize the correlation between phosphorus concentrations and these
water quality concerns. Excess nutrient loading causes excess algal growth within the
water column, which in turn affects levels of dissolved oxygen and pH in aquatic systems.
This correlation between phosphorus concentrations and other water quality concerns
can be seen in the Draft Snake River- Hell's Canyon TMDL recently developed by the
states of Idaho and Oregon. In this TMDL, concentration levels are established for both
Chlorophyll a and Total Phosphorus to ensure that nutrient concentrations do not result in
excessive algae or other aquatic growth, which may impede the attainment of water
quality standards for dissolved oxygen and pH.
KEY TRADING POINTS
A. Phosphorus Pollutant Form(s)
Total Phosphorus TMDLs—Most TMDLs establish load allocations for Total Phosphorus,
although levels of both Total Phosphorus and Ortho-phosphorus are often monitored.
Total Phosphorus is, however, comprised of two forms:
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• Soluble—also known as Dissolved Ortho-phosphate or Ortho-phosphorus—includes
highly soluble, oxidized phosphorus. Because of its solubility, ortho-phosphorus is
commonly more available for biological uptake and leads more rapidly to algal growth
than non-soluble phosphorus.
» Non-Soluble—also known as Sediment-Bound or Particulate-Bound phosphorus—is
mineral phosphorus incorporated in sediment and is not as likely to promote rapid
algal growth, but has the potential to become available to plants over time.
The concentration of total phosphorus is calculated based on the sum of the soluble and
non-soluble phosphorus. Due to phosphorus cycling in a waterbody (conversion between
forms) TMDLs usually consider Total Phosphorus concentrations. Total Phosphorus then
represents the phosphorus that is currently available for growth as well as that which has
the potential to become available over time.
Sources covered by a Total Phosphorus TMDL will be measuring discharges and
reductions using a common metric. Use of this common metric for measuring phosphorus
reductions in a TMDL should provide a high potential for matching phosphorus
discharges from various sources in the watershed. It will be important, however, to
understand the actual forms of phosphorus being discharged because some trades may
not represent an equivalent impact on water quality. For example, if individual
dischargers have substantially divergent load characteristics (e.g., one primarily
discharges soluble phosphorus while another primarily discharges non-soluble
phosphorus) then a trade between the two may not be environmentally equivalent. If a
high percentage of the total phosphorus is present as soluble ortho-phosphate, it is more
likely that rapid algal growth will occur than if the majority of the total phosphorus is
mineral phosphorus incorporated in sediment. Adjustments, using a trade ratio or other
means of establishing and equivalence relationship, may be needed to account for such
differences.
Other Phosphorus-Related TMDLs—To the extent that a TMDL establishes load
allocations in terms of individual phosphorus forms, challenges to trading may exist. If a
TMDL provides load allocations for different forms, participants in the watershed will be
limited to trading within two, smaller, more constrained markets for each form.
Alternatively, a reliable translation ratio may be generated to create broader trading
opportunities.
There may be circumstances where some dischargers receive phosphorus allocations
while others receive dissolved oxygen allocations. There is a known and well-
characterized link between phosphorus concentrations and dissolved oxygen problems.
This relationship provides an opportunity to establish a specific translation ratio between
Total Phosphorus and Dissolved Oxygen, potentially enabling additional trading
opportunities. For example, under the Draft Snake River-Hells Canyon TMDL, Idaho
Power Company was given a load allocation for DO, while municipal, industrial, and
agricultural sources have received Total Phosphorus allocations. Idaho DEQ is exploring
the development of a total phosphorus/dissolved oxygen (TP/DO) translation ratio, which
would enable Idaho Power to become a potential purchaser of TP surplus reductions
from other sources.
B. Impact
Adjusting for Fate. Transport, and Watershed Considerations—In general, phosphorus
fate and transport are sufficiently well understood, and the models used to develop
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phosphorus TMDLs are reasonably well suited, to support the development of
environmental equivalence relationships among potential phosphorus trading parties.
The phosphorus "retentiveness" of a water body describes the rates that nutrients are
used relative to their rate of downstream transport. As ratios are set for trading
opportunities, the factors that contribute to retentiveness should be considered. Areas of
high retentiveness are usually associated with low flows, impoundments, dense aquatic
plant beds, and heavy sedimentation. Trades that involve phosphorus loading through
these areas will likely require high ratios (e.g., 3:1) to achieve environmental equivalence
between dischargers. In areas with swift flowing water and low biological activity,
phosphorus is transported downstream faster than it is used by the biota, resulting in low
levels of retentiveness and minimal aquatic growth. In areas of low retentiveness, where
phosphorus is transported rapidly through the system, low ratios (e.g., 1.1/1) will likely
emerge.
Other factors, including substrate stability and light contribute to plant growth and factor
into a segment's "retentiveness." Sedimentation is another condition that can affect how
phosphorus will move through and be utilized in a system. Phosphorus is often found in
sediments and will persist longer in them. As a result, the presence of these factors
should be an explicit consideration in setting environmental equivalence ratios.
Examining Local Considerations—In a downstream trade, the upstream source will not
meet its allocation under the TMDL because it is purchasing reductions from another
source downstream. Discharges from the upstream source will not be reduced, and
water quality will not be improved in the segment between the two sources. Overcontrol
by the downstream source will result in improved water quality further downstream.
These types of trades will only avoid unacceptable localized impacts if the segment
between the two sources has not reached its assimilative capacity.
Additionally, a trade, irrespective of its direction (up or downstream), involving sources
discharging substantially different phosphorus forms may be vulnerable to creating
localized impacts. In particular, a trade that involves offsetting a primarily soluble
phosphorus discharge with a sediment-attached discharge will leave a greater quantity of
readily available phosphorus in the water body than otherwise would have been the case.
This readily available phosphorus has the potential, as discussed earlier, to contribute to
short-term, local nuisance aquatic growth problems.
C. Timing
The key time element to consider when examining phosphorus trading is the seasonal
load variability among dischargers. Agricultural non-point sources usually discharge
during the growing season only, i.e., between April and October. Point sources generally
discharge all year round. The relative importance of this difference plays out in the
context of how TMDL phosphorus allocations are set. Many TMDLs provide seasonal
phosphorus load allocations that apply only during those months of the growing season.
The potential for excessive algal growth occurs predominately in the summer when
sufficient light and temperature conditions support plant growth. Under these
circumstances, both point and non-point sources will likely receive a seasonal allocation,
and their ability to match reduction needs with the timing of phosphorus reduction credits
will overlap and readily support trading. However, allocations to lakes or other large
water bodies may be annual because of the relationship in these water bodies between
annual phosphorus loadings and eutrophication. In such cases, sources receiving year-
round allocations may be restricted from trading with sources that produce seasonal
loads.
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D. Quantity
Typically, phosphorus TMDLs establish WLAs and LAs in terms of concentration or mass
based reductions. For the most part, these allocations provide a straight forward means
to establish over control for purposes of identifying marketable reductions. For example,
a POTW with a permit limit established at 700 lbs./day that currently discharges 600
lbs./day, will have 100 lbs./day of marketable reductions. However, for some non-point
sources, estimates may need to be utilized to establish the level of phosphorus
reductions. This will likely be needed when sampling a discharge is complex, infeasible,
and/or not cost effective. Pilot projects have used estimation methods based on the type
and degree of BMP implementation to establish phosphorus reductions. Such estimates
should be based on the type and extent of BMP implementation and local conditions.
While less precise, if conservative assumptions are utilized, the degree of control which
can be achieved with various BMPs can be estimated and utilized for trading purposes.
Thus, in either case, reasonably well established methods exist for understanding the
degree of over control achieved by phosphorus sources and enabling trading parties to
clearly verify the existence of marketable reductions.
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Appendix B
Water Quality Trading Suitability Profile for
Temperature
TRADING SUITABILITY OVERVIEW
Unlike nutrient trading, which has been piloted in a number of areas around the country,
there is very little experience trading water temperature. The EPA Water Quality Trading
Policy does recognize that trading of pollutants other than nutrients and sediments has
the potential to improve water quality and achieve ancillary environmental benefits if
trades and trading programs are properly designed. Issues related to determining the
tradable commodity and establishing environmental equivalence are currently being
considered in a few watersheds in EPA Region 10. These efforts, as well as discussions
within Region 10, indicate that temperature impacts, fate, and transport are sufficiently
well understood to support at least some level of trading among sources of elevated
temperature sources. The current expectation is that environmental equivalence can be
established through direct sampling and through the models used in TMDL development.
Temperature standards have been established to protect beneficial uses such as cold
water biota, salmonid spawning and rearing, and anadromous fish passage. TMDLs in
Region 10 address water temperature primarily to protect cold water fish (salmonids) as
the most sensitive beneficial uses. As of 1996, water temperature was addressed in 240
TMDLs in Region 10 (38 by Idaho, 141 by Oregon, and 61 by Washington). Water
temperature is also an important consideration in Region 10 because a number of
salmonid species listed as threatened or endangered under the Endangered Species Act
(ESA) inhabit these waters and require improved water quality to support survival and
recovery.
In Region 10, water temperature has direct and indirect impacts on native salmonids, bull
trout, and other species listed under the ESA. Water temperature affects all life stages of
these fish. It directly affects spawning, rearing, feeding, growth, and overall survivability.
The incidence and intensity of some diseases are directly related to increased water
temperatures. Indirect effects include changing food availability, increasing competition
for feeding and rearing habitat, and enhancing the habitat for predatory fishes. Increased
water temperature also indirectly affects water quality by increasing the toxicity of many
chemicals, such as un-ionized ammonia. High water temperatures reduce DO
concentrations by increasing plant respiration rates and decreasing the solubility of
oxygen in water.
Sources of elevated temperature increases usually include both natural loading (from
high air temperatures and solar radiation) and anthropogenic loading (from point source
discharges and nonpoint sources such as devegetation of riparian areas, agricultural and
stormwater drains, and tributary inflows). Non-point sources contribute to solar radiation
heat loading by removing near stream vegetation and decreasing stream surface shade.
In urban areas, impervious surfaces reduce the cooling effect of natural infiltration of
surface runoff and increase the temperature of stormwater inflows. The Pacific
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Northwest State and Tribal Water Quality Temperature Standards11 identified the four
largest sources of increased temperature in the Pacific Northwest to be 1) removal of
streamside vegetation, 2) channel straightening or diking, 3) water withdrawals, and 4)
dams and impoundments.
KEY TRADING POINTS
A. Temperature Pollutant Form(s)
Temperature TMDL allocations are designed to limit human-caused water temperature
increases and to meet the applicable water quality standards. The standards are usually
expressed as specific limitations on surface water temperatures, as expressed in
degrees. For example, temperature load capacity in the Snake River-Hell's Canyon
TMDL is defined (through Oregon state standards) as no measurable increase over
natural background levels. The quantitative value used by Oregon Department of
Environmental Quality as "no measurable increase" is 0.25°F (0.14° C).
Most TMDLs provide temperature waste load allocations to point sources in degrees
Centigrade, (°C), degrees Fahrenheit (°F), or as heat per unit time, such as BTU's or
Kilocalories per day. In effect, allocations establish what volume of discharge at a given
temperature may enter a water body over a given period of time.
For non-point sources, temperature load allocations are often expressed as "no
anthropogenic increase" or no loading by human sources. For ease of implementation
these are also expressed in terms of percent of stream area shade required, providing
site-specific targets for land managers. In temperature impaired reaches, non-point
sources often meet this target by allowing stream banks to revegetate naturally until it
attains "system potential," or the near stream vegetation condition that would naturally
grow and reproduce on a site, given elevation, soil properties, plant biology, and
hydrologic processes.
Although point and non-point sources tend to receive different forms of temperature
allocations, models have been developed to convert the effect of increased stream shade
into degrees cooling. Oregon DEQ uses several different models during TMDL
development. The "Heat Source" model uses multiple data sources related to
temperature, vegetation, and hydrology to accurately predict stream temperature at 100-
foot distances. Other models are used to simulate stream temperatures for various
hypothetical riparian restoration strategies. These models provide a basis for converting
between point and non-point source temperature reductions for purposes of trading
allocations.
B. Impact
Adjusting for Fate. Transport, and Watershed Conditions—In general, temperature fate
and transport are sufficiently well understood, and the models to develop temperature
TMDLs are reasonably well suited, to support the development of environmental
equivalence relationships among potential temperature trading parties. Moreover, EPA
Region 10 temperature guidance currently supports the establishment of a mixing zone
for temperature discharges. If a similar provision is included in the state's water quality
standards and utilized in the development of the WLAs in the TMDL, this provides for
11 Pacific Northwest State and Tribal Water Quality Temperature Standards (US EPA, April 2003, 901-B-03-
002)
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some mixing between the discharge water and receiving stream. If the receiving water is
sufficiently cool as a result of upstream overcontroi, additional mixing may be allowed
provided that the temperature standard is met at the edge of the mixing zone.
However, water temperature fluctuates in response to natural conditions, such as
ambient air temperature, solar heating, and flows. Thus, the temperature effects of
control options can dissipate quickly as water bodies rapidly reach a new water
temperature equilibrium with the atmospheric and hydrologic conditions. As a result,
although models and sampling can be used to predict and track the impacts of water
temperature reductions at locations in a watershed, major water temperature effects are
not likely to be seen at distant locations. For trading purposes, this suggests that
potential trading parties will likely need to reside in relatively close proximity to each other
for an environmentally equivalent trade to emerge.
A second aspect of assessing the environmental equivalence of temperature reductions
relates to the potential importance of cold water refugia in streams which provide
salmonid habitat. Although temperature load allocations are designed to meet the
numeric criteria of applicable water quality standards, narrative standards also often
address the need to protect ecologically sensitive cold-water refugia. Thus, it will be
important to identify how sources of temperature impacts are connected to these refugia.
If these connections can be modeled to determine how overcontroi options can benefit
refugia, then trading opportunities that provide targeted temperature improvements to
refugia can be explored. In this context, and as discussed under the Quantity section
below, certain locations of temperature reductions will be of higher quality (more valuable
to protection of the desired beneficial use) and therefore more desirable. To the extent a
trading system can recognize this value and help to steer reductions to these areas it can
substantially support the TMDL goals.
Examining Local Considerations—Certain forms of temperature trades hold the potential
to create localized impacts. In some areas, high water temperatures can have harmful or
even lethal impacts on fish populations. In other areas, fish may be able to avoid the
hotspots with little effect on the species. The creation of a mixing zone under NPDES
permits will provide some flexibility in this context, although the expectation is that even if
standards are met at the zone's edge, there will be elevated temperature impacts at and
in close proximity to the discharge point. Any established threshold temperature level will
be site and conditions specific, and watershed participants should expect that the
presence of cold water refugia will almost certainly require limitations on the degree to
which a source could exceed their temperature allocation and mitigate through trading.
In general, caps on purchasing activity placed in NPDES permits will be a primary means
to control for local temperature impacts.
C. Timing
Exceedances of temperature-related water quality standards are more likely to occur in
the summer months. As a result, temperature TMDLs have focused allocations
seasonally, with required temperature reductions applying at the typically hottest times of
the year. In response, many waste load allocations provide (or are expected to provide)
different allocations for various times of the year, with more stringent limits during
summer months and salmonid spawning or other life cycle periods that are critical to fish
survival. In general, this seasonal approach supports opportunities for point sources and
non-point sources to consider temperature trading options. Irrespective of the
temperature allocation cycle, non-point source temperature reduction efforts in the form
of shade are seasonally dependent, as greater cooling effects are provided from the
shade during this period. Most nonpoint source temperature allocations are not
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Water Quality Trading Assessment Handbook.
seasonal—thus encouraging the vegetation to be in place year-round and indirectly
support channel stability and other key channel characteristics. Under a seasonal
temperature TMDL, point sources' need for reductions or willingness to overcontrol will
coincide with the non-point sources ability to influence stream temperature, thus
establishing a strong match for trading from a timing standpoint.
D. Quantity
Based on the nature of temperature allocations and related control options, both point
and non-point sources of temperature impacts have the ability to over control their
"discharge" and create temperature credits. For point sources, overcontrol would take
the form of lowering discharge temperature below that required in a TMDL. In instances
where the point source is a significant contributor to elevated in-stream temperatures
(e.g., the discharger's flow is greater than the in-stream flow with a temperature 50
percent higher), the impact of over control will likely be discernable for some distance.
This situation would readily support upstream trading with other point or non-point
sources. In EPA Region 10, however, most point sources of heat are relatively small and
have limited thermal loads. As a result, it is anticipated that their over control would
quickly be offset by more dominant in-stream and riparian conditions. Trading
opportunities, as a consequence, would be constrained to other sources in very close
proximity to the source of over control.
In order to attain most non-point source allocations in temperature TMDLs, land along
streams would need to achieve site potential shade. Natural re-vegetation varies with
species, climate, and local conditions, requiring between 20 and 80 years to achieve site
potential shade. If there are no state or local measures in place requiring landowners to
actively plant and restore riparian areas, non-point sources can over control by
influencing stream area shade in three ways: 1) earlier shade creation through tree
planting; 2) more effective shade creation through selection of planted vegetation with a
denser canopy; and 3) increasing the total shaded area of the stream.
In Region 10, tree planting programs that substantially advance the creation of shade as
compared to natural re-vegetation have emerged as strong candidates for creating over
control. Current thinking indicates that generating temperature benefits sooner than
would be present under either natural or required stream bank re-vegetation can be used,
at least temporarily, as reduction credits available for trading. The value of these credits
may be quite high, as they are potentially available for at least five and possibly up to
fifteen years, allowing other sources to delay what might otherwise be very substantial
capital expenditures to reduce discharge temperatures.
Other means of non-point source over control are more theoretical at this time. Although
it remains an untested concept, certain trees that create a denser and/or higher canopy
than natural vegetation may produce greater shading and thus reduce the warming
effects of sun light. Under such an approach, tree planting would not only produce
temperature benefits earlier than natural re-vegetation, it would create a more consistent
and/or greater area of shade than described in the TMDL. If utilized, tree selection
should take into consideration a diversity of species and the ability of the re-vegetated
community to sustain other functions of the riparian area.
Additionally, in instances where TMDLs do not require site potential shade throughout a
watershed, expanding the area of stream bank vegetation beyond TMDL allocations
could represent over control. However, Region 10 temperature TMDL experience to date
indicates that a typical TMDL approach will be to require natural re-vegetation throughout
the TMDL area, substantially reducing the opportunity for this option.
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Both point and non-point sources may have two additional options for creating
temperature reduction credits for either their own use or for sale to others. First,
modifications to channel complexity that return streams to more natural width-to-depth
ratios may result in temperature reductions. Moreover, reestablishing tree-covered
islands in mid stream is another channel modification that can create additional shading
effects to reduce water temperature.
Second, water volume and flow are critical factors affecting water temperature. Creative
solutions to water temperature problems often involve changes in flow regimes. Water
temperature improvement measures relating to flow include changes in location of
discharges, increases in irrigation efficiencies, and water right purchases or leases. It is
likely that any such changes in flow regimes that result in improved temperature
conditions can be easily accounted for with models used in the development of the
TMDL
Irrespective of the means by which non-point sources achieve over control, these actions
hold the potential to be more attractive than point source temperature reductions from an
overall watershed health standpoint. Non-point source over control options that
accelerate the return of vegetation in riparian areas provides important benefits to water
quality and fish and wildlife habitat. Increased vegetation along stream banks helps to
maintain temperature improvements from other sources. Increased vegetation in riparian
areas support other water quality objectives by reducing erosion, sediments, and
providing natural filtration of water entering the stream. Vegetated stream banks improve
the health of riparian areas, which provide important habitat for many types of wildlife and
aquatic species. As a result, a trade in which a point source opts to pay for non-point
source over control may prove highly desirable from an overall watershed health
perspective.
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Water Quality Trading Assessment Handbook..
Appendix C
Water Quality Trading Suitability Profile for Sediments
TRADING SUITABILITY OVERVIEW
The EPA Water Quality Trading Policy specifically supports sediment trading. Sources of
sediments include both natural and anthropogenic sources. Soil erosion from surface
water flow is the largest natural source of sediments. Erosion from high flow events,
such as flash floods or snow melt can result in greater sediment deposition in a single
large event than occurs all year from average flows. Nonpoint sources of sediment
include agricultural sources such as plowing and flood and furrow irrigation, forestry
sources, such as logging and stream bank disturbance, and urban/suburban sources
including construction, stormwater runoff, and irrigation. Point sources generally contain
sediment discharge limits in their NPDES permits but are usually not major contributors
to sediment concentrations.
Region 10 has had limited experience considering sediment trading opportunities.
However, other areas of the country have had more experience with sediment trading,
with pilot projects involving sediments conducted in the Delaware River, PA, the Truckee
River, NV, and the Lower Smith River, VA.
Water quality standards are developed to protect the most sensitive beneficial use and
have generally been established for sediments to protect designated uses associated
with aquatic life. They are often based on both a numeric standard related to turbidity
(e.g., 50 NTU's above background), and a narrative standard that protects beneficial
uses. Narrative standards are translated into a wide range of numeric criteria depending
on the conditions in the watershed, the fish species present, and the interpretation of the
agencies and stakeholders in the area.
TMDLs address sediments to meet water quality standards and control a number of
water quality problems. To establish appropriate environmental equivalence, trading
parties will need to understand how their sediment loads connect to the specific problem.
High concentrations of sediment can have both direct and indirect effects on water
quality. Excessive amounts of sediment can directly impact aquatic life and fisheries.
Excessive sediment deposition can choke spawning gravels, impair fish food sources,
and reduce habitat complexity in stream channels. Excessive suspended sediments can
make it more difficult for fish to find prey and at high levels can cause direct physical
harm, such as scale erosion, sight impairment, and gill clogging. Stream scour can lead
to destruction of habitat structure. Sediments can cause taste and odor problems for
drinking water, block water supply intakes, foul treatment systems, and fill reservoirs.
High levels of sediment can impair swimming and boating by altering channel form,
creating hazards due to reductions in water clarity, and adversely affecting aesthetics.
Indirect effects associated with sediment include low dissolved oxygen levels due to the
decomposition of organic sediment materials, and water column enrichment by attached
pollutant loads, such as nutrients, or legacy application of DDT or mercury-based seed
treatments. Elevated stream bank erosion rates also lead to wider channels which can
contribute to increased temperatures. Sediment targets and; monitored trends often
function as indicators of reductions in transport and delivery of these attached pollutants.
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Sedimentation is also an important consideration in Region 10 because a number of
species listed as threatened or endangered under the Endangered Species Act (ESA)
inhabit impaired waters in the region and require cold, clear, well oxygenated water to
support spawning, survival, and recovery.
KEY TRADING POINTS
A. Sediment Pollutant Form(s)
Sediment TMDLs—Sediment is discharged by sources in a wide range of particle sizes
and weights. TMDLs generally provide separate load allocations for sediments based on
two different particles sizes.
• Suspended or "water column" sediments are particles that are small and light enough
to remain suspended in the water column, generally less than 1 mm. Sources also
discharge two different types of these suspended sediments. Nonpoint sources
discharge geological particles, which are derived from rock and soil. Point sources,
such as wastewater treatment plants, usually discharge biological particles as part of
the treated wastewater. These different forms of suspended sediments may have
different impacts on water quality. As discussed below, TMDLs often establish
different load allocation forms for point and nonpoint sources to control water column
sediments.
• Bedload sediments are larger particles that are too heavy to be suspended in the
water column. They are generally discharged by nonpoint sources and are
transported by sliding, rolling, or bouncing along the bed of the stream. Bedload
sediments consist of particles greater than 1 mm in diameter and can range in size
from sand and gravel to small pebbles or large boulders. TMDLs often establish
mass-based load allocations for bedload sediments such as pounds per day or
tons/square mile/year of sediment loading, or use a percentage of fines deposited in
stream bottoms.
TMDLs often establish different load allocation forms for point and nonpoint sources.
Waste load allocations for point sources often use concentration-based limits, such as an
average weekly limit of 45 mg/L of Total Suspended Solids (TSS). Load allocations for
nonpoint sources are often expressed in mass-based allocations, such as tons/square
miles/year of sediment loading. Point source dischargers with similar sediment discharge
forms and waste load allocation metrics may have trading opportunities. For example,
two POTWs from neighboring jurisdictions in Virginia have entered into a cooperative
agreement whereby one POTW has agreed to a reduction in its permit limit for
discharging total dissolved solids so the other can have an increased limit. The
allocations are both expressed in terms of kg/day of total dissolved solids. The two
plants discharge into the same stream segment and the Virginia DEQ has determined
that the agreement would not result in a decrease in water quality. However, point
sources will also need to be aware of the form of sediment being discharged. A point
source discharging a biological form of sediment can have different water quality impacts
than a source discharging a geological form.
B. Impact
Adjusting for Fate and Transport Characteristics and Watershed Considerations—As
dischargers consider trading opportunities, it will be important to understand the specific
water quality impacts of each potential trading partner. Sediment load reductions by
87
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Water Quality Trading Assessment Handbook.
sources may be measured directly by sampling, with the models used to develop
sediment TMDLs, or using surrogate measures, such as percentage of fines in stream
bottoms. Other site specific watershed conditions, such as velocity, slope, channel
conditions, and type of sediment, are important considerations for understanding water
quality impacts and matching potential trading partners.
For suspended sediments, models are available to determine the impacts of reductions.
However, depending on the watershed conditions, and the water quality problem that is
being addressed, geological and biological forms of suspended sediments may have
different impacts. It is likely that trading between similar forms (e.g., geological to
geological, and biological to biological) will support water quality improvements. But
trading between different forms of suspended sediments will be dependent on the water
quality impacts that each reduction is intended to address. For example, if a source's
reduction in geological suspended sediments is intended primarily to reduce levels of
attached phosphorus, then a trade with a source discharging a biological form of
suspended sediments will not meet the water quality improvement needs of the
watershed. However, if suspended sediment reductions are intended primarily to reduce
turbidity, then a trade between two different forms may be supported.
While bedload sediment reductions may also be easily modeled, the impacts of bedload
sediments are generally experienced relatively close to the source of discharge as the
heavier particles are transported very slowly along the river bottom. Thus, opportunities
for trading bedload are likely to be limited to geographically smaller market areas.
Because suspended sediments and bedload sediments will have different impacts on
water quality, it is unlikely that there will be direct opportunities for trading between these
two different forms of sediment.
Watershed flow patterns are also likely to define market areas for trading. Sediment
movement in a stream varies as a function of flow. Suspended sediments discharged into
high flow areas will travel longer distances and may define a large market area. The
boundaries of markets may be defined by lower flows areas. The areas usually occur in
the lower sections of watersheds where flows decrease and the lighter, smaller
suspended sediments fall out. Upper sections of watersheds with higher flows often
transport more bedload sediment. Impoundments create significant barriers that restrict
sediment transport and create areas of sediment deposition. These distinct areas, based
on flow patterns, are likely to delineate defined trading market areas, with trading limited
to within each defined area.
Examining Local Considerations—Because watershed conditions relating to velocity,
slope, and channel conditions will directly affect the impact of sediment reductions, each
trade will have to be assessed to determine the potential for localized impacts. As with
other pollutants, downstream trades will only avoid unacceptable localized impacts if the
segment between the two sources has not reached its assimilative capacity. Additionally,
a trade, irrespective of its direction (up or downstream), involving sources discharging
substantially different sediment forms may be vulnerable to creating localized impacts.
For example, a trade that involves offsetting a biological form of suspended sediment
discharge with a geological form of suspended sediment discharge will leave a greater
quantity of biological sediments in the water column. This form of sediment may have a
greater impact on dissolved oxygen levels and may lead to unacceptable dissolved
oxygen-related water quality problems.
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.Water Quality Trading Assessment Handbook
C. Timing
Although sediment delivery to streams from nonpoint sources is an inherently seasonal
phenomenon, sediment allocations are generally applied year round. Allocations are
expressed as an average amount of sediment per year. To account for variability
between years (i.e., years with high snow melt or other extreme weather events will have
higher sediment delivery) some TMDL load allocations are expressed as ten year rolling
averages. Because sediment load allocations are generally applied on an average basis
year round, participants will be likely to align reductions between potential buyers and
sellers.
D. Quantity
There are a number of ways that sources can apply control options to reduce sediment
loads. These controls can be sampled and/or modeled to determine the amount of
sediment reduction beyond TMDL allocations.
Point sources can apply technological control options that result in a measurable change
in sediment concentration and associated loads. Permit limits for point sources are
usually based on a technology-based limit which may be lower than required to meet the
TMDL target. Under the Clean Water Act, point sources are required to comply with their
technology-based limits, irrespective of watershed conditions or their opportunities to
trade. Under such circumstances, there is no incentive for such sources to become
purchasers of sediment reductions. However, in circumstances where the technology-
based limit is higher than the water quality standards, incentives for trading may exist.
. In many watersheds experiencing sediment related water quality problems, point sources
are often only minor contributors to excessive sediment loads. Therefore, they may have
a limited capacity to overcontrol in a meaningful way to improve water quality. As
discussed above, point sources also discharge a different form of suspended sediment.
Point sources may be limited to trading with other sources discharging similar forms.
Nonpoint sources have the ability to overcontrol using more aggressive controls than
required to meet load allocations, using controls that cover broader areas, or using
controls that target more valuable areas for sediment reduction.
Nonpoint sources can overcontrol using Best Management Practices (BMPs).
Aggressive BMPs, such as conversion to drip irrigation on agricultural lands have the
ability to reduce sediment loads below TMDL allocations. BMPs can also be applied to
cover broader areas than specified in a TMDL.
Another potential overcontrol option is for sources to select higher value areas to apply
nonpoint BMPs, thus achieving higher reductions in the waterbody of concern.
Marketable reductions may be generated by applying control options that focus on areas
with highly erodible soils, or areas that have a direct impact on the beneficial use, such
as salmonid spawning areas, and may create a greater improvement in water quality than
specified under the TMDL allocation.
BMPs can be modeled to project the reduction in sediment loading. However, models
used in TMDL development usually provide only very coarse estimates of sediment
loading. Because of the limitations of models in projecting sediment reductions, TMDLs
often use surrogate measures that provide a more direct connection to the beneficial use
that is being protected. Measures such as the depth of sediment fines in riffle pools are
used in addition to the numeric targets to assess sediment reductions. These methods
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Water Quality Trading Assessment Handbook.
should allow nonpoint sources to calculate the amount of reductions beyond TMDL load
allocations.
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.Water Quality Trading Assessment Handbook
Appendix D
Capital Cost Annualization Factors
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Interest Rate
0.50%
1.005
0.5038
0.3367
0.2531
0.203
0.1696
0.1457
0.1278
0.1139
0.1028
0.0937
0.0861
0.0796
0.0741
0.0694
0.0652
0.0615
0.0582
0.0553
0.0527
1.00%
1.01
0.5075
0.34
0.2563
0.206
0.1725
0.1486
0.1307
0.1167
0.1056
0.0965
0.0888
0.0824
0.0769
0.0721
0.0679
0.0643
0.061
0.0581
0.0554
1 .50%
1.015
0.5113
0.3434
0.2594
0.2091
0.1755
0.1516
0.1336
0.1196
0.1084
0.0993
0.0917
0.0852
0.0797
0.0749
0.0708
0.0671
0.0638
0.0609
0.0582
2.00%
1.02
0.515
0.3468
0.2626
0.2122
0.1785
0.1545
0.1365
0.1225
0.1113
0.1022
0.0946
0.0881
0.0826
0.0778
0.0737
0.07
0.0667
0.0638
0.0612
2.50%
1.025
0.5188
0.3501
0.2658
0.2152
0.1815
0.1575
0.1395
0.1255
0.1143
0.1051
0.0975
0.091
0.0855
0.0808
0.0766
0.0729
0.0697
0.0668
0.0641
3.00%
1.03
0.5226
0.3535
0.269
0.2184
0.1846
0.1605
0.1425
0.1284
0.1 172
0.1081
0.1005
0.094
0.0885
0.0838
0.0796
0.076
0.0727
0.0698
0.0672
3.50%
1.035
0.5264
0.3569
0.2723
0.2215
0.1877
0.1635
0.1455
0.1314
0.1202
0.1111
0.1035
0.0971
0.0916
0.0868
0.0827
0.079
0.0758
0.0729
0.0704
4.00%
1.04
0.5302
0.3603
0.2755
0.2246
0.1908
0.1666
0.1485
0.1345
0.1233
0.1141
0.1066
0.1001
0.0947
0.0899
0.0858
0.0822
0.079
0.0761
0.0736
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Interest Rate
4.50%
1.045
0.534
0.3638
0.2787
0.2278
0.1939
0.1697
0.1516
0.1376
0.1264
0.1172
0.1097
0.1033
0.0978
0.0931
0.089
0.0854
0.0822
0.0794
0.0769
5.00%
1.05
0.5378
0.3672
0.282
0.231
0.197
0.1728
0.1547
0.1407
0.1295
0.1204
0.1128
0.1065
0.101
0.0963
0.0923
0.0887
0.0855
0.0827
0.0802
5.50%
1.055
0.5416
0.3707
0.2853
0.2342
0.2002
0.176
0.1579
0.1438
0.1327
0.1236
0.116
0.1097
0.1043
0.0996
0.0956
0.092
0.0889
0.0862
0.0837
6.00%
1.06
0.5454
0.3741
0.2886
0.2374
0.2034
0.1791
0.161
0.147
0.1359
0.1268
0.1193
0.113
0.1076
0.103
0.099
0.0954
0.0924
0.0896
0.0872
6.50%
1.065
0.5493
0.3776
0.2919
0.2406
0.2066
0.1823
0.1642
0.1502
0.1391
0.1301
0.1226
0.1163
0.1109
0.1064
0.1024
0.0989
0.0959
0.0932
0.0908
7.00%
1.07
0.5531
0.3811
0.2952
0.2439
0.2098
0.1856
0.1675
0.1535
0.1424
0.1334
0.1259
0.1197
0.1143
0.1098
0.1059
0.1024
0.0994
0.0968
0.0944
7.50%
1.075
0.5569
0.3845
0.2986
0.2472
0.213
0.1888
0.1707
0.1568
0.1457
0.1367
0.1293
0.1231
0.1178
0.1133
0.1094
0.106
0.103
0.1004
0.0981
8.00%
1.08
0.5608
0.388
0.3019
0.2505
0.2163
0.1921
0.174
0.1601
0.149
0.1401
0.1327
0.1265
0.1213
0.1168
0.113
0.1096
0.1067
0.1041
0.1019
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Water Quality Trading Assessment Handbook.
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Interest Rate
8.50%
1.085
0.5646
0.3915
0.3053
0.2538
0.2196
0.1954
0.1773
0.1634
0.1524
0.1435
0.1362
0.13
0.1248
0.1204
0.1166
0.1133
0.1104
0.1079
0.1057
9.00%
1.09
0.5685
0.3951
0.3087
0.2571
0.2229
0.1987
0.1807
0.1668
0.1558
0.1469
0.1397
0.1336
0.1284
0.1241
0.1203
0.117
0.1142
0.1117
0.1095
9.50%
1.095
0.5723
0.3986
0.3121
0.2604
0.2263
0.202
0.184
0.1702
0.1593
0.1504
0.1432
0.1372
0.1321
0.1277
0.124
0.1208
0.118
0.1156
0.1135
10.00%
1.1
0.5762
0.4021
0.3155
0.2638
0.2296
0.2054
0.1874
0.1736
0.1627
0.154
0.1468
0.1408
0.1357
0.1315
0.1278
0.1247
0.1219
0.1195
0.1175
10.50%
1.105
0.5801
0.4057
0.3189
0.2672
0.233
0.2088
0.1909
0.1771
0.1663
0.1575
0.1504
0.1444
0.1395
0.1352
0.1316
0.1285
0.1259
0.1235
0.1215
11.00%
1.11
0.5839
0.4092
0.3223
0.2706
0.2364
0.2122
0.1943
0.1806
0.1698
0.1611
0.154
0.1482
0.1432
0.1391
0.1355
0.1325
0.1298
0.1276
0.1256
1 1 .50%
1.115
0.5878
0.4128
0.3258
0.274
0.2398
0.2157
0.1978
0.1841
0.1734
0.1648
0.1577
0.1519
Ot47l
0.1429
0.1394
0.1364
0.1339
0.1316
0.1297
12.00%
1.12
0.5917
0.4163
0.3292
0.2774
0.2432
0.2191
0.2013
0.1877
0.177
0.1684
0.1614
0.1557
0.1509
0.1468
0.1434
0.1405
0.1379
0.1358
0.1339
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.Water Quality Trading Assessment Handbook
Appendix E
Participant Pollutant Management Options
Characterization
1. Background Information
a. Model Trade Participant Organization Name:
b. Organization Representative Contact Information:
i. Name:
ii. Address:
iii. Phone Number:
iv. E-mail:
2. Phosphorus Load Source(s) for Consideration:
a. Source A: (provide name of load source e.g., Trout Growers, Inc at Bhule)
b. Source B:
c. Source C:
3. Individual Source Characterization (Source A)
a. Source Description:
b. Source Location (river mile):
c. Source Discharge Location (river mile):
d. Source Phosphorus Type(s):
e. Source Baseline Discharge Quantity (from TMDL):
f. Source TMDL Target Load (from TMDL):
g. Source Current Load (by type if possible):
h. Source Expected Future Load (annual growth/decline rate and time horizon):
i. Seasonal or Other Cyclic Load Considerations:
4. Source Phosphorus Control Option(s):
a. Option A:
b. Option B:
c. Option C:
5. Source Phosphorus Control Option Description (Option A):
a. Description: (include technology/management practice, ability to scale/size to
specific control levels, seasonal variability of control, and design, construction,
shakedown periods along with overall lifespan)
b. Currently in Place: (yes or no, and provide date of completion and expected
lifespan)
c. Capital Cost:
d. Annual O&M Cost:
e. Phosphorus Control Achieved/Expected (in Ibs. Phosphorus/day):
93
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Water Quality Trading Assessment Handbook.
23,
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