EFFLUENT TRADING IN WATERSHEDS
                               POLICY STATEMENT
Purpose
       In response to President Clinton's Reinventing Environmental Regulation (March 1995),
EPA strongly promotes the  use  of effluent trading to achieve water quality objectives and
standards.  This  staimuaui -communicates  EPA's policy mi Bf(iueul  uadkig to wateislitsUs
discusses the benefits of trading, presents an explanation of several types of effluent trading, and
outlines how  EPA will be encouraging trading.  This policy is Agency  guidance only and does
not establish or affect legal rights or obligations. It does not establish a binding norm and is not
finally determinative of the issues addressed. Agency decisions in any particular case will be
made by applying the law and regulations on the basis of specific facts when permits are issued.

Policy

       EPA  will  actively support and promote effluent trading within watersheds to achieve
water quality objectives, including water quality standards, to the extent authorized by the Clean
Water Act and implementing regulations. EPA will work cooperatively with key stakeholders
to find sensible, innovative ways to meet water quality standards qukker and at less overall cost
than with traditional approaches alone.  EPA will assure that effluetf trades are implemented
responsibly so that environmental progress is enhanced, not hindered.

Benefits

       EPA's support of watershed-based trading is anchored to a strong commitmert to achieve
and maintain water quality  standards.  EPA believes that trading is an  innovative  way for
community stakeholders (e.g.,  regulated sources, non-regulated sources, regulalorjr tfencfcs and
the public) to develop more  "common sense" solutions to water quality problems in their
watersheds.  Effluent trading potentially offers a number of economic, environmeaial and social
benefits:

Economic Benefits:

              Reduces costs for individual sources contributing to water quality problems.

              Allows dischargers to  take advantage of economies  of scale and treatment
              efficiencies that vary from source to soujrce.
                                                  •
              Reduces overall cost of addressing water quality problems in the watershed.

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Environmental Benefits.

             Achieves equal or greater reduction of pollution for the same or less cost.

             Creates an economic incentive for dischargers to go beyond minimum pollution
             reduction and also  encourages pollution prevention and the use of innovative
             technologies.

             Can reduce cumulative pollutant loading, improve water quality, accommodate
 	  growth and pievent futuie-euviuumiemal UegiaUaiiuu.	 ~"    —•=—^

             Can  address  the broader  environmental goals within  a  trading  area, e.g.,
             ecosystem  protection,   ecological  restoration,  improved  wildlife  habitat,
             endangered species protection, etc.

Social Benefits:

             Encourages dialogue among  stakeholders and fosters concerted and  holistic
             solutions for watersheds  with multiple sources of water quality impairment.


Explanation of Different Types of Effluent Trading

       Trading supplements the current regulatory approach. It is a method to attain and/or
maintain water quality standards, by allowing sources of pollution to achieve poOutont reductions
through  substituting  a cost-effective and enforceable mix  of  controls on  other iources of
discharge.   As  the  Agency  improves its  understanding  of the opportunities afforded by
watershed-based decision making, EPA will provide infonnition for additional forms of trading.

       To take advantage of  trading,  a point source must be in compliance, and remain in
compliance, with applicable  technology-based limits.  Intra-plant  trades must  alao have a
technology-based floor, while  the technology floor for pretrettment trading is determined by Oie
categorical standards.  EPA expects that most trades will be covered by Total Maximum Daily
Loads (TMDL) or similar watershed-based analysis.1

       The items to be traded are the pollutant reductions or water quality improvement sought.
        1   A TMDL provides the water quality analysis and planning process for determining
 the specific pollution reductions that are necessary to attain or maintain water quality standards.
 Under section 303 (d) of the CWA, States establish TMDLs for impaired waters.  The TMDL
 process includes legal requirements for public participation and implementation through NPDES
 permits.

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Under trading, a source that can more cost-effectively achieve greater pollutant reduction than
is  otherwise required would  be able to sell or barter the credits for its excess reduction to
another source unable  to reduce its own pollutants as cheaply.   To ensure that water quality
standards  are met throughout a watershed, an equivalent or better water pollutant reduction
would need to result from a trade.  Below are proposed definitions for several different types
of effluent trading approaches.  These definitions are preliminary and do not reflect the full
range of feasible trades:
Intra-Plant Trading:
Pretreatment Trading:
 Point/Point Source Trading:
 Potal/Nonpoint Source Trading:
A point source is allocated pollutant  discharges
among  its -outfalls  -in -a -cust-effetaivti -maimeFT"
provided that the combined permitted discharge with
trading  is no greater than the combined permitted
discharge without trading in the watershed.

An indirect industrial point source(s) that discharges
to  a publicly  owned treatment works arranges,
through the local  control authority, for additional
control  by other indirect point sources  beyond the
minimum requirements in lieu of upgrading its own
treatment for an equivalent level of reduction.

A point source(s) arranges for other point source(s)
in  a watershed to undertake greater  than required
control  in lieu of upgrading  its own treatment
beyond the  minimum technology-based treatment
requirements  in  order to  more  cost-effectively
achieve water quality standards.

A point source(s) arranges for control  of nonpoint
source   discharge(s)  in a  watershed  in lieu  of
upgrading its own treatment beyond the minimum
technology-based treatment requirements in order to
 more   cost-effectively   achieve  .water   quality
 standards.
 Nonpoint/Nonpoint Source Trading:
 A  nonpoint source(s) arranges  for  more cost-
 effective control of other nonpoint sources  in a
 watershed in lieu of installing or upgrading its own
 control.

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  How EPA Will Be Encouraging Trading

         EPA  is developing a  framework  for watershed-based effluent trading,  as well as
  information exchange workshops, and limited technical assistance for trading projects in specific
  areas.  Watershed-based trading will be implemented on a voluntary basis under existing Clean
  Water Act (CWA) authorities.  There will be substantial public outreach effort  to  obtain
  stakeholders'  recommendations  and  insights  on draft portions of the framework prior to
  implementation.

       - Finally.-white  EPA .believes that  the potential ot trading is  largely untapped, the
  usefulness of trading will depend  on the. site-specific water quality conditions in any given
  situation. The framework will describe situations which EPA believes are most appropriate for
  watershed-based trading, and those that are generally inappropriate.

         EPA plans to distribute a draft trading framework in February, '1996 and hold a series
  of stakeholder meetings.  For'more information call  Mahesh-Podar at. (202)260-7818, fax
  (202)401-3372   or  send   an  Email  message   to   herzi.hawa@epamail.epa.gov  or
  tuano.theresa@epamail.epa.gov.
   Attachment
tss
Steven A. Herman
Assistant Administrator for Enforcement and Compliance Assurance
         Z. Cannon
        Counsel*

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                           EXPERIENCE TO DATE

      Trading  is being explored, developed or implemented in a number of watersheds
throughout the country.  Some examples are below:
ProjevUZacatton ;- ,'^ ^; "- . "*'-
Fox River, WI
Dillon Rgffrvoir, CO
Boulder Creek, CO
Tar-PamSco, NC
Arkansas Nature Conservancy
Maryland Nontidal Wetlands
Iron and Steel
Rhode Island eleetroplaters
ChtkaBi Piver Boon, WA
Boom* Ktunolr, TN
VRctmlfo River, MD
Homy Creek Watershed, OH
South San Francisco Bay, CA
Unt Island Somnd, NY
Ottrry Creek. CO
Tampa Bay, FL
Chatfleld Basin, CO
_ >'• * ,' * » *s
Focut '.;.. ,. .-.'
BOD, nutrients
phosphorus
ammonia,
nutrients
nitrogen,
phosphorus
wetlands
wetlands •
BOD, TSS, zinc, and
lead
metals
BOD
nutrients
phosphorus
phosphorus
copper
dissolved oxygen
phosphorus
nitrogen, TSS
phosphorus
Type of Trading, •'.*'•••
point/point
pointfnonpoint; nonpoint/nonpoint
point/nonpoint
pointfnonpoint
nonpoint/nonpoint
nonpoint/nonpoint
infra-plant
pretreatment
point/nonpoint
point/nonpoint
point/nonpoint
point/nonpoint
point/point
Point/nonpoint
point/nonpoint; point/point
point/point; point/nonpoint;
nonpoint/nonpoint
point/nonpoint

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