UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
A
Office of Water
Water Quality Trading Policy
January 13,2003
I. Background and Purpose of the Policy
The Clean Water Act (CWA)1 was enacted in 1972 to restore and maintain the chemical,
physical, and biological integrity of the nation's waters. It established a national policy
that called for the discharge of pollutants to be eliminated and established interim goals
for protecting fish, wildlife and recreational uses. The CWA also established a national
policy for development and implementation of programs so the goats of the Act could be
met through controls of point and nonpoint sources of pollution. Congress recognized
and preserved the primary responsibilities and rights of the States to prevent, reduce arid
eliminate pollution.
The application of technology and water quality based requirements through the National
Pollutant Discharge Elimination System (NPDE8) permit program has achieved and
remains critical to success in controlling point source pollution and restoring the nation's
waters. Despite these accomplishments approximately 40% of the rivers, 45% of the
streams and 50% of the lakes that have been assessed still do not support their designated
uses"'. Sources of pollution such as urban storm water, agricultural runoff and
atmospheric deposition continue to threaten our nation's waters. Nutrient and sediment
loading from agriculture and storm water are significant contributors to water quality
problems such as hypoxia in the Gulf of Mexico and decreased fish populations in
Chesapeake Bay. Population growth and development place increasing demands on the
environment making it more difficult to achieve and maintain water quality standards.
Finding solutions to these complex water quality problems requires innovative
approaches that are aligned with core water programs. Water quality trading is an
approach that offers greater efficiency in achieving water quality goals on a watershed
basis. It allows one source to meet its regulatory obligations by using pollutant
reductions created by another source that has lower pollution control costs. Trading
capitalizes on economies of scale and the control cost differentials among and between
sources.
The United States Environmental Protection Agency (EPA) believes that market-based
approaches such as water quality trading prm ide greater flexibility and have potential to
achieve water quality and environmental benefits greater than would otherwise be
achieved under more traditional regulatory approaches. Market-based programs can
1 Federal Water Pollution Control Act (Public Law 92-500, as amended), 33 U.S.C. Sec. 1251, ct. sgg.
2 About 33 percent of the nation's waters have been assessed by Stales and tribes pursuant to Section
305(b) of the Clean Water Act (National Water Quality Inventory: 2000 Report, EPA). The proportion of
non-assessed water that do not meet designated uses is likely Sower since assessments tend to be focused in
known problem areas.
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Water Quality Trading Policy Statement
achieve water quality goals at a substantial economic savings. EPA estimates thai in
1997 annual private point source control costs were about $14 billion and public point
source costs were about $34 billion3. The National Cost to Implement Total Maximum
Daily Loads (TMDLs) Draft Report estimates thai flexible approaches to improving
water quality could save $900 million dollars annually compared to the least flexible
approach (EPA, August 2001). Nitrogen trading among publicly owned treatment works
in Connecticut that discharge into Long Island Sound is expected to achieve the required
reductions under a TMDL while saving over $200 million dollars in control costs.
Market-based approaches can also create economic incentives for innovation, emerging
technology, voluntary pollution reductions and greater efficiency in improving the quality
of the nation's waters.
The purpose of this policy is to encourage states, interstate agencies and tribes to develop
and implement water quality trading programs for nutrients, sediments and other
pollutants where opportunities exist to achieve water quality improvements at reduced
costs. More specifically, the policy is intended to encourage voluntary trading programs
that facilitate implementation of TMDLs, reduce the costs of compliance with CWA
regulations, establish incentives for voluntary reductions and promote watershed-based
initiatives. A number of states are in various stages of developing trading programs.
This policy provides guidance for states, interstate agencies and tribes to assist them in
developing and implementing such programs.
This policy addresses issues left open by and limitations encountered implementing
projects and programs under EPA's January 1996 Effluent Trading In Watersheds Policy
and May 1996 Draft Framework for Watershed-Based Trading ("Draft Framework'1).
This policy should be given precedence over any inconsistencies with the Draft
Framework.
This policy draws upon lessons from a number of recent pilot trading projects and slate
experiences in developing water quality trading programs. These initiatives demonstrate
how trading can occur under the CWA and existing federal regulations. They illustrate
the importance of voluntary watershed-based partnerships, intcr-agcncy cooperation and
public participation in implementation of trading programs. They show that flexible
market-based approaches can facilitate slates and tribes finding solutions to complex and
diverse water quality and socioeconomic issues. These efforts have also highlighted the
importance of keeping transaction and administrative costs manageable while retaining
accountability. The lessons learned from these efforts have informed the development of
this policy.
This policy describes various requirements of the CWA and implementing regulations
that are relevant to water quality trading, including: requirements to obtain permits
(Sections 402 and 404). ami backsliding provisions (Section 303(d)(4) and Section
402(c)), the development of water quality standards including antidegradation policy
(Section 303(c)), federal NPDES permit regulations (40 CFR Parts 122, 123 and 124),
TMDLs (Section 303d{I)) and water quality management plans (40 CFR Part 130).
3 A Retrospective Assessment of the Costs of the Clean Water Act: 1972 - 1997 {EPA October, 2000).
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USEPA
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Water Quality Trading Policy Statement
These CWA provisions and regulations contain legally binding requirements. This policy
does not substitute for those provisions or requirements. In addition, this policy identifies
general elements and provisions that EPA believes are important for creating credible
water quality trading programs.
When EPA makes a decision with regard lo any particular permit, TMDL, water quality
standards or water quality management plan that includes provisions for trading to occur,
it will make each decision on a case-by-case basis guided by the applicable requirements
of the CWA and implementing regulations and the specific facts and circumstances
involved.
II. Trading Objectives
EPA supports implementation of water quality trading by states, interstate agencies and
tribes where trading:
A. Achieves early reductions and progress towards water quality standards pending
development of TMDLs for impaired waters.
B. Reduces the cost of implementing TMDLs through greater efficiency and flexible
approaches.
C. Establishes economic incentives for voluntary pollutant reductions from point and
nonpoinl sources within a watershed.
D. Reduces the cost of compliance with water quality-based requirements.
E. Offsets new or increased discharges resulting from growth in order to maintain
levels of water quality that support all designated uses.
F. Achieves greater environmental benefits than those under existing regulatory
programs. EPA supports the creation of water quality trading credits in ways that
achieve ancillary environmental benefits beyond the required reductions in
specific pollutant loads, such as the creation and restoration of wetlands,
floodplains and wildlife and/or waterfowl habitat.
G. Secures long-term improvements in water quality through the purchase and
retirement of credits by any entity,
I f. Combines ecological services to achieve multiple environmental and economic
benefits, such as wetland restoration or the implementation of management
practices that improve water quality and habitat.
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Water Quality Trading Policy Statement
III. Water Quality Trading Policy Statement
A, CWA Requirements. Water quality trading and other market-based programs
must be consistent with the CWA.
B, Trading Areas. All water quality trading should occur within a watershed or a
defined area for which a TMDL has been approved. Establishing defined trading
areas that coincide with a watershed or TMDL boundary results in trades that
affect the same water body or stream segment and helps ensure that water quality
standards are maintained or achieved throughout the trading area and contiguous
waters.
C. Pollutants and Parameters Traded. EPA supports trading that involves nutrients
(e.g., total phosphorus and iotal nitrogen) or sediment loads. In addition, EPA
recognizes 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. EPA believes that such trades
may pose a higher level of risk and should receive a higher level of scrutiny to
ensure that they are consistent with water quality standards. EPA may support
trades that involve pollutants other than nutrients and sediments on a case-by-case
basis where prior approval is provided through an NPDES permit, a TMDL or in
the context of a watershed plan or pilot trading project that is supported by a state,
tribe or EPA.
EPA also supports cross-pollutant trading for oxygen-re la led pollutants where
adequate information exists to establish and correlate impacts on water quality.
Reducing upstream nutrient levels to offset a downstream biochemical oxygen
demand or to improve a depressed in-stream dissolved oxygen level are examples
of cross-pollutant trading.
EPA does not currently support trading of pollutants considered by EPA to be
persistent bioaccumulative toxics (PBTs). EPA woutd consider a limited number
of pilot projecls over the next two to three years to obtain more information
regarding trading of PBTs. EPA believes pilot projects may be appropriate where
the predominant loads do not come from point sources, trading achieves a
substantial reduction of the PBT traded and where trading does not cause an
exccedance of an aquatic life or human health criterion. Based on the findings of
these pilot projects, EPA will consider making revisions to its policy.
Where state or tribal water quality standards allow for mixing zones, EPA does
not support any trading activity that would exceed an acute aquatic life criteria
within a mixing zone or a chronic aquatic life or human health criteria at the edge
of a mixing zone using design flows specified in the water quality standards.
D. Baselines for Water Quality Trading. As explained below, the baselines for
generating pollution reduction credits should be derived from and consistent with
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Water Quality Trading Policy Statement
water quality standards. The term pollution reduction credits ("credits"), as used
in this policy, means pollutant reductions greater than those required by a
regulatory requirement or established tinder a TMDL,
For example, where a TMDL has been approved or established by EPA, the
applicable point source waste load allocation or nonpoint source load allocation
would establish the baselines for generating credits. For trades that occur where
water quality fully supports designated uses, or in impaired waters prior to a
TMDL being established, the baseline for point sources should be established by
the applicable water quality based effluent limitation, a quantified performance
requirement or a management practice derived from water quality standards. In
these scenarios the baseline for nonpoint sources should be the level of pollutant
load associated with existing land uses and management practices that comply
with applicable state, local or tribal regulations.
E. When Trading May Occur.
1. Trading to Maintain Water Quality Standards. Trading may be used to
maintain high water quality in waters where water quality standards are attained,
such as by compensating for new or increased discharges of pollutants.
2. Pre-TMDL Trading In Impaired Waters, EPA supports pre-TMDL trading
in impaired waters to achieve progress towards or the attainment of water quality
standards. EPA believes this may be accomplished by individual trades that
achieve a net reduction of the pollutant traded or by watershed-scale trading
programs that reduce loadings to a specified cap supported by baseline
information on pollutant sources and loadings.
EPA also supports 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 nol sufficient or
as cost-effective.
If" pre-TMDL trading does not result in the attainment of applicable water quality
standards, EPA expects a TMDL to be developed. After a TMDL has been
approved or established by EPA, the reductions made to generate credits for pre-
TMDL trading may no longer be adequate to generate credits under the TMDL.
This will depend on the remaining level of reduction needed to achieve water
quality standards and, where applicable, the allocation of point and nonpoint
source pollutant loads established by the TMDL.
3. TMDL Trading. Trades and trading programs in impaired waters for
which a TMDL has been approved or established by EPA should be consistent
with the assumptions and requirements upon which the TMDL is established.
EPA encourages the inclusion of specific trading provisions in the TMDL itself,
in NPDPS permits, in watershed plans and the continuing planning process.
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Water Quality Trading Policy Statement
EPA does not support any trading activity that would delay implementation of a
TMDL approved or established by EPA or that would cause the combined point
source and nonpoint source loadings to exceed the cap established by a TMDL.
4. Techno logy-Based Trading. EPA does not support trading to comply with
existing technology-based effluent [imitations except as expressly authorized by
federal regulations. Existing technology-based effluent guidelines for the iron
and steel industry allow intraplant trading of conventional, nonconventional and
toxic pollutants between outfalls under certain circumstances (40 CFR 420.03).
EPA will consider including provisions for trading in the development of new
and revised technology-based effluent guidelines and other regulations to achieve
technology-based requirements, reduce implementation costs and increase
environmental benefits.
5. Pretreatment Trading. EPA supports a municipality or regional sewerage
authority developing and implementing trading programs among industrial users
that are consistent with the pretreatment regulatory requirements at 40 CFR Part
403 and the municipality's or authority's NPDES permit,
6. Intra-Plant Trading. EPA supports intra-plant trading that involves the
generation and use of credits between multiple outfalls that discharge to the same
receiving water from a single facility that has been issued an NPDES permit.
F. Alignment With The CWA. Provisions for water quality trading should be
aligned with and incorporated info core water quality programs. EPA believes
this may be done by including provisions for trading in water quality management
plans, the continuing planning process, watershed plans, water quality standards,
including antidegradation policy and, by incorporating provisions for trading into
TMDLs and NPDES permits.
When developing water quality trades and trading programs, states and tribes
should, at a minimum, take into account the following provisions of the CWA and
implementing regulations:
1. Requirements to Obtain Permits. Sources and activities that are required to
obtain a federal permit pursuant to Sections 402 or 404 of the CWA must do so to
participate in a trade or trading program.
2. Incorporating Provisions For Trading Into Permits. In some cases, specific
trades may be identified in NPDES permits, including requirements related to the
control of nonpoint sources where appropriate, EPA also supports several flexible
approaches for incorporating provisions for trading into NPDES permits: i)
general conditions in a permit that authorize trading and describe appropriate
conditions and restrictions for trading to occur, ii) the use of variable permit limits
that may be adjusted up or down based on the quantity of credits generated or
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Water Quality Trading Policy Statement
used; and/or, iii) the use of alternate permit limits or conditions that establish
restrictions on the amount of a point source's pollution reduction obligation that
may be achieved by the use of credits if trading occurs, EPA also encourages the
use of watershed general permits, where appropriate, to establish pollutant-
specific limitations for a group of sources in the same or similar categories to
achieve net pollutant reductions or water quality goals through trading.
Watershed permits issued to point sources should include facility specific effluent
limitations or other conditions that would apply in the event the pollutant cap
established by the watershed permit is exceeded,
3. Public Notice, Comment and Opportunity For Hearing. Notice, comment
and opportunity for hearing must be provided for all NPDES permits (40 CFR
124). NPDES permits and fact sheets should describe how baselines and
conditions or limits for trading have been established and how they are consistent
with water quality standards. EPA does not expect that an NPDES permit would
need to be modified to incorporate an individual trade if that permit contains
authorization and provisions for trading to occur and the public was given notice
and an opportunity to comment and/or attend a public hearing at the time the
permit was issued,
4. Consistency With Standard Methods. Where methods and procedures
(e.g., sampling protocols, monitoring frequencies) are specified by federal
regulations or in NPDES permits, they should continue to be used where
applicable for measuring compliance for point sources that engage in trading.
EPA believes this is necessary to provide clear and consistent standards for
measuring compliance and to ensure that appropriate enforcement action can be
taken,
5, Protecting Designated Uses. EPA does not support any use of credits or
trading activity that would cause an impairment of existing or designated uses,
adversely affect water quality at an intake for drinking water supply or that would
exceed a cap established under a TMDL.
6, Antibacksliding. EPA believes that the antibacksliding provisions of
Section 303(d)(4) of the CWA will generally be satisfied where a point source
increases its discharge through the use of credits in accordance with alternate or
variable water quality based effluent limitations contained in an NPDES permit,
in a manner consistent with provisions for trading under a TMDL, or consistent
with the provisions for pre-TMDE trading included in a watershed plan.
These antibacksliding provisions will also generally be satisfied where a point
source generates pollution reduction credits by reducing its discharge below a
water quality based effluent limitation (WQBEL) that implements a TMDL or is
otherwise established to meet water quality standards and it later decides to
discontinue generating credits, provided that the total pollutant load to the
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Water Quality Trading Policy Statement
receiving water is not increased, or is otherwise consistent with state or tribal
antidegradation policy.
7. Antidegradation. Trading should be consistent with applicable water
quality standards, including a slate's and tribe's antidegradation policy established
to maintain and protect existing instream water uses and the level of water quality
necessary to support them, as wet! as high quality waters and outstanding national
resource waters (40 CFR 131,12). EPA recommends that state or tribal
antidegradation policies include provisions for trading to occur without requiring
antidegradation review for high quality waters. EPA does not believe thai trades
and trading programs will result in "lower water quality" as that term is used in 40
CFR 131.12(a)(2), or that antidegradation review would be required under EPA's
regulations when the trades or trading programs achieve a no net increase of the
pollutant traded and do not result in any impairment of designated uses.
G. Common Elements of Credible Trading Programs. EPA believes that, in addition
to including provisions to be consistent with the CWA, trading programs should
include the following general elements to be credible and successful:
1. Legal Authority and Mechanisms. Clear legal authority and mechanisms
are necessary for trading to occur. EPA believes the CWA provides authority for
EPA, states and tribes to develop a variety of programs and activities to control
pollution, including trading programs. The CWA and federal regulations provide
authority to incorporate provisions for trading into NPDES permits issued to point
sources and for trading under TMDLs that include provisions for trading to occur.
In addition, states and tribes should use specific legal mechanisms to facilitate
trading. Provisions for trading may be established through various mechanisms,
including: legislation, rule making, incorporating provisions for trading into
NPDES permits and establishing provisions for trading in TMDLs or watershed
plans. These provisions may incorporate or be supplemented by private contracts
between sources or third-party contracts where the third party provides an
indemnification or enforcement function.
2. Units of Trade, Clearly defined units of trade are necessary for trading to
occur. Pollutant specific credits are examples of tradable units for water quality
trading. These may be expressed in rates or mass per unit time as appropriate to
be consistent with the time periods that are used to determine compliance with
NPDES permit limitations or other regulatory requirements.
3. Creation and Duration of Credits. Credits should be generated before or
during the same period they are used to comply with a monthly, seasonal or
annual limitation or requirement specified in an NPDES permit. Credits may be
generated as long as the pollution controls or management practices are
functioning as expected.
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Wafer Quality Trading Policy Statement
4. Quantifying Credits and Addressing Uncertainty. Standardized protocols
are necessary to quantify pollutant loads, load reductions, and credits. States and
tribes should develop procedures to account for the generation and use of credits
in NPDES permits and discharge monitoring reports in order to track the
generation and use of credits between sources and assess compliance.
Where trading involves nonpoint sources, states and tribes should adopt methods
to account for the greater uncertainty in estimates of nonpoint source loads and
reductions. Greater uncertainty in nonpoint source estimates is due to several
factors including but not limited to variability in precipitation, variable
performance of land management practices, time lag between implementation of
some practices and full performance, and the effect of soils, cover and slope on
pollutant load delivery to receiving waters.
EPA supports a number of approaches to compensate for nonpoint source
uncertainty. These include monitoring to verify load reductions, the use of greater
than 1:1 trading ratios between nonpoint and point sources, using demonstrated
performance values or conservative assumptions in estimating the effectiveness of
nonpoint source management practices, using site- or trade-specific discount
factors, and retiring a percentage of nonpoint source reductions for each
transaction or a predetermined number of credits. Where appropriate, states and
tribes may elect to establish a reserve pool of credits that would be available to
compensate for unanticipated shortfalls in the quantity of credits that are actually
generated.
The site-specific procedures and protocols used in water quality trading programs
that involve agriculture and forestry operations should be developed by states and
tribes in consultation with United States Department of Agriculture (USDA)
agencies. Those procedures should estimate nutrient or sediment load delivery to
the stream segment, water body or watershed where trading occurs. Numerous
methods and procedures to determine nutrient and sediment load reductions
associated with conservation practices on agricultural and forest land have been
developed or used by the USDA agencies, including the Natural Resources
Conservation Service, Forest Service, Agricultural Research Service and the
Cooperative State, Research, Education and Extension Service. Some of these
methods may be applied to water quality trading.
As an example, the Revised Universal Soil Loss Equation (RL'SLE) may be used
in some locations to estimate the sediment yield at the end of a slope in
agricultural settings. The sediment yield at the end of a slope coupled with an
appropriate method to estimate sediment delivery to (he receiving waters can
provide a reasonable estimate of sediment load and load reductions.
Representative soil sampling to determine the phosphorus content of soils can be
used with this approach to estimate non-soluble sediment-bound phosphorus loads
and load reductions. Different methods are appropriate to estimate soluble
phosphorus and nitrogen loads and load reductions.
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Water Quality Trading Policy Statement
EPA and the USDA are working with other agencies to evaluate existing methods
and to develop improved methods and procedures for estimating loads from
agricultural and forestry lands, More precise estimations will be possible as
technologies improve and new technologies arc developed.
For storm water runoff other than agriculture, EPA recommends monitoring or
modeling to estimate pollutant loads and load reductions. EPA believes this may
be based on local hydrology and actual data or pollutant loading factors that relate
land use patterns, percent imperviousness or percent disturbed land and controls
or management practices in a watershed to per acre or per unit pollutant loads,
where other methods arc not specified in a permit or regulation.
5. Compliance and Enforcement Provisions. Mechanisms for determining
and ensuring compliance are essential for all trades and trading programs. These
may include a combination of record keeping, monitoring, reporting and
inspections. Compliance audits should be conducted frequently enough to ensure
that a high level of compliance is maintained across the program. States and
tribes should establish clear enforceable mechanisms consistent with NPDES
regulations that ensure legal accountability for the generation of credits that are
traded. In the event of default by another source generating credits, an NPDES
permittee using those credits is responsible for complying with the effluent
limitations that would apply if the trade had not occurred. EPA also recommends
that states and tribes consider providing periodic accounting and reconciliation
periods and establishing appropriate enforcement provisions for failure to
generate the quantity of credits that are traded.
EPA recommends that states and tribes consider the role of compliance history in
determining source eligibility to participate in trading.
EPA recommends that states and tribes consider including provisions to address
situations where nonpoint source controls and management practices that arc
implemented to generate credits fail due to extreme weather conditions or other
circumstances that are beyond the control of the source.
6. Public Participation And Access To Information. EPA supports public
participation at the earliest stages and throughout the development of water
quality trading programs to strengthen program effectiveness and credibility.
Easy and timely public access to information is necessary for markets to function
efficiently and for the public to monitor trading activity. EPA encourages states
and tribes to make electronically available to the public information on the
sources that trade, the quantity of credits generated and used on a watershed basis,
market prices where available, and delineations of watershed and trading
boundaries. This information is necessary to identify potential trading
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opportunities, allow easy aggregation of credits, reduce transaction costs and
establish public credibility.
7. Program Evaluations. Periodic assessments of environmental and
economic effectiveness should be conducted and program revisions made as
needed. Environmental evaluations should include ambient monitoring to ensure
impairments of designated uses (including existing uses) do not occur and to
document water quality conditions. Studies should be performed to quantify
nonpoint source toad reductions, validate nonpoint source pollutant removal
efficiencies and determine whether the anticipated water quality objectives have
been achieved. Economic evaluations should include the number and type of
trades, the price paid for pollutant reduction credits, transaction costs, the costs
incurred to administer the program, and where possible any net cost savings
resulting from trading.
The results of program evaluations should be made available to the public. An
opportunity for comment should also be provided on changes to the program as
necessary to ensure that water quality objectives and economic efficiencies are
achieved, and that trading does not result in an impairment of designated uses
(including existing uses).
11. EPA's Oversight Role. States and tribes are encouraged to consult with EPA
throughout development of trading programs to facilitate alignment with the
CWA. EPA has various oversight responsibilities under the CWA, including
approval or establishment of TMDLs, approval of revisions to state or tribal water
quality standards, review of NPDES permits and provisions for reviewing and
making recommendations regarding revisions to a state's or tribe's water quality
management plans through the continuing planning process. In general, RPA
does not believe that the development and implementation by states and tribes of
trading programs consistent with the provisions of this policy necessarily warrant,
a higher level of scrutiny under these oversight authorities than is appropriate for
activities not involving trading. I lowevcr, where questions or concerns arise,
EPA will use its oversight authorities to ensure thai trades and trading programs
are fully consistent with the CWA and its implementing regulations.
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