EPA Encourages Water Quality Trading in January 2003 Policy

Pamela D. Marks

The Environmental Protection Agency’s (EPA) Water Quality Trading Policy issued on Jan. 13, 2003 (2003 Policy) is largely a continuation of the Clinton-era policy established in 1996. 68 Fed. Reg. 1608 (2003); Effluent Trading in Watersheds, 61 Fed. Reg. 4994 (1996). The 2003 Policy “allows one source [of water pollution] to meet its regulatory obligations by using pollutant reductions created by another source.”

Under EPA’s policy, entities that discharge into the same watershed may enjoy increased flexibility by working together to reduce discharges of certain pollutants. Sources may accomplish this by utilizing the most cost-effective manner of achieving reductions anywhere in the same segment of water. These less expensive reductions can substitute for more expensive reductions at a source’s own discharge point. For instance, non-mandatory land management pollution reduction techniques could be utilized in lieu of potentially less effective or prohibitively expensive “end of pipe” technology. The goal is to allow pollution reduction at the most cost-effective location, as long as technology based effluent limits and other applicable Clean Water Act requirements are met.

EPA’s issuance of the 2003 Policy raises a number of questions. To whom does the policy apply? What does it mean for dischargers? What are key issues and opportunities? Due to the states’ primary role in implementing much of the Clean Water Act, EPA’s new policy could be viewed as little more than a guide for states. As a guide, it is general and leaves significant details for future resolution. Nevertheless, the policy sends a clear signal that EPA welcomes effluent trading. As encouragement for states to implement trading, EPA enhanced flexibility, clarified several issues, and is providing $800,000 in funding to pilot projects.

Trading may be utilized in a variety of circumstances. In impaired waters, trades could be used to implement Total Maximum Daily Loads (TMDLs) or to meet other water quality based goals or requirements. Trading also can be used before TMDLs have been promulgated “to achieve progress towards or the attainment of water quality standards.” 2003 Policy, § III E 2. If pre-TMDL trading results in attainment of water quality standards, a TMDL may no longer be needed. However, where a TMDL is later established, further reductions may be required. Id. The main limitation is that trading cannot be used to delay implementation of a promulgated TMDL. In higher quality waters, trading could be used to offset increases in discharges. EPA also supports trading in the pretreatment arena. Therefore, the 2003 Policy maximizes flexibility to apply trading to many types of discharges.

For dischargers, the 2003 Policy is an invitation and offers flexibility. However, impediments to trading remain in varying degrees, depending on each state’s programs and politics. Widespread trading is not yet available. In states with an interest in allowing trading, regulators still must grapple with the details of creating a successful trading program. Dischargers can assist in this process.

There are multiple issues that state regulators must resolve in order to implement the EPA Policy. For instance, states must decide how to quantify pollution “credits” for reductions in pollution. These credits provide the basis for a trade. Point discharges are quantified under well-established units of measurement; non-point discharges may have to be quantified based upon models. Regulators will want to scrutinize any models and underlying assumptions. States also must define how they will determine compliance with the new requirements. In essence, they will want easily understood goals that they can measure. They will want to be able to explain and defend these measurable goals to community stakeholders. Meanwhile, many state water programs are focusing their limited resources on other concerns. In light of this potential complexity, some states may not allow trading in the near future. Others states may allow trading if dischargers propose well formulated trades that address each of these issues.

While EPA’s 2003 Policy remains general, it does clarify EPA’s position on some key issues. One pivotal issue was whether trading would be confined to water bodies with promulgated TMDLs. EPA’s 1996 Policy anticipated that trading would be used to implement TMDLs. A basic principle was that trades would be developed within a TMDL or other equivalent EPA approved analytical and management framework. Draft Framework for Watershed Based Trading, p. 2-6, EPA, May 1996. EPA’s 2003 Policy expands flexibility on this issue by allowing trading while TMDLs are under development. 2003 Policy, §§ II A, III E 2.

Another key issue concerns the types of pollutants to be traded. EPA is comfortable with trading sediment loads and nutrients, such as total phosphorus and total nitrogen. Trading of other pollutants will be subject to a “higher level of scrutiny to ensure that they are consistent with water quality standards.” 2003 Policy, § III C. EPA’s policy currently does not support the trading of persistent bioaccum-ulative toxics (PBTs). Any proposal to trade pollutants such as mercury would face likely opposition, based upon a perception that hot spots of pollution could result. This debate can be expected to evolve with trading experience and increased data.

In spite of the obstacles, the 2003 Policy is an invitation for both dischargers and regulators to use effluent trading to reduce pollution. Dischargers cannot yet depend on state regulators to facilitate planning of a trade. Dischargers will need to be proactive in formulating their trades and showing how their trades can be quantified and monitored successfully. This also means that dischargers currently enjoy the freedom to design trades creatively, unencumbered by rigid molds. Publicly owned treatment works, industrial dischargers, agriculture and a variety of other stakeholders can avail themselves of the opportunity to begin working with this underutilized water effluent trading tool to achieve their pollution reduction goals.