Water Quality TradingWater Quality Trading

Claire ScharyClaire ScharyWater Quality Trading CoordinatorWater Quality Trading Coordinator

U.S. Environmental Protection Agency,U.S. Environmental Protection Agency, Region 10, Seattle, WA Region 10, Seattle, WA

schary.claire@epa.govschary.claire@epa.gov

(206) 553-8514(206) 553-8514

May 5, 2005May 5, 2005

What is ‘Water Quality Trading’?What is ‘Water Quality Trading’?

A source facing higher pollution reduction costs A source facing higher pollution reduction costs compensates another source for achieving compensates another source for achieving equivalent, less costly reductions.equivalent, less costly reductions. Market-based tool to solve water quality problemsMarket-based tool to solve water quality problems Voluntary, flexible, stimulates innovationVoluntary, flexible, stimulates innovation Cost-effective pollution reductionCost-effective pollution reduction Operates within existing programsOperates within existing programs

Value for the pollution reduction credit is created Value for the pollution reduction credit is created by limiting the total amount of pollution allowed.by limiting the total amount of pollution allowed.

Conditions Necessary for TradingConditions Necessary for Trading

Market DriverMarket Driver regulatory requirement sets limit on pollutant dischargesregulatory requirement sets limit on pollutant discharges defines commodity and market areadefines commodity and market area

Cost differentialCost differential the financial incentive for entering into a tradethe financial incentive for entering into a trade must cover transaction costsmust cover transaction costs

AbilityAbility technical feasibility and adequate supplytechnical feasibility and adequate supply

OpportunityOpportunity tools for trading availabletools for trading available

Water Quality Trading: TMDLs Are the Water Quality Trading: TMDLs Are the Primary Regulatory DriversPrimary Regulatory Drivers

Total Maximum Daily Loads (TMDLs) are the Total Maximum Daily Loads (TMDLs) are the most common drivers for Water Quality Tradingmost common drivers for Water Quality Trading

TMDLs set a pollutant “budget” on all sources to achieve TMDLs set a pollutant “budget” on all sources to achieve reductions necessary to achieve water quality standards in reductions necessary to achieve water quality standards in impaired water bodiesimpaired water bodies

Under TMDLs point sources are assigned individual Under TMDLs point sources are assigned individual Waste Load AllocationsWaste Load Allocations

Enforced in NPDES permit through specified limitEnforced in NPDES permit through specified limit

Under TMDLs nonpoint sources are assigned Load Under TMDLs nonpoint sources are assigned Load Allocation by categoryAllocation by category

State, federal cost-share programs used to encourage use of State, federal cost-share programs used to encourage use of Best Management Practices (BMPs)Best Management Practices (BMPs)

EPA Region 10’s EPA Region 10’s Water Quality Trading ExperienceWater Quality Trading Experience

Idaho:Idaho: Lower Boise River Water Quality Trading Demonstration Project Lower Boise River Water Quality Trading Demonstration Project

- - phosphorusphosphorus Mid-Snake River Project - Mid-Snake River Project - phosphorusphosphorus Idaho DEQ issued Water Pollutant Trading Guidance for Idaho DEQ issued Water Pollutant Trading Guidance for

Watersheds based on project experienceWatersheds based on project experience

Oregon:Oregon: Tualatin River - Clean Water Services Water Quality Trading Tualatin River - Clean Water Services Water Quality Trading

Project – Project – temperature temperature trading under watershed permit.trading under watershed permit. Oregon DEQ issued “Internal Management Directive” on water Oregon DEQ issued “Internal Management Directive” on water

quality tradingquality trading

Water Quality Trading Assessment HandbookWater Quality Trading Assessment Handbook

Lower Boise RiverLower Boise River

Phosphorus Trading: Lower Boise RiverPhosphorus Trading: Lower Boise River

Dynamic, market-based tradingDynamic, market-based trading Broad authorization to trade subject to trading rulesBroad authorization to trade subject to trading rules

Liability remains with permit holderLiability remains with permit holder PS, NPS sign private trade contractsPS, NPS sign private trade contracts

Environment protectedEnvironment protected BMP List specifies acceptable practices, measurementBMP List specifies acceptable practices, measurement Location-based trade ratios applied to achieve Location-based trade ratios applied to achieve

environmentally equivalent reductionsenvironmentally equivalent reductions Robust participation by agricultureRobust participation by agriculture

Trading driven by economic decisionsTrading driven by economic decisions Private association oversees trading systemPrivate association oversees trading system Mechanisms to support farm-scale and watershed scale Mechanisms to support farm-scale and watershed scale

participationparticipation

Phosphorus Trading: Mid-Snake R. Phosphorus Trading: Mid-Snake R.

Trades between point sources only (not enough supply from Trades between point sources only (not enough supply from nonpoint sources so far)nonpoint sources so far)

Upstream point source City of Twin Falls has surplus Upstream point source City of Twin Falls has surplus phosphorus reductionsphosphorus reductions

Downstream point source fish farmers need to make Downstream point source fish farmers need to make reductionsreductions

Trade: reduction credits from Twin Falls will be used 30 Trade: reduction credits from Twin Falls will be used 30 miles downstream by fish farmers miles downstream by fish farmers

Water quality is protected by Water quality is protected by TMDL’s overall phosphorus reduction requirement,TMDL’s overall phosphorus reduction requirement, instream concentration limits, andinstream concentration limits, and upper limits in fish farmers’ permits to prevent “hot spots”upper limits in fish farmers’ permits to prevent “hot spots”

Theory to Practice inTheory to Practice inWater Quality TradingWater Quality Trading

Not all pollutants are tradable commoditiesNot all pollutants are tradable commodities Trading Policy allows nutrients, phosphorus, Trading Policy allows nutrients, phosphorus,

sediment, and case-by-case for others sediment, and case-by-case for others

Issues for pollutant trading suitability:Issues for pollutant trading suitability: Pollutant form: Pollutant form: Different forms of same pollutant dischargedDifferent forms of same pollutant discharged Impact:Impact: Fate and transport of pollutant, and its varying impact Fate and transport of pollutant, and its varying impact

on sensitive portions of the watershedon sensitive portions of the watershed• Location of dischargers in the watershed for determining Location of dischargers in the watershed for determining

environmentally equivalent reductionsenvironmentally equivalent reductions Time: Time: Match of timing of discharge and reductions across Match of timing of discharge and reductions across

sources; permit cyclessources; permit cycles Quantity:Quantity: supply and demand must alignsupply and demand must align

Financial Attractiveness Financial Attractiveness of Water Quality Trading of Water Quality Trading

Need to determine if trading makes financial sense for Need to determine if trading makes financial sense for one or more permittees in the watershed:one or more permittees in the watershed:

TMDL allocations affect ability to tradeTMDL allocations affect ability to trade Cost of required reductions based on control technology options and Cost of required reductions based on control technology options and

“lumpiness” of reduction amounts achieved“lumpiness” of reduction amounts achieved Cost of incremental reduction amounts for individual sources are what Cost of incremental reduction amounts for individual sources are what

drives the demand for trading drives the demand for trading • not the same as average cost of reductionsnot the same as average cost of reductions

Assess potential control costs for other point sources, Assess potential control costs for other point sources, nonpoint sources in the watershed and identify potential nonpoint sources in the watershed and identify potential tradestrades

Consider transaction costs, risk, and alternative Consider transaction costs, risk, and alternative compliance strategies by other sourcescompliance strategies by other sources

Market Infrastructure Market Infrastructure to Support Tradingto Support Trading

Transaction costs strongly influenced by market Transaction costs strongly influenced by market design, regulatory constraints, and uncertainty of design, regulatory constraints, and uncertainty of outcomesoutcomes

Participants’ uncertainty that a viable water quality trading Participants’ uncertainty that a viable water quality trading market will developmarket will develop

Participant’s uncertainty of regulatory approval of tradesParticipant’s uncertainty of regulatory approval of trades

Designing a market to address these needs, Designing a market to address these needs, while matching the market size to the volume of while matching the market size to the volume of trading expected, helps reduce transaction trading expected, helps reduce transaction costs.costs.

How Can Water Quality Trading Be How Can Water Quality Trading Be Used to Improve Multiple Resources?Used to Improve Multiple Resources?

One project can generate multiple types of credits One project can generate multiple types of credits Depends on what is beneficial for other resourcesDepends on what is beneficial for other resources Other types of credit markets need to define what is their Other types of credit markets need to define what is their

baseline and then what is “surplus” for tradingbaseline and then what is “surplus” for trading

Water Quality Trading Policy on baselines for credit Water Quality Trading Policy on baselines for credit calculations:calculations:

Must be consistent with water quality standardsMust be consistent with water quality standards Must lead to reduction amounts that are equal to or greater than Must lead to reduction amounts that are equal to or greater than

those established under existing regulatory requirements or those established under existing regulatory requirements or under a TMDL.under a TMDL.

When there is a TMDL, the Waste Load Allocations and Load When there is a TMDL, the Waste Load Allocations and Load Allocations are the baseline.Allocations are the baseline.

QuestionQuestion

For credits to be established for other For credits to be established for other ecosystem services besides water quality:ecosystem services besides water quality: What is the baseline and what is a “surplus” What is the baseline and what is a “surplus”

reduction?reduction? How will environmental equivalency be How will environmental equivalency be

established so the credit can be used in a established so the credit can be used in a different location?different location?

Will there be sufficient demand and supply, Will there be sufficient demand and supply, and at the same time?and at the same time?