1. Pollutant Trading Discussion 22 July 2003

2. Why Allow Trading? §To make point sources pay §To lure nonpoint sources into doing pollution control so we can enforce on them §To increase the size of DEQ §To allow discharges a mask to hide behind so they can pollute more §To distract EPA while we do other things No portion of this slide is intended to be truthful, tasteful or factual in any fashion

3. What problem does trading solve? §To let the market help allocate the assimilative capacity of a stream. Who wants to force existing sources to make additional cutbacks for future growth? §Who wants to decide which new applicant should get to use the allocation of pollutants for new growth? §Who wants to make cost decisions for the watershed?

4. What problems are caused by trading? §Finding the resources to set up the market §Speculation l Need to force the commodity into the market place §All of the perceptions in the second slide §You are you changing the relationship between stakeholders

5. Trading should allow us to distribute a scarce commodity (money) to protect a scarce resource (assimilative capacity) in the most efficient way possible

6. Policy Level Principles Necessary for Trading §Enforceability (for point sources of course) §Full environmental protection §Certainty for stakeholders without expanding EPA or DEQ authorities §Visibility §Robust participation (getting government out of day to day trading)

7. Practical Conditions Necessary for Trading §Market Driver l regulatory requirement sets limit on effluent discharges §Definable commodity and market area §Cost Differential l the financial incentive for entering into a trade l must cover transaction costs §Ability - technical feasibility & adequate supply §Opportunity - tools for trading available §Three watersheds evaluated; 2 successful - 1 failed

8. Market Drivers for Trading in Idaho §TMDLs NPDES permits are the only enforceable mechanisms §Antidegradation §Idaho State Legislature - no net increase statute for impaired waters

9. Defining the Marketable Commodity §Nonpoint Source Trades Limited to Practices on BMP List §Nonpoint Source Baseline = TMDL Baseline Conditions §Water Quality Contribution l Pre-TMDL Implementation Plan: each NPS project contributes between 10% and 20% of reduction to water quality by reducing marketable credits l Post-TMDL Implementation Plan: credits created only by reductions exceeding TMDL implementation plan requirements §Process for Adding New BMPs

10. Defining the Marketable Commodity §Measured Credits l Monitoring the WQ l Minimum design, construction and O&M requirements §Calculated Credits l Monitoring the BMP l Design, construction and O&M requirements l Credit calculation l Uncertainty discount

11. Defining the Marketable Commodity §Ratios apply to credit calculations to ensure equivalent reductions (Parma Pounds) l River Location Ratios: transmission losses in the Boise River l Drainage Delivery Ratios: transmission losses within a sub- watershed l Site Location Factors : potential for water re-use §Market places high value on high quality reductions

12. Lower Boise River Watershed

13. Mid Snake River

14. Ratios at work §Boise location ratio = 0.56, needs 10lbs. So 10lbs(.56)=5.6 Parma Pounds §Mason Drain Location ratio =.75, have 10lbs in excess of TMDL needs. So 10lbs(.75)=7.5lbs to sell. §Mid Snake River example = 1lb to 1lb for the full river reach

15. Boise River Demonstration Project Cost Differential §WWTPs l Costs range from less than $5/lbs to more than $200/lbs l Costs depend on current technology and options l PS-PS trading can save money §Agricultural Practices l Costs range from about $5/lbs to $50/lbs l Cost are specific to both site and control measure l PS-NPS trading can save money if transaction costs managed

16. Mid Snake River Example, Cost Differential §Twin Falls WWTP River Mile 608.5 §May have upto 325 lbs per day for 9 critical months §Cost of $25/lb per day §Clear Springs at River Mile 600.7 §Would like to buy 40 lbs per day §Cost of control is very unstable based on feed ingredients (strategy is low ash fish food)

17. Cost Differential Example §Participant A Limit 100 lbs/day Actual 200 lbs/day Cost $100 lb/yr §Benefit Cost w/o trading $10,000 Willing to pay $50 lb/yr Cost w/trading $5,000 §Participant B Limit 500 lbs/day Actual 600 lbs/day Cost $10 lb/yr. Can reduce 200 lbs/day §Benefit Cost w/o trading $1000 Cost w/trading ($3,000)

18. Tools Available - The TMDL §Authorizes trading subject to permit & trading rules §Establishes adjustable WLA allocations/implementation plans §Establish NPS load allocation §A mechanism for reasonable assurance §Evaluates the potential for local impacts and propose remedies

19. Tools Available - The NPDES Permit §Adjustable permit limits that have conditions to prevent localized impacts §Point sources liable for trade performance §Reporting and documentation of trade l Modified Discharge Monitoring Report form reports trades to EPA l Monthly Trade Summary provides watershed-wide reconciliation §Permit audits l Standard permit audits by EPA and DEQ l NPS project reviews by SCC, under agreement to EPA & DEQ §To provide certainty to NPDES permit holders

20. Tools Available - The Private Contract §Willing buyer and willing seller. §Establish a price. §Establish the remedy for contract failure. Certainty for the NPS delivery of reductions. §Establish the amounts, parties, and duration of the trade. §Assign monitoring responsibilities

21. Tools Available - Trading Rules Water Quality Protection §Ratios apply to credit calculations to ensure equivalent reductions (Parma Pounds) §Nonpoint Source Mechanisms l Nonpoint Source Trades Limited to Practices on BMP List §Water Quality Contribution l Pre-TMDL Implementation Plan: each NPS project contributes 10% of reduction to water quality by reducing marketable credits l Post-TMDL Implementation Plan: credits created only by reductions exceeding TMDL implementation plan requirements §Process for Adding New BMPs

22. Tools Available - The Clearing House Trade Execution & Tracking §Reduction Credit Certificates: certifies nonpoint source reductions, establishes credit, signed by point source §Trade Notification Forms: transfers credits from seller to buyer §Trade Tracking Database: records all trade transactions §Monthly Trade Summary: ensures watershed-wide trade reconciliation §Trade Tracking Audits: conducted by DEQ

23. Elements of the Trading Framework: Building Blocks

24. Point - Point Trade Process

25. Point - Nonpoint Trade Process

26. Conclusions §We can make pollution a commodity and trade it. §There is a demand in many basins - but not all.. §The tools necessary for trading are available and can fit within existing programs. §Trading framework summary is available from IDEQ at WWW2.state.id.us/deq.