1. USEPA TARGETED WATERSHEDS GRANT
Develop an integrated, Internet-based Watershed Information System (WIS)
Investigate the feasibility of a water quality trading program
Develop a water quality model to develop information & support the water quality trading
9:30 - Jack

2. Water Quality Task Force
PROJECT PARTNERS
USU Project Collaborators:
Nancy Mesner Terry Glover
David Stevens Arthur Caplan
Jeff Horsburgh Bethany Neilson
United States EPA
Gary Kleeman
Bear River Commission
Jack Barnett
Water Quality Task Force
Mitch Poulson
9:30 - Jack
Wyoming DEQ
Jack Smith
Idaho DEQ
Lynn Van Every
Utah DEQ
Mike Allred

3. 2003 --- U.S. EPA ISSUES ITS WATER QUALITY TRADING PROGRAM
WATER QUALITY TRADING (WQT)
U.S. EPA ISSUES ITS WATER QUALITY TRADING PROGRAM
THE POLICY ENABLES AND SUPPORTS THE ADOPTION OF MARKET-BASED PROGRAMS FOR IMPROVING WATER QUALITY
A 1996 “DRAFT FRAMEWORK FOR WATERSHED BASED TRADING” ACTUALLY INITIATED FUNDING FOR WATER QUALITY TRADING
EPA POLICY ENDORSES THE USE OF WATER QUALITY TRADING – WQT—AS A POSSIBLE MECHANISM TO IMPROVE WATER QUALIITY

4. THE BASIC INCENTIVE FOR TRADING
WHAT IS WATER QUALITY TRADING?
A market-based mechanism that allows a source facing relatively high
pollution-reduction costs to compensate another source to achieve a
less-costly reduction with the same or higher water-quality benefit.
THE BASIC INCENTIVE FOR TRADING
UNDER TMDL REGULATION
Suppose Source A is required to reduce a unit of total phosphorus (TP)
from the river. For whatever reason, it costs Source A $100 to reduce
that unit. Source B, on the other hand, can reduce an additional unit for $80. Under WQT, there is room for Source A to pay Source B something less than $100 but more than $80 for Source B to clean up that unit of TP.

5. BACKGROUND ON TRADING Nonpoint source $$$
WATER QUALITY IMPROVMENTS
Permitted Facility point source
Nonpoint source
$$$
WQT is a tool that generally connects permitted municipal and industrial facilities as point sources with nonpoint sources, the latter primarily being agricultural producers ---- there may exist some cases of trading between nonpoint sources depending on control cost differences
Point sources are permitted under the National Pollution Discharge Elimination System –NPDES---and their pollutants are regulated to be at certain levels
A water quality trading market can exist only when point and nonpoint sources in a watershed have very different opportunities and costs to reduce pollutants, thereby creating a market for less-expensive approaches to improve water quality---Ag conservation being one such approach

6. $$$
WATER QUALITY IMPROVMENTS
Cost Share
Programs
Investment $$$
WQT can provide an opportunity for nonpoint sources (e.g., ag producers) to receive compensation for implementing conservation practices on their lands
The implementation of pollutant reduction measures in order to sell credits to permitted point sources using cost share programs depends on the trading program and/or state program rules as well as the future existence of such programs. It is therefore important that the nonpoint source managers be a part of the program development.
USDA considers pollutant reductions via conservation as producer property.
Various cost share programs exist for producers to combine with their own investment to implement Best Management Practices – BMP’s – to reduce pollutants at lower costs

7. BEAR RIVER WATERSHED
For the Bear River Watershed, we are assessing the feasibility of trading assuming a pre-fixed pollution target (load for a watershed)
Such a target can be set by previous policy or by a TMDL process
TMDL = Total Maximum Daily Load
We are currently assessing the conditions for, and feasibility of, the Bear River Watershed
WQT in this watershed may be implemented as a watershed program or may be a part of statewide program ---- the program is yet to be determined

8. behavior on water quality}
TMDL IMPLEMENTATION MAY BE THE LEADING, BUT NOT THE ONLY, DRIVING FORCE FOR WATER QUALITY TRADING MARKETS
SMALL SCALE TRADING
OPPORTUNITIES MAY
EXIST
{one has to assess the
Impacts of strategic
behavior on water quality}
EVEN IF A WATERSHED HAS LIMITED
OR NO POTENIAL FOR
WATERSHED SCALE TRADING,
OTHER TRADING
OPPORTUNITIES
MAY EXIST
SITE SPECIFIC OFFSET
OPPORTUNITIES MAY
EXIST
NPDES PERMIT HOLDER
ARRANGES EQUIVALENT
CONTROL FROM AN
ALTERNATIVE DISCHARGE
SOURCE
INTRA-PLANT TRADES
NPDES PERMIT HOLDER TRADES BETWEEN ITS
OWN DISCHARGE POINTS TO LOWER COST OF
CONTROL

9. THE VIABILITY OF TRADING IN THE TMDL
CONTEXT DEPENDS ON SOME CONDITIONS:
CLEAN WATER ACT – CWA
MARKETS STRUCTURED WITHIN CWA
PUBLIC INPUT
A SUITABLE & TRADABLE POLLUTANT
SUFFICIENT DIFFERENCES IN CONTROL COSTS
STAKEHOLDER WILLINGNESS TO PARTICIPATE
INCENTIVES TO PARTICIPATE
COST REDUCTION POSSIBILITIES
PARTICIPATION BY NONPOINT
SOURCES IS VOLUNTARY
----
THEREFORE INCENTIVES NEED TO EXIST
FOR VOLUNTARY PARTICIPATION

10. TMDL POLICY TMDL --- TOTAL MAXIMUM DAILY LOAD
ESTABLISHMENT OF TMDL REGULATION AND LEVELS ARE STATE RESPONSIBILITY
EPA HAS REGULATORY OVERSIGHT
ONCE ESTABLISHED, THE TMDL ALLOWABLE LOAD NEEDS TO BE ALLOCATED ACROSS POINT SOURCES AND NONPOINT SOURCES WITHIN A WATERSHED
NATIONAL POLLUTANT DISCHARGE ELIMINATION SYSTEM (NPDES) PERMITS MAY BE INCOMPLETE
TMDL IMPLEMENTATION MAY (OR MAY NOT) IMPOSE MORE STRINGENT DISCHARGE LIMITS ON NPDES PERMIT HOLDERS -- PROVIDING THE “DRIVER” FOR TRADING ACTIVITY

11. THE TMDL PROGRAM The TMDL program Five key steps to TMDL development
Requires states to develop TMDLs for waters on the 303(d) list
Section 303(d) requires the identification and prioritization of waters not meeting in-stream water quality standards
The TMDL includes a distribution of pollutant loading (allocation) that results in attainment of water quality standards
Five key steps to TMDL development
Identify water quality-limited waters (303(d) list)
Prioritize water quality-limited waters
Develop the TMDL plan for each water quality limited stream segment
Implement the water quality improvement for each segment
Assess water quality improvement for each segment 11

12. TMDL = WLA + LA + MOS EPA TMDL EQUATION Citizens
Politicians and Scientists
Managers and Engineers
TMDL = WLA + LA + MOS
(total max. daily load)
(point source waste load allocation)
(nonpoint load allocation)
(margin of safety)
State water quality standard for the pollutant given the stream’s designated beneficial use
TMDL development phase 12

13. TMDL FOCUS
To determine the amount of pollution the water body is capable of assimilating while maintaining its intended beneficial uses 13

14. EPA WQT HANDBOOKS
TWO HANDBOOKS FOR ASSESSMENT OF TRADING HAVE BEEN DEVELOPED BY EPA
DEVELOPED TO MAP OUT INVESTIGATION AND STEPS TO DETERMINE FEASIBILITY OF WQT IN WATERSHEDS
RECOMMENDATIONS FOR CARRYING OUT AN ASSESSMENT OF CONDITIONS AND POTENTIAL FOR WATERSHED SCALE TRADING OR OTHER FORMS OF MARKET-BASED MEANS OF IMPROVING WATER QUALITY

15. Office of Wetlands, Oceans and Watersheds
Water Quality
Trading
Assessment
Handbook
EPA Region 10
Guide to Analyzing
Your Watershed
Water Quality
Trading
Assessment
Handbook
Can Water Quality
Trading advance
Your Watershed’s
Goals?
Region 10 (EMI – 163)
EPA 910-B
July 2003
EPA 841-B
Office of Wetlands, Oceans and Watersheds
November 2004
Assessment of:
developing a watershed discharge profile
pollutant Suitability
financial attractiveness
market infrastructure & sizing
stakeholder readiness
Appendices: nitrogen, phosphorus, temperature,
& sediments suitability profiles

16. MINNESOTA --- Minnesota River --- Lower Minnesota River
SEVERAL TRADING PROGRAMS ARE NOW IN ASSESSMENT, DEVELOPMENT, OR PERMITING PHASES
COLORADO --- Boulder Creek ---- N TMDL and initiation of a trading case study
IDAHO --- Lower Boise ---- Idaho DEQ draft on pollutant Trading Guidance --- we will hear about this one today
MINNESOTA --- Minnesota River --- Lower Minnesota River
NORTH CAROLINA --- Neuse River --- in permit phase

17. OHIO --- Great Miami Watershed --- development of an operations manual
PENNSYLVANIA --- Development of a trading guide for the Chesapeake Bay trading program--- setting up broker roles
WASHINGTON --- Water quality trading stability study
WISCONSIN --- Red Cedar River study --- Fox-Wolf Watershed Alliance - Broker
INTERSTATE PROGRAMS --- Chesapeake Bay water quality improvement
AUSTRALIA River Hunter salinity pilot program -- salinity licensing and trading

18. CURRENT WQT CONSIDERATIONS AROUND THE U.S.
ENVIRONMENTAL TRADING NETWORK

19. See ENVIRONMENTAL TRADING NETWORK --- www. envtn. org
See ENVIRONMENTAL TRADING NETWORK
Bear R. Being
Assessed

20. River Hunter Salinity Trading --- load licenses
New South Wales
Australia
Credits to Katy Brady, NSW DEC
Salinity load licensing and trading
-- dealing with 3 river segments,
2 power plants and 22 coal mines along with nonpoint source issues

21. USEPA TARGETED WATERSHEDS GRANT
Develop an integrated, Internet-based Watershed Information System (WIS)
Investigate the feasibility of a water quality trading program
Develop a water quality model to develop information & support the water quality trading
9:30 - Jack

22. Water Quality Task Force
PROJECT PARTNERS
USU Project Collaborators:
Nancy Mesner Terry Glover
David Stevens Arthur Caplan
Jeff Horsburgh Bethany Neilson
United States EPA
Gary Kleeman
Bear River Commission
Jack Barnett
Water Quality Task Force
Mitch Poulson
9:30 - Jack
Wyoming DEQ
Jack Smith
Idaho DEQ
Lynn Van Every
Utah DEQ
Mike Allred

23. WATER QUALITY TRADING IN THE BEAR RIVER WATERSHED:
ISSUES AND INFORMATION NEEDS

24. TRADING FOCUS AREA AND POLLUTANT
Bear River from Oneida Narrows Reservoir to Cutler Reservoir
Cub River – Middle Bear
Little Bear River
Spring Creek
Focus on areas with existing TMDLs
Focus on total phosphorus (TP) reduction

25. CUB RIVER SUBWATERSHED
Middle Bear River
Cub River

26. Suppose NPS 1 wants to trade reduction in TP
HYPOTHETICAL WATERSHED
River Flow
NPS = nonpoint source
PS = point source
NPS 3
NPS 2
NPS 1
Suppose NPS 1 wants to trade reduction in TP PS
Lake or reservoir
Receptor Point

27. Trading program & rules
TMDL only
specifies
Allowable
watershed
load & NPS’s
reduce TP by
50%
NPS 1 needs to estimate TP reductions
-- estimate current load contribution = CL
-- choose suitable BMP practice & reductions resulting from such a practice
-- determine baseline for trading
-- use ratios (which may be determined by program rules) to adjust available TP reduction eligible for trading
-- determine TP reductions needed by a buyer
Trading program & rules
are in place
NPS 1 needs information on TP emission given current management practice tons/year X lbs. P/ton = CL = 2190 lbs./year
year may be the 3-month irrigation season
Choice of BMP is rated at 100% effective but has 10% uncertainty discount
TP discharge X (BMP effectiveness – discount) = BMP TP reduction
BMP reduction =2190 X ( ) = 1971

28. NPS 1 baseline TP removal requirement via the TMDL is 50%
Required reduction by TMDL = 2190 X 0.50 = 1095 lbs TP/year
Will NPS 1 BMP Phosphorus reduction produce enough reduction so that trading can be initiated?
BMP TP reduction – Baseline requirement = TP reduction eligible
1971 – 1095 = 876 lbs TP/year
NPS 1 needs information on a delivery ratio = d = the fraction of a pound that reaches the water body of interest for every pound of TP discharge
This information is either contained in the rules for the NPS location or comes from water quality modeling or both ---- important information
Assume the ratio is 1:0.90
TP reduction eligible for trading X 0.90 = adjusted TP reduction
876 X 0.90 = 788 (rounded) lbs TP / year

29. PS
The point source, PS, needs 280 lbs per month during the irrigation season
NPS 1 needs
To find
A buyer
The BMP guidance document provides information on flow-loss factors for each month {information needed} to account for irrigation events and sediment loss
These are 0.35 for June – for July – for August
Monthly TP reductions eligible for trading
yearly TP reduction X flow-loss factor = monthly TP reduction (rounded)
788 X 0.35 = 276 lbs TP/ month for June
788 X 0.45 = 355 lbs TP / month for July
788 X 0.30 = 236 lbs TP / month for August
Average control cost = total cost / reductions achieved for the PS = $2,222 for Tier 1 control by the PS and $10,667 for Tier 2 control ---- and $438 for NPS there is potential for NPS1 and the PS to connect & contract

30. ENVIRONMENTAL PROFILE OF WATERSHED
Assumption: Target Load (TL) for Basin at receptor = 350
Source CL
%Total NPS CL
Delivery.
Ratio = d TL
Adj. TL
TMDL Red. PS
300 # 1 50
250
NPS 1
200
0.4
0.9
120
133 67
NPS 2
100
0.2
0.8 60 75 25
NPS 3
0.7
171 29
Totals
800
350
Totals (NPSs only)
500
1.00
CL = current load; % Total NPS CL = CL/NPS Total CL; TL = %CL(NPS Total TL); Adj. TL = Adjusted TL = TL/Delivery ratio; TMDL Red. = TMDL Reduction = CL – Adjusted TL---- Delivery ratio = 1 unit of a source’s emissions increases a pollution level by d units

31. ECONOMIC PROFILE OF WATERSHED
Scientific Literature
Source/Tech.
TMDL
Red.
Achd.
Total Control Cost
Ave. Control Cost
Credits PS
Tier 2 (75% Control)
Tier 3 (Additional 25% Control)
250
225 75
$500,000
$800,000
$2,222
$10,667 50
NPS 1
Con. Till. (80% Control) 67
160
$70,000
$438 93
NPS 2
Grass Buff. (90% Control) 25 90
$50,000
$556 65
NPS 3 29
$313
131
Red. Achd. = reduction achieved; Ave. Control Cost = Total Cost/Red. Achd.; Credits = Red. Achd. – TMDL Red.

32. MATRIX OF TRADING RATIOS
Purchaser
Seller PS
NPS 1
NPS 2
NPS 3 #
0.90
0.80
0.70
1.11
0.89
0.78
1.25
1.13
0.88
1.43
1.49
1.14
Trading Ratio = Purchaser’s Delivery Ratio / Seller’s Delivery Ratio,
or 1 unit of firm i emissions = t units of firm j emissions

33. EXAMPLES OF POSSIBLE TRADES
1. NPS 1 Sells Credits to PS
Why Trade? NPS 1’s Average Control Cost ($438 per unit reduced)
is lower than PS’s (weighted) Average Control Cost ($4,317per unit reduced).
PS/NPS1 Trading Ratio
Trade Volume? NPS 1 has 93 / 1.11 = 84 effective credits
available for sale to PS.
2. NPS 3 Sells Credits to NPS 2
Why Trade? NPS 3’s Average Control Cost ($313 per unit reduced)
is lower than NPS 2’s Average Control Cost ($556 per unit reduced).
NPS2/NPS3 Trading Ratio
Trade Volume? NPS 3 has 131 / 1.14 = 115 effective credits
available for sale to NPS 2.

34. Possible Trade (Assuming Trading Ratio = 1 for now.) Preston WWTP
Current Load = 3,563 lbs/yr
Target Load = 115 lbs/yr
TMDL Reduction = 3,449 lbs/yr
Nonpoint source
Current Load = 221 lbs/yr
Target Load = 37 lbs/yr
TMDL Reduction = 184 lbs/yr
Is it beneficial for Preston WWTP to trade with nonpoint source?
Preston WWTP
Nonpoint source

35. Nonpoint source is able to create 16 (200 – 184) credits by implementing conservation tillage (assuming 90% control rate).
Nonpoint source 1 could profit by selling each credit to the Preston WWTP for an amount greater than $2.78.
Preston WWTP could lower their cost of compliance by buying nonpoint source’s 16 credits for less than $ per credit.

36. CHALLENGES FOR THE NONPOINT SOURCE
The TMDL allocates a watershed load amongst sources in general --- not for each nonpoint source
The nonpoint source needs considerable information—needs to be in on rule development --- uncertainty considerations related to delivery and trading ratios
There is potential for high transactions costs of trade related activities --- these could be modified by association programs and pollutant credit exchanges
Complicated procedures associated with ill-defined programs and rules
Liability concerns ---- is the liability placed on the permitted facility? What of liability and nonpoint to nonpoint trades?
How is compliance certified? Who certifies and monitors? Regulator-nonpoint-point source understanding and relationship during trading activity
Fear that trading rules are subject to change--- cost share programs change or fade in the future
Contractual, payment and default concerns --- recourse issues

37. Will the point Source be Interested in trading?
There are several conditions under which a point source might be interested in trading
They need to meet discharge limits under NPDES in impaired waters
They may need to minimize pollutant loads in impaired waters prior to the development of a TMDL regulation ---- Which may preclude a TMDL
They may need to deal with more stringent discharge limits under TMDL regulation
The point source may have to accommodate an increase in discharge due to anticipated growth
Point sources face increased costs to control pollutants
Municipal and regional wastewater treatment plants are connected to taxing powers and sewerage charge bases
They need information just as the nonpoint source needs information
Point sources may be connected to secondary markets for pollutant reductions or may be a basis for formation of regional associations

38. CHALLENGES IN THE RULE MAKING
All of the
Nonpoint &
Point Source
concerns
Who develops
the rules?
Information --
Uncertainties
Reduction credit
guidelines
There are other
Nonpoint
sources
--Land in Development transition
--Road & Construction sites
__ Parking lots
-- Lawns & Golf courses
--- Dams, levies, channelization, culverts, diversions

39. WHO IS INVOLVED IN SETTING UP WQT?
-- TMDL regulators (state or watershed rules) --- Water agencies --- Legal services -- Broker-traders ---- Nonpoint & point source firms ---- Funding/cost share sources & agencies ---- Consumers/taxpayers
Guidelines on what constitutes credits that can be traded and definitions of possible permits associated with these credits need to be developed
All parties to trading activities need to be involved in the development of the rules of the trading program
McNees Wallace &Nurick LLC
WATER QUALITY
NUTRIENT CREDIT
TRADING GUIDE
May 2006
Example credit trading guide
Legal documentation of nutrient credits, contracting, BMP considerations for the Chesapeake
Watershed potential trading operations

40. There may be considerable uncertainty
Such as uncertainty with respect to the value of
Delivery ratios
In this case the regulator likely is given authority to set a permit cap and trading ratios, given a target in expected pollution
Regulator is given a target in expected pollution
Regulator decides permit cap and trading ratio not knowing cost differences and delivery ratio
Trading in permits associated with credits takes place and discharges are determined as related to cost of abatement
Natural conditions determine the delivery ratios and actual pollution is derived
The pollution reduction target in the uncertainty case is an average depending on several conditions

41. WATER QUALITY MODELING FOR WATER QUALITY TRADING
Beth

42. WHY DO WE NEED A MODEL TO STUDY THE POTENTIAL FOR TRADING?
Simulate the physical, chemical, and biological processes that affect pollutant concentrations
Consider spatial and temporal nature of pollutant loading
Calculate delivery ratios to
Determine the environmental equivalence of load reductions and potential trades
Beth

43. WHY DO WE NEED A MODEL? Producer X River Mile 15
Producer Y River Mile 5
Animal Producer Z River Mile 10
Beth
Point Source
River Mile 1
Agricultural Diversion (50%)
River Mile 7
Monitoring Location Receptor Point River Mile 0

44. WHY DO WE NEED A MODEL? Producer X River Mile 15
Total Phosphorus Load = 100 kg
Producer X could only reduce loading at the receptor point by 40.5 kg even though his total loading is 100 kg!
Delivery Ratio = 40.5/100 = 0.405
Loss to uptake/settling prior to diversion = 10% or 10 kg (90 kg left)
Beth
Loss to uptake/settling prior to receptor point = 10% or 4.5 kg (40.5 kg left)
Loss to Diversion = 50 % or 45 kg/yr (45 kg left)
Monitoring Location Receptor Point River Mile 0

45. WHY DO WE NEED A MODEL? Producer Y River Mile 5
Producer Y can reduce loading at the receptor point by 90 kg if he eliminates his entire loading.
Delivery Ratio = 90/100 = 0.9
Total Load = 100 kg
Producer Y River Mile 5
Beth
Loss to uptake/settling prior to receptor point = 10% or 10 kg (90 kg left)
Monitoring Location Receptor Point River Mile 0

46. WHAT DOES THIS MEAN?
The point source’s cost per unit phosphorus reduction with Producer X would be higher than Producer Y
Producer X can only get credit for 40% of any load reduction that he creates
Producer Y can get credit for 90%
It would be more economical for the point source to trade with Producer Y
It is critical to have an estimate of the delivery ratios
Beth