1. Water Quality Trading Claire Schary Water Quality Trading Coordinator U.S. Environmental Protection Agency Region 10 – Seattle Region 10 – Seattle schary.claire@epa.gov (206) 553-8514 August 23, 2010 Spokane, WA

2. Topics What is water quality trading What is water quality trading How does it work How does it work EPAs Water Quality Trading Policy EPAs Water Quality Trading Policy National and Idaho examples National and Idaho examples

3. What is Water Quality Trading? Voluntary exchange of pollutant reduction credits Voluntary exchange of pollutant reduction credits Sources with higher pollutant control costs may purchase pollutant credits from sources with lower control costs Sources with higher pollutant control costs may purchase pollutant credits from sources with lower control costs Credits are created by reducing below level required by regulations Credits are created by reducing below level required by regulations

4. Water Quality Trading Is…. Integrated and consistent with Clean Water Act regulations Integrated and consistent with Clean Water Act regulations An approach to meeting CWA goals, not an alternative to them An approach to meeting CWA goals, not an alternative to them Firmly based on a watershed analysis that must accurately establish the capacity of the water body to absorb and transport a pollutant and achieve water quality targets (usually a TMDL) Firmly based on a watershed analysis that must accurately establish the capacity of the water body to absorb and transport a pollutant and achieve water quality targets (usually a TMDL)

5. How Trading Works A cap or limit (TMDL) is placed on the total amount of pollutant that can be released from all sources A cap or limit (TMDL) is placed on the total amount of pollutant that can be released from all sources Point Sources receive an allocation under the cap - Waste Load Allocation - that is converted to a permit limit Point Sources receive an allocation under the cap - Waste Load Allocation - that is converted to a permit limit Nonpoint sources receive a Load Allocation Nonpoint sources receive a Load Allocation Sources can meet their allocation by: Sources can meet their allocation by: Making all necessary reductions on-site OR Making all necessary reductions on-site OR Buying additional allocations - credits - from other sources that have reduced pollutants below their own allocation Buying additional allocations - credits - from other sources that have reduced pollutants below their own allocation

6. What is Being Traded? Credits: Credits: A unit of pollutant reduction usually measured in pounds per unit of time equivalent A unit of pollutant reduction usually measured in pounds per unit of time equivalent Generated by a point source over- controlling its discharge, going beyond reductions required by its permit limit Generated by a point source over- controlling its discharge, going beyond reductions required by its permit limit Generated by a nonpoint source from the installation of best management practices beyond those needed to meet the Load Allocation Generated by a nonpoint source from the installation of best management practices beyond those needed to meet the Load Allocation

7. Trading Ratios Amount used by point source buyer must be adjusted by trading ratio(s) Amount used by point source buyer must be adjusted by trading ratio(s) Ratios equate environmental impact of pollutant discharged in its new location with where it was reduced, any changes in pollutant form, and uncertainty Ratios equate environmental impact of pollutant discharged in its new location with where it was reduced, any changes in pollutant form, and uncertainty Can also use ratios to add environmental benefit Can also use ratios to add environmental benefit

8. Non-Point Source Credits Nonpoint source credits are generated by reductions beyond what is needed to meet Load Allocation Nonpoint source credits are generated by reductions beyond what is needed to meet Load Allocation Measured or calculated from the same baseline used in TMDL and consistent with the assumptions used to develop the Load Allocation Measured or calculated from the same baseline used in TMDL and consistent with the assumptions used to develop the Load Allocation = the pollutant load associated with existing land uses and management practices that comply with current state, local or tribal regulations.

9. EPA Water Quality Trading Policy Geographic scope – within a watershed Geographic scope – within a watershed Size determined by ability to establish equivalence of water quality impacts Size determined by ability to establish equivalence of water quality impacts Pollutant suitability Pollutant suitability Nutrient trading encouraged Nutrient trading encouraged Persistent bioaccumulative toxics trading discouraged Persistent bioaccumulative toxics trading discouraged Other pollutants – may be OK Other pollutants – may be OK No trading to meet technology-based limits No trading to meet technology-based limits may use credits to meet more stringent water quality-based limits (such as indicated by TMDL ) may use credits to meet more stringent water quality-based limits (such as indicated by TMDL ) Trading may not adversely affect water quality at an intake for drinking water supply Trading may not adversely affect water quality at an intake for drinking water supply

10. EPA Water Quality Trading Policy Surplus credits created when discharge reduced below water quality-based limits Surplus credits created when discharge reduced below water quality-based limits For nonpoint sources, below TMDL load allocation For nonpoint sources, below TMDL load allocation Trading must not result in exceedence of water quality standard (no hot spots) or cap established by TMDL Trading must not result in exceedence of water quality standard (no hot spots) or cap established by TMDL Flexible NPDES permit approaches to implement Flexible NPDES permit approaches to implement Watershed permits with group caps, variable permit limits that allow trades without permit revision Watershed permits with group caps, variable permit limits that allow trades without permit revision

11. Elements of Credible Water Quality Trading Program Legal authority: Legal authority: Conforms with Clean Water Act & must be authorized by State policies and regulations. Conforms with Clean Water Act & must be authorized by State policies and regulations. Units of trade: Units of trade: A common unit of trade should be clearly defined. A common unit of trade should be clearly defined. Timing of credits: Timing of credits: Credits should be generated and used within the same time period, to comply with permit limits and prevent localized exceedence of water quality standards. Credits should be generated and used within the same time period, to comply with permit limits and prevent localized exceedence of water quality standards. Managing uncertainty: Managing uncertainty: Need to include methods of managing uncertainty such as using trading ratios, monitoring, modeling, and BMP efficacy estimates. Need to include methods of managing uncertainty such as using trading ratios, monitoring, modeling, and BMP efficacy estimates.

12. Elements of Credible Water Quality Trading Program Compliance and Enforcement: Compliance and Enforcement: Need to have mechanisms for compliance and enforcement – e.g., record-keeping, certifications, inspections, and reporting. Need to have mechanisms for compliance and enforcement – e.g., record-keeping, certifications, inspections, and reporting. Public notice: Public notice: Provide adequate public notice and trade transparency e.g., the TMDL and permit process and a public website. Provide adequate public notice and trade transparency e.g., the TMDL and permit process and a public website. Program evaluation: Program evaluation: Regularly assess results to modify and improve the program. Regularly assess results to modify and improve the program.

13. Water Quality Trading Examples Tar-Pamlico, NC Tar-Pamlico, NC Group limit for Basin Association members Group limit for Basin Association members Payment to NC Dept. Of Agriculture for nonpoint source reductions. Payment to NC Dept. Of Agriculture for nonpoint source reductions. Rahr Malting, MN Rahr Malting, MN Permit allows for discharge in exchange for specified up-stream nonpoint source reductions. Permit allows for discharge in exchange for specified up-stream nonpoint source reductions. Cherry Creek, CO Cherry Creek, CO Local water quality authority administers nonpoint source reduction projects and sells credits to point sources to comply with discharge limit. Local water quality authority administers nonpoint source reduction projects and sells credits to point sources to comply with discharge limit. Miami River, OH Miami River, OH Point sources provide funding for BMPs through reverse auction - farmers bid on how much reductions they provide for set price. Credit amounts revised based on monitoring results. Point sources provide funding for BMPs through reverse auction - farmers bid on how much reductions they provide for set price. Credit amounts revised based on monitoring results.

14. Lower Boise River WQT Framework Point Sources: Point Sources: Waste Load Allocation = initial permit limit for phosphorus of # lbs/day. Waste Load Allocation = initial permit limit for phosphorus of # lbs/day. Can buy or sell P pounds to match increase or decrease in amount of discharge Can buy or sell P pounds to match increase or decrease in amount of discharge Trades automatically adjust permit limit, compared to actual discharge amount at end of month Trades automatically adjust permit limit, compared to actual discharge amount at end of month No need to calculate what is surplus to sell credits from point sourcesNo need to calculate what is surplus to sell credits from point sources

15. Lower Boise River WQT Framework Nonpoint Source Credits Since nonpoint sources do not have a permit, their credits must be based on trading requirements: Since nonpoint sources do not have a permit, their credits must be based on trading requirements: Nonpoint source trades limited to practices on BMP List (but new BMPs can be added to the list) Nonpoint source trades limited to practices on BMP List (but new BMPs can be added to the list) Nonpoint source baseline = TMDL baseline conditions Nonpoint source baseline = TMDL baseline conditions Water Quality Contribution required from each NPS credit to represent share of Load Allocation reductions Water Quality Contribution required from each NPS credit to represent share of Load Allocation reductions Nonpoint source credits only created by reductions exceeding TMDL Implementation PlanNonpoint source credits only created by reductions exceeding TMDL Implementation Plan

16. Trading System Design Dynamic, market-based trading Dynamic, market-based trading Broad authorization to trade subject to trading rules Broad authorization to trade subject to trading rules Liability remains with permit holder Liability remains with permit holder PS, NPS sign private trade contracts PS, NPS sign private trade contracts No third party certification of credit validity No third party certification of credit validity EPA & Idaho DEQ inspect BMPs, enforce against permit holder EPA & Idaho DEQ inspect BMPs, enforce against permit holder Environment protected Environment protected BMP List specifies acceptable practices, measurement BMP List specifies acceptable practices, measurement Location-based trade ratios applied to achieve environmentally equivalent reductions: Parma Pounds Location-based trade ratios applied to achieve environmentally equivalent reductions: Parma Pounds Robust participation by agriculture Robust participation by agriculture Trading driven by economic decisions Trading driven by economic decisions Idaho DEQ oversees trading system Idaho DEQ oversees trading system

17. Explanation of Parma Pounds hypothetical example: River location ratios River location ratiosExample: 0.7 at Mason Cr. & Boise River 0.7 at Mason Cr. & Boise River 0.5 for City of Boise 0.5 for City of Boise Drainage delivery ratios Example: 0.9 on Mason Cr. Drainage delivery ratios Example: 0.9 on Mason Cr. Site location factors Site location factors Example: 0.7 for field draining to Mason Cr. Example: SELLER Farmer Jones 100 pounds local pounds x 0.7 x 0.9 x.7 = 44 Parma Pounds to sell Example: BUYER City of Boise 44 Parma Pounds ÷ 0.5 = 88 local pounds to use

18. Watershed and Pollutant Factors for Trading Success Water quality problem is characterized and desired target identified, with appropriate pollutant type Cap based on water quality standards, TMDL Multiple PS face more stringent NPDES permit limits, i.e., water quality based effluent limits Necessary pollutant load reductions can be achieved with some sources over-controlling and others under-controlling Significant differences in pollutant control costs among PS or between PS and NPS

19. Watershed and Pollutant Factors for Trading Success Timing of pollutant reductions can be aligned for generation/use of credits Timing of pollutant reductions can be aligned for generation/use of credits e.g., seasonal, annual e.g., seasonal, annual Stakeholders willing to embrace and invest in nontraditional approach Stakeholders willing to embrace and invest in nontraditional approach Sufficient modeling, data to assess relative water quality impact of trades Sufficient modeling, data to assess relative water quality impact of trades

20. Conclusion Water Quality Trading is not for sissies! http://water.epa.gov/type/watersheds/trading.cfm