Trading & Farming for Water Quality

President Bush gave U.S. EPA Administrator Stephen L. Johnson—the first scientist to head the 36-year-old, 18,000-strong agency—the charge of “accelerating the pace of environmental protection, while maintaining the country’s economic competitiveness.”

No wonder then that the EPA is so committed to water quality trading, an innovative, market-based approach to advancing environmental and economic goals through efficient and effective collaborations.

In October 2006, the EPA took a major step forward for environmental and economic progress on the agricultural waterfront. The Office of Water and USDA’s Natural Resources and Environment signed an unprecedented partnership agreement to promote clean water and healthy watersheds through water quality trading. In calling for a specific workplan and a pilot project in the Chesapeake Bay basin, the second largest estuary in the world, this agreement will apply market-based approaches to develop water quality trading standards and establish methods to ensure credible water quality results.

Credit trading
Water quality credit trading utilizes individual National Pollutant Discharge Elimination System (NPDES) permits under the Clean Water Act to foster increased compliance through flexible, market-based approaches.
For example, a wastewater permit facility can purchase pollutant reduction credits as an alternative compliance path or trade pollutant credits under an overall pollutant cap through watershed-based permits involving multiple permit holders. Nationwide, there are 94 NPDES permits that allow for trading, encompassing 236 facilities. Of these facilities, 121 have participated in trades.

The U.S. is awakening to the power and environmental potential of market-based approaches including water quality trading. Interest in credit trading is growing among various stakeholders, ranging from water and wastewater associations, capital markets, permit writers and the environmental community, to the consulting sector and construction industry.

Currently, the EPA believes market uncertainty is hindering potential growth of water quality trading; however, over the next five years, the EPA anticipates water quality trading will become increasingly important to plant managers as a means of reducing costs, allowing economic growth and advancing asset management and utility planning. In terms of controlling costs, purchasing pollutant reduction credits could in some cases represent the lowest cost option. As an economic growth tool, plant expansion may be possible when pollutant reduction credits are purchased as an offset to existing permitted wasteloads that are already maxed out.

A planning tool
As an asset management tool, if a major debt is going to be retired in four years, for example, it may be advantageous to purchase pollutant credits as a way of delaying the need for new capital expenditures until the previous debt is retired. As a planning tool, a phased-in cap under a watershed-based permit avoids the problem of all permit holders requiring consulting and contracting services at the same time. This planning can help to improve quality and control costs.

As individuals increasingly ask, “Where can water quality trading work?” greater clarity will be needed if contractual compliance options and physical compliance options are to be viewed equally by plant managers.

This is especially true as agriculture is introduced as a seller of pollutant reduction credits. Policy-makers need to consider that if wastewater plant managers and farmers lack sufficient confidence in the overall process, they may elect not to participate in trading. Uncertainty in the rules of the game, as well as the validity of the pollutant credits, can prevent a trading program from becoming successful.

The EPA-USDA agreement identifies the Chesapeake Bay basin as a pilot, in part, to test various theories and because of the existing water quality standard that limits nutrients from all sources.

Currently, Pennsylvania is completing policy work for water quality trading. In 2007, Virginia will operate 120 wastewater facilities under a general permit that caps nitrogen and phosphorus and allows for trading within major river basins. The EPA’s shared hope with the USDA is that information gained will be of true value to states in the Chesapeake Bay basin and transferable nationwide.

Water quality trading should be applied to ongoing hypoxia efforts in the Gulf of Mexico. Currently, the EPA supports the 2001 Hypoxia Action Plan to reduce the size of the Gulf of Mexico hypoxic zone to less than 1,930 sq miles (five-year average) by 2015. The EPA also coordinates the Gulf of Mexico/Mississippi River Watershed Nutrient Task Force, a collaborative effort among federal and state agencies to reduce nutrient loadings reaching the northern Gulf of Mexico.

In fact, the EPA provides landowners in the Mississippi River watershed with financial and technical assistance to reduce nutrient runoff from their agricultural lands. In 2004, the Gulf States established the Gulf of Mexico Regional Partnership to increase regional collaboration to enhance the Gulf’s ecological and economic health.

Flexibility is key
The trading agreement also focuses on establishing national “standards” in developing water quality trading policies and programs, and establishing methods to ensure credible water quality results. “Flexibility with accountability” is the key. The EPA believes better guidance at the federal level will accelerate water quality trading policy development at the local level and increase the probability of success. Ultimately, a successful trading program will occur when stakeholders take advantage of potential cost savings, economic growth, asset management, and planning as a result of buying and selling pollutant reduction credits.

The EPA’s partnership with the USDA is critical because agriculture is one of the greatest threats to water quality in many watersheds. Agriculture also presents one of the greatest opportunities to make true progress. Trading creates an incentive for point sources such as treatment plants to work with agriculture and provide cash to environmentally responsible farmers. Other than federal and state grant funds, farmers have no additional revenues to implement conservation practices that reduce farm runoff.

Water quality trading can bridge the gap between lower costs and greater environmental benefits by allowing market forces to find the best opportunities for pollutant reductions through a wider range of options. Well-crafted water quality trading policies and programs will foster the necessary market confidence. Stakeholders will increasingly recognize the value and opportunity of working together to restore impaired watersheds while protecting their own bottom lines.

Benjamin H. Grumbles is assistant administrator in the U.S. EPA’s Office of Water. He can be reached at 202/564-7000 or by e-mail at grumbles.benjamin@epa.gov.

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