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EPA Announces Clean Water Credit Trading Plan by CBB Staff Columbia Basin Bulletin - January 17, 2003

Efforts to improve water quality and reduce pollution in Northwest streams and rivers could be aided by a new Environmental Protection Agency policy encouraging clean-up credit trading programs.

EPA Administrator Christie Whitman on Monday announced the nationwide water quality trading policy to increase the pace and success of efforts to clean up impaired rivers, streams and lakes.

By providing incentives to encourage action by those who can achieve reductions easily and cost-effectively, the new policy "will result in cleaner water, at less cost, and in less time ... while demanding accountability to ensure that water quality does improve," Whitman said.

The policy, which has the support of state environmental officials and a few environmental groups, is intended to support and encourage states in developing water quality trading projects to meet Clean Water Act requirements in more flexible ways while reducing costs for polluters.

EPA's Northwest regional office has been trying to develop demonstration trading projects in each state for the past six years, although none has been implemented yet. Promising potential clean-up swapping arrangements have been identified on several river segments, and in one case, a detailed system was developed on paper with the involvement of local farmers, sewage treatment plant operators and other stakeholders.

Local stakeholders are interested in pursuing trades to reduce phosphorous pollution on the lower Boise River, the Snake River in Hells Canyon and the Middle Snake in the Twin Falls area, and to reduce water temperature in the Tualatin River in Oregon. A candidate area in Washington fell through several years ago because treatment plants went ahead with improvements on their own, and the regional EPA office is seeking other projects in the state.

In Idaho, implementation has been held up because of delays in establishing total maximum daily loads for impaired streams and river segments.

In most cases, farmers would get credits for doing extra clean-up of their run-off. They could then sell the resulting credit to municipal sewage treatment plants that need to reduce discharges. Along the middle Snake River, however, local fish farms are interested in buying credits from municipal treatment plants when they make excess reductions in their pollution discharges.

The new national policy lays out general guidelines, standards and rules for trading systems. In some states where EPA is in charge of point source discharge permits, close cooperation would be required with state officials, who regulate dispersed or non-point pollution, such as runoff from farms and forestry operations.

Regulators first would have to establish overall limits for each pollutant, or total maximum daily loads, before a system could be adopted for a watershed. Having TMDL limits and the resulting allocations among point and non-point sources enable environmental agencies and traders to measure the amount of pollution reduction achieved by a source and any resulting credit.

Under such a system, an industrial or municipal wastewater treatment plant that faced costly requirements to reduce discharges of a pollutant could instead buy credits from agricultural landowners or others who have exceeded their clean-up requirement for a given pollutant in the same watershed.

Thousands of miles of waterways in the Northwest still do not meet clean water standards for temperature, nitrates and phosphates, despite years of strict controls on discharges from sewage treatment plants, factories and food processing plants. Controlling pollution from farms, livestock operations and other dispersed sources has proven difficult, expensive and politically controversial, and TMDLs have not yet been established for many waterways.

An Idaho study found that buying such credits would be less expensive than installing new technology in treatment plants while actually resulting in greater water quality improvements than if the plant had simply met its compliance goal alone, a state DEQ official said. "Apparently there are a lot of projects out there" that farmers could implement more economically and sell to treatment plants, said Susan Burke, Idaho Department of Environmental Quality water quality programs compliance specialist.

Burke said that greater pollution reductions come about because the clean-up credits generated usually end up exceeding the immediate demand for buying credits.

To qualify for a credit, a farmer would have to go beyond simply meeting the requirements of the TMDL regime. "The way it all works, credits would be produced only for reductions above and beyond the TMDL requirements," she said. The Idaho DEQ plans to post its requirements on its web site soon so the public and interested parties can comment.

Another benefit is that by selling credits, agricultural producers could pay part of the cost of installing and maintaining improvements, such as settling ponds and vegetative buffer strips along waterways.

Because of the difficulty of measuring non-point pollution and pollution reduction, state officials might have to establish higher ratios for credits than a straight one-for-one swap between a sewage plant and a farmer, EPA's policy says.

The potential value of such credits is unknown, and EPA officials said buyers and sellers would not have to disclose prices.

"Our region decided to make a commitment" about six years ago, Claire Schary, an EPA environmental protection specialist who works on market based solutions, said. "We worked very hard at getting a trading system ready to go."

"We're an advocate of each state coming up with what works best. There's no cookie-cutter approach," she said.

Idaho, for example, has made participation by farmers and ranchers in TMDL programs voluntary. The same would hold true for participation in any trading system.

"We've got the framework in Idaho, (but) we need to speed up the TMDLs," Schary said. "We think we have some exciting prospects in Oregon; we'll see what works best. And we're still looking for projects in Washington."

While air pollution credit trading has become a proven national success over the past decade, water quality trading is much more difficult because it must be done on a smaller geographic scale with special circumstances in each watershed, Schary said. She moved to the region after having worked on the acid-rain reduction trading program at EPA headquarters in Washington, D.C.

"I believe trading is a great tool to explore and have available, but ultimately it may not fit all watersheds. We're still learning," she said.

Simply thinking about water quality trading can lead people to come up with alternative means of complying or building partnerships with each other in watershed to come up with a broader strategy for achieving water quality goals, Schary said.

The framework for a trading program that would cut phosphate pollution in the lower Boise River was developed over three years with the participation of local irrigators, state Department of Agriculture and the USDA's Natural Resource Conservation Service. Boise and other cities are interested in purchasing credits from farmers. Since its completion in 2000, implementation has been blocked by delays in establishing total maximum pollution limits for the area and the Hells Canyon section of the Snake River downstream, where three large reservoirs suffer from water quality problems.

Idaho officials have not yet reviewed the final trading policy but hope EPA provided enough flexibility to allow states to use trading as a tool to reach clean water goals without a host of restrictions and requirements.

"We've done some pilot explorations," Burke said. "We're just using pollutant trading right now as means to meet TMDL goals."

In Oregon, state officials are working on a potential water quality trading area on the Tualatin River with local sewage treatment plant managers, environmentalists and farmers that would speed up water temperature reduction efforts, Schary said.

Oregon officials and Clean Water Services, a sewage treatment plant operator, are exploring a different approach whereby the company would in effect create water temperature reduction credits on farms by spending money to revegetate buffer strips more quickly and more densely. That would speed up the scheduled water quality improvement under the area's TMDL plan, creating a temporary credit for Clean Water Services, Schary said. The current plan envisions farmers would achieve their water temperature reductions in 20 years.

The U.S. Department of Agriculture's Natural Resources Conservation Service Director Bruce Knight has endorsed trading programs as a means to "jump start" such buffer strips, which can also cut polluted run-off. "This policy will provide market-based incentives to encourage America's farmers, ranchers and woodlot owners and operators to do even more to maintain and improve the quality of our environment," Knight said.

Paul Faeth, managing director of World Resources Institute, agreed. "It creates a win-win solution for everyone involved and the new policy will allow states and others to take advantage of the newly created conservation innovation grants program" passed by Congress in the 2002 farm bill.

But other environmental groups opposed the plan. "Under this policy, our waterways are for sale. Only corporate polluters will benefit," Natural Resources Defense Council spokeswoman Nancy Stoner said.

State officials "recognize the short and long term benefits of the approaches by EPA and are pleased that the agency has formalized an effective trading policy," the head of the Association of State and Interstate Water Pollution Control Administrators said. The group is "enthusiastic about the potential for trading or exchanging pollutant credits. The process outlined by EPA provides greater flexibility to the states in addressing extremely complex pollution problems; can result in significant cost savings; provides an opportunity to regulate pollutants on a watershed basis; and accelerates pollutant reduction efforts," said Roberta Savage, executive director said.

Whitman also announced EPA will provide more than $800,000 for technical and other support for 11 trading projects around the country, none in the Northwest.

Setting forth its objectives, EPA said it will support implementation of water quality trading by states, interstate agencies and tribes where trading:

• Achieves early reductions and progress towards water quality standards pending development of TMDLs for impaired waters.
• Reduces the cost of implementing TMDLs through greater efficiency and flexible approaches.
• Establishes economic incentives for voluntary pollutant reductions from point and nonpoint sources within a watershed.
• Reduces the cost of compliance with water quality-based requirements.
• Offsets new or increased discharges resulting from growth in order to maintain levels of water quality that support all designated uses.
• Achieves greater environmental benefits than those under existing regulatory programs. EPA supports the creation of water quality trading credits in ways that achieve ancillary environmental benefits beyond the required reductions in specific pollutant loads, such as the creation and restoration of wetlands, floodplains and wildlife and/or waterfowl habitat.
• Secures long-term improvements in water quality through the purchase and retirement of credits by any entity.

Combines ecological services to achieve multiple environmental and economic benefits, such as wetland restoration or the implementation of management practices that improve water quality and habitat.

The policy is available at the EPA's website: www.epa.gov/owow/watershed/trading.htm

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