Frequent Questions about Water Quality Trading
- What is water quality trading?
- What are the benefits of trading?
- Who is involved in trading?
- What is a credit?
- What is EPA’s Trading Policy?
- What pollutants can be traded?
- When can trading occur?
- What are baselines?
- What are common trading scenarios?
Water quality trading (WQT) under the Clean Water Act (CWA) is an option for compliance with effluent limitations in a NPDES permit.
Water quality trading can provide greater flexibility on the timing and level of technology a facility might install, reduce overall compliance costs, and encourage voluntary participation of non-point sources within the watershed. Trading can provide ancillary environmental benefits such as carbon sinks, flood retention, riparian improvement, and habitat.
Pollutant sources in a watershed may face very different costs to control the same pollutant. Under trading programs, facilities with NPDES permitted discharges facing higher pollution control costs may be able to meet their regulatory obligations by purchasing environmentally equivalent (or superior) pollution reductions from another source at lower cost.
Trading can produce substantial cost savings while meeting the same water quality goal. It may also offer greater flexibility on the timing and level of technology a facility might install. Trading can provide ancillary environmental benefits such as flood retention, riparian improvement, and habitat.
A permitted facility or a point source might trade with another point source or with a nonpoint source. The partners might trade directly, or through a third party. Any party might act as champion for a trading program. Trading works best when all stakeholders interested in their local watershed including permit holders, conservation organizations and watershed groups are involved in the development of the trading program.
A credit is a unit of pollutant reduction usually measured in pounds equivalent. Credits can be generated by a point source over-controlling its discharge or by a nonpoint source installing best management practices (BMPs) that are different than or in addition to its baseline.
On February 6, 2019, EPA issued “Updating the Environmental Protection Agency’s (EPA) Water Quality Trading Policy to Promote Market-Based Mechanisms for Improving Water Quality” (2019 Memorandum). The 2019 Memorandum reiterates EPA’s strong support for water quality trading; promotes the adoption of market-based programs to incentivize the implementation of technologies and practices to reduce nonpoint source pollution; provides additional guidance and policy options to stakeholders for developing and implementing market-based programs; and promotes increased investment in conservation actions. To achieve these goals, the 2019 Memorandum identified six market-based principles:
- States, Tribes, and stakeholders should consider implementing water quality trading and other market-based programs on a watershed scale.
- EPA encourages the use of adaptive management strategies for implementing market-based programs.
- Water quality credits and offsets may be banked for future use.
- EPA encourages simplicity and flexibility in implementing baseline concepts.
- A single project may generate credits for multiple markets.
- Financing opportunities exist to assist with deployment of nonpoint land use practices.
EPA's policy supports trading of nutrients (e.g., total phosphorus, total nitrogen), sediment load reductions, temperature, and other pollutants.
EPA supports trading in unimpaired waters to maintain water quality standards as well as in impaired waters. EPA supports both pre-TMDL trading and trading under a TMDL. Trading scenarios include point source-point source trades, point source-nonpoint source trades, pretreatment trades, and intra-plant trades. EPA does not support trading that results in an impairment of an existing or designated use, adversely affect drinking water systems, or exceeds a cap established under a TMDL.
Baselines are the limits or expectations that would apply absent trading. These operate as the basis for credit calculation. A buyer’s baseline would be the effluent limits in its NPDES permit, and in a trading scenario, it can purchase credits to achieve that limit. The baseline for a point source seller is its most stringent effluent limitation. A point source seller generates credits when it reduces its discharge below its baseline. On September 5, 2019, EPA requested public comments on options for providing additional flexibilities for baselines for nonpoint sources in watersheds with EPA established or approved Total Maximum Daily Loads (TMDLs).
Trading might occur directly between two or more point sources or through an exchange. Trading might also occur between a point source and a nonpoint source, either directly or through an exchange. A credit exchange is where a third party such as a person, organization, or website, facilitates trading. Another unique feature a credit exchange might include is a reserve of credits held in case of failed trades. These are the basic trading scenarios; others may exist.