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Water Quality Credit Trading – A Regulator’s Perspective

Environmental & Land Use Law

    Water quality credit trading (WQCT) is an approach by the state of Florida to assist in the protection and improvement of Florida’s surface waters. The public policy of the state is:

    to conserve the waters of the state and to protect, maintain, and improve the quality thereof for public water supplies, for the propagation of wildlife and fish and other aquatic life, and for domestic, agricultural, industrial, recreational, and other beneficial uses and to provide that no wastes be discharged into any waters of the state without first being given the degree of treatment necessary to protect the beneficial uses of such water.1

    WQCT or “pollutant trading” is a voluntary, market-based approach designed to efficiently meet Florida’s water quality goals. It can also be an efficient, market-driven approach to meet the goals of the Clean Water Act, Pub. L. No. 92-500, 33 U.S.C. §1251, et seq. (CWA).2 The object of trading is water quality improvement at lower costs with increased flexibility.

    In a trading arrangement, a facility may discharge a pollutant that is expensive for that facility to control or offset. Another facility may be able to reduce the pollutant in a less costly or more efficient manner because facilities that discharge pollutants to the same water body, basin, or watershed may incur different costs and challenges to control their pollutants. Trading allows facilities with high pollution control costs and challenges to meet required total maximum daily load (TMDL) reduction requirements through the purchase of credits for environmentally equivalent or superior pollution reductions from another source, thereby achieving the same water quality improvement to the water body, basin, or watershed at an overall lower cost. WQCT is a tool to expedite restoration of impaired waters under the TMDL program, pursuant to F.S. §407.067, by allowing pollutant sources to find more cost-effective pollutant reduction treatment measures. Trading, therefore, provides a method to implement “loading reductions in a way that maximizes water quality and ecological improvements.”3

    The EPA states that the water quality trading policy is designed to encourage “sources to create pollutant reduction credits by making reductions greater than required to meet a regulatory requirement. Under a trading program, other sources may then purchase these pollutant reduction credits to meet their own water quality-based regulatory limit.”4WQCT may accelerate pollutant reduction because an individual discharger’s high costs to reduce pollutants could be addressed through a more economical offset of water quality credits.5

    F.S. §403.067(8) states that the Florida Department of Environmental Protection (DEP) is authorized to adopt rules to establish procedures for pollutant trading among pollutant sources to a water body or water body segment.6 The statute requires that trading procedures be implemented through permits or other legally binding authorizations and that rules include a mechanism for the issuance and tracking of the credits. Prior to developing rules, F.S. §403.067(8) required the DEP to submit a report to the governor, president of the Senate, and speaker of the House. The DEP submitted its report in December of 2006, setting forth recommendations for a framework for the WQCT program. This article provides a summary of the report titled, Water Quality Credit Trading, A Report to the Governor and Legislature” (December 2006) (WQCT Report).

    As required by F.S. §403.067(8), the DEP was assisted in the formulation of the WQCT report by the Pollutant Trading Policy Advisory Committee made up of public and private stakeholders from throughout the state, including regulated interests, environmental organizations, water management districts, and local governments. The report, together with potential additional direction from the governor and legislature, will provide direction for the development of implementing rules. Recommendations in the report are designed to address state and applicable CWA requirements for the protection and preservation of surface waters.

    Water Quality Credits
    As set forth in the WQCT report, trading will involve “a market-based exchange of pollution reduction ‘credits’ among pollutant sources with the objective of achieving lower net costs or more practical alternatives for meeting water quality standards.”7 Credits will be treated as “an accounting mechanism to establish and verify the market exchange of effective pollutant reduction actions,”8 not as a right to pollute. They will represent “quantifiable pollutant reductions from existing dischargers so that overall pollutant loadings to a watershed are not increased and water quality is preserved.”9

    Credits are an accounting mechanism to “reflect the value of pollution reduction in terms of water quality benefits, not dollar costs.”10 While the cost is important to both the entity generating the credit and purchasing the credit, these costs do not affect the environmental or true value of the credit. The proposed program, therefore, will not involve the trading of pollution rights but instead only a trade of credits with the objective of meeting water quality standards.

    The purchase of credits will not result in a regulatory enforceable right by the purchaser against the seller. Enforceable rights would instead be created by contract between the trading partners. The DEP would not be a party to or oversee the contract. Enforcement rights by the state will arise from permit requirements or other regulatory authorization.

    Comparison to the Federal Air Trading Program
    The CWA and its implementing regulations establish a legal basis for trading to achieve and maintain water quality standards. The EPA has promulgated a water quality trading policy that encourages states to adopt voluntary water quality credit trading programs and provides guidance on how trading may occur consistently within this legal framework.11 The foundation of this “framework is water quality standards.”12

    There has long been national interest in pollutant trading. Maryland, Michigan, Pennsylvania, Virginia, West Virginia, Wisconsin, and Colorado have established statewide policies or rules on pollutant trading.13 There are also local watershed programs. The variation in the approximately 40 programs existing nationwide is great. Yet, despite the number of programs, little trading has actually occurred.14

    Interest in water pollutant trading may have been sparked by the success of the sulfur dioxide (SO2) allowance market developed pursuant to Title IV of the 1999 amendments to the Clean Air Act (CAA). The amendments to the CAA established a cap on SO2 emissions representing a 50 percent reduction from 1989 emissions. Allowances were allocated to existing sources based largely on their past emissions. These allowances could be utilized by the source, sold, or banked. Facilities beginning operation after 1995 were not allocated allowances. The federal SO2 program allows for trading on the open market as a commodity through the Chicago Board of Trade. This program has resulted in the SO2 cap being maintained and also substantial savings to the sources.15

    The federal air program, however, is distinct from the proposed state water program in several ways. First, the CAA explicitly authorizes the EPA to establish a sulfur dioxide emissions trading program pertaining to fossil fuel power plants. The CWA does not, however, specifically provide for trading.16 While trading is not specifically provided for in the CWA, EPA has strongly promoted the use of watershed-based trading.17

    Other distinctions are that the federal air program has a larger scope which includes airsheds comprising the entire continental U.S. This creates a broader geographic base for both buyers and sellers than in the proposed Florida program. Second, the federal air program allows banking of credits for future use, while the proposed Florida program does not provide for future banking. The SO2 program users are distinct from potential users of the water quality program in that the SO2 trading focuses on fossil fuel power plants making the participants generally large and limited in number. Additionally, the federal air program is based on monitoring, but in the proposed state water quality program, reasonable assurances demonstrating that effluent limits will be attained are instead required in advance.18

    Total Maximum Daily Loads
    The Clean Water Act —The CWA was enacted in 1972 to restore and maintain the “chemical, physical and biological integrity of the nation’s waters.”19 The goal is to eliminate the discharge of pollutants into navigable waters.20 Section 303(d) of the CWA requires states to submit lists of impaired surface waters that do not meet applicable water quality standards after implementation of technology based effluent limitations or the application of other pollution control programs. TMDLs are to be set for these water bodies to establish the maximum amount of a pollutant or pollutants that a water body can assimilate without exceeding standards.21

    The EPA exercises oversight of state water quality protection programs, including trading, through the authority of the CWA. In 2003, EPA issued a final water quality trading policy to provide guidance to states and tribes on how trading can occur under the CWA and its implementing regulations.22 The policy requires state trading programs to include timely public access to trade information and public participation in program development and implementation; mechanisms to monitor and evaluate program progress and effectiveness, quantify credits, address uncertainty, and revise the program if necessary; legal mechanisms to facilitate trading; clearly defined trading units and trading accountability; and assurance that National Pollutant Discharge Elimination System permit holders meet their permit limits.23

    EPA’s policy allows “each state to come up with a design that best meets the needs and preferences of watershed stakeholders, while ensuring compliance with the criteria established in the water quality trading policy.”24 Because of the EPA’s oversight role, however, a memorandum of agreement is contemplated between the EPA and DEP, and the DEP anticipates submitting proposed WQCT rules to the EPA for review.25

    F.S. §403.067 — F.S. §403.067, is designed to satisfy §303(d) of the CWA by promoting “improvements in water quality throughout the state through the coordinated control of point and nonpoint sources of pollution.”26 F.S. §403.067(1) provides that a “scientifically based total maximum daily load program is necessary to fairly and equitably allocate pollution loads to both nonpoint and point sources.”27 The section requires the DEP, as the lead state agency, to identify and list impaired waters, develop and adopt TMDLs, allocate pollutant load reductions, and implement water quality improvement through basin management action plans and other methods including WQCT.28

    The TMDL establishes the maximum amount of a pollutant(s) an impaired water body can assimilate without exceeding water quality standards for the pollutant(s). The report further describes TMDLs as follows:

    Because it represents quantitative calculations of pollutant loadings from all sources in a watershed or basin, it allows the responsibility for pollutant load reductions to be equitably allocated among those pollutant sources. These pollutant reduction allocations may then be incorporated into permits for regulated facilities and otherwise accounted for through best management practices and other pollution control measures.29

    Allocations may be reflected in a BMAP that establishes the schedule for implementing projects and activities to meet pollution reduction allocation through “appropriate management strategies available to the state through existing water quality protection programs.”30 The BMAP is designed to equitably allocate pollutant reductions and identify mechanisms by which potential future increases in pollutant loading will be addressed.31 “It is the BMAP process and the adoption of formal, inter-related pollution reduction requirements that creates the conditions where market exchanges become more likely – the demand for the supply.”32

    Department Recommendations
    The DEP first recommends that its general statutory authority in F.S. §403.067(8) be expanded to more broadly outline the activities that a trading program may or must accomplish. Second, the DEP recommends that formal WQCT should only be authorized in basins with an adopted BMAP.33 Other legislative changes recommended by the DEP include elimination of the equitable abatement provisions in Fla. Admin. Code R. 62-4.242(4) where a BMAP has been adopted; authorization to develop by rule a “more appropriate” public interest test where basin management action plans are adopted; and a modification of F.S. §403.088(2)(f) to provide that permit revisions may be accompanied by an administrative order to reflect compliance schedules.34

    After statutory amendments are completed, the DEP anticipates adopting rules to establish the provisions for the trading program. It is critical to the DEP that new rules provide for an environmental valuation of credits based on how much and when the pollutant reduction will occur, not a monetary valuation of credits. Under the anticipated rules, trades will not be hypothetical but must instead achieve actual water quality improvements. Generation of credits, therefore, will occur only after the reduction of pollutants through the introduction or upgrades of pollution controls or the implementation of best management practices. In order to meet TMDL requirements, trades would have to be used by a buyer during the same time period as generation of the credit by the seller. Trading rules are not anticipated to include credit for incidental discharges which are occasionally below the discharger’s allocation or permit limits.35 A further premise is that the generation of credits for point source sellers will occur only after the seller’s permit has been revised to reflect a reduction in its pollutant loading beyond basic minimum regulatory requirements. The certainty of the transaction is anticipated to be based on contracts between the buyer and seller of the credits.36 Rules are also proposed to address permit transfers, location factors, uncertainty factors, and tracking of credits and trades.

    WQCT has the potential to provide benefits for the environment while allowing a free market transaction which is monetarily beneficial to the participants. Much time has been spent by the DEP and the Pollutant Trading Policy Advisory Committee in developing logically based concepts and premises for future rules. The future rules are expected to result in a sound approach for the trading of water quality credits.

    1 Fla. Stat. §403.021(2).
    2 U.S. Envtl. Prot. Agency (EPA), Draft Framework for Watershed-based Trading-Executive Summary at 2, EPA 800-R-96-001 (May 1996); see also EPA, Water Quality Trading, trading.
    3 Id.
    4 EPA, EPA 2003 Water Quality Trading Policy Questions and Answers, watershed/ trading/policyfaq.html.
    5 Florida Department of Environmental Protection (DEP), A Report to the Governor and Legislature at 1, 4, (December 2006) (WQCT Report), available at water/tmdl/docs/ WQ_CreditTrading Report_final_Decembe r2006.pdf; see also Alexandra Dunn & Elise Bacon, Doing Water Quality Credit Trading Right, 20 ABA Natural Res. & Env’t 43 (Summer 2005), getfile.cfm?fn=2006law- l.bacon.pdf.
    6 Chs. 99-223 and 99-353, Laws of Florida, as amended by Ch. 2000-130, Laws of Florida, creating and amending Fla. Stat. §403.067.
    7 WQCT Report at 5.
    8 Id.
    9 Id.
    10 Id. at 4.
    11 EPA, Water Quality Trading Policy, 68 Fed. Reg. 1608 (January 13, 2003).
    12 EPA, EPA 2003 Water Quality Trading Policy Questions and Answers, /owow/watershed/ trading/policy faq.html; see EPA, Final Water Quality Trading Policy (Jan. 13 2003), watershed/trading/ finalpolicy2003.html.
    13 For information on other trading programs see Hanna Breetz, Karen Fisher-Vanden, Laura Garzon, Hanah Jacobs, Kailin Kroetz, & Rebecca Terry, Water Quality Trading and Offset Initiatives in the U.S.: A Comprehensive Survey, Dartmouth College (August 5, 2004), rquality trading database.pdf; See also statewide policy and rules for the following states: Delaware,; Maryland, www.mde.state. Programs/Wate rPrograms/index.asp; Pennsylvania, river_ trading.htm; Virginia, us/vpdes; West Virginia, www.dep.; Mid-Atlantic Regional Water Quality Program, /Publications/Trading_ resources_ directory.doc.
    14 WQCT Report at 6.
    15 Id. at 7.
    16 Claire Schary & Karen Fisher-Vanden, A New Approach to Water Quality Trading: Applying Lessons from the Acid Rain Program to the Lower Boise River Watershed, 6 Environmental Practice 281 (December 2004).
    17 EPA, Draft Framework for Watershed-based Trading-Executive Summary at 1, EPA 800-R-96-001 (May 1996).
    18 WQCT Report at 7.
    19 33 U.S.C. §1251(a).
    20 33 U.S.C. §1251(a)(1).
    21 WQCT Report at 9.
    22 See EPA, Final Water Quality Trading Policy (Jan. 13 2003), owow/watershed/ trading/finalpolicy 2003.html; See also EPA, Fact Sheet on Final Water Quality Trading Policy, owow/watershed /2003factsheet.html.
    23 WQCT Report at 11; See also EPA, Fact Sheet on Final Water Quality Trading Policy, owow /watershed/ 2003factsheet.html.
    24 Claire Schary & Karen Fisher-Vanden, A New Approach to Water Quality Trading: Applying Lessons from the Acid Rain Program to the Lower Boise River Watershed, 6 Environmental Practice at 282 (December 2004).
    25 WQCT Report at 10.
    26 Fla. Stat. §403.067(1) (2006).
    27 Id.
    28 WQCT Report at 10.
    29 Id.
    30 Fla. Stat. §403.067(7)(a)1 (2006).
    31 Fla. Stat. §403.067(7)(a)2 (2006).
    32 WQCT Report at 11.
    33 Id. at 12, 13.
    34 Id. at 13-15.
    35 Id. at 16.
    36 The concept of utilizing contracts to manage risk is also used in the trading program in the Lower Boise River Watershed. Claire Schary & Karen Fisher-Vanden, A New Approach to Water Quality Trading: Applying Lessons from the Acid Rain Program to the Lower Boise River Watershed, 6 Environmental Practice at 288, 291 (December 2004); see also Wastewater: Pollutant Trading Overview, /water /prog_issues/ waste_water /pollutant_trading/ overview.cfm.

Susan Roeder Martin is a senior specialist attorney with the South Florida Water Management District. Ms. Martin graduated from the University of Florida College of Law, with honors. She received her B.S. from Florida Atlantic University. Ms. Martin was a member of the Legal Subcommittee of the Pollutant Trading Policy Advisory Committee.

This column is submitted on behalf of the Environmental and Land Use Law Section, Robert J. Riggio, chair, and Gary K. Oldehoff, editor.

Environmental & Land Use Law