United States Office of Water EPA 800-R-96-001

Environmental Protection (4102) May 1996

Agency 

Draft Framework for

Watershed-Based Trading
Purpose of This Framework

This framework is a companion to the Environmental Protection Agency*s effluent trading

policy and has been developed to encourage trading and assist in evaluating and designing

trading programs. Specifically, the framework provides:

# Background on what effluent trading is and the benefits it offers.

# A series of conditions that are necessary for trading, including those which ensure

protection of water quality comparable to the protection that would be provided

without trading.

# A template of regulatory, economic, data, technical, scientific, institutional,

administrative, accountability, and enforcement issues that facilitates identification and

evaluation of trading opportunities.

# Worksheets/checklists to evaluate whether potential trades meet threshold conditions.

Who Should Read This Document

This framework provides information to help all stakeholders establish successful trading

programs that are protective of water quality:

# Local and national community groups— Private citizens, environmental

organizations, and chambers of commerce.

# Members of the regulated and nonregulated community— Municipalities, business,

industry, commercial enterprises, and those engaged in land use activities that can

affect water quality, such as agriculture and forestry.

# Governmental organizations— Local governments, state agencies, regional

organizations, and federal agencies involved in protecting the environment.
For additional copies of the framework, you can fax NCEPI at (513)

569-7186; you must specify the publication number and title. 

Copies of the framework are also available on disk in WordPerfect

6.1 format or can be accessed on the EPA Office of Water Home

Page (Internet address: http://www.epa.gov/OW/watershed.)

This document provides a framework on how best to implement the Clean Water Act

and EPA's regulations to facilitate trading in watersheds. It also provides information to the

public and regulated community on how EPA intends to exercise its discretion in

implementing its regulations. This framework is designed to implement the President's policy

of promoting, encouraging, and facilitating trading wherever possible. The document

supplements, but does not replace, any existing guidance. It is not a substitute for EPA's

regulations, nor is it a regulation itself. Thus, it does not impose legally binding requirements

on EPA, states, or the regulated community. EPA may change this framework in the future,

as appropriate.
iv

TABLE OF CONTENTS

EXECUTIVE SUMMARY ix

CHAPTER 1. INTRODUCTION 1-1

USING THIS FRAMEWORK 1-1

ISSUES FOR THE FUTURE 1-1

CHAPTER 2. PRINCIPLES FOR TRADING 2-1

TRADING AND THE CLEAN WATER ACT 2-1

OVERVIEW OF WATER QUALITY RULES AND MANAGEMENT IN THE UNITED STATES 2-1

WATER QUALITY STANDARDS 2-1

EFFLUENT GUIDELINES, CATEGORICAL PRETREATMENT STANDARDS, AND LOCAL LIMITS 2-2

DIFFUSE SOURCES 2-3

TOTAL MAXIMUM DAILY LOADS (TMDLS) 2-3

ANTI-BACKSLIDING REQUIREMENTS 2-3

EFFLUENT TRADING PRINCIPLES TO MEET WATER QUALITY OBJECTIVES 2-4

PRINCIPLE 1: TRADING PARTICIPANTS MEET APPLICABLE CWA TECHNOLOGY-BASED 

REQUIREMENTS 2-4

PRINCIPLE 2: TRADES ARE CONSISTENT WITH WATER QUALITY STANDARDS THROUGHOUT A

WATERSHED, AS WELL AS ANTI-BACKSLIDING, OTHER REQUIREMENTS OF THE 

CLEAN WATER ACT, OTHER FEDERAL LAWS, STATE LAWS, AND LOCAL 

ORDINANCES 2-4

PRINCIPLE 3: TRADES ARE DEVELOPED WITHIN A TMDL OR OTHER EQUIVALENT 

ANALYTICAL AND MANAGEMENT FRAMEWORK 2-6

PRINCIPLE 4: TRADES OCCUR IN THE CONTEXT OF CURRENT REGULATORY AND 

ENFORCEMENT MECHANISMS 2-7

PRINCIPLE 5: TRADING BOUNDARIES GENERALLY COINCIDE WITH WATERSHED OR 

WATERBODY SEGMENT BOUNDARIES, AND TRADING AREAS ARE OF A 

MANAGEABLE SIZE 2-8

PRINCIPLE 6: TRADING WILL GENERALLY ADD TO EXISTING AMBIENT MONITORING 2-9

PRINCIPLE 7: CAREFUL CONSIDERATION IS GIVEN TO TYPES OF POLLUTANTS TRADED 2-10

PRINCIPLE 8: STAKEHOLDER INVOLVEMENT AND PUBLIC PARTICIPATION ARE KEY

COMPONENTS OF TRADING 2-10

CHAPTER 3. THE ECONOMICS OF TRADING 3-1

INTRODUCTION 3-1

COST SAVINGS 3-1

COMPARING COSTS 3-1

FACTORS THAT AFFECT THE ECONOMICS OF TRADING 3-5

TRADING RATIOS 3-5

TRANSACTION COSTS 3-6

UNCERTAINTY AND ITS ALLEVIATION 3-8

NUMBER OF TRADING PARTICIPANTS 3-8
v

AVAILABILITY OF COST DATA 3-10

CHAPTER 4. IDENTIFYING AND EVALUATING TRADING OPPORTUNITIES 4-1

WHERE TO BEGIN? 4-1

A SCREENING PROCESS FOR TRADING 4-1

SCREENING LEVEL 1: CONSISTENCY WITH WATER QUALITY AND ENVIRONMENTAL OBJECTIVES4-2

SCREENING LEVEL 2: ECONOMIC BENEFITS TO TRADING PARTNERS 4-3

SCREENING LEVEL 3: COORDINATION AND ADMINISTRATIVE SUPPORT 4-4

TEMPLATE OF FAVORABLE CONDITIONS 4-5

CHAPTER 5. POINT SOURCE/POINT SOURCE AND INTRA-PLANT TRADING 5-1

INTRODUCTION 5-1

5.1 REGULATORY ISSUES 5-2

ANTI-DEGRADATION POLICY 5-2

ANTI-BACKSLIDING REQUIREMENTS 5-3

REOPENER CLAUSE 5-3

5.2 ECONOMIC ISSUES 5-3

UNIT COST DIFFERENCES 5-4

TRANSACTION COSTS 5-4

OTHER ECONOMIC CONSIDERATIONS 5-4

5.3 DATA-RELATED ISSUES 5-5

CURRENT OR POTENTIAL FUTURE PERMIT LIMITS 5-6

LOADINGS 5-6

CONTROL OPTIONS 5-6

WATER QUALITY IMPACTS 5-7

5.4 TECHNICAL AND SCIENTIFIC ISSUES 5-7

LOCAL CONDITIONS 5-7

SPATIAL CONSIDERATIONS 5-8

TEMPORAL CONSIDERATIONS 5-8

CHEMICAL CONSIDERATIONS 5-8

ADDRESSING CONSIDERATIONS 5-9

5.5 INSTITUTIONAL ISSUES 5-9

5.6 ADMINISTRATIVE ISSUES 5-9

INITIAL ALLOCATION 5-10

PROGRAM OPERATION 5-10

TRADE TIMING, FREQUENCY, AND DURATION 5-11

STEPS TO ENCOURAGE TRADING 5-12

5.7 ACCOUNTABILITY AND ENFORCEMENT 5-13

5.8 WORKSHEET CHECKLIST 5-15

CHAPTER 6. PRETREATMENT TRADING 6-1

INTRODUCTION 6-1

6.1 REGULATORY ISSUES 6-2

6.2 ECONOMIC ISSUES 6-4
vi

POTENTIAL COST SAVINGS 6-4

TRANSACTION COSTS 6-4

TECHNOLOGICAL INNOVATION 6-5

LOCAL ECONOMIC DEVELOPMENT 6-5

6.3 DATA-RELATED ISSUES 6-5

POLLUTANT LOADINGS 6-7

POLLUTION REDUCTION OPTIONS AND COSTS 6-7

6.4 TECHNICAL AND SCIENTIFIC ISSUES 6-8

MASS - VS. CONCENTRATION-BASED LIMITS 6-8

UNIT OF EXCHANGE 6-8

6.5 INSTITUTIONAL ISSUES 6-9

STAKEHOLDER PARTICIPATION AND SUPPORT 6-9

6.6 ADMINISTRATIVE ISSUES 6-10

INITIAL ALLOCATION 6-10

REALLOCATION THROUGH TRADES 6-10

TIMING, FREQUENCY, AND DURATION 6-10

REVIEW AND APPROVAL OF TRADES 6-12

6.7 ACCOUNTABILITY AND ENFORCEMENT 6-12

6.8 WORKSHEET/CHECKLIST 6-13

CHAPTER 7. POINT SOURCE/NONPOINT SOURCE TRADING 7-1

INTRODUCTION 7-1

7.1 REGULATORY ISSUES 7-2

WATER QUALITY STANDARDS 7-2

TMDLS 7-2

TRADING SITUATIONS FOR POINT AND NONPOINT SOURCES 7-3

7.2 ECONOMIC ISSUES 7-5

UNIT COST DIFFERENCES 7-5

ANCILLARY BENEFITS 7-5

COMPARABILITY OF COSTS 7-5

TRANSACTION COSTS 7-6

COST SHARING 7-6

PIGGYBACKING 7-6

7.3 DATA-RELATED ISSUES 7-7

WATER QUALITY AND POLLUTANT LOADINGS 7-7

DATA-RELATED ROLE OF TMDLS 7-8

ECONOMIC AND GEOGRAPHIC DATA 7-8

7.4 TECHNICAL AND SCIENTIFIC ISSUES 7-9

SPATIAL CONSIDERATIONS 7-9

TEMPORAL CONSIDERATIONS 7-9

CHEMICAL CONSIDERATIONS 7-9

ACCOMMODATING DIFFERENCES 7-10

7.5 INSTITUTIONAL ISSUES 7-10

IDENTIFYING POTENTIAL STAKEHOLDERS 7-11

MATCHING TRADING SUPPORT NEEDS TO EXISTING ROLES AND RESPONSIBILITIES 7-11

7.6 ADMINISTRATIVE ISSUES 7-12
vii

MATCHING ADMINISTRATIVE ARRANGEMENTS TO TRADING ARRANGEMENTS 7-13

INFORMATION MANAGEMENT 7-13

FACILITATION AND BROKERING 7-14

TRACKING AND DOCUMENTATION 7-14

TECHNICAL ASSISTANCE 7-15

7.7 ACCOUNTABILITY AND ENFORCEMENT 7-15

REASONABLE ASSURANCE WITHIN A TMDL OR EQUIVALENT ASSESSMENT AND 

REMEDIATION PLAN 7-15

MEETING THE REASONABLE ASSURANCE TEST 7-16

REASONABLE ASSURANCE AND ACTUAL PERFORMANCE 7-18

REASONABLE ASSURANCE FOR PERMIT-BASED TRADES 7-18

WATERSHED BANKS 7-19

7.8 WORKSHEET/CHECKLIST 7-20

CHAPTER 8. NONPOINT/NONPOINT SOURCE TRADING 8-1

INTRODUCTION 8-1

8.1 REGULATORY ISSUES 8-2

STATE AND LOCAL REGULATORY PROGRAMS 8-2

QUASI-REGULATORY AND VOLUNTARY MANAGEMENT PROGRAMS 8-4

WETLAND MITIGATION BANKING 8-4

8.2 ECONOMIC ISSUES 8-5

PHYSICAL SITE CONDITIONS 8-5

NATURE OF BMP REQUIRED 8-6

SCALE OF BMP IMPLEMENTATION 8-6

AVAILABILITY OF COST-SHARING 8-6

TRANSACTION COSTS 8-7

8.3 DATA-RELATED ISSUES 8-8

POLLUTANT LOADS AND WATER QUALITY MONITORING DATA 8-8

ECONOMIC AND GEOGRAPHIC DATA 8-9

8.4 TECHNICAL AND SCIENTIFIC ISSUES 8-9

NATURAL CONDITIONS 8-9

EFFECTIVENESS OF BMPS 8-10

SPATIAL, TEMPORAL, AND CHEMICAL CONSIDERATIONS 8-11

MANAGING LOAD DIFFERENCES 8-11

8.5 INSTITUTIONAL ISSUES 8-12

IDENTIFYING SUPPORTING INSTITUTIONS 8-12

COORDINATING INSTITUTIONS 8-12

8.6 ADMINISTRATIVE ISSUES 8-13

ADMINISTRATION WHEN ONE PARTY IS REGULATED 8-14

ADMINISTRATION WHEN BOTH PARTIES ARE UNREGULATED 8-15

8.7 ACCOUNTABILITY AND ENFORCEMENT 8-15

NONPOINT SOURCE ACCOUNTABILITY AND ENFORCEMENT ARE LIMITED 8-16

8.8 WORKSHEET/CHECKLIST 8-17
viii

GLOSSARY GLOSSARY-1

APPENDIX A - EFFLUENT TRADING IN WATERSHEDS POLICY STATEMENT APPENDIX A-1

APPENDIX B - ISSUES FOR FUTURE CONSIDERATION APPENDIX B-1

APPENDIX C - EXAMPLES OF EXISTING AND POTENTIAL FUTURE TRADING 

PROGRAMS APPENDIX C-1

APPENDIX D - REFERENCES APPENDIX D-1
ix

EXECUTIVE SUMMARY

Two intertwined ideas are embodied in this Draft Framework for Watershed-Based Trading: (1)

the preservation of water quality progress made since the 1972 Clean Water Act; and (2) the

importance of addressing remaining water quality problems in a way that recognizes the

financial consequences and impacts of water quality control decisions.

Why Is EPA Publishing This Trading and Water Quality 

Framework Now?

In response to President Clinton’s Act (CWA) goals. It can be a more

Reinventing Environmental Regulation efficient, market-driven approach to meet

(March 1995), EPA is strongly promoting those goals. EPA supports only trades that

the use of watershed-based trading. meet existing CWA water quality

Trading is an innovative way for water requirements. 

quality agencies and community

stakeholders to develop common-sense,

cost-effective solutions for water quality

problems in their watersheds. Community

stakeholders include states and water

quality agencies, local governments, point

source dischargers, contributors to

nonpoint source pollution, citizen groups,

other federal agencies, and the public at

large. Trading can allow communities to

grow and prosper while retaining their

commitment to water quality.

The bulk of this framework discusses

effluent trading in watersheds. Remaining

sections discuss transactions that, while not

technically fulfilling the definition of 

“effluent” trades, do involve the exchange

of valued water quality or other ecological

improvements between partners

responding to market initiatives. This

document therefore includes activities such

as trades within a facility (intra-plant

trading) and wetland mitigation banking. 

Trading is not a retreat from Clean Water

Similarly, support for trading does not

represent any change in EPA's traditional

enforcement responsibilities under the

CWA. EPA encourages innovation in

meeting water quality goals but will not

depart from its enforcement and

compliance responsibilities under the

CWA. Trades that depend on fundamental

change in EPA's enforcement and

compliance responsibilities will not be

allowed.

EPA encourages trades that will result in

desired pollution controls at appropriate

locations and scales. Water quality

standards must be met throughout

watersheds. A buyer cannot arrange for

reductions from a downstream discharger

if violations of water quality standards

would result. Generally, trades will shift

additional load reductions to upstream

sources. Thus, discharges will be reduced

in the area between the sources. 

Trading Provides Flexibility

Trading provides watershed managers with

opportunities to facilitate implementing
x

loading reductions in a way that maximizes # A POTW in the western United States

water quality and ecological investigated the potential for some

improvements. Managers can encourage photofinishers discharging to the 

trades that result in desired pollution POTW to reduce their silver loading to

controls, preferred reduction locations, and zero in exchange for payments from

optimal scales for effective efforts. others who would continue to discharge

Trading can fully use the flexibility of

existing regulatory programs. The

following examples illustrate this

flexibility and demonstrate how trading

can contribute to the cost-effectiveness of

meeting water quality objectives.

# Selected publicly owned treatment

works (POTWs) on North Carolina's

Tar Pamlico Basin pay into a state fund

that supports implementation of best Regardless of who trades and how, the

management practices (BMPs) on common goal of trading is achieving water

farms. The plants achieve water quality objectives, including water quality

quality goals less expensively than if standards, more cost-effectively. Some

each plant upgraded its facility communities will use trading to meet their

independently. waterbodies* designated uses at a lower

# In a redevelopment area where space

and cost constrain installing additional

stormwater controls, the city of Tampa

is considering collecting fees from

developers and building a single

facility that would control and treat

more stormwater than feasible in the

redevelopment area.

# To meet a nitrogen target, EPA’s

Chesapeake Bay Program considered

whether several POTWs on a

Chesapeake Bay tributary could pay

others to install a higher level of

technology than that required and

thereby achieve the same water quality

goal at a lower total cost than if each

plant enhanced its own treatment. (To

date, no trading program has

developed.)

silver as a cost-effective way of

meeting a new silver loading limit. It

was thought that the photofinishers

could meet the limit more costeffectively as a group than if they acted

independently. (To date, no trading

program has developed.)

Trading Encourages Environmental

Benefits

cost than the cost without trading. Other

communities will use trading to expand a

waterbody*s designated uses for the same

amount they would have spent preserving

fewer uses without trading. Communities

can also use trading to maintain water

quality in the face of proposed new

discharges.

Trading might provide states and

dischargers with new opportunities to

comply with the anti-degradation policy. 

In the absence of trading, load increases

for some of the nation’s cleaner waters

may be justified only on the basis of

important social and economic growth. 

Trading provides an additional option for a

new source, or a source proposing to add

new pollution to a waterbody, to offset the

new loading by arranging for pollution

reductions from an existing source. 
xi

Trading can produce environmental stakeholders and engages them in a

benefits by accelerating and/or increasing partnership to solve water quality

the implementation of pollution control problems.

measures in a watershed. Sources have

more flexibility in their selection of

pollution controls when they also can

consider options at other sources. 

Where trading involves nonpoint source

pollution reduction, it offers a mechanism

to implement restoration and enhancement

projects. Such projects improve water

quality not only along chemical

parameters, but also along physical

parameters, such as temperature and flow,

which can help preserve and expand

designated uses. Moreover, such projects

provide an array of other habitat benefits

for aquatic life, birds, and other animals.

In particular, trading offers significant

opportunities to expand nonpoint source

pollution reductions beyond current levels. 

Point/nonpoint and nonpoint/nonpoint

trading can facilitate nonpoint source

reductions where they otherwise would not

have occurred. In so doing, it can help

address one of the sources of water

pollution that is most persistent and

difficult to reduce (economically,

technically, and politically).

Beyond implementing trades, the process the creek is receiving the ecological

communities go through when they benefits from restoration.

consider a trading option moves them

toward more complete management

approaches and more effective

environmental protection. Identifying

trading opportunities involves examining

all pollution sources at once when

evaluating technical and financial

capabilities to achieve loading reductions. 

This brings regulated and unregulated

sources together with other watershed

The examples below illustrate some of the

ways trading can provide environmental

benefits.

# Four POTWs at Lake Dillon have the

opportunity to purchase nonpoint

source loading reductions and avoid

more expensive plant upgrades. In

addition, nonpoint sources sometimes

may trade with other nonpoint sources

to offset additional loading. Through

the process of developing the trading

program, the POTWs also identified

inexpensive operational improvements. 

As a result, water quality standards are

maintained. 

# Boulder, Colorado*s POTW

contributed funds to a riparian

enhancement project on a nearby creek

to alleviate ammonia problems,

augment stream flow, and defer

expensive plant modifications. Studies

had shown that upgrades alone would

be insufficient to reach water quality

standards due to the degraded condition

of the creek. Short-term results are

promising for ammonia reduction, and

# The State of Maryland accepts feebased compensation for mitigation

requirements if it determines that

creation, restoration, and enhancement

of small nontidal wetlands is not

feasible. Fees are deposited into a trust

fund that pays for larger restoration

projects. The state believes

consolidating otherwise small and

isolated restoration projects into larger
xii

ones is a more environmentally water quality. Some communities face

effective approach to mitigation and growth constraints because nearby

water quality protection. waterbodies already have water quality

Economic Benefits of Trading

One of the most immediately visible

benefits of trading is the money some

sources save while meeting pollution

control responsibilities. Sources that “sell” 

loading reductions can also benefit

financially and can invest proceeds in Many sources or contributors to water

research and development, for example, or pollution might consider trading. Point

use them to offset other costs. source dischargers, nonpoint sources, and

These economic benefits reach beyond

dischargers to consumers and

communities. Trading can keep municipal Point sources are direct dischargers that

wastewater treatment or stormwater utility introduce pollutants into waters of the

charges from increasing as quickly or by as United States. Examples of point sources

much as they might without trading. include POTWs, private wastewater

Trading also can keep costs to consumers treatment facilities, industrial dischargers,

down as industry and business save on federal facilities that discharge pollutants,

pollution control costs. active and inactive mining operations,

The array of control options provided

under trading often includes less expensive

choices that can satisfy loading reduction

responsibilities. Increasing the

affordability of pollution control makes it

possible for sources to achieve reductions

more quickly and/or in greater amounts

than without trading.

Reducing the total cost of achieving an

environmental objective makes resources

available for other uses. Industry may

invest in research and development. Local

government may invest in additional

resource protection activities, or in

community services such as education,

welfare, and police protection.

Additionally, trading can facilitate

economic development while protecting

problems or could soon develop problems. 

Trading provides a mechanism for new and

expanding sources to offset additional

loading by obtaining reductions from

other sources.

Who Might Trade?

indirect dischargers may all participate in

trades.

aquaculture operations, and municipal

stormwater outfalls (generally communities

with populations over 100,000). Point

sources are regulated under the National

Pollutant Discharge Elimination System

(NPDES) established under section 402 of

the CWA. Many point source dischargers

are required to comply with national

discharge standards developed for

industrial categories.

Indirect dischargers are industrial or

commercial (i.e., nonresidential)

dischargers that discharge pollutants to a

POTW. Many indirect dischargers

"pretreat" their wastewater prior to

releasing effluent to POTW collection

systems. Pretreatment includes pollution

prevention and waste minimization

practices, as well as on-site and off-site

pollution control technology. Indirect
xiii

dischargers are regulated under certain quality objectives more costcircumstances by POTWs according to effectively.

CWA requirements. Many indirect

dischargers also comply with national

discharge standards developed for

industrial categories.

Nonpoint sources are more diffuse,

conveying pollution via erosion, runoff,

and snowmelt to surface waters. Nonpoint

sources also pollute groundwater via

infiltration; this pollution can sometimes

reach surface waters. Nonpoint sources

include agriculture, silviculture, urban

development, construction, land disposal,

and modification of flow and channel

structure. The CWA does not require

federal controls for nonpoint sources. 

Instead, it requires that states, with EPA

funding and technical support, develop and

implement programs to control nonpoint

sources. 

Five Types of Trading in a Watershed

Context

Generally, the term “trading” describes any

agreement between parties contributing to

water quality problems on the same

waterbody that alters the allocation of

pollutant reduction responsibilities among

the sources. Such agreements also may

include third parties, such as state agencies,

local agencies, or brokerage entities. This

framework groups trades into five

categories:

1. Point/Point Source Trading: a

point source(s) arranges for another Trading: a nonpoint source(s)

point source(s) to undertake greater- arranges for more cost-effective

than-required reductions in pollutant control of other nonpoint sources in

discharge in lieu of reducing its own lieu of installing or upgrading its own

level of pollutant discharge, beyond control or implement pollution

the minimum technology-based prevention practices.

discharge standards, to achieve water

2. Intra-plant Trading: a point source

allocates pollutant discharges among

its outfalls in a cost-effective manner,

provided that the combined permitted

discharge with trading is no greater

than the combined permitted

discharge without trading and

discharge from each outfall complies

with the requirements necessary to

meet applicable water quality

standards.

3. Pretreatment Trading: an indirect

industrial source(s) that discharges to

a POTW arranges for greater-thanrequired reductions in pollutant

discharge by other indirect sources in

lieu of upgrading its own

pretreatment beyond the minimum

technology-based discharge

standards, to achieve water quality

goals more cost-effectively.

4. Point/Nonpoint Source Trading: a

point source(s) arranges for control of

pollutants from nonpoint source(s) to

undertake greater-than-required

pollutant reductions in lieu of

upgrading its own treatment beyond

the minimum technology-based

discharge standards, to achieve water

quality objectives more costeffectively.

5. Nonpoint/Nonpoint Source
xiv

These categorizations are broad and might The hypothetical examples below illustrate

not reflect all possible trading several of these possibilities.

combinations. As communities gain

experience with trading and as EPA

improves its understanding of the

opportunities afforded by watershed-based

decision making, the Agency will provide

information about additional forms of

trading. 

Trading Arrangements

Trading arrangements can take many

different forms. There are varying degrees

of complexity related to the number of

partners involved, the pollutant or

reduction traded, and the form of the trade. 

Trading programs that involve point

sources or indirect discharges require

EPA’s preapproval of trades. 

Under trading arrangements, the total

pollutant reduction must be the same or

greater than what would be achieved if no

trade occurred. A “buyer” and “seller”

agree to a trade in which the buyer

compensates the seller to reduce pollutant

loads. Buyers purchase pollutant

reductions at a lower cost than what they

would spend to achieve the reductions

themselves. Sellers provide pollutant

reductions and may receive compensation. 

Sources may negotiate trades bilaterally or

may trade within the context of an

organized program. Sources may negotiate

prices or exchange rates for loading

reductions themselves, or they may face

those established by a market. A buyer

and seller may be the only parties to

trading, or third parties—public or

private—may become involved.

# A food processor facing new reduction

requirements (the buyer) contracts

directly with another processor (the

seller) to install additional new control

devices to reduce the seller*s pollutant

loads. The seller now maintains the

level of control that provides the load

reduction required of the seller as well

as an additional load reduction credited

to the buyer. The trade is incorporated

into the NPDES permit and is approved

by the permitting authority.

# Nonpoint source silviculture operations

purchase “water quality improvement

shares” from a nonprofit environmental

organization. The organization uses

the proceeds from the sale of shares to

conduct stream and habitat restoration

projects, which provide water quality

improvements. The tree farmers

receive pollutant reduction credits

proportionate to their funding

contribution to the water quality

improvements.

More detailed examples of possible trading

arrangements are provided in Chapters 5

through 8 of this framework.

Trading Mechanisms

EPA believes that two basic types of

trading mechanisms exist if one of the

trading partners is required to have an

NPDES permit under section 402 of the

CWA:

1. Trades can occur through development

of a total maximum daily load (TMDL)

or other equivalent analytical

framework. A TMDL establishes the
xv

loading capacity of a defined watershed Finally, any trading approach will rely on

area, identifies reductions or other in-stream water quality data to help ensure

remedial activities needed to achieve that the trade is working as forecasted. 

water quality standards, identifies Trading partners should be sure that the

sources, and recommends allocations ambient monitoring necessary to evaluate

for point and nonpoint sources. Parties the success or failure of the trade to

to the trade then negotiate within the produce the expected water quality impacts

loading capacity determined under the is part of any trading arrangement.

TMDL.

Trades in the context of a TMDL can

be between two or more partners, cover

a range of geographic scales, and

involve one or more remedial actions. 

Other analytical frameworks may be

appropriate if, like TMDLs, they are

approved by EPA. Analytical

frameworks must link pollutant

contributions to ambient conditions and

determine the pollutant reductions

needed from various sources to achieve

water quality objectives.

2. Trades can also occur in the context of

a point source permit. In this context, a

permittee would arrange a trade with

other sources of a pollutant, with

approval of the permitting authority. 

Achievement of the required in-stream

water quality would rely on the

permittee meeting its limits and on

actions by the trading partner. The

permittee would retain the

responsibility for achieving the

required pollutant reductions.

In addition to direct trades between parties,

trading partners could participate in public

or private banks that could buy and sell

pollutant reduction or other remedial action

credits within a watershed. Each of these

approaches works with individual buyers

and sellers and public and private

organizations.
May 1996 Draft

1-1

This framework provides readers with important questions that must be asked and

answered to trade successfully.

CHAPTER 1. INTRODUCTION

Using This Framework

This framework supplements EPA’s

January, 1996 policy statement on effluent

trading (Appendix A). It is intended to

provide basic information to anyone

interested in trading. Water quality

managers, potential traders, environmental

groups, and others will find assistance for

identifying and evaluating trading

opportunities. This framework can also be

used as a resource when designing a

trading project or program. Chapter 2, 

Principles for Trading, Chapter 3, The

Economics of Trading, and Chapter 4,

Identifying and Evaluating Candidates, are

especially important for anyone reading

this framework for the first time.

Chapters 5 through 8 describe several

types of trading: point/point source and

intra-plant trading, pretreatment trading,

point/nonpoint source trading, and

nonpoint/nonpoint source trading,

respectively. These four chapters also

address issues specific to each type in

detail and are designed so they can be

referenced individually. Regardless of

your specific interest, a quick study of

Chapters 5 through 8 will enhance your

understanding of the concepts and issues

presented in this framework.

Issues for the Future

This draft Framework will be a living

document that EPA hopes will encourage

innovation and open the door to new ideas. 

Because the applicability of trading is so

site-specific, this framework cannot solve

all the implementation challenges that

potential traders might face. EPA has tried

to identify some areas where questions still

remain. As you read this document, we

hope you will consider the following:

# What type of analysis is sufficient to

support a trading program? 

# What has been/will be the impact on

permit writers or POTWs from

reviewing trades? What has been/can

be done to minimize this impact or help

defray any additional cost?

# When proposing new limits, what water

quality-related information can be

shared with industrial pollution sources

that can lead them to initiate a dialogue

to identify potential opportunities to

trade?

# Who can help to broker the

development of trading programs

and/or the proposal of trades?

# Are there additional ways to ensure

accountability is built into

point/nonpoint source trades, beyond

those discussed in Chapter 7?
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1-2

# Are there any examples of local

ordinances requiring nonpoint source

controls that provide

accountability/enforcement for

point/nonpoint trades?

# Is the role of TMDLs sufficiently

described in the document?

# Are there any examples of

cross-pollutant trading that follow the

principles presented in this document?

(Please see Appendix B.)

# Are there other examples of effluent

trading programs in place? (Please see

Appendix C for a list of

existing/proposed trading programs.)

# Can you identify specific locations

(e.g., a watershed or sewer district)

where trading could be applied or

considered? 

# Can you identify industries or facilities

where intra-plant trading can be used or

facilities that could use intra-plant

trading to achieve water quality-based

limits? (Please see Appendix B)

We would like to hear your comments,

ideas, and suggestions on this draft. We

especially invite you to share with us any

experiences you might have had with

trading in your own community as we

develop the trading concept.
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2-1

CHAPTER 2. PRINCIPLES FOR TRADING

The fundamental principle of trading within the Clean Water Act framework is that water

quality standards must be met and technology-based requirements must remain in place. 

Trading and the Clean Water Act

Proper design of a trading approach is

essential for attaining environmental Designated Uses. States designate uses

objectives. The applicability and (e.g., recreational contact, fishing,

usefulness of trading depend on water industrial discharge) for each body of

quality problems in a given area. water and establish water quality standards

Similarly, the benefits of trading tend to be that protect, restore, and maintain

site-specific in nature. For these reasons, designated uses. 

trading is a tool that is most effective when

well designed and administered when and

where appropriate.

This chapter discusses ways in which uses, can be expressed in chemical,

trading can work. It is divided into two physical, or biological terms. Examples

major sections: the first provides a brief include: 10 mg/l BOD; 29E Celsius, indices

overview; and the second discusses eight of biological integrity, or narrative

principles for trading. This chapter statements such as “no discharge of toxics

identifies statutory and regulatory

requirements, analytical and planning

constructs, and design and implementation

considerations for effective trading. 

Overview of Water Quality Rules and

Management in the United States

The CWA is the backbone of water quality

management in the United States. The

act*s provisions and implementing

regulations create a system to protect water

quality and environmental health. A

number of CWA provisions affect how

trading can occur, including, water quality

standards, effluent guidelines, and total

maximum daily loads (TMDLs).

Water Quality Standards

Water quality standards consist of

designated uses, numeric and narrative

criteria, and antidegradation

implementation policies. 

Criteria. Water quality criteria, which

describe the specific water quality

conditions that will achieve designated

in toxic amounts.”

Anti-Degradation Policy. The antidegradation policy specifies that all

existing uses of a waterbody must be

maintained, whether or not they are

designated uses. If the water is cleaner

than necessary to support

fishable/swimmable uses, that water

quality must be maintained unless

important economic and social goals

dictate otherwise. A three-tiered antidegradation policy is part of each state*s

water quality standards: 

# Tier 1: Maintain existing beneficial

uses of surface waters and prevent

degradation that could interfere with

those uses.

# Tier 2: Protect water quality in

“fishable/swimmable” waters (i.e.,
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2-2

bodies of water in which water quality pollutants to a POTW. Many POTWs

meets or exceeds the levels necessary receive effluent from industrial and

to support (1) the propagation of fish, commercial sources that is indirectly

shellfish and wildlife and (2) recreation discharged to waterbodies through the

on and in the water). POTWs. 

# Tier 3: Provide special protection for POTWs, other direct dischargers, and

“Outstanding Natural Resource indirect industrial dischargers must meet

Waters,” such as waters of national or national minimum technology-based

state parks, wildlife refuges, or other effluent limits that EPA sets independent

waters of exceptional recreational or of receiving water quality. 

ecological significance.

Effluent Guidelines, Categorical

Pretreatment Standards, and Local Limits

To achieve water quality standards,

governmental authorities typically rely on

effluent guidelines, categorical

pretreatment standards, and local limits for

point sources and indirect dischargers,

respectively. 

A point source is any discernible, confined,

and discrete conveyance, including but not

limited to, any pipe, ditch, channel, tunnel,

conduit, well, discrete fissure, container,

rolling stock, concentrated animal feeding

operation, landfill leachate collection

system, or vessel or other floating craft

from which pollutants are or may be

discharged. 

The term “point source” includes

stormwater discharges from municipal

separate storm sewers generally serving

communities with populations of greater

than 100,000 and stormwater discharges

associated with industrial activities, but

does not include return flows from

irrigated agriculture or agricultural

stormwater runoff. Publicly owned

treatment works (POTWs) are an example

of a point source. 

Indirect dischargers are industrial or

commercial dischargers that discharge

Direct Dischargers. EPA has issued

technology-based requirements for 51

categories of direct industrial dischargers,

most of which are divided into

subcategories. These “effluent guidelines”

are based on assessments of the greatest

degree of pollution control applicable

technology can achieve that is

economically achievable for the industry.

In the case of POTWs, the national

baseline is called “secondary treatment.”

Point source dischargers are subject to a

permitting system known as the National

Pollutant Discharge Elimination System

(NPDES). They receive NPDES permits

from a permitting authority that reflect

applicable technology-based requirements

and any more stringent water quality-based

effluent limits, along with monitoring and

other requirements. 

When technology-based requirements are

not stringent enough for receiving waters

to meet water quality standards, permitting

authorities develop more stringent “water

quality-based” effluent limits (WQBELs)

that will result in the attainment of water

quality standards. WQBELs are

incorporated into point sources* NPDES

permits. The process of establishing these

limits varies across states and EPA

Regions.
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Indirect Dischargers. Pretreatment management measures for land uses and

standards include specific pollutant critical coastal areas adjacent to impaired

discharge standards for 39 industrial or threatened coastal waters. A variety of

categories, pollution discharge prohibitions state laws and local ordinances also contain

for all indirect dischargers, and local provisions that specify best management

discharge limits developed by POTWs for practices (BMPs) to control pollutants from

their systems. The national baselines for nonpoint sources.

indirect industrial dischargers are called

“categorical pretreatment standards.” All 

indirect dischargers must comply with

general prohibitions that address

discharges that can cause pass through

and/or interference, as well as specific

prohibitions that address fire and explosive

hazards in treatment works. Indirect

dischargers are regulated by the POTW

and do not require an NPDES permit

themselves; they are required to meet

applicable limits in accordance with

pretreatment standards. 

POTWs may develop requirements for

indirect dischargers to supplement

categorical pretreatment standards called

“local limits.” Local limits help POTWs

ensure that they remain in compliance with

their NPDES permits, as well as preventing

indirect dischargers’ wastestreams from

interfering with plant operations or passing

through POTWs untreated. 

Diffuse Sources

The CWA does not regulate diffuse, or

“nonpoint,” sources through a federal

permit program. Instead, it provides grants

for states to establish plans for reducing

pollution from nonpoint sources. Nonpoint

source management plans must adhere to

all applicable state and local regulations

and policies. 

Section 6217 of The Coastal Zone Act

Reauthorization Amendments (CZARA)

requires coastal states to provide for the

implementation of nonpoint source

Total Maximum Daily Loads (TMDLs)

A TMDL is an analysis used to calculate

the maximum pollutant load a waterbody

can receive (loading capacity) without

violating water quality standards. States

are required to establish TMDLs for

waterbodies where technology-based

requirements alone are insufficient to attain

water quality standards. 

A TMDL includes allocations of pollutant

loads among sources: wasteload

allocations (WLAs) for point sources, load

allocations (LAs) for nonpoint sources,

background loadings from natural sources,

and margins of safety to ensure

achievement of water quality goals. The

CWA requires that EPA review and

approve TMDLs.

Anti-Backsliding Requirements 

The anti-backsliding requirement of CWA

section 402(o) generally prohibits reissuing

a permit with a technology-based effluent

limit that is less stringent than the existing

technology-based limit. With respect to

water quality-based effluent limits

(WQBELs) the anti-backsliding clause in

CWA section 303(d)(4) specifies that

backsliding from a WQBEL can occur in

only two situations:

1. Where a waterbody is not attaining its

water quality standard, a limit may be

relaxed only if a TMDL or WLA has

been performed establishing a new

limit and implementation of that
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2-4

TMDL/WLA will ensure compliance These principles are discussed in greater

with water quality standards. detail below.

2. Where a waterbody is attaining its

water quality standards, a limit may be

relaxed only if the requirements of the

anti-degradation policy are being met.

Effluent Trading Principles to Meet

Water Quality Objectives

To work within the framework of laws,

regulations, and policies for attaining water

quality in the United States, trading should

follow eight principles:

3. Trading participants meet applicable

CWA technology-based requirements.

4. Trades are consistent with water quality

standards throughout a watershed, as

well as anti-backsliding, other

requirements of the CWA, other federal

laws, state laws, and local ordinances;.

3. Trades are developed within a TMDL

process or other equivalent analytical

and management framework.

4. Trades occur in the context of current

regulatory and enforcement

mechanisms.

5. Trading boundaries generally coincide

with watershed or waterbody segment

boundaries, and trading areas are of a

manageable size.

6 Trading will generally add to existing

ambient monitoring.

7. Careful consideration is given to the

types of pollutants traded.

8. Stakeholder involvement and public

participation are key components of

trading.

Principle 1: Trading participants meet

applicable CWA technology-based

requirements.

Technology-based requirements are

minimum national effluent standards

imposed on POTWs and industrial

dischargers by NPDES permits. These

technology-based requirements, as defined

by sections 301(b)(1), 301(b)(2), 304(b),

and 306 of the CWA, establish the

discharge standards to be achieved by all

POTWs and designated categories of

industrial dischargers. All dischargers

must install appropriate treatment to

achieve these required levels.

Implications for Trading

Establishing the principle that all trading

partners meet applicable technology-based

requirements preserves minimum levels of

water quality protection mandated by the

CWA. It also promotes fairness by

allowing only those sources which have

already met a baseline contribution to

water quality protection efforts to benefit

from trading. The result of implementing

this principle is that sources that meet

technology-based requirements may trade

to achieve any more stringent water

quality-based requirements. 

Since national minimum standards are

expressed as limits on the amount of a

pollutant that can be in the effluent a

facility discharges, it is not possible to

arrange for comparable pollution controls

at another source. This is why all traders

must first meet technology-based

requirements.

Principle 2: Trades are consistent with

water quality standards throughout a
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watershed, as well as anti-backsliding,

other requirements of the Clean Water

Act, other federal laws, state laws, and

local ordinances.

Water quality standards articulate water help to develop those WLAs and LAs

quality goals. Standards comprise as part of a TMDL.

designated uses, water quality criteria, and

an anti-degradation policy. Control

mechanisms used to meet the goals include

TMDLs, WLAs, LAs, WQBELs, other

NPDES permit provisions, BMPs, and

other local ordinances related to water

quality protection. Regulatory agencies

vary control mechanisms as necessary to

achieve water quality objectives.

Implications for Trading

Similar to applying Principle 1, applying

Principle 2 ensures a certain level of water

quality prior to implementation of a trading

program and promotes fairness by allowing

only those sources which meet baseline

requirements to benefit from trading.

Specific implications of Principle 2 for watershed. 

trading include:

# Trades must not produce water quality that the pollution reductions required of a

effects that constrain designated uses source reflect a margin of safety that is

for a waterbody. proportional to the uncertainty associated

# Traders or administrative authorities

must be able to demonstrate that trades

will ensure attainment of water quality

standards throughout the watershed. 

# No trader may discharge a higher level

of pollutants than what is specified in

permits or rules.

# Trading cannot result in a reissued

permit that has less stringent limits than

the original permit except, in the case

of a water quality-based requirement,

where the new limit is covered by a

TMDL or is consistent with the antidegradation policy.

# Traders must comply with assigned

WLAs and LAs, although trading may

# Prior to trading, traders should comply

with BMP requirements, if applicable.

To avoid double counting, pollutant

reduction credits associated with federal

requirements are not available for trading. 

For example, reduction credits from new or

revised effluent guidelines or BMPs

required by the Coastal Zone Act

Reauthorization Amendments (CZARA)

cannot be counted again in a trade.

Trades may not shift pollutant load

reductions within a watershed in such a

way that water quality standards are

attained at the downstream end of the

watershed while causing standards to be

violated within an upstream portion of the

An agency reviewing a trade should ensure

with load reductions over large spatial

scales and is adequate to ensure that the

reductions will actually attain water quality

standards throughout the trading area. 

Complex issues of flow, hydrology,

pollutant degradation, and related matters

should be evaluated over a potentially

large watershed.

Regulators can incorporate Principle 2 in

trading programs by modifying or revising

existing control mechanisms such as

TMDLs, WLAs, LAs, WQBELs, and other

NPDES permit provisions in a way that
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allows trading and is consistent with the for specific pollutants, while preventing

CWA. indirect dischargers’ wastestreams from

Principle 3: Trades are developed within

a TMDL or other equivalent analytical

and management framework.

Based on section 303(d) of the CWA,

states establish TMDLs for waterbodies, or

portions of waterbodies, where technologybased requirements alone are insufficient

to attain water quality goals. TMDLs TMDLs and similar water quality

provide estimates of pollutant loadings management approaches provide a basis

from all sources, include a margin of for successful trading for two reasons:

safety, and predict resulting ambient

pollutant concentrations. Data from a

TMDL can be used to forecast how

changes in various discharges will affect

water quality. 

Other analytical frameworks may be

sufficient for trading purposes if they are

approved by EPA. These analytical

frameworks should also be able to

determine the desired ambient condition,

link pollutant contributions from sources to

ambient conditions, and predict the effects

of pollutant reductions from different

sources on in-stream water quality. 

Examples of other appropriate frameworks

include Lakewide Area Management Plans

(LaMPs) and Remedial Action plans

(RAPs), used in the Great Lakes.

In cases where a TMDL has already

assigned load reductions, trades can occur

in the context of a point source NPDES

permit. With the permitting authority’s

approval, a permittee would arrange a trade

with other sources of a pollutant.(See

Principle 4.)

For pretreatment trading, the appropriate

analytical framework is called the

Maximum Allowable Headworks Loading

(MAHL). A POTW determines the MAHL

interfering with plant operations or passing

through POTWs untreated. The POTW

also determines the Maximum Allowable

Industrial Loading (MAIL), which is the

total daily mass that the POTW can accept

from all permitted industrial users. 

Implications for Trading

# TMDLs allocate pollution control

responsibilities among covered

dischargers using a process that can be

easily adapted to incorporate trades.

# Data and analyses generated in TMDLs

typically enable water quality managers

to better understand and predict general

effects of proposed trades.

The TMDL process establishes the baseline

pollution reduction responsibilities

necessary to achieve designated water

quality standards. This provides a starting

point to compare the costs of the baseline

responsibilities necessary to achieve

alternative allocations that also meet water

quality goals. In this way, TMDLs

facilitate identification of the economic and

water quality benefits of various

allocations of pollutant reduction

responsibilities.

Trades can be incorporated into TMDLs in

two ways. If sources are contemplating

trading when a TMDL is being developed,

final allocations can reflect traded loading

reductions. This approach resembles a

negotiated allocation process. 

If sources begin considering trading after a

TMDL is already in place, states may
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2-7

revise allocations to reflect proposed assessment of criminal penalties, including

changes in load reduction responsibilities, substantial jail sentences; and revocation of

i.e., trades. Such revisions may involve discharge permit.

reopening NPDES permits or otherwise

defining responsibilities for specific

dischargers. The cost to the permitting

authority should thus be considered in any

trading program. Revisions to TMDLs

require EPA review. 

When a TMDL assigns pollutant reduction Clean Water Act, NPDES permits, local

responsibilities to a nonpoint source, there ordinances) discussed at the beginning of

must be reasonable assurance that nonpoint this chapter.

source controls will be implemented. 

“Reasonable assurance” generally means

that the proposed nonpoint source controls

are (1) technically feasible, (2) specific to

the pollutant of concern, (3) to be

implemented according to a schedule and

within a reasonable time period, and (4)

supported by reliable delivery mechanisms

and adequate funding. Examples of

reasonable assurance include state

regulations or local ordinances,

performance bonds, memoranda of

understanding, contracts, or similar

agreements.

Principle 4: Trades occur in the context

of current regulatory and enforcement

mechanisms.

All point source dischargers, regardless of

involvement in trading, must comply with

the CWA. Regulatory authorities use

enforcement procedures as a tool for

ensuring compliance with NPDES permit

requirements, which are derived to achieve

water quality standards. 

Many types of enforcement tools are a basis for extending the compliance

available to water quality agencies. These period that would otherwise apply to the

tools can vary in intensity and breadth of point source under a non-trade permit. 

application. Several examples are notice Point sources are to meet compliance

of violation or administrative order; civil schedules as they would if no trade had

action, including assessment of fines; been approved. 

Water quality agencies cannot use these

enforcement tools unless individual

dischargers are subject to and aware of

specific requirements. These requirements

are defined in the water quality regulations

rules and management mechanisms (e.g.,

For nonpoint sources, some state

regulations and local ordinances establish

guidelines for selected nonpoint sources

that are similar to technology-based

requirements. Typically, states and

localities specify several BMPs for each

nonpoint source category as minimum

measures to protect water quality. 

Jurisdictions require nonpoint sources to

select options that offer economical

pollution control given the characteristics

of the land and the environment.

(Jurisdictions “recommend” BMPs when

commitments are voluntary.)

Implications for Trading

Trading should not lessen accountability

for achieving water quality objectives. 

Trades must rely on existing regulatory and

enforcement mechanisms where

appropriate. For example, all trades

involving point source dischargers should

be reflected in a revised or reissued

NPDES permit for each point source. A

trade implemented through a permit is not
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2-8

EPA anticipates that parties to trades will Trading can involve shifting some amount

need to work with federal, state, tribal, of pollutant loading reductions from one

and/or local regulatory entities on a case- location to another. A new location could

by-case basis to ensure an appropriate level be 100 yards away, across a lake, or half a

of accountability and enforceability in a mile upstream. Thus, selecting trading

trading arrangement. These entities can zone boundaries entails delineating the

help traders incorporate traded pollutant watersheds or segment(s) that might be

loading reduction responsibilities into affected by a set of dischargers.

current regulatory and enforcement

mechanisms.

Principle 5: Trading boundaries

generally coincide with watershed or

waterbody segment boundaries, and

trading areas are of a manageable size.

Most detailed analyses of waterbodies that

provide baseline data for trading programs

examine entire waterbodies or defined

segments of waterbodies. EPA and state The most appropriate hydrologic unit, and

water quality agencies use various systems therefore geographic area, for trading

that assign waterbody identification depends on site-specific hydrogeologic

numbers to specific hydrologic units. conditions: water chemistry; ecological

These units, often called segments, have parameters; and the location, number, and

been delineated based on hydrologic types of sources. Often trading zone

features, such as the presence of a dam, the boundaries coincide with watershed or

confluence of two rivers, or gradations of segment boundaries developed in TMDLs. 

salinity in an estuary. Division of These boundaries should be of a

waterbodies into segments helps define manageable size to ensure that assessments

where selected discharges are most likely are reliable.

to affect the water quality. Ideally, these

segments comprise all land and water

within the confines of a drainage.

Implications for Trading

Matching geographic trading areas with

appropriate hydrologic units helps ensure

that trades meet and maintain water quality

standards throughout a trading area and in

downstream or contiguous areas. For

pretreatment trading, the trading boundary The definition of a trading boundary also is

coincides with the collection system for an affected by the governing body or

individual treatment plant. management structure of the trading

Establishing the principle that trading

boundaries and watershed or segment

boundaries coincide ensures that the parties

to a trade are affecting the same waterbody

or stream/river segment. Implementing

this principle protects the waterbody as a

whole and guards against having adverse

localized effects or specialized local

problems, such as poor mixing.

Delineation of these boundaries can vary

for different pollutants, particularly those

for which effects depend on biological or

chemical processes that occur after the

pollutant is discharged (e.g., decay rates). 

With such pollutants, shifting discharges

from one point source to another can

change the location of key downstream

impacts.

program. The trading boundary should

prevent localized problems that could
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occur if trading boundaries overlap for # Assessment of trading results.

different trading programs or kinds of

trading. 

Consider, for example, a situation where of water quality improvements necessary

point/point source trades are beneficial to meet and maintain water quality

across three segments, but point/nonpoint standards. Together with data on current

source trades are beneficial in only one loadings and facility-specific information,

segment. As a result, trading area sizes regulatory authorities use water quality

might vary from program to program and data in the TMDL and NPDES permitting

might involve any number of segments. processes to establish wasteload and load

Principle 6: Trading will generally add

to existing ambient monitoring. 

Availability of data is important to all

parties involved in maintaining water

quality. Access to data on water quality

and changes that result from pollutant

loads allows analysts to evaluate proposed

methods of meeting water quality

standards. Most of the data necessary to

conduct such evaluations will need to be

collected through ambient water quality

monitoring. Such monitoring may be

conducted by government agencies,

pollutant dischargers, or other groups,

using approved sample collection, analysis,

and reporting methods.

Implications for Trading

An assessment of trading water quality

impacts may involve water quality analysis

and modeling. The data needed depend on

the sophistication of the analysis, the

pollutant(s) involved, and the nature of the

receiving water. Three general categories

of data are necessary to support trades:

# Current water quality conditions.

# Predicted effectiveness of pollution

reduction options.

Data describing current water quality

conditions help evaluate types and levels

allocations and effluent limits that will

yield in-stream pollutant concentrations

that meet applicable water quality

standards. Data also are needed to verify

that trading obligations have been met and

to build technical credibility. To evaluate

the potential impact of trades on water

quality, it is necessary to understand the

probable effects of various pollutant load

reduction options. 

Predicting effectiveness involves obtaining

data on factors present in the trading area

that are not strictly related to water quality. 

Spatial (where), temporal (when), chemical

(pollutant type/form), weather pattern, and

geographic (e.g., slope, soil type)

characteristics all can affect the level of

pollution control achieved by trading. The

necessary level of detail will vary

depending on the complexity of the

waterbody system and type of analytical

techniques used.

Once trades are initiated, ongoing ambient

and effluent monitoring data are needed to

determine whether trades are meeting and

maintaining water quality standards and

whether traders are meeting applicable

limits. As trading occurs, managers can

conduct periodic evaluations to determine

whether program design or administration

adjustments are warranted.
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Principle 7: Careful consideration is

given to types of pollutants traded.

Different pollutants have specific chemical

characteristics that interact with receiving

waters and affect water quality in unique

ways. A given pollutant*s effect on water

quality depends on numerous factors, such When trading facilitates reduction of

as the source of discharge or the weather. toxics, it could be valuable. The

Some pollutants can collect in receiving appropriateness of trading toxics, however,

waters in relatively large quantities without is dictated by the nature of the pollutants

causing ecological damage, whereas small considered and site-specific conditions. 

quantities of other pollutants can be quite For toxic pollutants that are persistent and

harmful. In addition, a pollutant that bioaccumulative in nature, it might be

generates no harmful impacts in one area inadvisable to supplement regulation of

within a waterbody might generate harmful toxic pollutants with a trading option.

local effects in another area.

Implications for Trading

Selecting pollutants that are eligible for

trading has implications for meeting water

quality goals and avoiding unnecessary

risks to ecological health. Localized

effects of pollutants are a particular

concern for trading programs. 

Trading often changes the location in a

watershed or segment where pollutant

loading reductions occur. Thus, while

some locations might receive smaller

pollutant loads, other locations might not

receive the additional reductions they

would have received without trading. 

Analysis of such trades, including the

potential impacts of spatial or temporal

variations in loadings, is necessary to avoid

localized violations of water quality

standards. Further assurance is obtained

by performing a site-specific cross check,

ensuring that water quality criteria are met

at the point where they apply.

Ensuring that water quality standards are

attained throughout a trading area is easier Trading brings watershed stakeholders—

for some pollutants than for others. regulated sources, nonregulated sources,

Nutrients, for example, might be less likely

to create serious localized effects. On the

other hand, it could be difficult to prevent

local violations of water quality standards

when trades involve certain toxic

pollutants.

EPA does not currently envision a situation

in which “cross-pollutant” trading could

work under current regulatory conditions

and technical limitations. Most (if not all)

trades to date have involved the same

pollutant, such as nitrogen for nitrogen or

phosphorus for phosphorus. A few

communities are considering trading

involving different pollutants, such as

nitrogen for phosphorus or nitrogen for

zinc. (See Appendix B.) 

Sufficient data are often unavailable to

enable assessment of the impacts of

different pollutants, and therefore the

relative value of pollutant load reductions. 

Without such assessment, though, water

quality managers are unable to predict the

effects of trading. In the future, in cases

where environmental benefits can be

thoroughly demonstrated, EPA will

consider the use of cross-pollutant trading.

Principle 8: Stakeholder involvement

and public participation are key

components of trading.
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regulatory agencies, other interested new or absent. Thus, the process

organizations, and the general communities go through when they

public—together and engages them in a consider a trading option moves them

partnership to solve water quality toward better management approaches and

problems. All stakeholders, including more effective environmental protection.

partners to a trade and waterbody

beneficiaries, can benefit from their

involvement in trading processes.

Trades draw on the expertise and local rewarded with greater efficiency or

knowledge of stakeholders to ensure that effectiveness than that possible under

trading projects have their support. A current regulatory approaches. Continued

trading option can serve as a consensus- progress in achieving environmental

building exercise, leading to more quality and economic development will

cooperative, comprehensive solutions. depend on greater involvement of

Such solutions can provide benefits that communities in designing local solutions to

might not have been captured in a local problems. Such involvement and

traditional regulatory approach, such as outreach also can lead to greater

increased identification and control of involvement in water quality improvement

cumulative effects (e.g., habitat projects beyond the scope of initial trades.

degradation).

Implications for Trading

The Clean Water Act or EPA regulations

require public notice and comment

procedures or a hearing where trades

involve point sources, NPDES permits,

TMDLs, and other CWA programs. State

and local authorities also can implement

public notice and participation procedures

for proposed trades that do not involve

point sources.

Stakeholder involvement and public

participation in trading educate the

community about the cost savings and

environmental benefits obtainable through

trading. They also educate those managing

a trading program about concerns of the

general public. Trading can build new

alliances both among stakeholders and

between stakeholders and the general

public. These groups might have had few

prior opportunities to work together,

especially where watershed approaches are

Communities that design and direct

innovative alternatives, such as trading, for

achieving environmental goals can be
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3-1

CHAPTER 3. THE ECONOMICS OF TRADING

Relative costs and expected water quality improvements among available pollution

reduction options are key indicators of whether economic incentives make trading feasible

and whether expected benefits are sufficient to sustain successful trading.

Introduction

This chapter describes economic concepts

related to effluent trading and economic

conditions necessary to support trading.

The chapter presents two major

discussions: descriptions of potential cost

savings from trading and factors that affect

trading economics. Several hypothetical

examples are used to illustrate major points

and clarify how economic comparisons are

key to successful effluent trading.

Cost Savings

Cost savings are the primary economic

benefit of trading among pollution

dischargers. Dischargers will be interested

in trading if it represents a way for them to

reduce their costs to meet environmental

objectives. Where such savings are

unavailable, interest in trading is likely to

be weak. In evaluating trading opportunities, it is

Market entry and production expansion

also generate economic benefits that can be

captured through trades. Dischargers,

therefore, also will be interested in trading

when it allows location of a new enterprise

or expansion of an existing one that would

not have been possible without trades.

Understanding the source of cost savings

and/or other economic gains to potential

traders is essential for identifying and

evaluating opportunities to trade. Buyers

benefit by purchasing pollutant reductions

from others that are less expensive than

their own costs of reduction. Sellers

benefit from payments they receive to

reduce loads below their own

requirements.

Comparing Costs

When considering trades, sources will

compare the cost-effectiveness of

achieving additional pollutant reductions

with that of other sources. The costeffectiveness of load reductions is typically

described in terms of cost per mass unit of

pollutants reduced, such as dollars per

pound or dollars per kilogram. Each

potential trading partner could have one or

more options to achieve additional

pollutant load reductions, and each option

will have a specific level of costeffectiveness. In their practical

application, different options may be

additive or mutually exclusive.

often convenient to analyze costs on a per

unit of pollutant load reduction basis. Two

different unit cost measures are widely

used in economic analyses: (1) average

cost—the cost per unit of reduction across

all units; and (2) marginal cost—the cost of

one more unit of reduction. Neither cost

measure, however, is a perfect choice for

evaluating trades.

The relevant unit cost for a proposed trade

is the average cost of only the additional

reductions. This measure is sometimes

referred to as the incremental cost. In its

practical application, incremental cost is a
May 1996 Draft

3-2

hybrid of average and marginal cost; it is source could install another ten feet of

calculated by dividing the total cost of vegetative buffer strip. In such instances,

additional reductions by the quantity of it might be possible to calculate a true

additional reductions. Costs of, and marginal cost. Incremental cost

reductions from, any pre-existing treatment calculations will be a practical approach

are not factored into this calculation. for most trading situations.

In comparison, average cost, strictly

defined, is calculated by dividing the total

cost of all a source’s loading reductions

(existing and proposed) by the total

quantity of reductions. This calculation

will over- or under-estimate unit costs for In Exhibit 3.1, a point source has three

additional reductions, depending on options to achieve additional reductions

whether the average cost of pre-existing (and the options are mutually exclusive):

controls is higher or lower, respectively,

than additional controls. In contrast,

marginal cost, by definition, assumes that

pollutant load reductions can always be

implemented in small units, for example, a

pound at a time. Because this frequently is

not the case, marginal cost is often

incalculable.

Focusing on incremental cost is consistent

with the scale of control/reduction options

available to most sources. Generally,

pollution controls are feasible to implement

in relatively large installments that reduce

multiple units of pollutants. Point sources

in particular tend to purchase additional

loading reduction capability in large

increments. For example, a wastewater

treatment plant upgrade or plant expansion

may be designed to treat millions of

gallons a day. Many nonpoint sources also

implement runoff controls and best

management practices in relatively large

increments for sizable areas of land.

In some cases, a point or nonpoint source

may be able to achieve load reductions in

smaller increments than discussed above,

For example, a point source could increase

the amount of chemicals it uses in its

treatment process without investing in

additional equipment; similarly, a nonpoint

Exhibit 3.1 provides a simple illustration of

the incremental cost concept. A more

formal explanation of the relationship of

incremental cost to average and marginal

cost is presented in Exhibit 3.2

EXHIBIT 3.1: INCREMENTAL COSTS

Option Pounds

Reduced

Total 

Cost

Incremental

Unit Cost

A 100 $2,00

0

$20

B 150 $2,25

0

$15

C 200 $2,60

0

$13

The point source in Exhibit 3.1 could

reduce its costs to achieve additional load

reductions if reductions were available

from another source at a lower unit cost.

Alternatively, this point source might sell

load reductions to other sources if it could

get a higher price per unit than its

incremental costs. For example, if its

reduction requirement is 100 pounds and

the market price for reductions is $18/lb, it

could select Option C and sell the

additional 100 pounds to other sources at a

profit of $5/lb.

Dischargers* motivation to trade will be

strongest when the potential cost savings

(economic benefits) associated with trading

are high. Cost savings are achievable
EXHIBIT 3.2: WHY FOCUS ON

INCREMENTAL COSTS?

Average cost (AC) is defined as the cost per

unit of reduction, and marginal cost (MC) is

defined as the cost of one more unit of

reduction, where the unit is very small (even

infinitesimally small). Their relationship to

total pollution control costs (TC) and

pollutant loading reduction quantities (Q) is

described below (where AC and MC are

cost functions and M indicates a partial

derivative):

1. AC = TC / Q

2. MC = M TC / M Q 

The ability to calculate marginal cost

assumes a continuous cost function

representing cases where it is possible to

continuously achieve pollutant load

reductions on a unit-by-unit basis. This

assumption does not always hold. Many

pollution control options, in fact, are more

accurately represented by step-functions,

where marginal cost is undefined at some

points and can be equal to average cost at

others. 

For this reason, focusing on the incremental

cost of additional pollutant load reduction

options will facilitate practical application of

the concepts discussed in this framework to

real-world trading opportunities. 

Incremental cost is defined as the average

cost of the additional incremental

reductions, as compared to the average cost

of the overall total reductions achieved. 

This incremental cost computation is similar

to a marginal cost computation where the

unit of change is defined as a measurable

unit (i.e., not very small), such as the units

of additional load reductions achieved by an

option.

when unit costs differ among dischargers.

These cost differences can arise for a

number of reasons. For example:

# The incremental unit cost of pollution

control often increases as levels of

control become more stringent and

more sophisticated and expensive

technologies are required to reduce

pollutant loadings further. A

discharger might be able to reduce the

first 1,000 kg of pollutant from its

effluent stream for $50 per kg, while

reduction of the next 100 kg is $100

per kg, and reduction of another 100 kg

costs $1,000 per kg. Thus, dischargers

with varying levels of on-site control

mechanisms may have different unit

costs of pollution control.

# Economies of scale also result in

different unit costs across sources.

Economies of scale in pollution

reduction occur when average unit

costs decrease as the volume of

effluent treated increases. For

example, a source that treats extremely

large quantities of effluent might have

low unit load reduction costs compared

to sources with smaller discharges to

treat.

Differences in unit costs among pollution

sources help identify potential trading

opportunities. An important motivating

factor for participation in trading, however,

is the magnitude of cost savings that

dischargers can realize. Therefore,

potential traders will want to identify both

the differences in unit costs across sources

and the total amount of pollution reduction

that can be traded across these sources.

Exhibit 3.3 illustrates how differences in

unit load reduction costs provide an

incentive to trade.
EXHIBIT 3.3: POLLUTION REDUCTION COSTS WITHOUT AND WITH

EFFLUENT TRADING—A HYPOTHETICAL EXAMPLE

Lake Aqua, a popular recreation spot, has exhibited a steady decline in water quality over the

past several years. Local fishermen indicate that catch rates have decreased in recent years.

The State Department of Environmental Quality has conducted a water quality study revealing

high nutrient levels, especially nitrogen (N). In fact, nitrogen levels in the lake exceed

acceptable standards as defined by state statutes. The water quality study also determined that

nearly 100% of nitrogen loadings into the lake are discharged from two sources, Mammoth, Inc.

and the Spruce Wastewater Treatment Plant (WWTP). In response to this problem, the local

water quality district has determined that nitrogen discharges into Lake Aqua must be reduced

by 200 kg per day. The local water quality district divides responsibility for pollution reduction

equally across both sources.

Mammoth, Inc. and Spruce WWTP have different unit load reduction costs. Spruce is able to

remove nitrogen more cheaply because it processes much more effluent than Mammoth, Inc.,

resulting in an economy of scale. Unit load reduction costs for nitrogen are as follows:

Mammoth, Inc. = $30/kg

Spruce WWTP = $10/kg

In the absence of trading, Spruce WWTP and Mammoth, Inc. are each responsible for removing

100 kg/day of nitrogen from their own effluent streams. The chart below shows per day

compliance costs for this scenario.

Mammoth, Inc. Spruce WWTP

Nitrogen Reduction Responsibility 100 kg/day 100 kg/day

Amount of N Removed In-House 100 kg/day 100 kg/day

Unit Load Reduction Cost $30/kg $10/kg

Compliance Costs Without Trade $3,000/day $1,000/day

Using a trading scheme, Mammoth, Inc. and Spruce can comply with the local water quality

standards more efficiently. In the trade, Mammoth, Inc. purchases 100 kg of nitrogen reduction

from Spruce WWTP for $20/kg. Thus, Mammoth, Inc. does not reduce its nitrogen discharge,

and pays Spruce $2,000 to reduce its discharge by an additional 100 kg. This transaction is

summarized in the table below.

Nitrogen Reduction Responsibility 100 kg/day 100 kg/day

Amount of N Reduced In-House 0 kg/day 200 kg/day

Unit Load Reduction Cost (N) $30/kg $10/kg

In-House Control Costs $0/day $2,000/day

Payment from Buyer to Seller $2,000/day $-2,000/day

Compliance Costs with Trade $2,000/day $0/day

In-House Savings from Trading $1,000/day $1,000/day

Watershed-wide Savings from Trading = $2,000/day
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3-5

Factors That Affect the Economics of

Trading

Several major factors can influence the case traded reductions are less effective

economics of trading. This section than expected.

examines the following factors, building on

Exhibit 3.3 to illustrate key points:

# Trading ratios

# Transaction costs

# Uncertainty and its alleviation

# Number of trading participants

# Availability of cost data.

Trading Ratios

A trading ratio specifies how many units of

pollutant reduction a source must purchase

to receive credit for one unit of load

reduction. Trading ratios incorporate one

or more of the following scientific and

policy principles:

# Relative value—Trading ratios can

reflect the relative environmental

benefit of reducing a unit of pollution

from one source compared to another

(or, conversely, the relative harm of not

reducing a unit compared to another).

# Address “leaks”—Trading ratios can

require buyers to offset the full water

quality impact of their activities, for

example when a residential

development creates additional point

and nonpoint source loadings.

# Margin of safety—Trading ratios can

require buyers to purchase more units

of reduction than they would have

achieved without trading to account for

uncertainties in the level of control

needed to attain water quality

standards, and to provide a buffer in

# Differential water quality impacts—

Trading ratios can be set to achieve

load reductions that maintain current

water quality where improvements are

not needed, or they can be set to

improve water quality above a level

that would have been achieved without

trades.

Other important considerations include

differences in location, timing, and/or

chemistry of pollutant loadings that may be

traded. These are discussed in more detail

in Chapters 5 through 8.

Trading ratios affect the economics of

trading primarily by changing unit load

reduction costs and the prices negotiated

for purchase of reductions. Ratios greater

than 1:1 may raise trading costs to buyers

and modify profits to sellers.

A ratio of 1:1 indicates an equal exchange

between sources. In Exhibit 3.3, the

trading ratio was 1:1, and Mammoth, Inc.

paid Spruce WWTP to reduce 100 kg/day

of nitrogen and received credit as if it had

reduced 100 kg/day of its own nitrogen

loadings.

As indicated above, there are several

reasons for using a trading ratio other than

1:1. For example, a ratio of 2:1 could

incorporate a margin of safety, while

increasing that ratio to 3:1 could

implement a net reduction strategy. In this

case, the three units of reduction purchased

for one unit of credit are considered as

follows: the first goes toward the credit;

the second provides a margin of safety for
May 1996 Draft

3-6

selling source reductions that are less Trade administrators can take a number of

certain than those from the buying source; steps to minimize transaction costs,

and the third provides greater net loading including:

reductions.

To analyze the economics of a specific clearinghouses.

trade, it is important to include the

consequences of a mandated trading ratio.

Exhibit 3.4 shows how a trading ratio can

affect the economics of a trading situation.

Transaction Costs

Transaction costs are expenses for trading

participants, including public and private

participants and facilitators, that occur only

as a result of trading. Examples of

transaction costs include costs associated

with:

# Identifying potential trading partners.

# Negotiations to implement a trade.

# Additional ambient water quality represents a transaction cost of the trading

monitoring and analysis required for process. For example, although it is up to

trading. the sources involved to propose trading

# Additional documentation of trading

agreements.

# Government and/or private

administration of trades.

Transaction costs normally affect trades by

raising the effective price of pollutant

reductions to buyers and/or the potential

monetary compensation to sellers. Trading

can at times reduce transaction costs for

trading partners if environmental goals are

achieved more quickly than without a

trade. However, high transaction costs can

also partially or totally offset cost savings

associated with trading, thereby negating

economic and environmental benefits that

trading could otherwise achieve.

# Establishing information

# Helping potential trading partners

identify trading opportunities.

# Providing information about relative

water quality impacts of pollutant load

reduction options of eligible sources.

# Setting and communicating clear

procedures and criteria for evaluating

trades.

# Initiating trading programs in areas that

have numerous water quality analyses

and abundant data.

Administrative resources must be used

effectively since the cost of such resources

options, permits that include a trade may

be more challenging to develop than

permits without trades. Decisions on how

increased costs associated with trading will

be divided by the permitting authority and

sources will vary. Governmental

organizations have the capability to help

minimize transaction costs. They can

efficiently fold trading programs into other

water quality programs that require similar

administrative resources.

Evaluation of transaction costs for a

trading opportunity requires careful

consideration of costs associated with

alternative actions. In some instances,

administrative costs for conventional water

pollution control can be higher than those

from trading. All effects of trading on
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3-7

EXHIBIT 3.4: THE EFFECTS OF A TRADING RATIO—A HYPOTHETICAL EXAMPLE

The local water quality district is interested in enhancing water quality in Lake Aqua to the

greatest extent possible. Thus, it wants to use trading to increase water quality more than it

could with conventional control methods. The district has investigated the potential cost

savings to trading participants, and believes that savings will be quite high. Therefore, the

district mandates a trading ratio of 2:1, whereby a buyer must purchase 2 kg of nitrogen

reduction to receive credit for 1 kg of reduction.

Nitrogen discharges into Lake Aqua must be reduced by 200 kg per day. Mammoth, Inc. and

Spruce WWTP are each responsible for reducing 100 kg/day of in-house nitrogen discharges.

In the absence of trading, Spruce WWTP and Mammoth, Inc. are each responsible for

removing 100 kg/day of nitrogen from their own effluent streams. The chart below shows

the per day compliance costs for this scenario.

Mammoth, Inc. Spruce WWTP

Nitrogen Reduction Responsibility 100 kg/day 100 kg/day

Amount of N Reduced In-House 100 kg/day 100 kg/day

Unit Load Reduction Cost $30/kg $10/kg

Compliance Costs Without Trade $3,000/day $1,000/day

Total Nitrogen Removed from Lake Aqua = 200 kg per day

Under the district*s trading scheme with a 2:1 trading ratio, Mammoth, Inc. and Spruce can

comply with water quality standards more efficiently, and less nitrogen will be discharged into

Lake Aqua. In the trade, Mammoth, Inc. purchases 200 kg of N reduction from Spruce

WWTP for $13/kg. Thus, Mammoth, Inc. does not reduce its N discharge, and pays Spruce

$2,600 to reduce its discharge by an additional 200 kg. This transaction is summarized in the

table below.

Nitrogen Reduction Responsibility 100 kg/day 100 kg/day

Amount of N Reduced In-House 0 kg/day 300 kg/day

Unit Load Reduction Cost $30/kg $10/kg

In-House Control Costs $0/day $3,000/day

Payment from Buyer to Seller $2,600/day -$2,600/day

Compliance Costs with Trade $2,600/day $400/day

In-House Savings from Trading $400/day $600/day

Total Nitrogen Removed from Lake Aqua = 300 kg per day

Watershed-wide Savings from Trading = $1,000 per day
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3-8

administrative and other costs should be uncertainty. Other tools such as

considered to determine the net transaction performance bonds can supplement trading

costs associated with trading. documents and further reduce risk and

Exhibit 3.5 provides a numerical

illustration of how transaction costs can

affect a particular trade.

Uncertainty and Its Alleviation

Potential trading partners and other

stakeholders might be uncertain about

some elements of trading and therefore

view trading as risky. Uncertainty can take

many forms. Several examples are

presented below.

# Potential traders might be concerned

that a regulatory agency would annul a

trade. An agency could conceivably do

this if a trade produced lower loading

reductions than expected or resulted in

increased potential for ecological harm.

# Potential traders might question the

longevity of a trading option, resulting

in an unwillingness to make investment

choices that rely on trading.

# Potential traders might be uncertain

about the accuracy of data on pollution

control costs.

Minimizing uncertainty encourages interest

and participation in trades. Reduced

uncertainty often translates into lower

long-term transaction costs, fewer

adjustments in costs to account for

uncertainty, and increased potential for

cost savings. Note that a particular action

to reduce uncertainty might incur costs,

and might itself be counted as a transaction

cost while serving to reduce overall

transaction costs.

Clearly specifying roles and

responsibilities in permits, memoranda of

agreement, contracts, and other trading

documents helps reduce risk and

uncertainty. A performance bond is a sum

of money set aside by a seller at the time of

a trade. If the seller reduces the amount of

pollution it sold in the trade, it reclaims the

money and any interest. If the seller is

unable to reduce its pollutant loading

adequately, it loses the money to a

pollution abatement fund or some other

suitable recipient. Other methods for

reducing uncertainty also can be used by

trading programs.

Number of Trading Participants

The number of participants involved in

effluent trading can change the economics

of trading in several ways. The specific

effects of increasing or decreasing the

number of participants are completely

dependent on the circumstances of a

particular trading situation. Several

general conclusions, however, can be made

about the impacts of increasing the number

of participants.

As the number of participants increases,

the availability of information about water

quality impacts is likely to increase,

resulting in less uncertainty among

participants. Increasing the number of

participants also heightens the probability

of sustaining a trading program over the

long term. This increased probability is

due to the fact that if several participants

decide to withdraw from the program,

enough participants will remain to continue

trading.

Trading programs can attract more

participants by fostering a cooperative

atmosphere, choosing a market area that is

large enough to sustain trading while

meeting water quality objectives, and
May 1996 Draft

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EXHIBIT 3.5: THE EFFECTS OF TRANSACTION COSTS ON EFFLUENT TRADING—A

HYPOTHETICAL EXAMPLE

Recalling from Exhibit 3.3, Mammoth, Inc. and Spruce WWTP are mandated by the local

water quality district to reduce nitrogen loadings into Lake Aqua. This example shows how

transaction costs affect the attractiveness of trading.

For this trade, Mammoth, Inc. and Spruce have calculated their respective transaction costs,

including the costs of negotiation, administration, sampling, inspections, and documentation.

The total transaction cost for each participant is estimated to be $1,000/day. A price of

$20/kg was negotiated for the trade.

Mammoth, Inc. Spruce WWTP

Compliance Cost without trading $3,000/day $1,000/day

Nitrogen Reduction Responsibility 100 kg/day 100 kg/day

Amount of N Reduced In-House 0 kg/day 200 kg/day

Unit Load Reduction Cost $30/kg $10/kg

In-House Control Costs $0/day $2,000/day

Payment from Buyer to Seller $2,000/day - $2,000/day

Transaction Cost +$1,000/day +$1,000/day

Compliance Costs With Trade $3,000/day $1,000/day

In-House Savings from Trading $0/day $0/day

In the above example, trading is not economically attractive because total compliance costs

with trading (including transaction costs) are the same as compliance costs without trading.

Now consider the following example. In this case, an information clearing house has been

established, thus reducing the transaction costs associated with trading. Transaction costs are

$750/day per participant.

Mammoth, Inc. Spruce WWTP

Compliance Cost without Trading $3,000/day $1,000/day

Nitrogen Reduction Responsibility 100 kg/day 100 kg/day

Amount of N Reduced In-House 0 kg/day 200 kg/day

Unit Load Reduction Cost $30/kg $10/kg
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3-10

EXHIBIT 3.5: (CONTINUED)

In-House Control Costs $0/day $2,000/day

Payment from Buyer to Seller $2,000/day - $2,000/day

Transaction Cost +$750/day +$750/day

Compliance Costs With Trade $2,750/day $750/day

In-House Savings from Trading $250/day $250/day

Watershed-wide Savings from Trading $500/day

promoting information exchange.

Developing interest in trading from # Public agencies and/or private

numerous dischargers and obtaining the organizations can assist potential

benefits described above can be especially traders by simply facilitating the flow

important for a new trading program. of information. They can use public

Availability of Cost Data

To assess effluent trading opportunities,

potential traders need to know their own

pollutant reduction costs. This information

enables dischargers to determine whether

they want to enter the market as buyers or

sellers. It also enables them to estimate

their potential cost savings or monetary

compensation from trading using the

methods described in this chapter.

Dischargers can estimate their own

pollution control costs in the absence of

trading. Obtaining information on the

costs of other dischargers could be more

problematic. Information can be shared in

several ways:

# A discharger can advertise that it

wishes to sell pollution reduction

credits at a specified price, thus

providing necessary data for other

potential trading participants.

information outlets to suggest typical

costs of compliance within the

watershed.

# Regulatory agencies and/or private

parties can take responsibility for the

flow of information by facilitating

operation of a market, including

helping to track prices for trades.

It is important to remember that favorable

economic conditions alone are not enough

to promote effluent trading. Trading will

not occur unless potential participants have

access to necessary cost data and other

relevant information.
May 1996 Draft

4-1

CHAPTER 4. IDENTIFYING AND EVALUATING TRADING OPPORTUNITIES

A screening approach helps water quality managers, dischargers, and other stakeholders

apply Clean Water Act and economic principles in a systematic way to take advantage of

options, such as trading, that meet water quality objectives and improve cost-effectiveness.

Where to Begin?

Chapters 2 and 3 introduced a series of

CWA principles and economic concepts

that lay the foundation for successful

trading— from a single trade to a

watershed-wide trading program. The

question remains: How can someone apply

those principles to real-world situations

and identify places where trading could be

a viable option? And once such candidates

are identified, how should someone go

about evaluating how well site-specific

conditions and program choices meet those

principles?

A screening process helps stakeholders

focus on make-or-break issues first—those

conditions which are difficult to change or

accommodate—before moving on to other

issues. For example, if no potential trades

can meet CWA principles, economic and

administrative issues are moot. A

screening process also groups related

issues together to streamline consideration

of many issues. 

The exact order in which someone

addresses relevant issues in a screening

process beyond starting with a water

quality standard depends on who potential

traders are and what their interests and

priorities are. For example, dischargers

might start with a given water quality

objective first, examine preliminary

economic questions second, revisit water

quality issues, and then conduct more

detailed economic analysis, and so forth. 

A screening process can be conducted in

iterations to provide the level of analysis

necessary for evaluative and decisionmaking purposes. 

A Screening Process for Trading

Determining the potential for trading

hinges on three major questions:

1. Are trades consistent with water quality

and other environmental objectives?

2. Will any potential trading partners

benefit from trading?

3. Are administrative arrangements

available to support trading?

Together, these questions form the basis of

a screening process that can help identify

and evaluate potential trading

opportunities. Each of the CWA principles

and economic concepts presented in

Chapters 2 and 3 is represented in at least

one of these questions. 

Stakeholders first begin with a given water

quality objective and then ask whether it is

possible to reach that objective more costeffectively. This approach represents a

bottom-up development process that many

existing trading programs and programs

currently under consideration have

followed.

In practice, the questions above can be

conceptualized as points of a triangle:
May 1996 Draft

4-2

Water Quality Trading will be most attractive if (1)

 Economics •Administration 

After starting with water quality, the

direction taken depends on who you are. 

Further, it might be necessary to go around

the triangle (through the screening process)

more than once to arrive at a final go/no go

decision. The three issue sets described

here are interrelated: how stakeholders

answer and resolve any one set of

questions affects, constrains, and creates

opportunities for other issues. 

This chapter provides two screening

processes that help identify and evaluate

trading opportunities. The first process is

somewhat broad and can be used to

streamline identification of viable trading

opportunities. As described above, three

broad levels of screening criteria can be

used to identify and evaluate potential

trading programs. Level 1 examines how

trading will support water quality

standards; Level 2 determines availability

of economic benefits to trading partners;

and Level 3 examines accessibility to

administrative and institutional support.

The second process is essentially a

checklist of threshold conditions that

should be met for a trading program to

succeed. Together, these screening

processes also can be used to guide design

of a trading program and to measure the

probability of success.

Screening Level 1: Consistency With

Water Quality and Environmental

Objectives

The initial step is to determine whether a

trade will support water quality objectives. 

sources that already meet technologybased requirements are looking for an

alternative way to meet more stringent

water quality-based limits or (2) a number

of sources are faced with further pollutant

reductions to meet an in-stream water

quality standard. 

Clean Water Act provisions establish

guideposts for trading that can be used to

assess a proposed trading program*s

consistency with the statute and

regulations. Trading that is consistent with

water quality standards generally meets the

principles outlined in Chapter 2. The

purpose of Screening Level 1 is to

determine if and how these principles can

be met. 

Screening for consistency with water

quality and environmental objectives can

be accomplished in several ways,

depending on available information. Three

related screening tools are discussed

below: (1) use of existing regulatory

information (2) water quality monitoring

data and simple analysis, and (3) more

complex analysis and the use of computer

simulation models.

After determining that a candidate for

trading can satisfy CWA provisions, it is

essential to note any adjustments in trading

proposals that might be necessary to ensure

compliance with the CWA. These

adjustments should then be reviewed to

ensure that economic benefits identified

under Screening Level 2 are preserved. 

Regulatory Information. A review of

regulatory documents, such as NPDES

permits, local ordinances, and compliance

reports, helps determine whether

technology-based requirements are in place

where appropriate. The effective dates of
May 1996 Draft

4-3

enforceable requirements provide a context Where ambient data are unavailable, or of

for evaluating where a potential trader suspect quality, it might be possible to

stands with respect to applicable identify and evaluate potential trading

technology-based requirements. Permits candidates using relatively simple

and management plans usually indicate calculations (e.g., mass balance). 

how long such enforcement mechanisms However, for trades involving nonpoint

have been in place and when they are sources, it might be necessary to gather

scheduled for review, renewal, or revision. additional ambient data. 

Reviewing the language and structure of Complex Analysis and Models. While

such tools can help determine whether simple calculations using available data

trading arrangements can be incorporated might be adequate, a variety of computer

into existing enforcement mechanisms. models are available to help understand the

This review also provides assurances that potential effects of trading on water quality

trades would be consistent with the anti- (although some computer models might be

backsliding requirement. When regulatory too complex for screening purposes). 

documents and proposed trades are Models are used to understand how

complex, discussions with appropriate pollutant loads and waterbody responses

permit writers and managers can clarify change with trades, considering spatial,

expected trading effects. temporal, and chemical parameters. In

Data and Simple Analysis. Ambient and

effluent water quality monitoring data and

analysis can help determine if potential

trades meet the principles outlined in

Chapter 2. Where data and analytical tools

are available, analysts can estimate impacts

of reallocations of pollutant loading

reductions or other water quality

improvements in a manner that might

occur under trading. 

Various analyses can indicate what trades

are likely to support water quality and

enhance compliance with the antidegradation policy. Analysis also can

identify what types of trades might create As described in Chapter 3, cost savings are

localized effects and threaten ambient or a primary attraction to trading among

local standards. Additionally, when sources of pollution. Dischargers will be

assessing potential trades, dischargers* interested in buying or selling water quality

geographic locations should be identified, improvements when such transactions

noting any special considerations, such as reduce their costs to meet environmental

shallow streams, dissolved oxygen sags, or objectives. They also will be interested if

poorly mixed areas (e.g., embayments, trading allows expansion of an existing

lagoons). facility or location of a new source that

many cases, these models can provide the

information needed to evaluate the

compliance of trading actions with CWA

provisions. More sophisticated analysis

may be necessary where trading is

considered for complex waterbodies,

numerous potential traders, or pollutants

for which precise safeguards are required. 

EPA*s Compendium of Watershed-Scale

Models for TMDL Development (EPA

841-R-92-002, June 1992) provides

detailed information on available models.

 Screening Level 2: Economic Benefits to

Trading Partners

would not have been possible without
May 1996 Draft

4-4

trades. Where economic benefits are # Potential traders use different

unavailable, interest in trading by pollution technologies to treat effluent (including

sources is likely to be weak. older treatment equipment)—Unit load

To determine if dischargers might be

interested in trading, stakeholders might

want to estimate a unit load reduction cost

for each potential trader. A list of these

costs can provide a range of cost

reductions. The size of unit cost

differences among potential traders is a

good indicator of the strength and stability

of economic benefits from trading. 

Another useful indicator is the magnitude

of cost savings that dischargers can realize. 

Therefore, stakeholders in trading should # Potential traders treat effluent to

estimate the total amount of pollution different degrees—As a discharger gets

reduction that can be traded among closer to removing 100 percent of a

dischargers. This estimate, along with pollutant from its effluent, it is more

information on unit costs, can be used to likely to incur higher pollution control

compute the total cost savings available costs. In fact, the cost of pollution

from trading. control tends to increase at an

If it is not possible to obtain preliminary

estimates of incremental unit load

reduction costs, stakeholders may examine

many other characteristics of potential

traders that indicate differences in unit

costs. Several such characteristics are

listed below.

# Potential traders are numerous—The

probability of finding dischargers with

different unit load reduction costs

increases as the number of dischargers

increases. Where water quality objectives and

# Potential traders treat varying amounts

of effluent—As discussed in Chapter 3,

dischargers that treat larger amounts of

effluent tend to have lower unit costs. 

Thus, if some dischargers treat different

amounts of effluent than others, there

are likely to be differences in unit costs.

reduction costs are dependent on the

equipment and technology used to treat

effluent. Usually, newer technology is

more efficient and can achieve lower

unit costs over the long term. Older

treatment technologies, on the other

hand, might be less efficient, resulting

in relatively higher unit costs. 

Therefore, dischargers with different

technology levels are likely to have

different unit costs.

increasing rate the closer a discharger

gets to full removal of a pollutant. 

Therefore, potential traders treating

varying percentages of their pollutant

loads are likely to have different unit

load reduction costs (although similar

facilities generally use similar

technologies and treat to similar

performance levels).

Screening Level 3: Coordination and

Administrative Support

economic benefits appear achievable, the

last level of the screening process

addresses the administrative feasibility of

trading. Screening Level 3 asks the

question: Do potential traders—public

and/or private—have sufficient resources

and a cooperative setting in which to

administer a trading program? Important

issues to examine are identified below.
May 1996 Draft

4-5

# Matching administrative capabilities to precursor to developing and

the scope of trading activities—Careful implementing a trading program. 

attention should be given to matching Trade administrators should receive

the level of administration to the scope watershed-wide support for trading

of trading. Overly complex or programs before development and

centralized administration establishes implementation.

unnecessary technical and budgetary

requirements that raise costs associated

with participation. Alternatively,

inappropriately weak or decentralized

structures fail to provide necessary

support and place a greater burden on

participants to identify each other and

establish trades. As the number of

participants increases, trading might

benefit from more formalized

administration (which again, can be

publicly and/or privately provided) that

can provide clearinghouse and

facilitation functions.

# Information needs of participants—

When participants have adequate

access to information about trading

options and potential trading partners,

cost savings can be maximized. Useful

information relates to who is trading

what, where and when, and at what

price. Trade administrators should be

able to facilitate information flow. 

# Institutional responsibilities—Many

organizations play a role in trading,

necessitating clearly defined

responsibilities. Assigning

responsibilities requires creative use of

existing institutional structures to

maximize effectiveness and minimize

the need for additional resources. 

Local institutions (public and/or

private) are likely to be more effective

than state or federal agencies alone for

site-specific trading programs.

# Consensus on the role of trading—

Achieving consensus is an important

# Tracking and documenting trades—

Trade administrators need to have the

capability to track and document

trades. Such capability is essential to

ensuring compliance with traded

responsibilities. Tracking also provides

a storehouse of information that is

important to potential traders. A

number of options are available to

conduct any necessary tracking. For

example, trading parties and/or a

regulatory agency could assume

responsibility.

# Ongoing monitoring—In addition to

tracking trades, administrators need to

be able to track the impacts of trades on

water quality. As discussed in Chapter

2, once trades are initiated, ongoing

ambient and effluent monitoring data

are needed to determine whether trades

are meeting water quality standards and

traders are meeting applicable limits.

# Accountability and enforcement—

Organizations responsible for trading

programs need to have access to

enforcement mechanisms that allow

them to uphold all provisions of the

trading program and meet requirements

of the CWA.

Template of Favorable Conditions

The three-level screening process

described above can assist in determining

whether a particular trading opportunity

satisfies broad criteria for success. Moving

from Level 1 to Level 3 sequentially
May 1996 Draft

4-6

provides an efficient way to screen out

weak candidates and focuses attention on

stronger ones.

Each broadly drawn criterion comprises

several narrow, specific criteria. Many of

these specific criteria represent CWA

principles for trading identified in Chapter

2 and economic conditions described in

Chapter 3. Others are separate conditions

or situations that are important for

successful trading. Together, these

principles form a set of favorable

conditions for trading. As more of these

conditions can be met, a more solid

opportunity exists to use trading as a costeffective and ecologically sound water

quality management tool.

These conditions can be incorporated into

a screening process that may be applied to

a potential trading program subsequent to

the broad three-level process. The

conditions might also serve as a valuable

design checklist when preparing a trading

program for implementation.

The conditions listed in the checklist below

apply to all types of trading discussed in

this framework. These general conditions

provide a template that is the basis for the

type-specific checklists provided in

Chapters 5 through 8.
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4-7

WORKSHEET FOR FAVORABLE CONDITIONS FOR TRADING

Legal and Regulatory Conditions

General:

• Is trading implemented within the context of Clean Water Act statutory and regulatory yes

requirements ? no

Specific:

• Is trading consistent with applicable technology-based requirements? yes

no

• Are resultant conditions from trading expected to achieve water quality standards? yes

no

• Is trading consistent with the anti-degradation policy? yes

no

• Is trading consistent with anti-backsliding requirements? yes

no

Economic Conditions

General:

C Can dischargers save or make money by trading (i.e., are there economic incentives to yes

trade)? no

Specific:

• Are total incremental costs for pollution reduction, which include direct incremental yes

costs and transaction costs, different among dischargers? no

• Do cost differentials among dischargers allow one discharger to reduce pollution more yes

cheaply than another? no

• Are transaction costs less than cost savings from the trade? yes

no

• Do cost savings from trading outweigh the uncertainty that dischargers face under yes

trading schemes? no

• Is there a sufficient supply of pollution reduction for sale, and a reasonable demand to yes

buy reduction credits? no

• Are potential aggregate savings to a trading candidate large enough to attract serious yes

interest? no

Data Availability Conditions

General:

• Are the data necessary to implement a trading program available or estimable? yes

no

Specific:

• Are there are enough data to understand pollution quantities and flows within the yes

watershed (e.g., have water quality authorities conducted a TMDL)? no

• Can regulatory authorities monitor water quality across the trading area and points of yes

discharge under trading? no

• Can dischargers estimate their direct costs of reducing a specified unit(s) of pollution? yes

no

• Can dischargers estimate transaction costs that they would have to pay to conduct yes

trades? no
May 1996 Draft

4-8

Administrative and Institutional Conditions

General:

• Are governmental authorities and potential trading participants capable of administering yes

a trading program? no 

Specific:

• Do governmental authorities have enforcement mechanisms to ensure trades are being yes

implemented correctly and applicable limits are being met? no

• Is information about trading partners readily available so that buyers and sellers can yes

coordinate? no

• Are responsibilities clearly defined for institutions and dischargers taking part in yes

trading? no

• Is the scope of administrative infrastructure compatible with the amount and complexity yes

of the trading that is expected? no

• Has the administering agency established who is accountable for implementing yes

measures to reduce pollutant loading? no

• Has the administering agency established who is accountable for water quality yes

improvements? no

• Is the agency that enforces trading provisions able to give necessary feedback to parties yes

responsible for water quality? no
May 1996 Draft

5-1

EXHIBIT 5.1: POINT/POINT

TRADING SOUTH SAN FRANCISCO

BAY

The San Francisco Regional Water

Quality Control Board directed three

POTWs and a stormwater management

agency to negotiate how together they

could achieve a 900-pound-per-year

reduction in copper loadings needed to

meet TMDL allocations. The 900 lb/yr

reduction target exceeds reductions San

Jose, Palo Alto, and Sunnyvale POTWs

and the Santa Clara Valley Nonpoint

Source Pollution Control Program have

already achieved to meet their WLAs. 

The four parties will report back to the

Board to specify how the additional

reduction target will be met, including

identifying specific responsibilities. 

Options include point/point trading

between some or all parties.

Source: USEPA Region 9, personal

communication, October 1995.

CHAPTER 5. POINT SOURCE/POINT SOURCE AND INTRA-PLANT TRADING

Point/point source trading involves two or more dischargers, enabling one facility, in lieu

of upgrading its own pollution controls, to arrange for greater than required controls at a

second facility that can further reduce pollutant loads more cost-effectively. Intra-plant

trading allows a single facility that maintains multiple outfalls to allocate pollutant

discharges among them in a cost-effective manner.

Introduction

Both point/point source trading and intraplant trading involve trading between point

sources. The Clean Water Act (CWA)

defines a point source as “any discernible,

confined and discrete conveyance ... from

which pollutants are or may be

discharged.” Point/point trading involves

two or more facilities, and intra-plant Effluent characteristics, economic

trading involves only one. incentives, treatment options, financial

Point/point and intra-plant trading are

unique among types of trading discussed in

this framework in that all potential trading

parties are subject to the same regulatory

regime—National Pollutant Discharge

Elimination System (NPDES) permits. As

a result, many issues related to these trades

are relatively straightforward and/or are

addressed according to established

protocols, compared to other types of

trading. Nonetheless, site-specific water

quality conditions and effluent

characteristics of the particular trading

partners involved will determine whether

contemplated trades warrant any special

considerations, analyses, or administrative

arrangements to supplement NPDES

permits.

Additionally, even though point sources

are regulated by the same permit program,

the cast of potential trading partners in any

watershed or segment can be quite diverse.

A watershed*s point sources could include

discharges from municipal treatment

plants, industrial facilities, federal

facilities, active and inactive mines, and

large concentrated animal feedlots, as well

as any stormwater collected and discharged

through a discrete outfall. The diversity of

point sources in a watershed can create

opportunities for trading, as illustrated in

Exhibit 5.1.

capabilities, experiences with permit

authorities, and/or familiarity with other
May 1996 Draft

5-2

permittees will differ among point sources. As noted in the Executive Summary and

When trading involves more than one type Chapter 2, both point/point source trading

of point source, such differences might and intra-plant trading take place within

require some attention. the context of the NPDES program. Like

5.1 Regulatory Issues

Both point/point source trading and intraplant trading may help achieve water

quality standards when technology-based

discharge limits are insufficient to do so.

Under point/point source trading and intraplant trading, all point sources would still

meet technology-based requirements. The

only instance in which EPA has authorized

an intra-plant trade to meet technologybased requirements is in the iron and steel

industry. (See Appendix B.) It is unclear

whether future effluent guidelines will

allow this form of intra-plant trading.

Beyond technology-based requirements,

dischargers would be free to exchange

pollution reduction requirements between

outfalls, subject to criteria established by

permit authorities. In point/point source

trading, municipal and industrial facilities

could buy and sell or otherwise exchange

pollution reduction requirements, provided

that resulting changes in allowable

discharges are consistent with water quality

standards and comply with the principles

identified in Chapter 2. Revised limits are

then incorporated into dischargers* permits

by the permitting authority.

In intra-plant trading, a facility with enhance compliance with a state antimultiple outfalls could negotiate revised degradation policy depends on whether

permit limits with the permit authority, receiving waters in question are Tier 1, 2,

enabling it to allocate its total pollutant or 3. The implications of anti-degradation

load across outfalls in a cost-effective policies for trading also will depend on

manner while attaining water quality each state*s approach. It will be necessary

standards and complying with other trading to ensure compliance with the specific

principles. requirements of the state*s anti-degradation

conventional NPDES permits, permits for

point sources engaged in a trade contain

specific effluent limits for each outfall.

These limits must reflect the results of any

trade.

In addition, terms of trades can be

documented in the special conditions

section of permits and incorporated into

permit compliance schedules, though

additional monitoring may be required.

Incorporating results of trades into NPDES

permits for each involved facility will

ensure that permittees are clearly

accountable for compliance. NPDES

permits may be issued in the context of a

total maximum daily load (TMDL). (The

role of TMDLs in trading is discussed in

more detail in Chapter 7.)

In addition to documenting trades in

effluent limits, NPDES permits issued to

point sources engaged in trades must be

developed in a manner consistent with the

anti-degradation policy and antibacksliding requirements of the CWA.

The implications of these requirements for

trading are described below.

Anti-Degradation Policy

The extent to which point/point trading can

policy before enacting a trade.
May 1996 Draft

5-3

# For waters where water quality is not The CWA, however, allows backsliding

better than fishable/swimmable (Tier from a water quality-based effluent limit

1), trading can be incorporated into the (WQBEL) in two situations:

development of a new TMDL,

providing a means of reducing

pollutant loads, attaining water quality

standards, protecting existing uses,

and/or improving water quality to a

Tier 2 level at less cost.

# For waters that are better than with water quality standards.

fishable/swimmable quality (Tier 2),

point/point source trading might offer a

means of accommodating important

economic or social development and

result in less degradation than a nontrading option, and/or provide other

benefits to the community (e.g., lower

wastewater treatment rates). In these

areas, new dischargers could trade with

existing dischargers to reach a costeffective reallocation of pollutant loads.

# Similarly, for Outstanding Natural

Resource Waters (Tier 3), trading

might be the only means of

accommodating new dischargers,

provided that current high levels of

water quality will be maintained.

Anti-Backsliding Requirements

CWA anti-backsliding requirements are

met by point sources trading in

waterbodies that are newly water-qualitylimited, or where wasteload allocations

(WLAs) are being revised downward. In

such cases, point sources face loading

reduction requirements above what they

are already achieving. Point sources

buying loading reductions could continue

discharging at current limits with permits

no less strict than those in place before

trading. Point sources selling reductions

end up with stricter limits.

1. Where a waterbody is not attaining its

water quality standard, a limit may be

relaxed only if a TMDL or WLA has

been performed establishing a new

limit and implementation of that

TMDL/WLA will ensure compliance

2. Where a waterbody is attaining its

water quality standards, a limit may be

relaxed only if requirements of the antidegradation policy are being met.

Most trades will allow a point source to

meet new pollutant reduction requirements

more cost-effectively by arranging for

treatment by another source. If a trade is

implemented through a TMDL, a point

source might receive a reduced WQBEL as

a result of the trade. A reduced WQBEL

would be part of a suite of pollution

controls that would attain water quality

standards.

Reopener Clause

As a further protection against the

possibility that trading might cause adverse

water quality effects, permitting authorities

can invoke a reopener clause in any

NPDES permit. This clause gives permit

agencies the power to alter discharge limits

at any time during the life of a permit if instream surveys, improved water quality

modeling, or other factors indicate that a

modification is necessary.

5.2 Economic Issues

The economic benefits of point/point

source trading and intra-plant trading can

be substantial. While experience to date
May 1996 Draft

5-4

with point/point source trading is limited, control become more stringent and more

EPA estimates that potential pollution sophisticated and expensive technologies

control cost savings associated with this are required. As a result, it might be more

form of trading might reach as high as $1.9 expensive per unit to reduce the effluent

billion per year, according to an analysis of concentration of a pollutant from 2 mg/l to

benefits and costs prepared for President 1 mg/l than to reduce the concentration

Clinton*s Clean Water Initiative (USEPA, from 20 mg/l to 2 mg/l.

Office of Water, March 1994, EPA 800-R002). Similar national estimates for intraplant trading are not available.

Unit Cost Differences

Dischargers* motivation to trade will be

strongest when the potential cost savings

associated with trading are high. As

discussed in Chapter 3, cost savings are

possible when incremental costs of

reducing pollution differ from source to

source. In the case of point sources,

differences in incremental costs might arise Transaction Costs

for a number of reasons.

Economies of scale—the tendency for

average pollution control costs to fall as

volumes of effluent to be treated

increase—are one common factor. As

noted in the introduction to this chapter,

many types of point sources can exist

within a watershed. Some types tend to

discharge much greater amounts of effluent

than others. For instance, a large

wastewater treatment plant is likely to

discharge higher volumes of effluent than a

small paper mill. This situation creates

opportunities to take advantage of

economies of scale. The same situation

also can exist for a single plant (i.e., intraplant trading) in cases where a plant has

outfalls that discharge varying volumes of

effluent.

Another factor that is likely to create

differences in incremental control costs is a

tendency for the cost-effectiveness of

pollution control to diminish as levels of

Potentially, point sources in a watershed

differ significantly in the level of treatment

currently achieved. Even though they all

operate under the NPDES regulatory

system, differences in technology-based

requirements among different industries

might result in different pollutant

concentrations. Additionally, age of

facility and treatment processes are factors

in relative current pollutant loadings

among dischargers.

As discussed in Chapter 3, transaction

costs (the costs incurred in identifying

potential partners, negotiating and

documenting a trade, and soliciting and

maintaining regulatory approval for a

trade) can significantly affect trading.

Methods available to reduce transaction

costs can involve some level of

governmental and/or private action (e.g.,

clearinghouse, facilitator). Since point

sources are already regulated under the

NPDES permit system, government

agencies and industries may prefer a more

market-like approach to trading that avoids

significant government roles beyond the

NPDES process.

Other Economic Considerations

A number of other economic

considerations may influence point

sources* interest in trading. Many point

sources are profit-seeking businesses that

work within the setting of the market
May 1996 Draft

5-5

economy. Given this setting, interest in whether a rate board would allow a POTW

trading might depend not only on the to pay another source for loading

absolute magnitude of potential cost reductions credited to the POTW (POTW

savings (net of all transaction costs), but as buyer), and whether a rate board would

also on the relative size of those savings allow a POTW to overcontrol and sell a

compared to overall operating costs (e.g., portion of its additional reductions to other

total production costs for an iron and steel sources (POTW as seller).

manufacturer). If the benefits of trading

outweigh associated costs, but returns on

investments in trading have little overall

impact on a discharger*s total operating

costs, the discharger might choose to

devote its limited resources to endeavors

that promise greater returns.

Further, trading programs might be most operators felt that their rate boards and the

successful when they are organized to public would view even a partial reliance

include a range of industries, or when on trading as risky, given the need to make

neutral parties broker trades. Firms in the financial investment decisions for future

same industry could be reluctant to share plant operations well in advance of an

sensitive information due to competitive actual need for additional capacity or

pressures. treatment capabilities.

Point sources subject to financial

regulations might face economic incentives

for a particular trading scenario that are

different from those of unregulated

sources. An example of a financially

regulated point source is a POTW that

charges rates approved by a public utilities

commission. Such POTWs undergo

review processes in which commissions

verify the authenticity of POTW-reported

costs. The review process keeps POTW

rates in line with costs.

Because such POTWs have to justify all potential effects of alternative discharge

costs and expenditures to be able to charge limits on water quality.

a given rate, they will want to discuss

potential participation in a trading program

with the appropriate utility regulator.

Some rate boards might be averse to

POTWs’ participating in a new program

such as trading; other rate boards might

encourage trades if they are economically

justifiable. Specific questions include

For example, when EPA*s Chesapeake

Bay Program identified potential

point/point trading opportunities among six

POTWs discharging to the lower Potomac

River, several plants raised concerns about

how they could incorporate trades into

their capital planning process. Many

5.3 Data-Related Issues

Dischargers and permitting authorities will

be interested in obtaining a range of data in

order to implement a trading program. To

formulate a trading proposal, dischargers

need information on current or proposed

permit limits and pollution reduction goals;

current pollutant discharges; and the cost,

applicability, and effectiveness of

alternative pollution control methods. To

assess the acceptability of potential trades,

dischargers also may want to evaluate

With the exception of cost data, permitting

authorities will need similar information to

evaluate proposed trades. Cost data may

also be of value to permitting authorities if

their interests include tracking the

economic benefits of trading. This

information might be particularly useful,
May 1996 Draft

5-6

for example, in documenting the limits, can usually be obtained from public

accomplishments of an agency*s trading sources—in this case, NPDES permittees*

program and encouraging other agencies to Discharge Monitoring Reports (DMRs).

initiate similar efforts. Dischargers typically file these reports on a

EPA maintains a number of databases that

can provide useful information in support

of trading programs. For example, EPA*s

Permit Compliance System maintains

information on current pollutant loadings

and permit limits. Similarly, the STORET

system and EPA*s Waterbody System can

provide information on water quality

conditions, and the Agency*s Treatability

Database is a source of data on applicable DMR requirements are a main difference

treatment technologies. These centralized between point/point and other types of

sources might not, however, contain the trading with respect to data availability.

most current information available or DMRs provide by far the most complete

provide sufficient detail on site-specific pollutant release information in any

conditions. Potential sources of more medium and for any source. Furthermore,

detailed and current information are DMRs contain actual releases, rather than

described below. permitted releases, as some forms of

Current or Potential Future Permit Limits

Some of the information that will support

trading is readily available from public

sources. For example, NPDES permits

specify current permit limits, and Both dischargers and permitting authorities

information on these limits can be obtained can obtain general information on the cost,

from the permitting authority. Also, applicability, and effectiveness of

permitting authorities may publish alternative pollution control methods from

documents related to TMDL development EPA effluent guideline development

and proposed wasteload allocations that documents and similar sources, as well as

provide information on potential pollution from trade associations and other industry

reduction requirements beyond organizations. These sources, however,

technology-based requirements and water are designed primarily to provide rough

quality impacts. More general data on estimates of the cost or effectiveness of

applicable water quality standards should alternative methods, not to provide detailed

be available from the local permitting assessments for application to a particular

authority, the states, or EPA. facility. To avoid mischaracterizing the

Loadings

Data on current point source loadings, like

information on current or proposed permit

monthly basis, providing data on effluent

flows and the concentrations of each

pollutant in their discharge that their

permits require them to monitor. In some

cases, DMRs might not include data on all

pollutants of concern. Supplemental

information might be obtained as part of

the TMDL development effort or through

special monitoring studies.

reporting do. As a result, DMR provides a

better picture of the real world than permits

alone.

Control Options

cost-effectiveness of control options

available to them, dischargers or other

interested parties can complete more

detailed, plant-specific assessments before

proposing a trade.
May 1996 Draft

5-7

In conducting such assessments, Even so, several typical data gaps are

dischargers are encouraged to consider notable and might necessitate special

pollution prevention practices as well as sampling. For example, despite an

end-of-pipe treatment. In many situations, abundance of effluent data, little

pollution prevention can be more cost- documentation of ambient water quality

effective than end-of-pipe treatment in downstream from point sources exists.

achieving pollution reduction goals. Additionally, mixing zone data are

Facilities that explore pollution prevention especially rare.

opportunities might be better positioned to

discharge at lower levels than those set in

the NPDES limits they would have had in

the absence of trading and to offer

pollution reductions in trades with other

dischargers. State and EPA regional

pollution prevention coordinators might

prove to be a good source of pollution

prevention ideas.

Water Quality Impacts

An assessment of trading water quality quality analysis for trading.

impacts might involve water quality

modeling and analysis. Data needed for

such efforts will depend on the

sophistication of the analyses, the

pollutant(s) involved, and the nature of the

receiving waters.

If trading is integrated into TMDL mixing zone. Mixing zone effects, as well

development processes, the analytic effort as downstream effects, depend in part on

should be no different than that ordinarily spatial, temporal, and chemical differences

required. If trades are negotiated following between trading partners* loads.

initial development of TMDLs, permitting

agencies will likely evaluate proposed

trades—or ask dischargers to evaluate

proposed trades—using analytic techniques

like those employed in developing the

original TMDLs. If this is the case, data

requirements for trading analyses should

be similar or identical to those for the

original TMDL efforts. Additional data

should be necessary only if permitting

authorities employ specialized approaches

to analyze proposed trades.

5.4 Technical and Scientific Issues

As noted earlier, technical and scientific

issues facing point/point and intra-plant

trading revolve around the fact that such

trading produces additional load reductions

at sellers* outfalls rather than at buyers’

outfalls, where additional reductions would

otherwise occur. As a result, assessing

trading effects at the edge of mixing zones

and downstream is a key part of any water

Point source discharges must meet permit

limitations. If the permit limit is based on

the protection of the water quality rather

than technology-based effluent guidelines,

the limit is probably based on meeting

water quality standards at the edge of the

Local Conditions

A key factor in evaluating trades is the

need to ensure attainment of water quality

standards and protect against adverse

effects on the aquatic environment in the

immediate vicinity of a point source

outfall. This is a special concern in the

case of pollutants that do not degrade or

decay, such as metals, as well as with other

pollutants that can bioaccumulate, with

resulting toxic effects on aquatic life.
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Careful analysis of such trades, including also have different water quality impacts,

the potential impacts of spatial or temporal depending on the flow and temperature of

variations in loadings, will be necessary to receiving waters at particular times.

ensure that the creation of local “hot spots”

or “dead zones” is avoided. To facilitate

this type of analysis, procedures for

conducting local water quality evaluations

can be based on those which permitting

agencies currently employ in establishing

water quality-based effluent limits (i.e.,

current state or regional policies on the use

of mixing zones and the application of

acute vs. chronic water quality criteria).

Spatial Considerations

The effect of trades on water quality will

depend, in part, on where trading partners

are located relative to each other in

watersheds and segments. Distances

between partners and existing water quality

conditions (e.g., assimilative capacity,

levels of non-traded pollutants) at, near,

and between traders* outfalls are factors in

how well additional reductions at sellers*

outfalls will maintain or improve overall

water quality in the area of concern.

Temporal Considerations

Many point source loads are relatively authorities might also need to evaluate the

constant and predictable over time, as effects of trading arrangements on

allowed by their NPDES permits. Among loadings of pollutants other than those

the different types of point sources, and explicitly traded, to ensure that no

even among same-type point sources, inadvertent violations of water quality

however, temporal characteristics of loads standards result. For example, if trading of

can vary dramatically. For example, conventional pollutants shifts additional

loadings from combined sewer systems load reductions to a discharger whose

and sanitary sewers with inflow are highly effluent also contains certain toxics, the

influenced by rainfall. Feedlot and resulting effect on toxic loadings is worth

stormwater loadings also are weather- examining. Permitting authorities can ask

dependent. Loadings from other types of dischargers to reformulate trading

point sources, such as industrial proposals if the projected impact on other

dischargers and mining operations, can pollutants would threaten to violate permit

vary according to production cycles and conditions or water quality standards.

processes. A given unit of pollutant will

Several simple analytical techniques can

help compare loads from different sources.

Calculating daily, monthly, or annual

average loadings (whichever period is most

appropriate) is one approach. More

sophisticated analyses involving time

series data are also options. Such

comparisons should factor in seasonal

differences in loadings and/or assimilative

capacity (e.g., dry seasons), as necessary.

Chemical Considerations

Chemical differences can exist between the

same pollutant coming from different point

sources. Point source pollutants typically

reach waterbodies in dissolved form, but

pollutants from sources where discharges

have come into contact with land or other

materials (including soils, asphalt, and

other conveyances) might be attached or

adsorbed to sediment. Such differences

should be accounted for in water quality

analyses conducted to support trading.

In reviewing proposed trades, permitting
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5-9

Addressing Considerations

A variety of tools are available to

permitting authorities and dischargers to

accommodate differences between trading

partners* loadings and their effects on

water quality. TMDL margins of safety,

discussed in Chapter 7, are one approach. The existence of a well-established

The use of trading ratios, introduced in institutional framework within which

Chapter 3, also can accommodate point/point source and intra-plant trading

differences between loadings for the can occur simplifies the implementation of

purposes of trading. these types of trading programs.

Trading ratios (also sometimes referred to

as “offset ratios”) may be used to guard

against the creation of hot spots, to provide

a margin of safety against uncertainties in

water quality modeling, or even to create a

buffer to accommodate future discharge

growth. It is important to note, however,

that the use of trading ratios can dilute or

possibly eliminate incentives to trade since

the costs associated with achieving more As outlined below, the need for new

stringent control through trading might procedures might be greater if permitting

outweigh potential cost savings that would authorities choose to implement a more

otherwise be achieved. While permitting structured program for the review and

authorities can employ trading ratios in an approval of trades following initial

effort to ensure that trades result in water development of a TMDL. Involving all

quality improvements, they should interested parties—including dischargers,

recognize that stringent trading ratios local government agencies, community and

might eliminate the potential economic environmental groups, and the general

benefits of trading. public—in the development of these

5.5 Institutional Issues

Few, if any, institutional modifications for

point/point source trading and intra-plant

trading programs may be necessary. Both The initial design of a point source trading

take place within the context of the program involves consideration of a

existing NPDES program, which provides number of issues. These include:

a well-established framework for

interaction between the permitting

authority and point sources that wish to

participate in a trading initiative. In

addition, the NPDES program provides

established procedures for inviting

environmental groups and other interested

parties, including the general public, to

comment on proposed permit conditions.

These procedures can be employed to

invite public review and comment on

proposed trades.

Nonetheless, permitting authorities might

wish to modify current procedures to

facilitate trading implementation. These

modifications are likely to be modest when

permitting authorities adopt informal

trading programs, under which they

encourage dischargers to propose

alternative limits as an integral part of

TMDL development processes.

procedures will give trading programs the

greatest possible chance of success.

5.6 Administrative Issues

# The process by which the permitting

authority establishes initial pollutant

load allocations among contributing

dischargers.
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# Whether the permitting authority will consistent with standard wasteload

require dischargers to employ trading allocation procedures, such as requiring all

ratios of greater than 1:1. dischargers to achieve a proportional

These issues are discussed in more detail

below. These procedures can vary significantly

Initial Allocation

Trades should begin with identification of

the pollutants of concern, the dischargers

contributing to the pollution problem, and

the total reduction in pollutant loads

needed to meet water quality standards.

This can be accomplished through the

development of TMDLs and/or WQBELs.

Once the state (or, if EPA disapproves the

state*s TMDL, EPA) determines the

TMDL for a specific pollutant, load

reductions needed to reduce pollution to

levels established in the TMDL are

allocated among the contributing sources.

The initial allocation can have a significant

effect on the economic positions of

potential participants in a trade since it Once the basic design of trading programs

establishes discharge limits with which a is defined, it will be necessary for

source must comply if it cannot trade for permitting authorities to establish standard

additional discharge credits. All other operating procedures. In particular,

factors being equal, the more expensive it permitting authorities will need to establish

will be for a source to comply with its conditions, standards, and procedures for:

initial allocation, the more the source will

likely be willing to pay to acquire pollution

reduction credits from other dischargers.

Nevertheless, a discharger that can

inexpensively comply with its initial

allocation could be well-positioned to

invest in additional pollution controls,

thereby creating pollution reduction credits

that it could trade to other dischargers.

Permitting authorities have several options

in establishing an initial allocation prior to

trading. From an administrative

standpoint, a simple and equitable option is

to allocate loads in a manner that is

reduction in current loads.

across states and EPA Regions. EPA*s

Technical Support Document for Water

Quality-based Toxics Control (EPA/505/2-

90-001, March 1991) lists 19 allocation

methods and indicates that regulatory

agencies can apply any other strategy that

meets applicable legal requirements.

Under current practice, however, most

states or EPA Regions allocate loads to

dischargers using methods that impose

similar effluent limits or require equivalent

reductions in pollutant loads.

Based on initial allocations, the state can

work with dischargers to determine if any

point/point trades are appropriate.

Program Operation

# Submitting proposed trades for the

authority*s consideration.

# Evaluating proposed trades.

# Establishing appropriate timeframes for

review and approval/disapproval of

proposed trades.

# Incorporating approved trades into

permits and TMDLs.

# Ensuring public participation in trading

program development and

implementation.
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For example, permitting authorities should transaction costs is to tie trading to the

specify information that dischargers will be permitting authority*s standard permit

required to include in trading proposals, as renewal cycle (e.g., every 5 years). This

well as the form in which proposals should might be particularly attractive to

be submitted. In some situations, this may permitting authorities that move toward

include asking dischargers to develop watershed permitting strategies that

water quality analyses to support their synchronize the permit development

trading proposals, and to provide process for all dischargers in a geographic

documentation of approved analytic region.

methods and results as part of their

submission.

If permitting authorities make this request, to the duration of the involved dischargers*

they should identify in advance any permits. Notably, the CWA currently

recommended methods and standard prohibits permit terms of greater than 5

assumptions (e.g., the minimum flow years. Granting trades the longest possible

condition to be employed in evaluating term would help dischargers to predict

achievement of water quality-based accurately the value of acquiring or selling

effluent limits). This will help to ensure discharge credits, and to make investments

that dischargers submit trading proposals in pollution control accordingly.

that are well formulated and fully

documented, and will facilitate the review

of proposals by the permitting agency.

In addition, all parties will benefit if and add permit conditions needed to

permitting authorities clearly define comply with trading principles. Tying

procedures and standards they will employ trading to a permitting authority’s standard

in evaluating proposed trades, including permit renewal cycles offers advantages to

the methods by which they will verify both the permitting authority and

results of dischargers* water quality dischargers. For this reason, EPA

analyses. If these standards and encourages dischargers interested in trades

procedures are articulated clearly, both the to submit proposals at least a year before

dischargers* transaction costs and their permit expires.

permitting authorities* administrative costs

can be kept to a minimum. To the extent

that permitting authorities incur additional

administrative costs resulting from trading,

they can examine opportunities to recover

those expenses.

Trade Timing, Frequency, and Duration

An additional administrative issue is the

establishment of conditions governing the

timing, frequency, and duration of trades.

One option that would help to reduce

In addition, transaction costs may be

minimized by tying the duration of trades

As discussed in Chapter 2, trades may

occur outside the TMDL process where

permits are revised to adjust effluent limits

Consideration of trading proposals

submitted in between permit cycles will be

at each permitting authority*s discretion.

Reopener clauses provide opportunities to

accommodate dischargers that negotiate a

trade after permit limits are issued by

reopening participating dischargers*

permits and incorporating revised limits. A

disadvantage of this approach is the

additional administrative burden on

permitting authorities.
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Nonetheless, the potential benefits of available, its organization into a useful and

trading might justify the additional easily understood format would help

administrative cost. This could be dischargers that could legitimately benefit

particularly true if trading provides a from trading to identify and pursue their

means of accommodating growth, either to opportunities more efficiently. For

expand an existing facility or construct a example, permitting authorities or

new facility. In these circumstances, interested third parties could develop and

allowing expanding or new facilities to make available readily accessible databases

trade with dischargers that already hold listing point sources on a stream segment

permits might offer both a cost-effective or within a potential trading zone,

means of controlling pollution and the including data on the type and quantity of

regulatory flexibility needed to support pollutants discharged, current or proposed

regional economic growth, while still permit limits, and relative water quality

meeting the requirements of the CWA. impacts.

Steps to Encourage Trading

Permitting authorities or other groups can

take a number of other steps to facilitate

and encourage trading. For example, a

permitting authority or third party could

support the exploration of trading

opportunities by forming a multiparty

advisory committee or convening Permitting authorities also could provide

stakeholder forums. Alternatively, information from past water quality studies

permitting authorities could take the lead that would allow dischargers to develop

by requiring negotiated solutions to better trading strategies and improve the

pollution problems, which might include focus of their water quality analyses. Such

trades, as in the case of South San information would save dischargers time

Francisco Bay (see Exhibit 5.1). and effort in investigating trading

Actively engaging stakeholders at early

stages will ensure that processes fairly

consider all legitimate interests, fostering

the development of trading proposals that

are likely to receive broad support. In

addition, the involvement of stakeholders

might help to identify additional trading

opportunities, and can provide a forum for

identifying and overcoming potential

obstacles to trading.

Another means of encouraging trading is

providing dischargers with information

relevant to possible trades. While most of

this information is already publicly

The experience with tradable effluent

allowances on the Fox River described in

Exhibit 5.2 emphasizes the importance of

designing a trading program in a way that

will facilitate trades and what happens

when a trading program is not well

structured.

opportunities and identifying potential

trading partners. Outside parties could also

provide dischargers technical assistance in

developing trading strategies. For

example, an independent broker could

work directly with a group of dischargers

in performing a water quality study for a

proposed trade or could act as an

intermediary in negotiating a trading

arrangement.

Steps like these could improve the

efficiency of the negotiating process and

further reduce transaction costs. While not

essential in all cases, they could increase

the likelihood that the potential benefits of
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EXHIBIT 5.2: LEARNING FROM THE FOX RIVER EXPERIENCE

In a 1981 effort to reduce pollution in the Fox River, the state of Wisconsin initiated a point/point

source trading program, focusing on the discharge of BOD by 15 industrial and 6 municipal

facilities. A preliminary analysis suggested that trading of BOD allowances could lead to annual

savings of up to $6.8 million. To date, however, only one trade has taken place, in which a paper

mill closed its wastewater treatment plant and asked the state to shift its allocation to the

municipal treatment plant that began treating its wastewater. The full predicted economic

benefits of trading have not been realized.

Several factors might have limited the success of point/point source trading on the Fox River. For

example, many of the industrial facilities eligible to participate in the program are paper mills. 

Competitive pressures within the paper industry might dampen willingness to trade between

facilities. In addition, some researchers suggest that the potential cost savings from trading on the

Fox River represent such a small share of total paper production costs (less than 1 percent) that

corporations have little incentive to invest management time in negotiating trades. Moreover,

Wisconsin staff believe that the facilities generally have been reluctant to “trade away” part of

their BOD load allocation since many believe they will need the full allocation to accommodate

future growth.

In addition to these factors, there are significant administrative impediments to trading under the

Fox River program. In particular, dischargers are not allowed to trade unless they demonstrate

need; i.e., they may trade if a plant is increasing production or is unable to achieve discharge

limits using the treatment systems currently in place, but cannot trade solely to reduce treatment

costs. Relaxing this constraint, as well as taking other steps to facilitate trading, could have had a

substantial beneficial effect on the trading program.

Source: The Benefits and Feasibility of Effluent Trading Between Point Sources: An Analysis in

Support of Clean Water Act Reauthorization , prepared for the Offices of Water and Policy,

Planning, and Evaluation, USEPA, September 1993.

trading, both economic and environmental, compliance with all permit conditions,

would be realized. including monitoring, record-keeping, and

5.7 Accountability and Enforcement

Incorporating results of point/point and

intra-plant trades into NPDES permit limits

ensures that permittees are accountable for

compliance and creates a clear

administrative mechanism for enforcement.

Information on effluent limits that would

have been issued without trading should be

included in the fact sheet accompanying

permits. As with any standard NPDES

permit, permittees would be responsible for

reporting. Violating permits might subject

violators to administrative, civil, or

criminal action. Exhibit 5.3 illustrates the

development of a cumulative limit for a

group of dischargers involved in a trade.

A potential concern of state and regional

enforcement officials is that point source

dischargers could prolong trading

negotiations to postpone compliance with

permit limits. To avoid this problem,

permitting authorities can establish
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EXHIBIT 5.3: USE OF THE BUBBLE

APPROACH IN EPA REGION 2

For at least two waterbodies, Lake

Champlain and Long Island Sound, EPA’s

Region 2 has established bubbles as part of

setting discharge limits for selected point

sources. Under this approach, New York

State has issued nitrogen limits in permits

for discharges within a defined geographic

area—the bubble. A "group" permit

contains a cumulative limit for all

dischargers in the bubble, and individual

permits contain limits for each discharger. 

As long as the cumulative limit is met, no

action would be taken on individual

performance. If the cumulative limit is

exceeded, enforcement would be taken on a

plant-by-plant basis based on the individual

permits.

deadlines for trading proposals—for

example, asking that a proposed trade be

submitted for an authority*s review a year

before an existing permit expires. If no

proposal is received by the deadline, the

permitting authority can begin standard

review procedures for the purpose of

issuing a new permit. The assurance that a

conventional permit will be issued if

trading negotiations become prolonged

should provide an incentive for expeditious

resolution of negotiations and a guarantee

that dischargers will conduct such

negotiations in good faith.

5.8 Worksheet/Checklist

The following checklist outlines key

questions to consider in implementing a

point/point source or intra-plant trading

program.
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WORKSHEET FOR EVALUATING SUCCESS OF POINT/POINT SOURCE AND INTRA-PLANT TRADING

Legal and Regulatory Conditions

General:

• Will point sources and administrative agencies implement trading within the context of yes

NPDES permits? no

Specific:

• Can point sources and administrative agencies include conditions in NPDES permits? yes

no

• Can administrative agencies specify effluent limits for each outfall, if necessary? yes

no

• Can administrative agencies include reopener clauses in permits to allow alterations to yes

trading arrangements? no

Economic Conditions

General:

• Can point sources save or make money by trading (i.e., are there economic incentives to yes

trade)? no

Specific:

• Do point sources* total incremental costs for pollution reduction, which include direct yes

incremental costs and transaction costs, differ among point sources or outfalls? no

• Do cost differentials among point sources or outfalls allow one point source or outfall to yes

reduce pollution more cheaply than another? no

• Are transaction costs less than cost savings from the trade? yes

no

• Do cost savings from trading outweigh the uncertainties that point sources face under yes

trading schemes? no

• Is there a sufficient supply of pollution reduction for sale, as well as a reasonable yes

demand to buy reduction credits among point sources? no

• Are competitive pressures among dischargers subdued enough to allow trades? yes

no

Data Availability Conditions

General:

• Are the data necessary to implement a trading program among point sources available? yes

no

Specific:

• Are there enough data to understand pollution quantities and flows within the watershed yes

(e.g., water quality authorities have conducted a TMDL), including local impacts at no

specific outfalls?

• Can regulatory authorities monitor point source discharges and water quality under yes

trading? no

• Can point sources estimate their direct costs of reducing a specified unit(s) of pollution yes

(direct incremental costs)? no

• Can point sources estimate transaction costs that they would have to pay to conduct yes

trades? no
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Administrative and Institutional Conditions

General:

• Are governmental authorities and point sources capable of administering a trading yes

program? no

Specific:

• Do governmental authorities have enforcement mechanisms to ensure that point sources yes

comply with NPDES permit conditions under trading arrangements? no

• Is information about trading partners readily available so that buyers and sellers can yes

coordinate? no

• Are responsibilities clearly defined for institutions and point sources taking part in yes

trading? no

• Is the scope of the administrative infrastructure compatible with the amount and yes

complexity of the trading that is expected? no

• Do NPDES permits establish accountability for both water quality and pollutant

reductions among point sources?

yes

no
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Pretreatment includes physical, chemical, and biological processes used by industrial and

commercial customers to reduce, eliminate, or alter pollutants in wastewater before its

release to publicly owned treatment works (POTWs). Pretreatment trading refers to

agreements that affect the allocation of pollutant loads among facilities that discharge

wastewater to POTWs.

CHAPTER 6. PRETREATMENT TRADING

Introduction

Approximately 1,500 POTWs administer uniform concentration limit allocation

approved local pretreatment programs. approach for local limits. This allocation

Approved states administer local method results in a single discharge

pretreatment programs for an additional concentration limit for each pollutant that

314 plants. Available data suggest that is the same for all users. This method

plants with pretreatment programs account provides POTWs with an allocation

for over 80 percent of the total national vehicle that has minimal burden in both

POTW wastewater flow, even though less development and implementation and is

than 20 percent of all POTWs operate viewed as an equitable approach. For

pretreatment programs. POTWs, a method with low burden that

Unlike other regulatory programs, the is often preferable to other methods that

concept of trading is not completely new in are more resource-intensive.

the pretreatment program. The term

“trading” is relatively new. In the As noted, the uniform concentration limit

pretreatment program, trading is discussed method does have advantages, but it also

in terms of allocation of local discharge has shortcomings. Specifically, it provides

limitations (i.e., local limits), which dictate allocations to industries that might not

what the indirect dischargers can send to even discharge the pollutant in question.

the POTW. POTWs are required to Also, the uniform concentration approach

develop local discharge criteria to protect does not reflect any differences in

plant workers, plant operations, receiving dischargers’ ability to reduce pollutants

water environments, and the quality of the and costs in achieving a uniform limit.

biosolids.

These criteria are called local limits. EPA biosolids quality become more stringent, or

has designed the local limits development if industrial growth places increasing

process to facilitate the most appropriate pressure on POTW operations, POTWs

allocation of pollutants as determined by might want to consider other allocation

the POTW, including trading, if desired by methods (mass allocations) for their local

the POTW (Guidance Manual on the limits.

Development and Implementation of Local

Discharge Limitations Under the EPA is not aware of any POTWs that have

Pretreatment Program, December 1987). developed formal pretreatment trading

To date, POTWs have preferred the

produces the desired environmental results

In the future, if standards for water and
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6-2

programs to date. Some POTWs are, POTWs can implement trading programs

however, implementing methods of at their discretion when developing local

allocating local limits that incorporate limits. EPA and states, however, may

certain aspects of trading, as illustrated in require that a POTW develop written

the case of Oxford, North Carolina, in procedures and appropriate legal

Example 6.1. authorities for implementing a trading

EXAMPLE 6.1: PRETREATMENT TRADING

IN THE TOWN OF OXFORD, NORTH

CAROLINA

Oxford has used an allocation approach

similar to trading. After determining the

total pollutant loading capacity available, the

POTW and industries agree on specific

limits for the seven industries involved: 

three textile mills, a rubber manufacturer, an

asphalt roofing manufacturer, a cosmetic

manufacturer, and a china manufacturer.

POTWs or states administering local

pretreatment programs may choose to

allow indirect dischargers (also known as

industrial users or IUs) that send their

wastes to POTWs to exchange reductions

of pollutant loadings. These exchanges

should be formalized through the IU

permit. In general, where a POTW has an

approved pretreatment program and

established procedures to allocate and track

pollutant loadings and agrees to allow

pollutant trades, one firm may coordinate

with one or more other firms to implement

improved controls, rather than reducing inhouse loadings. Incentives for trades may

include payments between firms for

additional reductions.

In all cases, trades are subject to IU

permitted pollutant limitations and

requirements established by POTWs to

protect operations as well as biosolid and

water quality. EPA*s technology-based

(categorical) limits for indirect dischargers

must always be met and cannot be traded.

program. For example, in cases where a

POTW has instituted its local limits

through a uniform concentration method,

the POTW will probably need to change its

local limits allocation to a mass allocation

to implement trading. This will require a

change to their legal authority since most

local limits are contained within the

POTW’s ordinance.

6.1 Regulatory Issues

General pretreatment regulations establish

a three-part approach to controlling

discharges from nondomestic sources to a

POTW:

1. General prohibitions forbid discharge

of pollutants that cause pass through or

interference, and specific prohibitions

forbid certain discharges of concern,

such as those posing fire or explosive

hazards, and corrosive, solid, or

viscous substances.

2. EPA promulgates categorical

Pretreatment Standards, which are

national technology-based standards,

on an industry-by-industry basis.

3. Individual POTWs develop local limits

(as well as Pretreatment Standards)

when necessary to ensure compliance

with their NPDES permits and

biosolids use or disposal standards, and

to protect worker health and safety.

Under current regulations, POTWs must

develop local pretreatment programs if
May 1996 Draft

6-3

they have design flows (combination of all programs, the POTWs are responsible for

treatment works) exceeding 5 million direct regulation and oversight of industrial

gallons per day (mgd) and they receive user compliance and enforcement.

discharges from industrial users that may

cause “pass through” or “interference,” or Where a POTW does not have an approved

are otherwise subject to pretreatment program, industrial users must still comply

standards. At the discretion of EPA or with the general and specific prohibitions

state authority, POTWs with design flows discussed earlier, and if an industrial user

less than 5 mgd may also be required to is subject to categorical standards, it must

develop programs. comply with the standards and report its

Pass through occurs when pollutants exit per year. In general, pollutant trading

POTWs at levels above the limits or in would be possible only in the cases where

violation of any requirement in their the state or EPA requires the POTW to

NPDES permits. Interference occurs when establish local limits in addition to other

pollutants inhibit or disrupt POTW legal authorities that may be required to

operations, thereby leading to violations of support a trading program.

NPDES permits or preventing the use or

disposal of biosolids (i.e., sewage sludge) Approved pretreatment programs

in compliance with statutory requirements. interested in developing and implementing

Trading applies only to allocated local applicable local, state, and federal

limits. In no case may a categorical requirements to determine whether changes

industrial user be allowed to discharge are needed to the approved program. In

pollutants in excess of those limits addition, POTWs will need to ensure that

specified in applicable National results of trades do not violate the terms of

Categorical Pretreatment Standards their NPDES permits or approved

promulgated by EPA. pretreatment programs, or otherwise

The National Pretreatment Program

provides POTWs with considerable Some regulatory issues are of less concern

flexibility in establishing local limits. EPA for pretreatment trading than for point

has established guidance to assist the source trading. CWA anti-backsliding

POTWs in development of local limits (see requirements and anti-degradation policy

introduction to this chapter). In addition, do not apply to IU permits issued by

many EPA Regional offices and states POTWs to their industrial users. As long

have developed more specific guidance on as the net effects of trades allow POTWs to

development and implementation of local meet their NPDES permit limits and

limits. conform to parameters set out in

The legal framework for the pretreatment not affect pretreatment trading.

program splits responsibility for regulating

industrial users across federal, state, and

local authorities. In communities where

POTWs have approved local pretreatment

compliance status to EPA or the state twice

trading programs will also need to review

interfere with POTW operations.

pretreatment programs, these policies will
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6.2 Economic Issues

Pretreatment trading can reduce the costs will be highly motivated to seek

of pollution abatement while promoting opportunities for reducing pollution

improvements in environmental quality. abatement costs. Firms for which pollution

As explained below, trading also can control costs are less significant may

encourage investment in new control choose to focus their attention on other

technologies and local economic types of concerns.

development.

Potential Cost Savings

Development of a trading program may be Such dischargers might be reluctant to

undertaken at any POTW where indirect engage in trades if the financial benefits

dischargers face differing costs for would provide a competitive advantage to

pollutant reductions and the POTW feels other firms. Trading might still be

implementing a trading program might be desirable in these cases as long as it

beneficial to the pretreatment program. benefits all participating dischargers.

Industrial users choosing pollutant trading

may need to install flow monitoring

equipment, where none exists, and monitor

facility flows for determining compliance Transaction costs include costs of revising

with IU permits. POTW legal authorities and IU permits,

Cost savings could be significant in cases negotiating trades, and completing any

where dischargers would need to purchase necessary analysis and reporting. These

and install expensive new treatment costs need to be accounted for in

equipment. For example, one industrial developing and implementing trades.

user might need to install new treatment

equipment to reduce its pollutant loadings, Trading primarily impacts the way that

while another might be able to simply allowable pollutant loads are allocated to

increase its use of existing treatment industrial users. When pollutant

capacity. In this case, the first firm (that allocations (or re-allocations to reflect

would otherwise need to install new trades) are determined, POTWs must write

equipment) could save money by the results into permits or other control

negotiating with the second firm to mechanisms, much as discharge limits are

increase its level of treatment. If trading imposed under the current program.

allocations allow some industrial users to Changes in approved pretreatment

avoid large capital investments, substantial programs to accommodate trading would

savings might result. be expected to necessitate a program

Not surprisingly, incentives for engaging in activities may remain substantially

trades will be larger in cases where control unchanged.

costs are a significant proportion of a

firm*s total operating expenditures,

including costs of manufacturing and

distributing products. In such cases, firms

Economic incentives for trading may be

weaker in cases where industrial users are

direct competitors in the same industry.

Transaction Costs

identifying opportunities for trading,

modification. Monitoring and enforcement
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6-5

Technological Innovation

Because trading may provide incentives for Local limits allocation, including trading,

developing innovative technologies, it may provides opportunities for POTWs to

encourage continued improvement in accommodate new indirect dischargers or

technology performance and/or reductions facility expansions, even in cases where

in control costs over time, as new POTWs must reduce their own discharges

technologies are developed and or have little available capacity. This

implemented. Firms could benefit by capability may foster local economic

developing more cost-effective control growth. Likewise, the local economy

technologies, then agreeing to increase benefits if trading allows industries to

their level of treatment (or pollution reduce their pollution control costs, freeing

prevention) in exchange for payments from resources to finance new capital

other firms. As more firms become investments.

interested in trading, markets for such

technologies are likely to expand, and For example, pollutant loads from a new or

firms could work cooperatively to develop expanding firm can be accommodated by

pollution prevention techniques or new using the existing load allocated to the

treatment processes. growth factor or allowing the firm to

Local Economic Development

The current regulations and guidance allow pretreatment program. The new or

the POTW to change to an alternative expanded firm could either compensate

allocation method under selected current users for reducing their discharges

circumstances: in cases where POTWs use or develop more cost-effective treatment

a uniform allocation method for local technologies and engage in trades to

limits implementation and the uniform reduce the burdens on existing users.

allocation makes it appear that all of their

capacity for accepting industrial pollutants Trading can also relieve financial pressures

has been exhausted; or where POTWs may on individual firms by allowing them to

want to increase surplus capacity. pay or otherwise arrange with others for

The change in allocation may require a purchasing control technology. In these

modification to the existing approved cases, trading may free funds for other

program, requiring a minor modification of types of investments, such as plant

the NPDES permit and public notice of the expansion or additional employment.

change. The choice of local limits

allocation directly affects the allowable

loadings from each contributing source. In

many cases, during development of local To implement pretreatment trading

limits the POTW builds in a safety factor programs, dischargers and POTWs need

and growth factor, allowing industrial information characterizing opportunities

growth without having to change existing

allocations.

negotiate with current users for a share of

the total industrial user allocation, with

cooperation and prior approval by the local

further pollution reduction rather than

6.3 Data-Related Issues

for and effects of trades. Loading
May 1996 Draft

6-6

information for the pollutant(s) of concern, Detailed information on pollutant loadings

general wastestream characteristics, and is needed to identify opportunities for

treatment options and cost information are trades and to determine whether a

particularly important for developing particular trade will result in a reallocation

pretreatment trading programs. of loads through the IU permits, while

Pollutant Loadings

Local limits are developed to protect loading is already available to the POTW

against pass through and interference from various sources.

(including adverse impacts on biosolids

disposal), including the specific # In cases where POTWs currently

prohibitions specified at 40 CFR 403.5(b). express local discharge limits as mass

A POTW will determine the Maximum loadings, the current total permitted

Allowable Headwork Loading (MAHL) it loading is available in the IU permits or

may receive for specific pollutants, while other control mechanisms used by

protecting against pass through and POTWs.

interference. POTWs will subtract from

the MAHL such things as reserved mass # In cases where POTWs express limits

for expansion and safety from slug loads, as concentrations, the POTW often

residential and non-IU loadings, and other collects information on IU wastewater

factors. flows and can convert the permit limits

The resultant pollutant loading, expressed discharger*s limit for zinc is 1.5 mg/l

generally as pounds per day, is then the and its flow is 10,000 gallons per day,

Maximum Allowable Industrial Loading its permitted daily loadings are 1.5 mg/l

(MAIL). This MAIL is the total daily mass x 0.010 mgd x 8.34 = 0.125 lb of zinc

that a POTW can accept from all permitted per day. The POTW would perform

IUs and ensure the POTW is protecting this evaluation for all IUs that are

against pass through and interference. permitted to discharge the pollutant(s)

POTWs wishing to develop a trading in question. The sum of these daily

program will adopt the MAILs in its legal loadings would be compared to the

authority (often an ordinance or other MAIL that forms the basis for the local

regulation) as part of its local limits. The limits, to ensure that the MAIL is not

POTW will also develop a procedure to exceeded. The POTW would generally

allocate the MAILs to its IUs. be required to adopt the MAIL into its

As mentioned earlier, most approved which trading is implemented.

pretreatment programs go one step farther

when adopting local limits. They divide When firms engaging in trades discharge

the MAIL by the total industrial flow to get the same pollutants, comparisons are

a uniform concentration local limit for each straightforward; loadings can be summed

pollutant of concern. This uniform and compared to the POTW MAIL. When

concentration local limit is then adopted industrial users have more than one

and applied to each IU. pollutant involved in a potential trade,

ensuring that the MAIL is not exceeded.

Much of the information on pollutant

to mass loadings. For example, if a

legal authorities for each pollutant for
May 1996 Draft

6-7

POTWs also will need to consider trading for increased pollution reduction

impacts on total loadings of other (especially in cases where new technology

pollutants received. must be implemented). It also would help

Once trades have been implemented, potential trading partners.

information on loadings will be collected

through IU permit (or other control General information on costs, applicability,

mechanism) reporting requirements. and effectiveness of alternative pollution

Industrial users also provide reports or reduction methods is available from EPA

notifications in cases where self- effluent guideline development documents

monitoring indicates violations of and similar sources. As noted in Chapter

applicable pretreatment standards or 5, however, these sources are designed to

requirements, and report any substantial provide rough comparisons of costs and

change in the volume or character of effectiveness of treatment methods

pollutants in their discharge. identified during development of the

Pollution Reduction Options and Costs

To determine whether opportunities for effectiveness of pollution reduction options

trading exist, individual industrial available to them, indirect dischargers can

dischargers will, at a minimum, need complete more detailed, facility-specific

information on whether their POTW has a assessments before proposing a trade. In

trading program or is willing to develop conducting such assessments, indirect

such a program, their pollutant loadings, dischargers are encouraged to consider

pollution reduction costs, and the price at pollution prevention practices prior to endwhich pollution reduction credits can be of-pipe treatment. In many situations,

bought from or sold to other dischargers. pollution prevention can be more costGeneral information on pollution reduction achieving pollution reduction goals.

costs also will be useful to POTWs

considering whether an investment of As a result, facilities that explore pollution

management resources in promoting prevention opportunities will be better

trading will be worthwhile. For example, positioned to exceed pollution reduction

if available information on a POTW*s performance standards requirements and to

industrial users indicates that offer pollution reduction credits in trades

administrative costs to the POTW are with other dischargers. In addition, many

substantially less than savings to the POTWs may require pollution prevention

industrial users, trading is likely to be opportunities to be explored prior to a

beneficial and a POTW might be willing to request for pollutant trading.

cooperatively invest the resources.

Dischargers might be interested in detailed

information on pollution reduction options POTWs interested in implementing trading

and costs. This information would enable programs may face two types of technical

them to determine costs they would incur issues: the development and adoption of

develop their strategy for negotiating with

applicable standards.

To avoid mischaracterizing the costeffective than end-of-pipe treatment in

6.4 Technical and Scientific Issues
May 1996 Draft

6-8

mass-based limits, and implementation of a POTWs using the mass-proportion method,

program to permit and track pollutant or other methods that specify mass

loadings. loadings limits rather than pollutant

Mass- vs. Concentration-Based Limits

POTWs (or states operating pretreatment not need to convert concentrations into

programs in lieu of approved local loadings (as discussed in the previous

programs) develop local limits based on section) to evaluate the impacts of trades.

evaluation of local POTW operations and In addition, POTWs using mass-based

guidance provided by EPA, as explained in limits are already accustomed to

Section 6.3. Development of local limits incorporating this type of limit into their

may be based on a range of methods: permitting, monitoring, and enforcement

# Uniform concentration limits for all

industrial users—For each pollutant, POTWs currently using other approaches

the maximum allowable industrial generally will be required to adopt massloading to the POTW is divided by the based limits to facilitate implementation of

total flow from all industrial users. trading programs.

# Concentration limits based on

industrial contributory flow—This

method is similar to the uniform POTWs can define units to be traded in

concentration limit allocation except various ways, for example, pounds per day

that the flow from only those users that of a particular pollutant. Regardless of

actually have the pollutant in their raw whether trading is implemented, units used

wastewater at greater than background to develop local limits have at least two

levels is used to derive a concentration dimensions: the time period covered (e.g.,

limit for the pollutant. day) and the unit of mass (e.g., kilograms

# Mass proportion for each pollutant— expressed as an average, a maximum, or

The maximum allowable industrial both.

loading to the POTW is allocated

individually among each IU in Another issue to consider is whether to

proportion to the IU*s current loading. include batch dischargers in a trading

Mass limits (MAILs) are adopted for program. Including batch dischargers

pollutants, and portions of the MAILs increases opportunities for trades. If batch

are allocated to the IUs. dischargers are included, a trading program

# Selected industrial reduction—The do not exceed a POTW*s peak capacity.

POTW selects the pollutant loading The timing of discharges may be

reductions that each IU will be required particularly important.

to accomplish.

concentration limits, will find it easier to

implement trading programs than those

using other methods. These POTWs will

procedures.

Unit of Exchange

or pounds). In addition, the unit may be

needs to ensure that combined discharges
May 1996 Draft

6-9

6.5 Institutional Issues

Because the local limits development likely to maintain primary responsibility

process already provides an institutional for oversight of program operations

framework for pretreatment trading, (subject to federal, state, and local

relatively few institutional issues need to government approval, as needed); ongoing

be addressed to implement trading involvement of other interested parties

programs. Issues to be considered include generally will be desirable.

whether a POTW wants to develop a

trading program, what changes to a POTW

legal authorities are necessary (if any),

what procedures must be developed for Trading programs are most likely to be

implementation, and availability of POTW successful if all stakeholders are involved

resources to institute a trading program. in and committed to development of the

Some POTWs may not need to alter their and industrial users, as well as EPA and

current procedures substantially. Once the state agencies responsible for the

local limits are adopted and procedural and pretreatment program; elected officials;

resource issues addressed, POTWs could federal, state and local agency staff; the

encourage dischargers to seek out trading general public; and environmental

opportunities, or could act as brokers, organizations.

bringing together potential trading

partners. POTWs would then review Because POTWs are generally operated by

results of negotiations and incorporate local government agencies, they are likely

them into permits and individual control to share community interest in

mechanisms where appropriate. environmental protection and economic

A trading program that includes an support trading programs as a method of

established administrative structure will expediting compliance with pollution

require more extensive development reduction requirements and reducing the

efforts. Such programs could include potential corresponding costs. Industrial

designating certain officials or users may find trading programs desirable

organizations as responsible for if they can reduce their pollution reduction

encouraging trading and developing costs by amounts that exceed any costs

standardized procedures. A key associated with participating in trading

consideration will be minimizing the costs programs, particularly if these savings are

of program administration and engaging in a significant proportion of their total

transactions so that such costs do not operating costs and can be gained without

outweigh the pollution reduction cost providing disproportionate benefits to their

savings that trading would provide. competitors.

To minimize transaction costs, criteria for Other interested groups may be supportive

approving trades, including relevant data if they view programs as maintaining or

and analysis submitted by dischargers improving environmental quality while

interested in trading, could be specified in providing economic benefits to local areas.

advance. This would decrease uncertainty

and clarify responsibilities. POTWs are

Stakeholder Participation and Support

program. Stakeholders include POTWs

development. As a result, they may
May 1996 Draft

6-10

POTWs can encourage trading by

providing information on topics of interest

to each participating group. For example, In a trading program, once an initial

information on environmental benefits and allocation is made (i.e., an IU permit is

cost savings could be developed for review

by industry and local community leaders,

as well as all other stakeholders.

6.6 Administrative Issues dischargers, or may include the

Administration of a pretreatment program

that incorporates trading includes at least

three primary activities: (1) the initial

development of local limits and resultant

allocation to the IUs through permits

(2) review and approval of the trade by the

POTW, and (3) reallocation of pollutant

loadings (IU permit modification or

reissuance). These components are

discussed below.

Initial Allocation types of mutually beneficial agreements

Under a typical local limits development

process, as discussed earlier, POTWs

identify pollutants of concern, develop

loadings to protect the POTW, incorporate

these loadings into their legal authorities,

and include appropriate discharge limits

based on the loadings in IU permits.

Incorporation of pollutant limits into

permits (whether mass or uniform

concentration) can have a significant effect

on industrial users, determining relative

bargaining power when trading occurs and

costs of required controls if dischargers

cannot find opportunities for trades. The

perceived equity of the initial allocation

can also affect program implementation,

particularly where industry protests the

results.

Reallocation Through Trades

issued), industrial users could negotiate

exchanges in pollutant reductions among

themselves. These exchanges may be

trades directly negotiated between two

development of a more formal market for

buying and selling discharge allowances.

In the latter case, industrial users with high

pollution reduction costs could acquire

additional pollution discharge credits,

while those with lower costs would be

compensated for removing larger quantities

of pollutants through the sale of their

credits or through other forms of

compensation. As noted earlier, such

compensation need not be monetary; other

may be reached.

Once exchange units are established,

POTWs may require trading ratios (termed

"offset ratios") greater than one-to-one

(e.g., 1.25:1) to encourage further

reductions in pollutant loadings. While

such ratios might be desirable, they should

be applied carefully to avoid constraining

opportunities for trades.

Timing, Frequency, and Duration

Another issue in developing trading

programs is establishing conditions

governing the timing, frequency, and

duration of trades. Frequent trades with

short durations may be difficult for

POTWs to track and control (and allocate

sufficient resources), while infrequent

trades with long durations may inhibit

desirable changes from initial allocations

and hence decrease benefits of trading.
May 1996 Draft

6-11

Trading could be allowed on an ongoing Federal regulations limit duration of

basis. If trades occur too frequently or on permits or individual control mechanisms

an unpredictable schedule, however, to a maximum of 5 years. Therefore,

POTWs may need to devote substantial incorporation of a trade into permits or

resources to reviewing the effects of the other individual control mechanisms will

trades and may find it difficult to track necessitate renewing trading agreements at

constantly changing allocations. least once every 5 years. In addition,

Conversely, if trades are allowed to reopen and revise permits or other

infrequently, industrial users will not be individual control mechanisms that

able to accrue the full benefits of trading. incorporate trades. Such flexibility may be

They may not be able to exchange needed to respond to future changes in

allowances with other industrial users to POTW operations or NPDES permit

reflect changes in pollution reduction costs requirements.

or needs (resulting from changes in

production processes, costs, or the scope of It is important to realize that trading that

operations) as they occur. results in less stringent local limits for one

One option is to allow trading whenever be a substantial program modification, and

permits or other individual control therefore would require approval of EPA

mechanisms of participating industrial or the state authority. This may not be the

users are scheduled for renewal. In cases case where the Approval Authority has

where POTWs renew permits or individual approved the MAIL and the reallocation is

control mechanisms on a staggered basis, within the MAIL. It may be best to have

trading could be encouraged by grouping trading activity occur along with the local

industrial users according to pollutants limit reevaluation process, which is

discharged, and addressing pollution required at least every 5 years in

reduction conditions for all members of a connection with the POTW*s NPDES

group simultaneously. As with other permit reissuance.

options, any change in trading would be

allowed only after POTW approval and The duration of trading agreements could

incorporation of the resulting allocation be determined by the trading partners and

into a revised permit or other individual provided for approval to the POTW in

control mechanism. advance. Dischargers may not be willing

Incorporating trading into standard review agreements is too short, because of

and renewal cycles provides the least negotiation costs, uncertainty inherent in a

disruption of current operations. It also need to renegotiate, and the risk that an

reduces burdens on POTW staff, who can investment in improved pollution reduction

review implications of proposed trades at methods would be lost if a trade were

the same time they are reviewing other discontinued after only a short period. In

industrial user information. Time frames general, if POTWs are willing to allow

within which trading is allowed can best be trading agreements to remain in place for

determined through discussions between longer periods of time, it is more likely that

POTWs and participating industrial users. trades will occur, particularly in cases

POTWs will be expected to retain authority

or more of a POTW*s industrial users may

to engage in trades if the duration of
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6-12

where industrial users are investing in

treatment equipment with relatively higher

costs and long life spans. The following checklist provides examples

Review and Approval of Trades

Once a POTW is able to consider trades positive responses, the more likely the

and the industrial users agree to a trade, the trading program will be successful.

next step is POTW review and approval.

This review may be accomplished through

the same procedures used in the existing

permitting processes. Reviews will need to

consider issues related to protecting

POTWs from interference and ensuring

that standards for POTW effluent and

biosolids quality are met (i.e., MAILs are

not exceeded). Once trades are approved,

they must be incorporated into industrial

users* permits or other control mechanisms

to ensure all applicable limits and

monitoring requirements are fully

enforceable.

6.7 Accountability and Enforcement

POTWs have developed mechanisms to

ensure that relevant pretreatment standards

are met, regardless of whether trading is

implemented. The principal mechanism

used by POTWs to ensure the

enforceability of local limits is the IU

permit. All changes to allocated pollutant

loadings and monitoring and reporting

requirements must be enforceable by the

POTW’s pretreatment program. Therefore,

whenever a POTW changes the allocation

of pollutant loadings between IUs, such

changes must be adequately reflected in

the relevant IU permit. This will ensure

the continued enforceability of local limits,

as well as provide detailed information to

each IU on what it is allowed to discharge.

6.8 Worksheet/Checklist

of the types of issues a POTW should

consider in determining whether and how

to implement a trading program. The more
May 1996 Draft

6-13

WORKSHEET FOR POTWS TO EVALUATE POTENTIAL FOR PRETREATMENT TRADING

Legal and Regulatory Conditions

General:

C Is pretreatment trading implemented within the context of the National Categorical yes

Pretreatment Standards and NPDES permits? no

Specific:

C Are local POTW standards more stringent than National Categorical Pretreatment yes

Standards? no

C Do the results of pretreatment trading comply with conditions within the NPDES permits yes

of POTWs? no

Economic Conditions

General:

C Can dischargers to POTWs save or make money by trading (i.e., are there economic yes

incentives to trade)? no

Specific:

C Do total marginal costs for pollution reduction, which include direct marginal costs and yes

transaction costs, differ among dischargers? no

C Do cost differentials among dischargers allow one discharger to reduce pollution more yes

cheaply than another? no

C Do cost savings from trading outweigh the risks that dischargers face under trading yes

schemes? no

C Is there a sufficient supply of pollution reduction for sale, and a reasonable demand to yes

buy reduction credits? no

C Are competitive pressures among dischargers subdued enough to allow trades? yes

no

Data Availability Conditions

General:

C Are the data necessary to implement a trading program available or estimable? yes

no

Specific:

C Are there enough data to understand pollution quantities and flows to the POTW? yes

no

C If pollution limits are expressed in permits and ordinances as concentrations, are data on yes

wastewater flow available to convert limits to loadings? no

C Do industrial users of POTWs submit at least two compliance reports per year, which yes

provide information on loading? no

C Can industrial users estimate costs for pollution control and transaction costs that they yes

would have to pay to conduct trades? no
May 1996 Draft

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Administrative and Institutional Conditions

General:

C Are governmental authorities and potential trading participants capable of administering yes

a trading program? (If no, do not proceed.) no

C Does the POTW have an approved pretreatment program? (If no, stop and contact

appropriate state/EPA Regional office.)

yes

no

Specific:

C Has the POTW developed and adopted technically based local limits and have the local

limits been publicly noticed and approved by the approval authority? (If no, do not

proceed.)

yes

no

C Have the technically based local limits been allocated to industrial users? yes

no

C Has the POTW developed the necessary legal authorities and implementation procedures yes

to implement trading? no

C Does the POTW have enforcement mechanisms in place to ensure pretreatment trades yes

(discharge limits) are being complied with? no

C Does the POTW currently have adequate resources to expend on administration of the yes

trade? (If no, do not proceed.) no

C Is the economic benefit to the POTW, community, and industrial user greater than the yes

transactional costs of implementing the trade? no

C Are the data required from the industrial user(s) available or can the data be obtained? yes

no
May 1996 Draft

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In point/nonpoint source trades, point and nonpoint sources agree on reductions. Typically,

these agreements involve reductions in nonpoint source pollutant loadings in lieu of

additional point source reductions. Point sources seeking trades with nonpoint sources have

already met technology-based requirements and are seeking cost-effective ways to implement

pollution controls needed to meet water quality standards and objectives.

EXHIBIT 7.1: POINT/NONPOINT SOURCE

TRADING AROUND THE COUNTRY

Programs in place or operating:

C Boulder Creek, CO

C Chatfield Basin, CO

C Cherry Creek, CO

C Dillon, CO

C Tar Pamlico, NC

Programs under

consideration/investigation:

C Chehalis River, WA

C Clear Creek, CO

C Denver Metro/South Platte, CO

C Flat Head Lake, MT

C San Joaquin Basin, CA

C South San Francisco Bay, CA

C Tampa Bay, FL

C Truckee River, NV

C Yakima River, WA

C Selected Midwest communities (atrazine

for drinking water concerns)

C Several Chesapeake Bay Basin

tributaries

EPA-sponsored studies/simulations:

C Boone River, TN; Honey Creek

Watershed, OH; and Wicomico River,

MD

CHAPTER 7. POINT SOURCE/NONPOINT SOURCE TRADING

Introduction

There is significant interest in point/ # Nonpoint source management

nonpoint source trading. It has been the combined with point source controls in

subject of numerous academic studies, the trading context can provide broad

EPA-supported investigations, and ecological benefits such as stream,

pioneering attempts at successful wetland, and habitat restoration.

implementation. Exhibit 7.1 identifies

several of these efforts.

Differences between point and nonpoint

sources create perhaps the most significant

watershed management opportunities

among the trading types discussed in this

framework. Point sources are subject to

NPDES permitting and include wastewater

treatment plants, industrial dischargers,

active and inactive mines, and ambient

sewer overflow (CSO) or stormwater

outfalls. Nonpoint sources are not subject

to NPDES permits and can include

landowners engaged in agriculture,

silviculture, and development; public or

private enterprises involved in small-scale

construction or hydromodification; and

owners/operators of degraded riparian

habitat.

As a general rule:

# Considering nonpoint and point source

reductions together advances the

watershed-based approach to water

quality management—prioritization,

selection, and implementation of

options on the basis of environmental

effectiveness, cost-effectiveness,

location, and other key factors occur in

a watershed context.
May 1996 Draft

7-2

# Nonpoint source loads may be less will ensure that water quality standards are

expensive to reduce per unit of met throughout the watershed. Where point

pollutant than point source loads. and nonpoint sources are far apart, trades

# Nonpoint sources significantly comply with water quality standards,

outnumber point sources in most including applicable mixing zone policies.

watersheds, resulting in a wide pool of

potential trading partners. Technical and scientific issues associated

# Where greater than 1:1 pollutant are discussed in more detail in Section 7.4.

loading reduction ratios are achieved,

nonpoint trades can result in greater

reductions than those achievable

without trades. States establish total maximum daily loads

Differences between point and nonpoint requirements do not or are not expected to

sources also present challenges in meet water quality standards. TMDLs

designing trades. Potentially complex recommend a mix of pollutant reductions

issues related to technical, scientific, (often reflecting a variety of regulatory and

regulatory, and institutional issues must all nonregulatory controls) necessary to attain

be considered when trades are designed. and maintain water quality goals, and they

7.1 Regulatory Issues

Point/nonpoint trading may help to achieve EPA if state TMDLs are disapproved. As

water quality standards when technology- part of each TMDL, wasteload allocations

based discharge limits for point sources are (WLAs) and load allocations (LAs)

insufficient to do so. Point sources which establish target loads or load reductions for

are in compliance with technology-based pollutants that point/nonpoint source

effluent limitations could trade with trading can help meet. LAs may be

nonpoint sources to achieve additional developed for individual nonpoint sources,

pollution reductions needed to meet water but are more commonly developed for

quality-based effluent limitations. several or all nonpoint sources within a

Water Quality Standards

Point/nonpoint source trading, as with sources and incorporated into NPDES

other types of trading, may shift the permits. LAs are implemented through

location of additional reductions in state and local nonpoint source control

pollutant loading from the point source programs, which rely on a mix of local,

mixing zone to one or more zones adjacent state, and federal requirements, contractual

to nonpoint sources. For each trade, a arrangements established by federal and

permitting authority should specify critical state farm programs, and voluntary

locations in the watershed to conduct site- measures. EPA believes that only trades

specific cross checks. These cross checks

are limited by the extent to which they can

with water quality standards and analyses

TMDLs

(TMDLs) when technology-based

include a margin of safety to account for

technical uncertainty. TMDLs must be

approved by EPA and are established by

TMDL*s geographic area.

WLAs are developed for specific point
May 1996 Draft

7-3

between sources covered under the same 2. Second, trades may occur in the

TMDL or similar assessment and context of other analyses and

remediation plan are appropriate. remediation plans similar to TMDLs.

Trading Situations for Point and

Nonpoint Sources

Given the differences in statutory and reductions and remedial activities

regulatory foundations, point/nonpoint necessary to meet water quality

source trading is sometimes viewed as standards. Like TMDLs, other

difficult to implement in practice. EPA analyses and remediation plans require

believes that point/nonpoint source trading, knowledge of ambient water quality

including consideration of the technical conditions and must be approved by

and legal uncertainties normally associated EPA. Examples include Lakewide

with the control of nonpoint sources, is Area Management Plans (LaMPs) and

practical and feasible in at least three

situations.

In all three of the situations described

below, agreed-upon activities may involve

a number of parties, cover a range of

geographic scales, and involve a number of

remedial actions. Participation in a trade

is voluntary and subject to the approval of

the appropriate regulatory authority. Like

any other trade, a point/nonpoint trade

should comply with the principles

articulated in Chapter 2.

1. Trades may occur in the context of a

TMDL. TMDLs establish the loading

capacity of a watershed, identify

needed reductions and related remedial

activities necessary to meet water

quality standards, identify sources, and

recommend allocations for point and

nonpoint sources. TMDLs, because

they focus on achieving, maintaining,

and protecting water quality standards,

necessarily require knowledge of

ambient water quality conditions.

Parties cooperating in a trade negotiate

within the loading capacity of the

TMDL, and the TMDL is reviewed and

approved by EPA.

These are appropriate frameworks for

trading if they, like TMDLs, link

pollutant contributions to ambient

conditions and determine needed

Remedial Action Plans (RAPs) used in

the Great Lakes. The relationship of

federal and state NPDES requirements

and requirements applicable to

nonpoint source controls is important.

Each party to a trade is responsible for

fulfilling its obligations.

3. The third situation for a trade is when

an NPDES permittee arranges a trade in

order to meet the ambient water quality

conditions expected to result from

implementing its effluent limits. This

again is a voluntary arrangement

between parties. In this situation the

permittee looks for other sources of the

pollutant being controlled in its effluent

and arranges for the other sources to

remove a specified amount of that

pollutant. The proposed trade is

submitted by the permittee with the

permit application. After the permit

writer has approved the trade, the

permit writer uses the trade information

to derive the point source’s permit

requirement and documents those

requirement in the permit fact sheet.

Thus, in situations 1 and 2 described above

the regulatory authority approves a trade
May 1996 Draft

7-4

via approval of a TMDL or similar analysis In the third situation described above,

and an NPDES permittee is responsible for some of the permittee’s effluent limits may

meeting effluent limits established for its be less stringent than they would have been

facility as part of the trade with other without trading because the nonpoint

partners. EPA and state enforcement source will remove some of the specified

authority applies to NPDES permits, and pollutant. The permit-issuing authority

the effluent limits are agreed on as part of includes conditions in the permit that

the trade. specify the nonpoint pollution controls to

Compliance for any nonpoint sources in 1 provide for recalculation of the point

and 2 is determined by the appropriate source’s effluent limits if nonpoint sources

existing regulatory authority and is based fail to meet their obligations over a

on reasonable assurance that the nonpoint reasonable time period.

sources will comply with the provisions of

the trade. It is likely to rely on a mix of Unlike situations 1 and 2 described above,

state, local, and other federal authorities. in situation 3 a permittee arranging a trade

Reasonable assurance means that the remains accountable for the reductions

proposed nonpoint source controls are agreed to by the nonpoint source(s).

technically feasible, specific to the Reductions agreed to by the two partners

pollutant of concern, to be implemented are linked through the NPDES permit, and

according to a schedule and within a failure of a nonpoint source partner results

reasonable time period, and supported by in enforcement actions against the NPDES

reliable delivery mechanisms and adequate permit holder. In this situation, it is the

funding. The permit fact sheet for the responsibility of the permit holder to

point source participating in the trade ensure that other parties to the trade can

should document the basis for reasonable meet obligations undertaken as part of the

assurance. trade.

For situations 1 and 2 described above,

accountability and enforcement for the

point and nonpoint source are not linked. Several economic issues are specific to

If a permittee fails in its obligations, point/nonpoint source trading. They relate

applicable federal and state enforcement, to differences in unit control costs,

based in the CWA, occurs. If the nonpoint ancillary benefits from nonpoint source

source fails in its obligations, appropriate controls, comparability of costs,

corrective action, most likely rooted in transaction costs, cost sharing, and

local, state, or contracts law, occurs. A piggybacking.

failure of a nonpoint source partner does

not trigger an enforcement action against

the point source trading partner, but it may

result in a revision to the TMDL or a As noted in Chapter 3, the economic

modification to the point source’s current attractiveness of point/nonpoint source

permit limitations and conditions to ensure trading depends on differences between

water quality is protected. unit costs of pollutant reductions for point

be implemented and reopener clauses to

7.2 Economic Issues

Unit Cost Differences

sources compared to such costs for
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7-5

nonpoint sources. Often, nonpoint source benefits along chemical, physical and

reduction is cheaper than point source biological parameters, and can be a way to

reduction on a per unit basis, although implement restoration and enhancement

incorporating a margin of safety into a projects. For instance, wetland restoration

trade may affect the cost differential. may be prescribed to prevent agricultural

The reason for this cost variance is that quality, it also may provide habitat

point sources often require expensive functions for wildlife.

technological methods to control pollution

in their effluent. Most types of nonpoint

sources, on the other hand, can often rely

on cheaper, nonstructural best management Point sources and nonpoint sources

practices (BMPs) to reduce pollutant contemplating trading may calculate their

loading. Structural BMPs are those which costs in different ways. Such differences

require construction efforts or physical can originate in accounting procedures that

changes to a site, whereas nonstructural are more likely to be employed by point

BMPs change the way people (and/or sources than by nonpoint sources. In some

animals) use a site and do not otherwise cases, it may be necessary to adjust point

change physical site conditions. and/or nonpoint source costs to account for

Point sources, therefore, can often save source controls are in many cases more

substantial sums by arranging for pollution capital-intensive than those for nonpoint

control from nonpoint sources. In turn, sources and so are depreciated over

nonpoint sources can receive compensation multiple years. Many BMPs, however, are

for implementing desirable BMPs, such as less capital-intensive, often involving

planting riparian vegetation. These operational techniques, and so are

measures also may have value for the deducted as current year expenses.

nonpoint source, for example, reduction of

soil erosion for farmers.

Additionally, the CWA regulatory structure Transaction costs associated with

has focused on point sources for over 20 point/nonpoint source trading can be

years. As a result, the less expensive point biased upward because potential nonpoint

source control methods have already been source partners are often numerous, but the

implemented. While states and nonpoint potential to reduce loadings from any

sources have made good progress in individual nonpoint source may be low.

reducing nonpoint pollution, significant This situation can result in point sources

nonpoint pollution reduction opportunities having to coordinate with multiple

remain. nonpoint sources to achieve loading

Ancillary Benefits

As stated above, nonpoint sources sources benefit largely from trading, point

generally use BMPs to decrease their sources and other stakeholders may have to

pollutant loads. These BMPs can provide

runoff. While this BMP improves water

Comparability of Costs

these differences. For example, point

Transaction Costs

reduction targets. Additionally, nonpoint

sources may have few regulatory

incentives to trade. So unless nonpoint
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7-6

lobby nonpoint sources to create trading

opportunities.

Stakeholders can help reduce transaction achieve cost savings by expanding

costs by supplying both point and nonpoint nonpoint source pollution control projects

sources with information on potential that are already being implemented. Such

trading partners. Point sources and other projects are often implemented by

parties seeking nonpoint source trading organizations that do not themselves cause

partners may contact local governments pollution (e.g., nonprofit environmental

and state agencies involved in nonpoint protection groups). Trading partners

source pollution management. Nonprofit achieve cost savings because expansion of

environmental organizations also may be such projects is usually cheaper on a unit

able to direct interested parties to candidate cost basis than implementation of a new

nonpoint sources. Additionally, watershed nonpoint source control project. Thus,

management, growth management, and point sources achieve required loading

local comprehensive plans often identify reductions for less money than they could

unaddressed nonpoint source pollution otherwise, even through a more standard

problems. trading arrangement.

Cost Sharing

Cost sharing is an aspect of nonpoint

source management that affects

point/nonpoint source trading. Many

governmental programs offer cost sharing

options to nonpoint sources to install

BMPs for pollution control. These cost

share programs are often essential to

meeting nonpoint load reductions in an

approved TMDL.

Cost-share BMPs may be more attractive

than non-cost-share BMPs to point sources

since cost sharing may result in lower

prices for trades. Therefore, state officials

approving a trade should consult with the

state nonpoint and cost-share programs

(including U.S. Department of Agriculture

programs) to ensure that any existing

commitments to implement nonpoint load

reductions will not be compromised by a

trade.

Piggybacking

Often point/nonpoint source trading can

Piggybacking also can reduce transaction

costs. For such arrangements, stakeholders

share information about existing or

planned projects where point sources could

contribute additional funding to expand a

project*s scope. This lowers costs to point

sources associated with trade identification,

evaluation, implementation, and

monitoring. An example of piggybacking

appears in Chapter 8.

7.3 Data-Related Issues

Data in two general areas provide

important information for identifying,

designing, and implementing trading

programs: (1) water quality and pollution

control effectiveness and (2) economic and

geographic information. Some of these

data will be on hand as part of regular

water quality management activities where

TMDLs and similar analyses have been

performed. Where unavailable, some data,

such as control cost and effectiveness

information, can be obtained from other

watersheds or published literature and
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7-7

customized to areas considering trading. and individual waterbodies. The often

Water quality data are most useful when large numbers of nonpoint sources and the

they are specific to waterbody segment(s) variance of their loadings according to

where trading is proposed. spatial (e.g., location relative to water

Water Quality and Pollutant Loadings

To help ensure trading principles are identifiable pollution sources.

upheld, agencies should have sufficient

water quality monitoring in place to Nonetheless, reliable estimates of expected

support loading estimates from point and loading reductions from nonpoint source

nonpoint sources, establish water quality BMPs and restoration efforts are key to

objectives, and measure needed pollutant predicting water quality improvements

reductions. Adequate data will provide under trading. A variety of water quality

confidence in presumed cause-and-effect analyses can be used to estimate nonpoint

relationships between pollution control source loading reductions and evaluate

measures and water quality responses. their effects on receiving waters.

Many data limitations exist for The best information on potential

point/nonpoint source trading. An reductions will come from local water

abundance of effluent loading data for quality data collected before and after

most point sources exists, but loading data implementation of BMPs or restoration

for nonpoint sources are rarely available projects. Good field data also are needed

for individual nonpoint sources. Instead, to verify compliance with NPDES permit

nonpoint source loading data are typically conditions, and agreements between point

available only for whole tributaries, or and nonpoint sources, and to build

more generally, as estimates of background technical credibility. Some agencies, like

loading. the U.S. Geological Survey’s National

Data documenting point source discharge beginning to systematically monitor

effects in the mixing zone and on local nonpoint source contributions to water

ambient water quality are not generally quality problems in particular waterbodies.

widely available. Also, there is little

documentation of ambient water quality To be most helpful, such analyses should

downstream from point source dischargers. be linked to specific characteristics of the

Additionally, mixing zone data are nonpoint source control measures (e.g.,

especially rare. (Ohio is an exception.) scale, scope, method). Where local data

However, models are available to assist in are not available, it may be possible to use

the estimation of nonpoint source loadings, effectiveness estimates from other nearby

both before and after the application of areas, adjusting for any differences in

various BMPs. rainfall, topography, soil type, and other

Data documenting nonpoint source effects source for BMP effectiveness information

on water quality are even more inconsistent is Guidance Specifying Management

across nonpoint source categories, states, Measures For Sources of Nonpoint

edge) and temporal (e.g., seasonal) factors

further complicate the task of attributing

specific environmental effects to

Water Quality Assessment program, are

factors influencing effectiveness. One
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7-8

Pollution In Coastal Waters (EPA840-B- An understanding of the spatial distribution

92-002, January 1993). of potential trading participants and their

Trading program organizers can conduct key component of evaluating water quality

their own field research to provide better effects of trading. Point and nonpoint

data when needed for design and sources can be identified and listed by

evaluation purposes. Both the Lake Dillon location, e.g., River Mile 34. Knowledge

and Tar Pamlico River point/nonpoint of local topography and soil conditions, as

source trading programs relied, in part, on well as rainfall, snowmelt, and evapotraneffectiveness data generated by local spiration, also is important because these

demonstration projects. Additionally, factors influence nonpoint source loadings.

monitoring of nonpoint source pollutant

loadings can be expanded as part of a Maps indicating sources and locations

trading program to provide information where additional reductions are possible

about BMP effectiveness as trading occurs. (e.g., where BMPs are not fully

Data-Related Role of TMDLs

TMDLs can play an important role in trading scenarios. Geographic information

linking the selection and implementation of systems (GIS) provide sophisticated

trades to the attainment of water quality mapping capabilities and can combine sets

standards by providing a framework for of information based on various decision

data collection and analysis. The TMDL factors and display results in map form.

process results in estimates of pollutant

loadings from all sources and predicts the

resulting pollutant concentrations in

receiving waters. As a result, a framework Spatial, temporal, and chemical differences

for evaluating water quality implications of between point and nonpoint source

various trading scenarios will generally pollutant loadings pose challenges to

exist where TMDLs have been developed. understanding and predicting effects of

Economic and Geographic Data

As discussed in Section 7.2, cost- environmental objectives.

effectiveness estimates for reductions in

point source and nonpoint source pollutant

loadings will help to identify where

sufficient cost differentials, and therefore Because point/nonpoint source trading

potential trading opportunities, exist. Cost shifts additional loading reductions from

estimates specific to sources or source sub- point sources to nonpoint sources,

categories, such as secondary treatment understanding how nonpoint source

plants and livestock feedlots, in a trading loadings behave relative to point source

area will be preferable to less specific loadings as they enter a waterbody helps

estimates or estimates from other areas. predict trading effects on water quality.

characteristics within a trading area is a

implemented) can be simple but powerful

tools to help water quality managers and

other stakeholders visualize potential

7.4 Technical and Scientific Issues

point/nonpoint trading on water quality.

Accommodating these differences in the

conditions of a trade can help attain

Spatial Considerations

Point sources are more likely to discharge
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a load continuously at specifically During dry seasons, point source loadings

identifiable points. In contrast, are higher relative to a waterbody*s

concentrations of pollutants in nonpoint assimilative capacity; although loadings

source discharges vary considerably and remain constant on average, waterbody

are released intermittently over the length flows are reduced. For this reason,

of the water-land boundary. estimating loads coming from a point

In some cases nonpoint sources may be trade is critical to protecting water quality

located within the same watershed but year-round.

upstream or distant from the point source

and/or waterbody of concern. Examination

of the implications of the relative locations

of trading partners and impacts on Chemical differences can exist between the

receiving waters is necessary. same pollutant coming from a point source

Temporal Considerations

Substituting reductions in nonpoint source them readily available to plants and

loadings for further point source reductions animals. For example, only inorganic

also changes the timing of when those forms of nitrogen are bioavailable.

reductions occur. Most point source

loadings are more predictable, as allowed In contrast, some pollutants from nonpoint

by daily and monthly average limits in sources can be attached or adsorbed to

their NPDES permits. Nonpoint source sediment when they reach water.

loads are typically more random and (Although in some situations, point source

variable, being influenced by daily and loadings can also be attached to sediment.)

seasonal weather conditions. In this form, chemical pollutants are less

Nonpoint source loadings generally Elevated concentrations of sediment can

increase during rainy seasons and decrease directly cause water quality problems due

during dry seasons. (One exception is to increased turbidity (decreasing the

nonpoint source pollution conveyed by amount of sunlight available to aquatic

irrigation return flows.) Since rain also life), clogged fish gills, and increased

dilutes nonpoint source runoff with higher levels of sediment oxygen demand.

waterbody flows, the short term effects of

nonpoint sources may be mitigated to some

extent. In many northern and high-altitude

climates, spring snowmelt is a major Several approaches are available to

source of nonpoint source pollution. Point account for differences between point and

source loadings are relatively constant nonpoint source loadings and address

across seasons; exceptions include uncertainty about how to exchange point

combined sewer overflows (CSOs) and source for nonpoint source loading

sanitary sewers with high inflow. reductions in such a way that water quality

source during low flow periods after a

Chemical Considerations

compared to a nonpoint source. Pollutants

from point sources typically reach

waterbodies in a dissolved form, making

available to create water quality problems.

Accommodating Differences

standards are achieved throughout

watersheds.
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EXHIBIT 7.2: TRADING RATIOS IN THE

DILLON AND TAR PAMLICO PROGRAMS

Point sources in the Lake Dillon program

trade at a ratio of 2:1; that is, they reduce

two pounds of nonpoint source phosphorus

loadings and receive credit for one pound. 

Dillon Lake established this ratio because it

was estimated that one additional pound

allowed to be discharged by the POTW due

to growth would lead to two additional

pounds from nonpoint sources. New

developments are required to install erosion

controls that are at least 50 percent

effective. As a result, the one additional

pound from the POTW leads to one

additional pound from nonpoint sources. 

Therefore, a 2:1 ratio was applied. (In

general, various averaging periods can

accompany trading ratios.)

Using a slightly different approach, the Tar

Pamlico River Basin point/nonpoint source

trading program*s fee for nonpoint source

loading reductions is based on a weighted

average of a trading ratio of 3:1 for cropland

BMPs and 2:1 for animal BMPs. (The

different crop and animal ratios reflect

differences in effectiveness and certainty of

the different activities and suitable BMPs.) 

In this program, point sources contribute a

specified amount to an agricultural costshare fund for every kilogram of nutrient

reduction they want to buy.

For example, using long-term average

loadings for both point and nonpoint

source loadings allows the loadings of each

to be compared over time periods where

variance is acceptable (i.e., where adverse

effects are chronic but not acute). This

comparison should be made based on an

evaluation of the load during periods of

“critical” conditions appropriate to the

waterbody; e.g., low flow, high loadings,

etc. Margins of safety offer a way to

protect water quality. They reflect

uncertainty about the relative effectiveness

of point source and nonpoint source

controls where trading is an option.

Establishing exchange rates between point

and nonpoint sources that reflect known

and unknown differences in effect should

also be considered.

Exchange rates, or trading ratios define the

number of units of nonpoint source

pollutant loading reduction that are

equivalent to one unit of point source

loading reduction. Where nonpoint source

loading reductions are less certain than

point source reductions, point sources

would pay for more than one unit of

loading reduction for every unit of credit

received. This “extra” reduction represents

a margin of safety that should be

proportional to the uncertainty associated

with predicted nonpoint reductions and

will help ensure that expected water quality sources build new alliances between

improvements actually occur. The use of stakeholders that may have had few prior

trading ratios for two programs is briefly opportunities to work together, especially

described in Exhibit 7.2. where watershed approaches are new or

7.5 Institutional Issues

Support from institutions and organizations

that have relationships with point and The list of potential stakeholders in

nonpoint sources is critical to developing a point/nonpoint source trading programs is

successful trading program. Trading long and diverse. The point source

programs involving point and nonpoint community is relatively small (compared to

not yet used.

Identifying Potential Stakeholders
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EXHIBIT 7.3: POINT/NONPOINT SOURCE

TRADING INSTITUTIONAL STAKEHOLDERS

C Environmental Protection Departments

C Natural Resource Management

Agencies

C Public Health Departments

C Public Works Departments

C Public Utility Commissions

C Fish and Wildlife Agencies

C Forest Service Offices

C Mining Offices

C Local Conservation Districts

C State Soil and Water Conservation

Districts;

C State Agriculture and Forestry

Departments

C Natural Resource Conservation Service,

Other USDA Affiliates

C Watershed Organizations

C Transportation Planning and Road

Construction Organizations

C Land Use Planning and Zoning

Organizations

C Flood Control Districts 

C Navigation Districts

C Water/Irrigation Districts

C University Cooperative Extension

Services

C Array of Nonprofits and trade

associations related to above

the nonpoint source community),

comprising mostly municipal and industrial

sources holding NPDES permits along

with their regulators and affiliate

associations. In contrast, many different

types of nonpoint sources are potential

trading partners. As a result, numerous

organizations with ties to nonpoint sources

may play a role in supporting

point/nonpoint source trading.

Additionally, each category of nonpoint

source typically represents a distinct

constituency and communication between

constituencies is often infrequent.

A first step in addressing institutional

issues for point/nonpoint source trading

involves identifying the specific

institutions and organizations—even down

to the departmental office or branch if

necessary— that currently regulate,

manage, assist, or act as watchdogs for the

specific point and nonpoint sources in the

area where trading is being considered.

Some of these state, regional, and local

organizations are identified in Exhibit 7.3.

Matching Trading Support Needs to

Existing Roles and Responsibilities

Key support needs of any trading program

include:

# Regulatory oversight scope of trading. Since point/nonpoint

# Providing information a large number of traders, many trades, and

# Brokering and facilitation facilitation, and tracking may be

# Tracking and documentation unregulated nonpoint sources are

# Technical assistance. assistance to help them implement

The appropriate level of support in any too may be a key support need of any

area is directly related to the scale and point/nonpoint source trading program.

source trading has the potential to involve

a large geographic area, information,

particularly important. Because many

accustomed to receiving technical

voluntary pollution reduction efforts, this
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Generally, entities that already provide In contrast, many electric utilities have

support to trading partners will be the best cited burdensome administrative

candidates to perform these functions for a requirements as reasons for not

trading program. By matching roles and participating in the acid rain allowance

responsibilities in a trading program to auction established under the Clean Air

current ones, point/nonpoint source trading Act and held through the Chicago Board of

can be more easily integrated into the Trade. Further, it is widely believed that

existing water quality management the Fox River point/point trading program

framework of a given area. faltered due to a poorly designed trading

7.6 Administrative Issues

Administrative issues relate to the nuts and

bolts of trading between point and

nonpoint sources. Generally, they include

the following activities:

# Guidelines for trading (e.g., eligibility,

trading ratios)

# Information management and benefit from administrative assistance from

dissemination other stakeholders. For example, if a

# Facilitation and brokering

# Tracking and documentation

# Technical assistance.

Experience to date with point/nonpoint

source trading, other types of effluent

trading, and trading in other media has

shown that the most successful trading

programs are those which minimize

administrative requirements for trading

parties and their governmental partners.

For example, the lead banking and trading

program that helped reduce lead content in

gasoline has been cited as the most

successful trading program in the United

States. (Banking describes arrangements

where pollutant reductions may be taken as

credit some time after they are purchased.)

Its success has been attributed in large part

to simple trading arrangements and

reporting requirements.

scheme (as described in Chapter 5).

Matching Administrative Arrangements

to Trading Arrangements

The type of trading arrangements between

point and nonpoint sources, as well as the

number of trades and traders, will

influence how much and what kind of

administrative support is needed and

whether point and nonpoint sources would

single point source is trading with a

handful of nonpoint sources, administrative

activities will likely be limited and

additional assistance unnecessary. On the

other hand, if a dozen point sources are

trading with a hundred potential partners,

administrative activities will likely be

broad and assistance from selected

agencies and watershed groups could

greatly facilitate trading and keep

transaction costs down. In fact, successful

trading schemes are most likely to occur

where there is a watershed group

committed to overseeing the effort.

Specific arrangements point and nonpoint

sources can use to carry out their trades are

as varied as the possible combinations of

point and nonpoint sources. They range

from simple, single-trade arrangements to

highly structured programs designed to

support an active trading market.
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Information Management

To facilitate trading, potential point and

nonpoint source partners need to be able to

identify each other. This can be

accomplished by the sources independently

or through a centralized service. Selected print and electronic media provide

Regulatory agencies, resource management forums for communication about many

departments, watershed groups, trade aspects of trading. This can be especially

associations, and nonpoint source important because point/nonpoint source

organizations are examples of candidates trading involves many individuals and

that can provide information about point groups that may be unfamiliar with each

and/or nonpoint sources to interested other outside trading programs. For

parties. example, local newspapers, existing

Point sources and other parties attempting

to identify potential nonpoint source

trading partners can consult a wide variety

of resources, depending on the type of

pollutant loading reduction sought and the

profile of nonpoint sources in the trading

area. Agencies and departments

responsible for managing nonpoint source

pollution can identify where nonpoint

source BMPs are not required and/or have

not been implemented. They also can

describe the type of pollutants that

nonpoint source BMPs and restoration

projects can reduce.

Land use maps and property owner lists are Watershed associations, conservation

often kept by local planning departments districts, nonprofit groups, private firms,

and/or state agencies. Regional planning and some government agencies would

and watershed organizations also may be a meet these criteria.

source of land use information. Where

available, geographic information systems

(GIS) also are a useful resource.

For nonpoint sources and other parties

seeking point sources interested in trading,

agencies regulating point sources generally

have a considerable amount of readily

available public information. This

information describes applicable

technology-and water quality-based limits,

pollutant loadings, compliance records,

and facility descriptions. Plant managers,

public works officials, corporate

environmental managers, and trade

associations are contacts to solicit point

source interest in trading.

environmental and association

publications, trading-specific newsletters,

and electronic bulletin boards offer

avenues for disseminating information

about trading programs and publicizing

opportunities.

Facilitation and Brokering

In some cases, point and nonpoint source

trading partners can benefit from

facilitation or brokering assistance to

identify, evaluate, and/or transact trades.

Traders will likely look for two things in a

facilitator or broker: a familiarity with

participants and issues and independence.

Tracking and Documentation

At a minimum, tracking and

documentation of trades should provide

feedback to regulatory agencies and natural

resource managers to ensure that trading is

consistent with water quality objectives.

Additionally, following implementation of

BMPs and restoration projects would

enable lists of candidate nonpoint source

projects to be kept up-to-date. Tracking
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can provide valuable information to important when nonpoint source owners or

support estimation of the overall managers, rather than third parties, are

effectiveness of trading programs. For responsible for operating and maintaining

larger trading programs, regular (e.g., BMPs providing loading reduction credits.

annual, quarterly) summaries of trading

activities can be an important

administrative tool.

Information that point and nonpoint

traders, as well as other stakeholders,

might find of interest includes:

# Parties to a trade

# Number of loading reduction credits

available/needed

# Terms of trade (e.g., type of

arrangement, price, trading ratio,

monitoring/ maintenance conditions,

etc.)

# Location and type of point and

nonpoint source(s).

# Type of management planned or

implemented.

Tracking and documenting trades also will

develop information that can be used to

enhance trading opportunities and can be

shared with others to assist their

consideration, design, and implementation

of trading programs.

Technical Assistance

Because many potential nonpoint source

trading partners mighthave had limited

experience with BMPs and other pollution

prevention measures, appropriate technical

assistance can increase chances for

successful trading. Many stakeholders

listed above in Exhibit 7.3 have

traditionally provided assistance to

nonpoint sources to help them implement

and manage BMPs. Identifying any

necessary assistance is particularly

7.7 Accountability and Enforcement

The contrast between accountability and

enforcement authorities and approaches

between point and nonpoint sources is a

critical consideration for point/nonpoint

trades. Point sources are controlled by

federal and state regulations, whereas

nonpoint sources are generally managed

through local, state, and other federal

regulatory, nonregulatory, and voluntary

programs. EPA anticipates that parties to a

trade will need to work with federal, state,

tribal, or local regulatory entities on a caseby-case basis to ensure that there is an

appropriate level of accountability and

enforceability in a trading arrangement.

Reasonable Assurance Within a TMDL or

Equivalent Assessment and Remediation

Plan

In the first two situations for

point/nonpoint source trading described

above (section 7.1, Regulatory Issues), a

trade will occur in the context of a TMDL

or an equivalent assessment and

remediation plan. A trade agreement

between partners and the state agency must

include a reasonable assurance that all

parties will be able to implement the

conditions of the trade. Point sources are

subject to direct federal and state

regulatory NPDES requirements. This

direct enforcement authority provides a

reasonable assurance that agreed-upon

activities will be implemented and that if

implementation does not occur there is a

regulatory recourse available to compel

compliance.
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Reasonable assurance in the context of Examples of reasonable assurance vary.

nonpoint source commitments is very Some include:

different. Nonregulatory, non-federal

reasonable assurances are appropriate

bases for trades under the following

conditions

1. The first condition for reasonable

assurance for nonpoint sources is that

proposed controls are technically

feasible. Expectations for reductions

included as part of a trade must be

consistent with actual field information

or commonly accepted modeling or

textbook values. Performance

expectations of BMPs must be

consistent with past practice or

expectations based on the application

of the specific practice to similar

situations. Thus, for example, expected

reductions in sediment from

agricultural activities must be based on

similar soils, hydrology, crop practices,

and associated pesticide and fertilizer

application and usage.

2. The second condition for meeting

reasonable assurance is that the

appropriate local, state, or federal

agencies have a reasonable expectation

that a nonpoint source will implement

specified controls. Reasonable

assurance of implementation can be

based on recent history of

implementation and experience with

similar types of activities. It may

include local or state regulatory

authority, or agreements between

different parties to provide financial or

technical assistance to finance

implementation, especially where these

agreements include contractual

arrangements with a federal or state

cost-share provider.

# Performance measures for controlling

and mitigating effects of development

or other land-disturbing activities.

# Local ordinances, state laws, or written

agreements or contracts that require

implementation of best management

practices for construction, agriculture,

forestry, road construction, etc.

# Local ordinances for erosion control

and flood protection.

# Local ordinances or state laws that rely

initially on voluntary compliance, but

provide for direct action in the event

voluntary approaches are ineffective.

# Existence of financial mechanisms to

support implementation of these and

other voluntary and regulatory

measures.

Exhibit 7.4 illustrates several examples of

state laws to implement nonpoint source

controls.

Meeting the Reasonable Assurance Test

In determining whether these types of

programs meet the reasonable assurance

test, designers of a trade need to consider a

number of factors. First, are the proposed

measures regulatory or voluntary? Unlike

NPDES permits, these types of measures

are rarely subject to direct federal

oversight. They may be subject to local or

state regulation. Examples of local

regulation are zoning or construction

runoff requirements applied to developers.

These requirements typically have high

rates of compliance, contain penalty

provisions if violated, and are generally
May 1996 Draft

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EXHIBIT 7.4: STATE LAWS FOR IMPLEMENTING NONPOINT SOURCE CONTROLS

• The Rhode Island Coastal Resources Management Council has broad authority to enforce

standards to reduce pollutant loadings from new development, redevelopment, and new and

relocated roads, highways, and bridges. Violators may be subject to administrative fees, fines,

and in some cases, criminal prosecution.

• The state of Delaware requires stormwater practices for new development to reduce total

suspended solid loadings to surface waters. The state has responsibility for enforcement,

exercised through referral from delegated agencies or citizen complaints. Delaware sediment

and stormwater regulations provide the authority to levy penalties for violations. 

• Maryland’s Forest Conservation Act requires that local jurisdictions with planning and zoning

authority adopt forest conservation programs that address how forests will be retained or

planted in priority areas. The Department of Natural Resources has the right and authority to

intervene in any local approvals of a forest conservation plan. The statute establishes

enforcement authority through DNR for violation, stop work orders and penalties.

• Wisconsin law allows the state’s Department of Natural Resources to directly remedy sites of

significant pollution. The law applies to any nonpoint source category, including agriculture,

urban, construction sites, and forestry, except for animal waste. DNR may order the abatement

of any water pollution deemed to be significant. Examples of covered water pollution include

a violation of water quality standards, a significant impairment of aquatic habitat or organisms,

and restrictions of navigation due to sedimentation.

• North Carolina’s “Nondischarge Rules” require certain categories of new and expanded animal

waste systems to apply for and receive an approved management plan. In certain cases, where

the state determines that a facility has an adverse impact on water quality, the rules also allow

the state to require systems to apply for and receive an individual nondischarge permit from the

Division of Environmental Management.

• The Kentucky Agriculture Water Quality Act requires that surface water and groundwater

resources be protected from pollution from agriculture and silviculture activities. It also

creates the Agriculture Water Quality Authority, which is a 15-member peer group made up of

representatives from various agencies, organizations, and farmers. The Authority reviews

water quality data and evaluates BMP effectiveness. The law also establishes a “Bad Actor

Clause” that sets out a procedure to follow in the event that contamination occurs.

• Vermont has a law and regulations that implement and enforce land use practices designed to

reduce the amount of agricultural pollutants entering state waters. Violators may face

injunctions or administrative penalties if they do not follow recommended corrective actions.

• The state of Oregon requires some landowners engaged in agricultural activities to develop

water quality management plans. If, under these plans, reasonable attempts at voluntary

solutions have failed, applicable parties may be subject to enforcement procedures such as civil

penalties as high as $10,000. 
May 1996 Draft

7-17

enforced. In addition, regulatory Specific performance contracts,

authorities need to provide for direct action incorporating performance bonds and other

in the event that voluntary approaches fail. individual financial incentives, provide a

In the absence of a specific regulatory

requirement, past practice, intent, and

ability to pay for the agreed-upon activities

may be considered. In this regard,

voluntary programs with good records of

past implementation may be considered. The third consideration in determining

Similarly, existing programs with poor reasonable assurance is the time frame for

records of implementation may not meet implementation. Reasonable assurance

the reasonable assurance test. would not apply, for example, to a local

Reasonable assurance may depend on the

existence of effective or assured financial

support mechanisms. Voluntary programs

with a past history of good compliance and

a guaranteed source of funding probably

meet the reasonable assurance test.

Similarly, voluntary or regulatory Reasonable assurance must be

programs eligible for funding support from demonstrated for all these factors before

assured sources of financing, such as low EPA approves a TMDL based on

interest, government-guaranteed loans or reductions expected as a result of nonpoint

assured payment streams, should be source controls.

carefully evaluated for purposes of

determining whether the measures being

proposed meet the reasonable assurance

test.

Contracts between nonpoint sources and

federal or state agencies provide financial

assistance in return for the owner or

operator*s commitment to install and

maintain particular practices and also may

meet the reasonable assurance test. Certain

programs provide, for example, economic

incentives for voluntary action to reduce

nonpoint pollution (e.g., USDA and state

cost-share, loan programs from State

Revolving Funds (SRFs), capitalized under

the CWA).

Finally, reasonable assurance should

consider the consequences if an

implementation activity fails to occur.

very strong incentive for continued

implementation. Lack of dedicated

funding or specific financial incentives

may indicate that reasonable assurance will

be extremely difficult to demonstrate.

ordinance expected to be acted on by a city

or county government in the near future. It

would apply, however, if the ordinance had

been passed and contained explicit

implementation time frames consistent

with any trade.

Reasonable Assurance and Actual

Performance

Point sources must meet an individual

discharge limit, i.e., an NPDES water

quality-based effluent limit. Nonpoint

source controls have higher degrees of

technical uncertainty. A well-designed

nonpoint source BMP, based on accepted

modeling, data from similar applications,

and commonly accepted professional

expectations, may nonetheless fail to

perform up to those expectations. In this

situation, the TMDL might need to be

revised or additional BMPs developed and

implemented.
May 1996 Draft

7-18

EXHIBIT 7.5: WATERSHED BANKS 

A watershed bank enters into binding legal agreements (including Consent Agreements,

Administrative Orders, or other legal contracts) with sources that will be implementing pollution

controls in exchange for financial payments. The value of a bank is determined through the

development of a TMDL or other equivalent analysis that allocates assimilative capacity and

pollutant loads. The bank can be operated by a regulatory entity such as a state authority or can be

operated by another public, private, or nonprofit entity. To compensate for any possible

nonperformance by the watershed bank, the regulatory entity can require the bank to post a bond or

related financial instrument in an amount sufficient to ensure that the regulatory entity would be able

to implement needed pollution control measures. In setting prices for pollutant load reduction

credits, a watershed bank will need to consider:

C The availability of nonpoint pollutant load reduction opportunities in the watershed.

C The likely future effects of implementing federal grant and other state nonpoint pollution

control programs and the resulting effect on the availability of nonpoint pollution control

opportunities.

C The likelihood of point sources seeking to initiate independent trades with nonpoint sources

and the resulting effect on the availability of nonpoint pollution control opportunities.

C The need to generate cash income sufficient to cover the costs of the banking activity and to

cover any unexpected costs associated with implementation of pollution control measures

over time.

C The technical feasibility and time constraints of developing multiple pollution control

programs at the same time.

Reasonable Assurance for Permit-Based

Trades

In the third situation described in section

7.1, in which point sources identify trades

with nonpoint sources that provide for

cost-effective implementation of controls

in lieu of treating their effluent to the

degree specified in a water-quality based

effluent limit, responsibility for

determining reasonable assurance rests

primarily with the NPDES permittee. In

this situation, responsibility for meeting

effluent limits, and ensuring that nonpoint

source controls are implemented and

effective, remains with the permittee. This

trading arrangement must be explained in

the fact sheet submitted when a permit is

issued or reissued. EPA believes that the

same consideration of reasonable

assurance applied within the context of a

TMDL is appropriate between the

permittee and nonpoint sources for permitbased trades.

Watershed Banks

In addition to direct trades between parties,

trading partners could participate in public

or private banks, which could buy and sell

pollutant reduction or other remedial action

credits within a watershed. Each of these

approaches works with individual buyers

and sellers and public and private

organizations. (See exhibit 7.5.)

7.8 Worksheet/Checklist

The following checklist outlines key

questions to consider in implementing a

point/nonpoint source trading program.
May 1996 Draft

7-19

WORKSHEET FOR EVALUATING SUCCESS OF POINT/NONPOINT SOURCE TRADING

Legal and Regulatory Conditions

General:

C Is point/nonpoint source trading implemented within the context of NPDES permitting,

local ordinances for nonpoint sources, TMDLs, and/or other applicable water quality

regulations?

yes

no

Specific:

C Can specific effluent limits be assigned to each point source, if necessary? yes

no

C Do reopener clauses in NPDES permits allow trading arrangements to be altered if water

quality standards are not met?

yes

no

C Does the regulatory climate for nonpoint sources create trading opportunities? yes

no

Economic Conditions

General:

C Can point and nonpoint sources save or make money by trading (i.e., are there economic

incentives to trade)?

yes

no

Specific:

C Do total incremental costs for pollution reduction, which include direct incremental costs

and transaction costs, differ among dischargers?

yes

no

C Do cost differentials among dischargers allow point sources to reduce pollution more

cheaply than nonpoint sources?

yes

no

C Do cost savings from trading outweigh the uncertainty that dischargers face under

trading schemes?

yes

no

C Are transactions costs less than cost savings from the trade? yes

no

C Is there a sufficient supply of pollution reduction for sale, as well as a reasonable

demand to buy reduction credits?

yes

no
May 1996 Draft

7-20

Data Availability Conditions

General:

C Are the data necessary to implement a trading program available or estimable? yes

no

Specific:

C Are there enough data to understand pollution quantities and flows within the watershed

(e.g., have water quality authorities conducted a TMDL or similar analysis)?

yes

no

C Can ambient water quality be monitored under trading? yes

no

C Are the physical characteristics of the watershed and waterbody appropriate to

accommodate trading?

yes

no

C Can point sources estimate their direct costs for reducing a specified unit(s) of pollution

(direct incremental costs)?

yes

no

C Can a direct cost or a watershed-wide average cost be calculated for nonpoint sources to

reduce a specified unit(s) of pollution?

yes

no

C Can dischargers estimate transaction costs that they would have to pay to conduct trades? yes

no

Administrative and Institutional Conditions

General:

C Are governmental authorities and potential trading participants capable of administering

a trading program?

yes

no

Specific:

C Do governmental authorities have enforcement mechanisms to ensure trades are being

implemented correctly and applicable limits and water quality standards are being met?

yes

no

C Is information about trading partners readily available so that buyers and sellers can

coordinate?

yes

no

C Are responsibilities clearly defined for institutions and dischargers taking part in trading? yes

no

C Is the scope of administrative infrastructure compatible with the amount and complexity

of the trading that is expected?

yes

no

C Are accountability for implementation of measures to reduce pollutant loading and

accountability for water quality improvements clearly established?

yes

no

C Can the agency responsible for enforcing trading provisions give necessary feedback to

parties responsible for water quality?

yes

no
May 1996 Draft

8-1

EXHIBIT 8.1: NONPOINT/NONPOINT TRADES

AT LAKE DILLON, COLORADO

Several nonpoint/nonpoint source trades have

been implemented at Lake Dillon, Colorado,

under a framework originally established for

point/nonpoint source trading that has been in

place since 1984. The four POTWs discharging

to the lake have not needed to trade to meet their

loading allocations due to high plant operating

efficiencies and slower-than-anticipated

population growth. Instead, controlling nonpoint

source loading is now a major objective in the

lake’s phosphorus mitigation strategy. 

In one trade, the Town of Frisco plans to use

phosphorus loading reductions the Frisco

Sanitation District achieved with stormwater

controls to offset additional phosphorus loadings

a proposed new golf course is expected to

generate. (This trade also is an example of

banking reductions for future application.) In

another trade, Keystone Resort paid for

sewering individual septic systems in specific

areas to produce reductions it could use to offset

new nonpoint source loads projected to come

from future resort development. In both trades,

additional nonpoint source loads were fully

offset with nonpoint source loading reductions

(i.e., no net gain in nonpoint source loadings).

Sources: Incentive Analysis for Clean Water Act

Reauthorization: Point Source/Nonpoint Source

Trading for Nutrient Discharge Reductions prepared

for the EPA Offices of Water and Policy, Planning,

and Evaluation, April 1992; and Northwest Colorado

Council of Governments, personal communication,

May 1996.

CHAPTER 8. NONPOINT/NONPOINT SOURCE TRADING

Nonpoint/nonpoint trading describes situations where nonpoint sources that have a

responsibility or a commitment to reduce pollutant loads arrange for reductions at other

nonpoint source sites.

Introduction

Nonpoint/nonpoint trading occurs where

nonpoint sources meet state or local

requirements by installing best

management practices (BMPs) or

conducting restoration at another location. 

The terms on-site and off-site describe

where BMP and restoration projects occur

relative to the nonpoint source property in

question. As a result, nonpoint/nonpoint

trading is a somewhat new term to describe

off-site activities. (To be consistent with

other chapters, this chapter uses the term

“nonpoint source” to mean landowners and

contributors to nonpoint source pollution). 

This chapter focuses on arrangements

where at least one nonpoint source faces a

voluntary commitment or mandatory,

enforceable requirement to implement

BMPs or reduce loadings by some amount

and the buyer pays at least part of the cost

to the seller in cash or in services. Exhibit

8.1 describes two such trades.

Off-site options and trading programs are

not alone in increasing the effectiveness of

nonpoint source pollution control. Many

watershed management and related

programs provide cost-sharing, lowinterest loans and grants, and technical

assistance to support nonpoint source

controls. Some of these programs embody

the same cost-effectiveness principles as

trading.
May 1996 Draft

8-2

An important reason nonpoint sources, States and local governments rely on a

regulators, and watershed managers wide variety of regulatory and

exercise off-site options is to capture cost nonregulatory tools to manage nonpoint

savings or additional environmental source pollution. The specific approach

benefits unavailable from on-site options. taken in any given jurisdiction reflects a

A number of factors can influence costs combination of local economic and

and expected effectiveness of nonpoint environmental priorities and preferences,

source control, including site as well as historical treatment of land uses

characteristics; available BMP options; and other local considerations. As a result,

proximity to incompatible land uses (e.g., a regulation of nonpoint sources varies

wetland in the middle of an urban area); greatly across jurisdictions, and readers

and location-specific technical interested in trading are encouraged to

considerations related to implementation, familiarize themselves with local nonpoint

operation, maintenance, monitoring, and source management approaches.

other actions. Trading, which can result in

more selective siting of BMPs, can

minimize costs and maximize

environmental results.

8.1 Regulatory Issues

The major distinguishing regulatory feature

of nonpoint/nonpoint source trading is that

trading parties are rarely regulated by

federal implementation of the CWA. 

Instead, the federal government relies on

state programs, operated in part with

federal dollars, to manage nonpoint source

pollution by vesting the states with

management responsibility. This situation

gives states flexibility in how they exercise

that responsibility and enables them to

defer to local land use authorities.

Examples of this approach are found in

section 319 of the CWA and the Coastal

Zone Act Reauthorization Amendments

(CZARA). Under these laws, coastal states

develop and implement comprehensive

management plans (subject to EPA

approval) that address nonpoint source

pollution. Federal grant eligibility under

the nonpoint source and coastal zone

management programs is contingent on

EPA approval of such plans.

Three strategies for managing nonpoint

source pollution that state and local

governments employ are discussed below:

# State and local regulatory programs

# Quasi-regulatory programs

# Voluntary programs.

In addition, wetland mitigation banking is

available as a management tool under the

CWA section 404 permit program. It also

is discussed below.

State and Local Regulatory Programs

State and local governments can use

permitting, licensing, or other prior

approval processes to protect water quality,

natural resources, and public health from

land uses that generate or have the

potential to generate nonpoint source

pollution. State and local governments

also can operate permit programs in which

an activity*s location triggers permit

review. Exhibit 8.2 describes key features

of state and local permit programs and

provides examples of activities and

geographic areas that most often receive

attention from such programs.
May 1996 Draft

8-3

EXHIBIT 8.2: STATE AND LOCAL PERMIT PROGRAMS FOR NONPOINT SOURCES

State and local permit programs involving nonpoint sources can be extremely diverse due to the fact that

they are optional and lack federal guidance. These programs, however, do have some common features. 

Permit programs also tend to apply to a common set of activities and a common set of geographical areas.

Key features:

• Enabling legislation and/or ordinance

• Definition, description, delineation of area subject to regulation

• Identification of uses and activities allowed, permitted, and prohibited

• Permitting criteria, design, and performance standards (sometimes specified by state statute)

• Required and/or voluntary BMPs

• Monitoring requirements

• Requirements for prevention or mitigation of adverse impacts

• Penalties for noncompliance

Examples of regulated activities (many of which can also fall under regulation by the 

NPDES program):

• Building and development, including roads • Pesticide and fertilizer application

• Timber harvesting • Marina siting

• Landfills • Golf courses

• Livestock management • Septic system siting and operation

Common special permit areas:

• Wetlands and adjacent uplands • Riparian zones

• Shorelines • Erosion-prone areas such as hillsides

• Floodplains • Aquifer recharge areas

• Wellhead protection areas • Drinking water supply sources

• Coastal zones • Sensitive-designated areas

• Special management areas

Unregulated sources can be trading and/or use provides substantial public

partners with regulated or unregulated benefits. Such unregulated nonpoint

sources. Activities may be exempt from sources are generally addressed in one or

permit review, always permitted, or more management plans that depend on

omitted in ordinances. “Grandfather” quasi-regulatory programs or voluntary

clauses also provide exemptions for land implementation of BMPs.

uses that existed prior to enactment of

enabling legislation.

Jurisdictions exempt certain activities from nonpoint sources. Combinations of

permit programs for a number of reasons, permitted and unregulated nonpoint

including the following: use compatible sources may exist within a watershed. 

with water quality protection; use provides Both types of sources, however, may trade

substantial and broad economic benefits; with each other.

Flexibility at the local level creates

significant opportunities for trading among
May 1996 Draft

8-4

Local planning departments and other

agencies with permitting authority often

have wide-ranging choices of what BMPs

and restoration requirements they include

in permits. Minimum standards establish

baseline conditions for permits. Beyond

those, local officials typically specify

conditions based on a balance between

environmental protection considerations

and economic development objectives.

Local officials concerned about balancing

economic impacts typically seek ways to

minimize compliance costs while

maintaining target levels of environmental

protection. Many local governments

accept off-site options after permittees

show that on-site options are economically

or technically less desirable or infeasible. 

Some jurisdictions also offer permittees the

option to pay a fee to support public and

private environmental restoration projects

in lieu of on-site action, particularly where

on-site actions are less beneficial to the

ecosystem or watershed than a more

holistic approach.

Since many local governments have

experience administering permits that

allow for off-site BMPs and restoration or

fees in lieu of on-site action, implementing

nonpoint/nonpoint source trading is not a

new concept. Those interested in

expanding existing options for such

nonpoint/nonpoint source trades should

first review ordinances, memoranda of

agreement, management plans, and other

relevant documents to determine whether

revisions are necessary to allow more

frequent consideration of off-site or fee-inlieu contributions.

Quasi-Regulatory and Voluntary

Management Programs

A variety of quasi-regulatory approaches

create incentives for nonpoint/nonpoint

source trading and a framework for

implementation of trades. These

approaches include nonpoint source

management plans, cost-share agreements,

and load allocations (LAs) that result from

TMDL development.

Management plans that address nonpoint

source pollution are often developed for

watersheds, jurisdictions, special areas, or

specific source categories. Plan sponsors

encourage voluntary BMP implementation

through a variety of mechanisms, including 

low interest loans, direct grants, costsharing, technical assistance, outreach and

public education, provision of benefits

contingent on BMP implementation (e.g.,

program eligibility, financial support), and

linking other regulatory and economic

decisions to implementation. 

A TMDL or other watershed project that

identifies contributing sources and

develops target loads also may provide

incentives to trade. TMDLs develop LAs

to allocate portions of the total load to

selected nonpoint sources. LAs are

implemented through state and local

nonpoint source control programs that vary

in their reliance on regulatory requirements

and voluntary measures to achieve loading

reductions. 

Wetland Mitigation Banking

The CWA section 404 permit program

regulates discharges of dredged or fill

material into waters of the United States,

including wetlands. The section 404

program relies on compensatory mitigation

to offset unavoidable impacts to wetlands
May 1996 Draft

8-5

and aquatic resources. Mitigation typically of BMP implementation or restoration

involves the restoration, creation, efforts, availability of cost-sharing, and

enhancement, or, in exceptional presence of transaction costs, are

circumstances, preservation of wetlands. discussed below.

Federal guidance on wetland mitigation Before addressing each of these factors,

"banking" encourages the consolidation of though, it is important to note that nonpoint

small, fragmented mitigation projects into sources and communities in which they

large, contiguous sites that are more exist may have different objectives. 

beneficial to the environment. Units of Nonpoint sources are primarily concerned

restored, created, enhanced, or preserved with minimizing costs for BMP

wetlands are expressed as "credits," which implementation and typically are

may subsequently be withdrawn to offset concerned about cost-effectiveness only

impacts, or "debits," incurred at a project where performance standards are

development site. applicable. Communities sponsoring

While traditionally used to offset wetland

losses, a mitigation bank also can be used

to compensate for other impacts to aquatic

resources, such as point and nonpoint

sources of pollution, where wetlands in the

mitigation bank serve to enhance or protect

water quality. In this way,

nonpoint/nonpoint trades may take place

within the context of wetland mitigation

banking. 

8.2 Economic Issues

Like other types of trading, cost and costeffectiveness are primary economic

considerations for nonpoint source trades

between on-site BMPs and off-site

alternatives. There is a significant

distinction in costs for nonpoint source

control, however, that affects

nonpoint/nonpoint trades: costs for

nonpoint source controls are highly

dependent on site-specific characteristics. The cost of a specific BMP varies with

Awareness of site-specific factors that

influence BMP cost, and likewise costeffectiveness, allows identification and

comparison of specific BMP options. 

These factors, which include physical site

conditions, nature of BMP required, scale

trading also are interested in providing cost

savings to nonpoint sources, but not at the

expense of environmental goals. They are

more concerned with achieving

environmental goals as cost-effectively as

possible. Reconciling stakeholder

objectives and providing clear incentives

are critical to designing successful trading

programs.

Physical Site Conditions

Trading provides nonpoint sources with

opportunities to select the least costly BMP

implementation option that will achieve

their environmental objective. This may

involve taking an action off-site that is less

expensive than it would be on-site. It also

may involve selecting a different, less

expensive off-site BMP that is appropriate. 

BMP suitability depends on site conditions,

so options and costs vary from site to site.

local physical conditions, such as slope,

soil type and permeability, vegetative

coverage, micro-climates, land uses, size of

drainage area, and depth to bedrock. This

is especially true for structural BMPs

because their design, construction,

operation, and maintenance must be
May 1996 Draft

8-6

tailored to site conditions. The terms stable regardless of size, and smaller

structural and nonstructural refer to two projects have fewer units (e.g., feet, cubic

types of BMPs. Structural BMPs are those feet, acres) over which to spread such

which require construction efforts or costs. However, proximity to existing

physical changes to a site. Nonstructural activities and effective scheduling of

BMPs do not change physical site resources can make small-scale BMPs

conditions. Instead, they change how more cost-effective.

humans use a site.

Nature of BMP Required

Measures available to control nonpoint

source pollution include a range of

physical structures and natural systems, as

well as nonstructural behavioral changes

and protection efforts. Often, nonstructural

BMPs are less expensive than structural

BMPs to implement because they involve

less engineering design, site preparation

(e.g., grading), and construction, all of

which can be relatively expensive. Thus, a

site that would require structural BMPs to

achieve desired loading reductions can

arrange a trade that uses less expensive off- Both approaches offer advantages to

site nonstructural BMPs. nonpoint sources, project sponsors,

Even though nonstructural BMPs tend to

be less expensive than structural BMPs,

they can be costly when they require land

purchases or other resource-intensive

actions. Alternative techniques, such as

conservation easements, are often available

to supplement or replace expensive land

purchases and other actions.

Scale of BMP Implementation

Nonpoint/nonpoint source trading can

provide opportunities to take advantage of

economies of scale (which occur when

average unit cost decreases as scale

increases). Larger BMPs and restoration

projects are generally less expensive per

unit than smaller ones of the same type. 

Certain kinds of costs, such as those related

to design and equipment, are relatively

Several types of trading arrangements help

nonpoint sources take advantage of

economies of scale. Many involve

piggybacking or pooling. Piggybacking

describes arrangements where a nonpoint

source contributes additional funding to

expand a project*s scope beyond what

would have been implemented without the

trade. Pooling describes arrangements

where several nonpoint sources responsible

for implementing individual BMPs or

mitigating wetland losses implement a

single project together. Exhibit 8.3

illustrates these concepts. 

resource managers, and watersheds by

lowering unit costs and increasing the

frequency and size of well-designed and

managed restoration projects. These

approaches also can reduce or eliminate

transaction costs associated with trade

identification, evaluation, implementation,

and monitoring.

Availability of Cost-Sharing

Several nonpoint source management

programs offer assistance for BMP

implementation in the form of cost-sharing,

direct grants, loans, and technical

assistance. Cost-sharing opportunities are

especially prevalent in agricultural

programs, and other situations in which

affordability of BMPs is a concern. The

availability of cost-sharing plans for certain

types of nonpoint sources may make them
May 1996 Draft

8-7

EXHIBIT 8.3: TWO EXAMPLES OF POOLING AND PIGGYBACKING :

FEE-BASED WETLAND MITIGATION PROGRAMS IN MARYLAND AND LOUISIANA 

The Maryland Department of Natural Resources (DNR) may accept fee-based compensation for

mitigation requirements if it determines that creation, restoration, or enhancement of nontidal

wetlands is not feasible. In most cases, monetary compensation is acceptable if the size of the

nontidal wetland loss is less than one acre and mitigation is not feasible on-site. DNR determines

the mitigation acreage requirements as a function of the size of the permitted impact and an

established mitigation ratio—3:1, 2:1, or 1:1. Per acre mitigation fees are determined based on the

cost to buy land in the affected county, plus design, construction, and monitoring costs. (In 1993,

they ranged from $11,000 to $52,000 per acre.) The fee option enables DNR to collect and pool

compensatory mitigation fees from small development impacts to fund larger nontidal wetland

restoration, creation, and enhancement projects. DNR presented the fee option as a mechanism not

only to reduce the administrative burden on the regulatory process, but also to serve as a means of

fulfilling its responsibility to mitigate for impacts of less than 5,000 square feet, for which it does

not require individual mitigation projects. 

The Nature Conservancy *s Louisiana field office (LNC) administers a program in which it accepts

fees in compensation for unavoidable losses of wetlands stemming from development activities

located in southeastern Louisiana. LNC uses compensation fees for off-site preservation and longterm management activities of degraded pine flatwood wetlands. In all cases, the U.S. Army Corps

of Engineers (Corps) determines whether fee-based compensatory mitigation is acceptable after

potential impacts have been avoided, unavoidable impacts have been minimized, and feasible on-site

mitigation measures have been determined to be impracticable. The Corps also determines the

amount of acreage that must be mitigated through a standardized process that quantifies the overall

natural quality of the wetlands in the area. Compensatory fees payable to the trust fund take into

account the appraised ecological value of the developed property and the estimated loss of

ecological value as a result of the development. Valuation calculations are primarily the Corps *s

responsibility.

more likely to install BMPs. It also will addition, a nonpoint source can experience

make some BMPs subsidized with cost- transaction costs in evaluating off-site

share funds less expensive to the nonpoint options. Transaction costs vary based on

source than other BMPs. Thus, these factors including:

sources may be good candidates for offsite partners in trading programs.

Transaction Costs

Nonpoint/nonpoint source trading involves options.

some transaction costs that are different

from those identified with other trading

types. The major difference stems from

the fact that nonpoint sources tend to be

less conspicuous—by definition they are

diffuse. They are also typically smaller

and more numerous. These tendencies can

make identifying suitable trades costly. In

# Ability to identify other nonpoint

sources.

# Number and proximity of off-site

# Similarity of nonpoint source

candidates.

# Complexity of physical conditions at

area nonpoint sources.
May 1996 Draft

8-8

# Availability of preexisting data at off- measured at the water*s edge, it is often

site sources. difficult to attribute loads to specific near-

# Efforts required to compare off-site

options to on-site options. Data may be of sufficient quantity and

Local governments and state agencies

involved in nonpoint source pollution

management can help reduce transaction

costs by supplying information about

potential trading partners. Nonprofit

environmental organizations also might be

able to direct interested parties to candidate

nonpoint source trading partners. 

Additionally, watershed management,

growth management, and local

comprehensive plans often identify

unaddressed nonpoint source pollution

problems.

8.3 Data-Related Issues

Nonpoint/nonpoint trading may require

several types of data. Pollutant loads and

water quality data provide an indication of

the ability of BMPs to control nonpoint # National Estuary Program estuaries.

source pollution and enhance watershed

ecology. Economic information enables

cost comparisons between BMP options,

while geographic data helps understand the

types and distribution of land uses that

contribute to nonpoint source pollution in

watersheds.

Pollutant Loads and Water Quality

Monitoring Data

In many places, nonpoint/nonpoint trading

relies on creative strategies, simple

techniques, and approximations to identify

opportunities and evaluate results because

the quantity and quality of pollutant

loading and water quality data vary

considerably. Unlike point sources,

nonpoint source loads are not typically

monitored at the source. When loads are

shore and upland sources.

quality to support trading where data

collection and analysis efforts exist as part

of other programs. As a result, data

quantity and quality is a site-specific issue

that requires careful consideration. In

urban areas, ambient monitoring conducted

for stormwater programs and by point

sources as part of their NPDES permit

requirements can provide useful

information for nonpoint/nonpoint source

trading. In urban and rural areas, U.S.

Geological Survey monitoring stations also

provide some data. Other sources of data

include:

# TMDL waterbody analyses, especially

where load allocations are made.

# Section 319 monitoring programs.

# Great Lakes, Chesapeake Bay, and

Gulf of Mexico programs.

# Federal, state, regional, and local

special management areas.

# Nonpoint source-specific agencies and

programs.

# Demonstration and pilot projects.

# Academic studies.

In the absence of site-specific data,

nonpoint/nonpoint trading can be

supported by a variety of techniques that

are available to estimate BMP pollution

control efficiencies. These techniques

range from simple runoff and soil loss
May 1996 Draft

8-9

equations to more complex ecosystem same departments, universities, or regional

modeling and simulations. governmental and watershed organizations

These techniques have been applied with

good results to structural BMPs, such as

infiltration basins, vegetative filter strips,

sediment barriers, and detention ponds. 

Their applicability to nonstructural BMPs,

such as street cleaning, air pollution

control, public education, and land use

planning, is still an emerging science. As a

result, relatively few data are available that

characterize the effectiveness of

nonstructural BMPs.

Nonpoint/nonpoint source trading can be (i.e., pollution from rain or airborne

initiated with the best available data, using contaminants) and hydrologic modification

estimates if necessary. As trading occurs, (e.g., channelization and channel

managers can conduct periodic evaluations modification, dams, and streambank and

to determine if program design or shoreline erosion). Nonpoint sources

administration adjustments are warranted. contribute to water quality problems

Additionally, as trading evolves, associated with nutrients, pesticides,

monitoring improvements and other metals, organics, bacteria, low dissolved

advances can be used to increase the data oxygen, and suspended sediment.

precision and enhance environmental

results.

Economic and Geographic Data

Economic and geographic data related to

nonpoint sources are typically available

from state and local government agencies, # Natural watershed conditions (local

special regional and university-based soils and precipitation, for example).

programs, and federal publications. Cost

estimates for BMP implementation in

specific areas are not always available, but

a variety of sources provide estimates of

incremental unit costs and describe how to

adjust such general estimates for source,

location, climate, and other site-specific

factors.

Maps and other records indicating location

of potential trading partners and existing

BMPs are generally available from state

and local planning departments. These

sometimes have geographic information

systems that can produce detailed maps

showing, for example, zoning, land use,

soil conditions, and topography.

8.4 Technical and Scientific Issues

Nonpoint source pollution occurs when

rain, snowmelt, or irrigation return flows

move over and through the ground,

transporting pollutants from the land to

surface water. Nonpoint source pollution

also results from atmospheric deposition

The way in which nonpoint source

pollution occurs raises several scientific

issues that must be considered to undertake

nonpoint/ nonpoint trades. These issues

include:

# Effectiveness of BMPs.

# Spatial, temporal, and chemical

differences among nonpoint source

loads.

Natural Conditions

Since nonpoint source loads are highly

dependent on natural, random, and mostly

uncontrollable events, understanding and

predicting the results of trades may be
May 1996 Draft

8-10

difficult. Climatic events, such as usually expressed in the form of ranges or

precipitation, wind, and temperature, averages. But measuring the effectiveness

greatly affect delivery of nonpoint source of non-structural BMPs is more

loads. Geologic and hydrologic problematic than measuring the

conditions, including surface soil types, effectiveness of structural BMPs. 

underlying geologic structure, and Effectiveness can be expressed in terms of

watershed hydrology, also influence reduced loads, improved water quality,

nonpoint pollution. and/or other benefits such as habitat or

Nonpoint/nonpoint trading programs

require flexibility to handle the variability

of nonpoint source loads. For example,

above-average rainfall might cause

increased nonpoint loads, even after BMPs

have been implemented through a trading

program. This situation does not

necessarily reflect ineffective BMPs. Use

of scientific models or other analytical

tools can help program administrators

understand the effects of random

watershed conditions and verify the One way to address such variability is to

effectiveness of trading programs. index pollutant loading reductions to a

Effectiveness of BMPs

The effectiveness of a BMP at a particular

site is subject to a variety of factors that

interact in sometimes complex and/or

hidden ways. Some factors are humaninfluenced, while others are natural or

otherwise uncontrollable. They include:

# Proper installation, operation, and

maintenance.

# Suitability of BMP selection and design

for source and pollutants.

# Physical site conditions such as slopes,

soils, and water table.

# Climate, including precipitation,

temperature, and wind.

Because such variability exists, available

estimates for BMP effectiveness are

flood protection. Scientific models are

also used to evaluate potential

effectiveness of BMPs under a range of

conditions. Departments of agriculture and

local planning departments are two

potential sources of BMP effectiveness

information along with Guidance

Specifying Management Measures For

Sources Of Nonpoint Pollution In Coastal

Waters (USEPA, Office of Water, 840-B92-002, January 1993).

baseline year, as was done for the Lake

Dillon Program. By doing this, program

managers would not penalize BMPs that

removed relatively small amounts of

pollutants during dry periods or over-credit

BMPs that removed significant amounts

despite poor performance during heavy

rainfall conditions. 

Side effects are an important consideration

in evaluating and comparing trading

options. For example, management

practices that intercept pollutants leaving a

source (e.g., installation of infiltration

basins) may reduce runoff, but also may

increase infiltration to groundwater. Such

BMPs may not be suitable for trading in

areas with high groundwater tables.

Again, flexibility is the key for

administrators of nonpoint/nonpoint

trading programs to manage variability. 

Just as they account for variability in

natural conditions, trading programs must
May 1996 Draft

8-11

account for variations in BMP for two reasons: (1) different nonpoint

effectiveness. sources produce different types of

Spatial, Temporal, and Chemical

Considerations 

Spatial, temporal, and chemical differences

and uncertainties can exist among loads

from nonpoint sources. This can be true

within as well as across source categories. 

Estimating relative impacts of load

reductions from one nonpoint source

compared to that from another helps

predict the potential effects of trading on

water quality. 

Nonpoint/nonpoint source trading shifts

additional load reductions from one site in

a watershed to another site. As noted

above, nonpoint source loads are sitespecific and vary according to a number of Given the fluctuating nature of nonpoint

factors. Thus, changing the spatial source loads, nonpoint/nonpoint trading

configuration of nonpoint source loads to programs can be relatively difficult to

waterbodies can produce results for water quantify and more uncertain than other

quality that are difficult to predict. types of programs. Various methods for

Substituting reductions in nonpoint source

loads from one site for another also can

change the timing of loads to waterbodies. 

The major reason for these changes in the

temporal arrangement of loads is that

discharges from different nonpoint sources One approach is to compare nonpoint

occur at very different rates. For example, source loads using average loads over a

a sharply sloped, paved urban area can specific time period, such as a season,

discharge much higher quantities of runoff year, or low-flow period. Average loads

than a flat, vegetated septic system field for various nonpoint sources can highlight

during a single rain event. Thus, trading the relative magnitude of spatial, temporal,

may alter the rate at which selected and chemical differences.

pollutants are discharged, producing

uncertain effects on water quality.

In addition to effects from spatial and quality objectives in trade situations by

temporal configurations of nonpoint source setting aside a portion of pollutant

loads, trading can change the overall allocations. Margins of safety may reflect

chemical composition of loadings. This uncertainty about the relative effectiveness

facet of nonpoint/nonpoint trading occurs of nonpoint source controls where trading

pollutants; and (2) the same pollutant from

different types of nonpoint sources may

produce different reactions in receiving

waters. 

Some nonpoint source loads are associated

with dissolved constituents (e.g., those

carried by irrigation return flows and

leaking septic systems). Others are

associated more closely with solid phase

constituents (e.g., urban runoff and soil

erosion losses from cropland). Trades that

affect the proportion of various

constituents in nonpoint loads can

significantly modify water chemistry.

Managing Load Differences 

managing this uncertainty, however, are

available to water quality authorities and

other stakeholders in a trading program. 

These methods help to ensure that water

quality objectives are achieved.

TMDL margins of safety are another

approach to ensure achievement of water
May 1996 Draft

8-12

is an option. Using margins of safety to

structure individual nonpoint/nonpoint

trades can decrease the uncertainty

associated with load reductions from

nonpoint source controls. 

Exchange rates, or trading ratios, define the institutional structures vary from state to

reduction in pollutant loading at one site state, and even at the local level, Exhibit

needed to match reductions in loading at 8.4 lists agencies and departments that

another. Trading ratios can be used for typically manage different types of

nonpoint/nonpoint trades where loading nonpoint sources.

reductions are less certain at one site than

at another (or result in less water quality

improvement). In such situations, a

nonpoint source purchases more than one

unit of off-site load reductions for every

unit of credit received. This “extra”

reduction acts as an insurance policy to

make sure that expected water quality

improvements actually occur.

8.5 Institutional Issues

Institutional support for nonpoint/nonpoint

source trading is key to successful trades. Once it becomes clear which nonpoint

Institutions involved can be as numerous sources are likely to be trading partners

and diverse as the types of nonpoint (e.g., agriculture with agriculture, septic

sources in a watershed. Typically, with agriculture), institutions not currently

management of nonpoint sources is based involved with those sources opt out of

on the economic sector (e.g., farming, playing a significant role in trading. 

forestry, etc.) and/or jurisdiction (e.g., city, Nevertheless, keeping them informed

county, special district). about trading developments provides

The result is often a patchwork of

oversight and assistance, which requires

coordinated efforts among institutions. 

Overlaps occur frequently where two or

more institutions are involved with the

same nonpoint sources in the same areas. 

Just as frequently, different institutions can

be involved in nonpoint source

management on adjacent parcels, but not

coordinate their activities. Further, gaps in

coverage exist for selected categories in

some areas.

Identifying Supporting Institutions

Listing the types of nonpoint sources

located in a trading area helps identify

those institutions which could play a role

in supporting trading. Although specific

Any organization involved with nonpoint

sources that might be trading candidates

should be invited to participate in early

discussions about trading. Other

stakeholders can benefit from their

knowledge and expertise about particular

nonpoint sources and BMPs. Additionally,

such participation ensures that nonpoint

trading is examined as broadly as possible

before eliminating any sources or locations

from consideration.

opportunities for them to identify future

trading possibilities.

Coordinating Institutions

Achieving sufficient coordination among

participants may be particularly

challenging for nonpoint source trading. 

Many organizations involved in nonpoint

source management work with specific

nonpoint sources; communication among

the organizations is limited. Therefore,

when trading partners are similar with

respect to category, activity, location, and 
May 1996 Draft

8-13

EXHIBIT 8.4: INSTITUTIONS THAT MANAGE VARIOUS TYPES OF NONPOINT SOURCES

Nonpoint Sources Institutions

Agricultural runoff Natural Resource Conservation Service, state agriculture or soil and

water

 conservation agencies, water conservation districts

Silvicultural runoff National Forest Service, state forestry agencies

Urban runoff and State and local permitting authorities, including land use planning and

 construction activities zoning departments/boards

Septic systems* State and local public health departments

Residential urban runoff State and local environmental protection departments, consumer protection

and education offices

Marinas and recreational U.S. Coast Guard, state and local natural resource offices

boating*

Hydromodification U.S. Army Corps of Engineers, delegated Section 404 states, local 

governments, navigation districts

*Although nonpoint sources, these can fall under regulation by the NPDES program.

jurisdiction, coordination is relatively easy; roles in one nonpoint/nonpoint trading case

when trading partners are dissimilar with study.

respect to these factors, coordination is

more challenging.

Coordination challenges often can be met In most areas, regulatory and

with minimal additional effort. nonregulatory nonpoint source

Stakeholders can identify a lead management programs provide a

organization to facilitate coordination and framework for trading. Trading is most

clarify responsibilities. successful when it is integrated into

Candidates for this role include frameworks, making changes or adding

organizations with permitting authority or new responsibilities when necessary.

with management responsibility for areas Nonpoint/nonpoint source trading may

where traded BMPs will be implemented, require the following types of

as well as umbrella institutions such as administrative support:

watershed organizations and regional

planning commissions. Nonprofit # Establishing guidelines for trading

environmental organizations also typically (e.g., eligibility, trading ratios).

are involved with many different sources. 

Other mechanisms to enhance coordination

include work groups, task forces, and

information sharing. Exhibit 8.5 illustrates

8.6 Administrative Issues

existing regulatory and management

# Information management and

dissemination.

# Facilitation and brokering.
May 1996 Draft

8-14

EXHIBIT 8.5. INSTITUTIONAL ROLES IN A

POTENTIAL SELENIUM TRADING

PROGRAM

In a study examining the feasibility of using

economic incentives to control nonpoint

source pollution from subsurface farm

drainage in California *s Central Valley, the

Environmental Defense Fund (of a) proposed

a program that relies on trading. The

Regional Water Quality Control Board

would specify a TMDL for selenium in the

San Joaquin River and then assign

allocations (essentially LAs) to regional

drainage districts, or directly to water

districts (in the absence of a regional

district) in the form of discharge permits. 

The regional districts would then allocate

LAs among contributing water and drainage

districts. The trading program would provide

an additional opportunity to adjust load

allocations. Through trades, districts could

achieve a cost-effective distribution of

pollution reduction responsibility (which

may change from year to year) and resolve

any equity issues resulting from the initial

allocation. The regional drainage districts

would assist member districts by identifying

potential trades, recording transactions, and

enforcing permit limits.

Source: Plowing New Ground: Using

Economic Incentives to Control Water Pollution

from Agriculture Environmental Defense Fund

(T. Young and C. Congdon), 1994, pp 126-127.

# Tracking and documentation.

# Technical assistance and outreach.

# Coordination among participants.

Administrative needs differ for

nonpoint/nonpoint trades that involve at

least one permitted party compared to

trading strictly among unregulated

partners.

Administration When One Party Is

Regulated

When at least one party to nonpoint trading

operates under the conditions of a state

requirement or local ordinance, trading can

be fully or partially administered through

the applicable requirements. 

Usually, construction, operating, and other

types of requirements that cover nonpoint

sources include the following information

that is useful to support trading:

# Name and address, and site address if

different.

# Required BMPs (identified as

performance- or design-based),

performance standards, and

mitigation/restoration.

# Location of BMP/restoration project if

off-site.

# Special off-site conditions (e.g., two

acres off-site equal one acre on-site,

monitoring, reporting).

# General conditions for compliance. 

# Inspection rights.

# Enforcement measures.

If programs already offer off-site options

under certain circumstances (and in effect

have a trading program),

nonpoint/nonpoint trading can be

administered easily through this existing

option. If off-site options are currently

unavailable, areas considering trading can

look to other jurisdictions offering off-site

options as models. It might be appropriate

to supplement existing requirements with

additional site-specific information to

ensure that water quality managers and
May 1996 Draft

8-15

nonpoint source owners are aware of Where regulated nonpoint sources trade

trading activities. with unregulated nonpoint sources, permits

When BMPs are implemented at different

sites than they would be in the absence of

trading, authorities and nonpoint sources

can involve appropriate organizations in a

variety of ways to facilitate trading and

maximize effectiveness. Options to

involve other organizations include sharing

information, engaging them in identifying

trading opportunities, and assigning them One way nonpoint/nonpoint trading can

responsibility for oversight, monitoring, increase the effectiveness of BMPs is by

and/or technical assistance. targeting implementation at a place and/or

Administration When Both Parties Are

Unregulated

Trades involving unregulated nonpoint

sources may generally rely on existing

technical and financial assistance networks

to help administer trading. In many areas,

assistance is available to nonpoint sources

that implement BMPs voluntarily.

Trading is easier to administer between

nonpoint sources covered by the same

program. Cross-source trading is more

difficult to administer since partners may

be unfamiliar with each other, and different

programs may be incompatible.

8.7 Accountability and Enforcement

Trading programs function differently

depending on the regulatory status of

partners involved. For example, when

regulated nonpoint sources trade with each

other, permitting authorities want to be

sure that each party to a trade fully meets

applicable permit conditions. Permitting

authorities can specify trading

arrangements as permit conditions for

nonpoint sources involved in trading.

could specify that regulated parties are

responsible for off-site BMP

implementation. This provides the permit

authority control over water quality. 

Alternatively, nonpoint source

owners/managers or third parties can

accept responsibility for BMPs through

contracts or other agreements.

source where the level of accountability

and enforcement is higher than it is on-site. 

BMP effectiveness is dependent, in part,

on proper installation and maintenance. 

This includes holding nonpoint sources

accountable when implementation is

poorly executed and enforcing that

accountability.

Nonpoint Source Accountability and

Enforcement Are Limited 

One distinguishing feature of nonpoint/

nonpoint source trading is that pollutant

control requirements are almost always

technology-based or performance-based, as

opposed to water quality-based. Nonpoint

sources satisfy requirements by

implementing and maintaining required

BMPs. If BMPs are properly implemented

and maintained but do not provide the

expected level of pollutant control,

nonpoint sources are generally not required

to take additional measures.

Other limitations also may decrease the

accountability of nonpoint sources

involved in trading. Many regulatory

programs have insufficient resources to

conduct inspections to ensure that BMPs

and restoration projects are properly

installed and maintained over time. As a
May 1996 Draft

8-16

EXHIBIT 8.6: APPROACHES FOR ENHANCING

ACCOUNTABILITY AND ENFORCEMENT

C Select sites where BMPs are visible and

easily monitored.

C Select sources where a commitment to

operation and maintenance exists.

C Require the posting of a performance

bond.

C Execute contracts or agreements that

specify responsibilities and enforcement

consequences.

C Vest accountability in the off-site

landowner.

C Vest accountability in a third party.

C Monitor BMP performance periodically

to detect problems and provide

assistance.

C Use economic, political, public relations,

and other incentives to ensure full

implementation.

C Provide interested volunteers with

information on BMP location

maintenance.

result, full advantage is not always taken of

existing enforcement authority.

Additionally, when problems are

identified, it may be impractical or

infeasible to initiate enforcement actions

for a number of reasons (e.g., business

closure ). Even when enforcement occurs,

remediation can take a long time. 

Sometimes, the only leverage managers

have over nonpoint sources that install or

maintain BMPs improperly is to reduce or

eliminate certain technical assistance,

financial support, or eligibility for other

programs.

Several approaches, listed in Exhibit 8.6,

can be used to enhance existing

accountability and enforcement for

nonpoint/nonpoint trading. Accountability

is also discussed in more detail in Chapter

7. 

8.8 Worksheet/Checklist

The following checklist outlines key

questions to consider in implementing a

nonpoint/nonpoint source trading program. 

It is not necessary for each of these

questions to be answered favorably for

trading to succeed. The chances for

success will be greatest, however, if all

interested parties are aware of these issues

and take them into account as they pursue

the potential benefits of a trading program.
WORKSHEET FOR EVALUATING SUCCESS OF NONPOINT/NONPOINT SOURCE TRADING

Legal and Regulatory Conditions

General:

C Is nonpoint/nonpoint source trading implemented within the context of state or local yes

regulations and management plans? no

Specific:

C Are certain types of nonpoint sources required to implement specific BMPs to control yes

pollutant discharges? no

C Are local or state permits flexible enough to allow trading among nonpoint sources? yes

no

C Do trades comply with the conditions in permits? yes

no

C Are there unregulated nonpoint sources available to trade with regulated sources? yes

no

Economic Conditions

General:

C Can nonpoint sources save or make money by trading (i.e., are there economic incentives yes

to trade)? no

Specific:

C Do total incremental costs for BMPs, which include direct incremental costs and yes

transaction costs, differ among nonpoint sources? no

C Do cost differentials among nonpoint sources allow one discharger to implement BMPs yes

more cheaply than another? no

C Are transaction costs less than cost savings from a trade? yes

no

C Do cost savings from trading outweigh the uncertainties that nonpoint sources face under yes

trading schemes? no

C Is there a sufficient supply of BMP implementation for sale, ras well as a reasonable yes

demand to buy BMP credits? no

Data Availability Conditions

General:

C Are the data necessary to implement a trading program available or estimable? yes

no

Specific:

C Are there enough data to understand pollution quantities and flows within the watershed yes

(e.g., have water quality authorities conducted a TMDL that includes load allocations)? no

C Can regulatory authorities monitor water quality under trading? yes

no

C Can nonpoint sources and regulatory agencies calculate or estimate the water quality yes

effects of BMPs? no

C Can nonpoint sources or regulatory agencies calculate or estimate the costs of yes

implementing various types of BMPs? no

C Can a regulatory agency calculate the average cost of all BMPs for a watershed, if a yes

banking system is planned? no

C Can nonpoint sources estimate transaction costs that they would have to pay to conduct yes

trades? no
May 1996 Draft

8-18

Administrative and Institutional Conditions

General:

C Are governmental authorities and potential trading participants capable of administering yes

a trading program? no

Specific:

C Do governmental authorities have enforcement mechanisms to ensure trades are being yes

implemented correctly? no

C Are governmental authorities with expertise in different types of nonpoint sources yes

available to help administer trading programs? no

C Is a governmental agency capable of operating a bank or fund for purchasing BMPs, if a yes

banking-style trading program is desired? no

C Are responsibilities clearly defined for administering institutions and nonpoint sources yes

taking part in trading? no

C Is the scope of administrative infrastructure compatible with the amount and complexity yes

of the trading that is expected? no

C Is accountability for implementation and success of BMPs clearly established? yes

no

C Can the agency responsible for enforcing trading provisions give necessary feedback to

parties responsible for water quality?

yes

no
Glossary -1

GLOSSARY

Acute: A stimulus severe enough to rapidly induce an effect; in aquatic toxicity tests, an effect observed

in 96 hours or less typically is considered acute. When referring to aquatic toxicology or human health,

an acute effect is not always measured in terms of lethality. 

Advanced Wastewater Treatment: Any treatment of sewage that goes beyond the secondary or

biological water treatment stage and includes the removal of nutrients such as phosphorus and nitrogen

and a high percentage of suspended solids. ( See: primary, secondary treatment.)

Agricultural Pollution: Farming wastes, including runoff and leaching of pesticides and fertilizers;

erosion and dust from plowing; improper disposal of animal manure and carcasses; crop residues; and

debris. 

Anti-degradation: Policies that are part of each state*s water quality standards. These policies are

designed to protect water quality and provide a method of assessing activities that may impact the

integrity of the waterbody. 

Assimilative Capacity: The capacity of a natural body of water to receive wastewaters or toxic

materials without deleterious effects and without damage to aquatic life or humans who consume the

water. 

Benefits: A good, service, or attribute of a good or service that promotes or enhances the well-being of

an individual, an organization, or a natural system. 

Best Management Practices (BMPs): Schedules of activities, prohibitions of practices, maintenance

procedures, and other management practices to prevent or reduce the pollution of waters of the United

States. BMPs also include but are not limited to treatment requirements, operating procedures, and

practices to control plant site runoff, spillage or leaks, sludge or wastewater disposal, or drainage from

raw material storage.

Bioaccumulation: The process by which a contaminant accumulates in the tissues of an individual

organism. For example, certain chemicals on food eaten by a fish tend to accumulate in its liver and

other tissues.

Bioavailable: The state of a toxicant such that there is increased physicochemical access to the toxicant

by an organism. The less the bioavailability of a toxicant, the less its toxic effect on an organism. 

Categorical Pretreatment Standard: A technology-based effluent limitation for an industrial facility

discharging into a municipal sewer system. Analogous in stringency to Best Availability Technology

(BAT) for direct discharges. 

Chronic: A stimulus that lingers or continues for a relatively long period of time, often one-tenth of the

life span or more. Chronic should be considered a relative term depending on the life span of an

organism. The measurement of a chronic effect can be reduced growth, reduced reproduction, etc., in

addition to lethality.

Clean Water Act (CWA): The Clean Water Act (formerly referred to as the Federal Water Pollution

Control Act or Federal Water Pollution Control Act Amendments of 1972), Public Law 92-500, as

amended by Public Law 96-483 and Public Law 97-117, 33 U.S.C. 1251 et seq.
Glossary -2

Coastal Zone: Lands and waters adjacent to the coast that exert an influence on the uses of the sea and

its ecology, or whose uses and ecology are affected by the sea. 

Combined Sewer Overflow: Discharge of a mixture of stormwater and domestic waste when the flow

capacity of a sewer system is exceeded during rainstorms.

Concentration-Based Limit: A limit based on the relative strength of a pollutant in a wastestream,

usually expressed in milligrams per liter (mg/l). 

Continuous Discharge: A discharge that occurs without interruption throughout the operation hours of

the facility, except for infrequent shutdowns for maintenance, process changes, or other similar

activities. 

Control Authority: A POTW with an approved pretreatment program or the Approval Authority in the

absence of a POTW pretreatment program. 

Conventional Pollutants: Statutorily listed pollutants understood well by scientists. These may be in

the form of organic waste, sediment, acid, bacteria, viruses, nutrients, oil and grease, or heat. 

Created Wetland: A wetland intentionally created from a non-wetland site to produce or replace

natural habitat (e.g., a compensatory mitigation project). These wetlands are normally considered waters

of the United States or waters of the state. (See restoration, enhancement, constructed wetland.)

Designated Uses: Those water uses identified in state water quality standards that must be achieved and

maintained as required under the Clean Water Act. Uses can include cold water fisheries, public water

supply, irrigation, and others. 

Direct Runoff: Water that flows over the ground surface or through the ground directly into streams,

rivers, and lakes. 

Discharge Monitoring Report (DMR): The EPA uniform national form, including any subsequent

additions, revisions, or modifications, for the reporting of self-monitoring results by permittees. DMRs

must be used by approved states as well as by EPA.

Discharge: Flow of surface water in a stream or canal or the outflow of groundwater from a flowing

artesian well, ditch, or spring. Can also apply to discharge of liquid effluent from a facility or to

chemical emissions into the air through designated venting mechanisms. 

Ecosystem: A biological community together with the physical and chemical environment with which it

interacts. 

Effluent: Wastewater, treated or untreated, that flows out of a treatment plant, sewer, or industrial

outfall.

Effluent Guidelines: Technical EPA documents that set effluent limitations for given industries and

pollutants. 

Effluent Limitation: Restrictions established by a state or EPA on quantities, rates, and concentrations

in wastewater discharges. 

Enhancement: In the context of restoration ecology, any improvement of a structural or functional

attribute.
Glossary -3

Feedlot: A confined area for the controlled feeding of animals. Tends to concentrate large amounts of

animal waste that cannot be absorbed by the soil and, hence, may be carried to nearby streams or lakes

by rainfall runoff. 

Groundwater: The supply of fresh water found beneath the earth*s surface, usually in aquifers, which

supply wells and springs. Because groundwater is a major source of drinking water, there is growing

concern over contamination from leaching agricultural or industrial pollutants and leaking underground

storage tanks. 

Heavy Metals: Metallic elements, such as mercury, lead, nickel, zinc, and cadmium, that are of

environmental concern because they do not degrade over time. Although many are necessary nutrients,

they are sometimes magnified in the food chain and in high concentrations can be toxic to life. 

Indirect Discharge: A nondomestic discharge introducing pollutants to a publicly owned treatment

works. 

Industrial User (IU): A source of indirect discharge that does not constitute “discharge of pollutants”

under regulations issued pursuant to section 402 of the Clean Water Act. 

Irrigation Return Flow: Surface and subsurface water that leaves a field following the application of

irrigation water.

Irrigation: Applying water or wastewater to land areas to supply the water and nutrient needs of plants.

Land Application: Discharge of wastewater onto the ground for treatment or reuse. (See: irrigation)

Landfills: 1. Sanitary landfills are disposal sites for nonhazardous solid wastes spread in layers,

compacted to the smallest practical volume, and covered by material applied at the end of each operation

day. 2. Secure chemical landfills are disposal sites for hazardous waste, selected and designed to

minimize the chance of release of hazardous substances into the environment. 

Leachate: Water that collects contaminants as it trickles through wastes, pesticides, or fertilizers. 

Leaching can occur in farming areas, feedlots, and landfills and can result in hazardous substances

entering surface water, groundwater, or soil.

Leachate Collection System: A system that gathers leachate and pumps it to the surface for treatment.

Load Allocation (LA): The portion of a receiving water*s loading capacity that is attributed either to

one of its existing or future nonpoint sources of pollution or to natural background sources. Load

allocations are best estimates of the loading, which can range from reasonably accurate estimates to

gross allotments, depending on the availability of data and appropriate techniques for predicting the

loading. Wherever possible, natural and nonpoint source loads should be distinguished. (40 CFR

130.2(g))

Loading Capacity (LC): The greatest amount of loading that a water can receive without violating

water quality standards.

Margin of Safety (MOS): A required component of the TMDL that accounts for the uncertainty about

the relationship between the pollutant loads and the quality of the receiving waterbody (CWA section

303(d)(1)(C)). The MOS is normally incorporated into the conservative assumptions used to develop

TMDLs (generally within the calculations or models) and approved by EPA either individually or in

state/EPA agreements. If the MOS needs to be larger than that which is allowed through the

conservative assumptions, additional MOS can be added as a separate component of the TMDL (in this

case, quantitatively, a TMDL = LC = WLA + LA + MOS)
Glossary -4

Mass-Based Standard: A discharge limit that is measured in a mass unit such as pounds per day.

Mitigation: Actions taken to avoid, reduce, or compensate for the effects of environmental damage. 

Among the broad spectrum of possible actions are those which restore, enhance, create, or replace

damaged ecosystems. 

Monitoring: Periodic or continuous surveillance or testing to determine the level of compliance with

statutory requirements and/or pollutant levels in various media or in humans, plants, and animals. 

National Pollutant Discharge Elimination System (NPDES): The national program for issuing,

modifying, revoking and reissuing, terminating, monitoring, and enforcing permits, and imposing and

enforcing pretreatment requirements, under Sections 307, 402, 318, and 405 of the Clean Water Act.

Nonpoint Source: Diffuse pollution sources (i.e., without a single point of origin or not introduced into

a receiving stream from a specific outlet). The pollutants are generally carried off the land by

stormwater. Common nonpoint sources are agriculture, forestry, urban, mining, construction, dams,

channels, land disposal, saltwater intrusion, and city streets. 

Permit: An authorization, license, or equivalent control document issued by EPA or an approved state

agency to implement the requirements of an environmental regulation; e.g., a permit to operate a

wastewater treatment plant or to operate a facility that may generate harmful emissions. 

Point Source: Any discernible confined and discrete conveyance, including, but not limited to, any

pipe, ditch, channel, tunnel, conduit, well, discrete fissure, container, rolling stock, concentrated animal

feeding operation, landfill leachate collection system, vessel, or other floating craft from which

pollutants are or may be discharged. This term does not include return flows from irrigated agriculture

or agricultural stormwater runoff. 

Pollutant: A contaminant in a concentration or amount that adversely alters the physical, chemical, or

biological properties of the environment. The term includes pathogens, toxic metals, carcinogens,

oxygen-demanding materials, and all other harmful substances. With reference to nonpoint sources, the

term is sometimes used to apply to contaminants released in low concentrations from many activities that

collectively degrade water quality. As defined in the federal Clean Water Act, pollutant means dredged

spoil; solid waste; incinerator residue; sewage; garbage; sewage sludge; munitions; chemical wastes;

biological materials; radioactive materials; heat; wrecked or discarded equipment; rock; sand; cellar dirt;

and industrial, municipal, and agricultural waste discharged into water. 

Pollution: Generally, the presence of matter or energy whose nature, location, or quantity produces

undesired environmental effects. Under the Clean Water Act, for example, the term is defined as the

man-made or man-induced alteration of the physical, biological, chemical, and radiological integrity of

water. 

Pretreatment: The reduction of the amount of pollutants, the elimination of pollutants, or the alteration

of the nature of pollutant properties in wastewater to a less harmful state prior to or in lieu of discharging

or otherwise introducing such pollutants into a publicly owned treatment works.

Primary Treatment: A basic wastewater treatment method that uses settling, skimming, and (usually)

chlorination to remove solids, floating materials, and pathogens from wastewater. Primary treatment

typically removes about 35 percent of biochemical oxygen demand (BOD) and less than half of the

metals and toxic organic substances.

Privately Owned Treatment Works: Any device or system that is (a) used to treat wastes from any

facility whose operator is not the operator of the treatment works and (b) not a POTW. 
Glossary -5

Public Comment Period: The time allowed for the public to express its views and concerns regarding

action by EPA (e.g., a Federal Register notice of a proposed rule-making, a public notice of a draft

permit, or a Notice of Intent to Deny).

Publicly Owned Treatment Works (POTW): Any device or system used in the treatment (including

recycling and reclamation) of municipal sewage or industrial wastes of a liquid nature that is owned by a

state or municipality. This definition includes sewers, pipes, or other conveyances only if they convey

wastewater to a POTW providing treatment.

Restoration: Return of an ecosystem to a close approximation of its condition prior to disturbance.

Riparian Areas: Areas bordering streams, lakes, rivers, and other watercourses. These areas have high

water tables and support plants that require saturated soils during all or part of the year. Riparian areas

include both wetland and upland zones. 

Riparian Vegetation: Hydrophytic vegetation growing in the immediate vicinity of a lake or river close

enough so that its annual evapotranspiration represents a factor in the lake or river regime.

Riparian Zone: The border or banks of a stream. Although this term is sometimes used

interchangeably with floodplain, the riparian zone is generally regarded as relatively narrow compared to

a floodplain. The duration of flooding is generally much shorter, and the timing less predictable, in a

riparian zone than in a river floodplain. 

Secondary Treatment: The second step in most publicly owned waste treatment systems, in which

bacteria consume the organic parts of the waste. It is accomplished by bringing together waste, bacteria,

and oxygen in trickling filters or in the activated sludge process. This treatment removes floating and

settleable solids and about 90 percent of the oxygen-demanding substances and suspended solids. 

Disinfection is the final stage of secondary treatment. (See: primary, tertiary treatment.)

Septic System: An on-site system designed to treat and dispose of domestic sewage. A typical septic

system consists of a tank that receives waste from a residence or business and a system of tile lines or a

pit for disposal of the liquid effluent (sludge) that remains after decomposition of the solids by bacteria

in the tank; must be pumped out periodically.

Sewer: A channel or conduit that carries wastewater and stormwater runoff from the source to a

treatment plant or receiving stream. “Sanitary” sewers carry household, industrial, and commercial

waste. “Storm” sewers carry runoff from rain or snow. “Combined” sewers handle both. 

Stormwater: Stormwater runoff, snowmelt runoff, and surface runoff and drainage; rainfall that does not

infiltrate the ground or evaporate because of impervious land surfaces but instead flows onto adjacent

land or watercourses or is routed into drain/sewer systems. 

Stream Restoration: Various techniques used to replicate the hydrological, morphological, and

ecological features that have been lost in a stream due to urbanization, farming, or other disturbance. 

Surface Runoff: Precipitation, snowmelt, or irrigation water in excess of what can infiltrate the soil

surface and be stored in small surface depressions; a major transporter of nonpoint source pollutants.

Surface Water: All water naturally open to the atmosphere (rivers, lakes, reservoirs, ponds, streams,

impoundments, seas, estuaries, etc.) and all springs, wells, or other collectors directly influenced by

surface water. 

Technology-Based Limitations: Industry-specified effluent limitations applied to a discharge when it

will not cause a violation of water quality standards at low stream flows. Usually applied to discharges

into large rivers. 
Glossary -6

Technology-Based Standards: Effluent limitations applicable to direct and indirect sources that are

developed on a category-by-category basis using statutory factors, not including water quality effects. 

Tertiary Treatment: Advanced cleaning of wastewater that goes beyond the secondary or biological

stage, removing nutrients such as phosphorus, nitrogen, and most biochemical oxygen demand (BOD)

and suspended solids.

Total Maximum Daily Load (TMDL): The sum of the individual wasteload allocations (WLAs) for

point sources and land allocations (LAs) for nonpoint sources and natural background. If a receiving

water has only one point source discharger, the TMDL is the sum of that point source WLA plus the LAs

for any nonpoint sources of pollution and natural background sources, tributaries, or adjacent segments. 

TMDLs can be expressed in terms of mass per time, toxicity, or other appropriate measure that relates to

a state*s water quality standard. If best management practices (BMPs) or other nonpoint source pollution

control actions make more stringent load allocations practicable, WLAs can be made less stringent. 

Thus, the TMDL process provides for nonpoint source control trade-offs. (40 CFR 130.2(I))

Total Maximum Daily Load (TMDL) Process: The approach normally used to develop a TMDL for a

particular waterbody or watershed. This process consists of five activities, including selection of the

pollutant to consider, estimation of the waterbody*s assimilative capacity, estimation of the pollution

from all sources to the waterbody, predictive analysis of pollution in the waterbody and determination of

total allowable pollution load, and allocation of the allowable pollution among the different pollution

sources in a manner that ensures that water quality standards are achieved.

Toxic Pollutants: Materials that cause death, disease, or birth defects in organisms that ingest or absorb

them. The quantities and exposures necessary to cause these effects can vary widely. Those pollutants

listed by the Administrator under section 307(a) of the Clean Water Act.

Wasteload Allocation (WLA): The portion of a receiving water*s loading capacity that is allocated to

one of its existing or future point sources of pollution. WLAs constitute a type of water quality-based

effluent limitation (40 CFR 130.2(h)).

Water Quality Criteria: Levels of water quality expected to render a body of water suitable for its

designated use. Composed of numeric and narrative criteria. Numeric criteria are scientifically derived

ambient concentrations developed by EPA or states for various pollutants of concern to protect human

health and aquatic life. Narrative criteria are statements that describe the desired water quality goal.

Criteria are based on specific levels of pollutants that would make the water harmful if used for drinking,

swimming, farming, fish production, or industrial processes.

Water Quality Standard: A law or regulation that consists of the beneficial designated use or uses of a

waterbody or a segment of a waterbody and the water quality criteria that is necessary to protect the use

or uses of that particular waterbody. Water quality standards also contain an anti-degradation policy. 

The water quality standard serves a twofold purpose: (a) it establishes the water quality goals for a

specific waterbody and ( b) it is the basis for establishing water quality-based treatment controls and

strategies beyond the technology-based levels of treatment required by sections 301(b) and 306 of the

Clean Water Act, as amended by the Water Quality Act of 1987.

Water Quality-Based Effluent Limitations: Effluent limitations applied to dischargers when mere

technology-based limitations would cause violations of water quality standards. Usually WQBELs are

applied to discharges into small streams. 

Water Quality-Based Permit: A permit with an effluent limit more stringent than one based on

technology performance. Such limits may be necessary to protect the designated use of receiving waters

(e.g., recreation, irrigation, industry or water supply). 
Glossary -7

Water Quality-Limited Segments: Those water segments which do not or are not expected to meet

applicable water quality standards even after the application of technology-based effluent limitations

required by sections 301(b) and 306 of the Clean Water Act (40 CFR 130.29(j)). Technology-based

controls include, but are not limited to, best practicable control technology currently available (BPT) and

secondary treatment.

Waterbody Use: A waterbody or a segment of a waterbody can have many uses. Typical uses include

public water supplies, propagation of fish and wildlife, recreational purposes, agricultural use, industrial

use, navigation, and other such uses. EPA does not recognize waste transport as an acceptable use. 

Watershed Protection Approach (WPA): The U.S. EPA*s comprehensive approach to managing

water resource areas, such as river basins, watersheds, and aquifers. WPA has four major

features—targeting priority problems, stakeholder involvement, integrated solutions, and measuring

success.

Watershed-Scale Approach: A consideration of the entire watershed, including the land mass that

drains into the aquatic ecosystem. 

Watershed: A drainage area or basin in which all land and water areas drain or flow toward a central

collector such as a stream, river, or lake at a lower elevation.

Wetlands: An area that is saturated by surface water or groundwater with vegetation adapted for life

under those soil conditions, as in swamps, bogs, fens, marshes, and estuaries. 
APPENDIX A—EFFLUENT TRADING IN WATERSHEDS

POLICY STATEMENT
Appendix A-1

EFFLUENT TRADING IN WATERSHEDS

POLICY STATEMENT

Purpose

In response to President Clinton's Reinventing Environmental Regulation

(March 1995), EPA strongly promotes the use of effluent trading to achieve water

quality objectives and standards. This statement communicates EPA’s policy on

effluent trading in watersheds, discusses the benefits of trading, presents an

explanation of several types of effluent trading, and outlines how EPA will be

encouraging trading. This policy is Agency guidance only and does not establish or

affect legal rights or obligations. It does not establish a binding norm and is not finally

determinative of the issues addressed. Agency decisions in any particular case will be

made by applying the law and regulations on the basis of specific facts when permits

are issued.

Policy

EPA will actively support and promote effluent trading within watersheds to

achieve water quality objectives, including water quality standards, to the extent

authorized by the Clean Water Act and implementing regulations. EPA will work

cooperatively with key stakeholders to find sensible, innovative ways to meet water

quality standards quicker and at less overall cost than with traditional approaches

alone. EPA will assure that effluent trades are implemented responsibly so that

environmental progress is enhanced, not hindered.

Benefits

EPA's support of watershed-based trading is anchored to a strong commitment

to achieve and maintain water quality standards. EPA believes that trading is an

innovative way for community stakeholders (e.g., regulated sources, non-regulated

sources, regulatory agencies and the public) to develop more "common sense"

solutions to water quality problems in their watersheds. Effluent trading potentially

offers a number of economic, environmental and social benefits:

Economic Benefits:

- Reduces costs for individual sources contributing to water quality

problems.

- Allows dischargers to take advantage of economies of scale and

treatment efficiencies that vary from source to source.
 A TMDL provides the water quality analysis and planning process for determining the specific pollution 1

reductions that are necessary to attain or maintain water quality standards. Under section 303 (d) of the CWA,

States establish TMDLs for impaired waters. The TMDL process includes legal requirements for public

participation and implementation through NPDES permits.

Appendix A-2

- Reduces overall cost of addressing water quality problems in the

watershed.

Environmental Benefits:

- Achieves equal or greater reduction of pollution for the same or less

cost.

- Creates an economic incentive for dischargers to go beyond minimum

pollution reduction and also encourages pollution prevention and the

use of innovative technologies.

- Can reduce cumulative pollutant loading, improve water quality,

accommodate growth and prevent future environmental degradation.

- Can address the broader environmental goals within a trading area, e.g.,

ecosystem protection, ecological restoration, improved wildlife habitat,

endangered species protection, etc.

Social Benefits:

- Encourages dialogue among stakeholders and fosters concerted and

holistic solutions for watersheds with multiple sources of water quality

impairment.

Explanation of Different Types of Effluent Trading

Trading supplements the current regulatory approach. It is a method to attain

and/or maintain water quality standards, by allowing sources of pollution to achieve

pollutant reductions through substituting a cost-effective and enforceable mix of

controls on other sources of discharge. As the Agency improves its understanding of

the opportunities afforded by watershed-based decision making, EPA will provide

information for additional forms of trading.

To take advantage of trading, a point source must be in compliance, and remain

in compliance, with applicable technology-based limits. Intra-plant trades must also

have a technology-based floor, while the technology floor for pretreatment trading is

determined by the categorical standards. EPA expects that most trades will be covered

by Total Maximum Daily Loads (TMDL) or similar watershed-based analysis.1
Appendix A-3

The items to be traded are the pollutant reductions or water quality

improvements sought. Under trading, a source that can more cost-effectively achieve

greater pollutant reduction than is otherwise required would be able to sell or barter the

credits for its excess reduction to another source unable to reduce its own pollutants as

cheaply. To ensure that water quality standards are met throughout a watershed, an

equivalent or better water pollutant reduction would need to result from a trade. 

Below are proposed definitions for several different types of effluent trading

approaches. These definitions are preliminary and do not reflect the full range of

feasible trades:

Intra-Plant Trading: A point source is allocated pollutant

discharges among its outfalls in a costeffective manner, provided that the combined

permitted discharge with trading is no greater

than the combined permitted discharge

without trading in the watershed.

Pretreatment Trading: An indirect industrial point source(s) that

discharges to a publicly owned treatment

works arranges, through the local control

authority, for additional control by other

indirect point sources beyond the minimum

requirements in lieu of upgrading its own

treatment for an equivalent level of reduction.

Point/Point Source Trading: A point source(s) arranges for other point

source(s) in a watershed to undertake greater

than required control in lieu of upgrading its

own treatment beyond the minimum

technology-based treatment requirements in

order to more cost-effectively achieve water

quality standards.

Point/Nonpoint Source Trading: A point source(s) arranges for control of

nonpoint source discharge(s) in a watershed

in lieu of upgrading its own treatment beyond

the minimum technology-based treatment

requirements in order to more cost-effectively

achieve water quality standards.

Nonpoint/Nonpoint Source Trading: A nonpoint source(s) arranges for more costeffective control of other nonpoint sources in
Appendix A-4

a watershed in lieu of installing or upgrading

its own control.

How EPA Will Be Encouraging Trading

EPA is developing a framework for watershed-based effluent trading, as well as

information exchange workshops, and limited technical assistance for trading projects

in specific areas. Watershed-based trading will be implemented on a voluntary basis

under existing Clean Water Act (CWA) authorities. There will be substantial public

outreach effort to obtain stakeholders' recommendations and insights on draft portions

of the framework prior to implementation.

 

Finally, while EPA believes that the potential of trading is largely untapped, the

usefulness of trading will depend on the site-specific water quality conditions in any

given situation. The framework will describe situations which EPA believes are most

appropriate for watershed-based trading, and those that are generally inappropriate. 

EPA plans to distribute a draft trading framework in February, 1996 and hold a

series of stakeholder meetings. For more information call Mahesh Podar at (202)260-

7818, fax (202)401-3372 or send an Email message to herzi.hawa@epamail.epa.gov

or tuano.theresa@epamail.epa.gov.

Attachment

s/

Robert Perciasepe

Assistant Administrator for Water 

Steven A. Herman

Assistant Administrator for Enforcement and Compliance Assurance

Jonathan Z. Cannon 

General Counsel
Appendix A-5

Attachment

EXPERIENCE TO DATE

Trading is being explored, developed or implemented in a number of

watersheds throughout the country. Some examples are below:

Project/Location Focus Type of Trading

Fox River, WI BOD, nutrients point/point

Dillon Reservoir, CO phosphorus point/nonpoint; nonpoint/nonpoint

Boulder Creek, CO ammonia, point/nonpoint

nutrients

Tar-Pamlico, NC nitrogen, point/nonpoint

phosphorus

Arkansas Nature Conservancy wetlands nonpoint/nonpoint

Maryland Nontidal Wetlands wetlands nonpoint/nonpoint

Iron and Steel BOD, TSS, zinc, and intra-plant

lead

Rhode Island electroplaters metals pretreatment

Chehalis River Basin, WA BOD point/nonpoint

Boone Reservoir, TN nutrients point/nonpoint

Wicomico River, MD phosphorus point/nonpoint

Honey Creek Watershed, OH phosphorus point/nonpoint

South San Francisco Bay, CA copper point/point

Long Island Sound, NY dissolved oxygen Point/nonpoint

Cherry Creek, CO phosphorus point/nonpoint; point/point

Tampa Bay, FL nitrogen, TSS point/point; point/nonpoint;

nonpoint/nonpoint

Chatfield Basin, CO phosphorus point/nonpoint
APPENDIX B—ISSUES FOR FUTURE CONSIDERATION
INTRA-PLANT TRADING IN THE IRON AND STEEL INDUSTRY

In establishing effluent limitation guidelines for the iron and steel industry, EPA

employed the same procedures it uses in setting technology-based requirements for other

industries. Unlike guidelines for other industries, effluent limitation guidelines for the

iron and steel industry permit a facility to trade discharge allowances among multiple

outfalls. Under these regulations, a facility that reduces pollutant discharges beyond

technology-based requirements at one or more outfalls need not meet technology-based

requirements at other outfalls, provided that total discharges of pollutant(s) involved in

such trades are less than would be discharged under normal uniform technology-based

requirements. This flexibility is designed to allow facilities to reduce their total pollution

control costs, provided that they can simultaneously achieve better overall pollution

control.

EPA regulations have placed the following specific conditions on intra-plant trading in the iron

and steel industry:

1. Resultant discharges comply with applicable state water quality standards.

2. Each outfall is assigned specific, fixed effluent limitations for pollutants affected.

3. Process wastewaters associated with certain iron and steel industry operations are

excluded from trades since trades involving these wastewaters could inadvertently result

in a net increase in quantity of toxic pollutants discharged.

4. The net allowable discharge of traded pollutants is less than the discharge that would be

allowed without the trade. The minimum necessary reduction is approximately 15

percent for total suspended solids and oil and grease, and 10 percent for all other

pollutants.

A recent EPA study identified 10 iron and steel plants that took advantage of the intra-plant

trading rule. These facilities applied trading to wastewater discharges from a range of steel plant

processes, including trades of both conventional pollutants and metals. Estimates of the reduction

in pollution control expenditures attributable to trading are available for only seven of these

facilities. The present value of the cost savings realized at the seven facilities between 1983 and

1993 is approximately $123 million( 1993 dollars). Estimated savings ranged from $3 million at

an East Chicago plant to $69 million at a Gary, Indiana, facility. Moreover, the permits for each

of these facilities established discharge limits more stringent than ordinary technology-based

requirements. At the Gary plant, for example, the permitted daily average discharge of

total suspended solids (TSS) under trading was 2,575 pounds per day lower than would

have been allowed under a standard permit. Trades at other iron and steel facilities have

established more stringent permit limits for lead, zinc, and oil and grease, as well as TSS. 

In each case, trades also resulted in significant cost savings.

Source: The Use and Impact of Iron and Steel Industry Intra-Plant Trades , prepared for

the Office of Policy, Planning, and Evaluation, USEPA, March 1994.

ISSUES FOR FUTURE CONSIDERATION

Intra-Plant Trading to Meet Technology-Based Requirements

This framework establishes the principle that sources must meet applicable

technology-based requirements before they are eligible to participate in trades. Below

is an example of the only instance where EPA has allowed trading to meet technologybased requirements. It is unclear whether future effluent guidelines will allow this

form of intra-plant trading.
Appendix B-2

CROSS POLLUTANT TRADES? CLEANING UP ORPHAN

NONPOINT POLLUTION SOURCES FOR CREDIT

Stakeholders in Colorado *s Clear Creek Basin are examining point/nonpoint source trading

opportunities that could include cross-pollutant trading. Under the proposed program, point

sources could “adopt” (clean up) orphan nonpoint sources in exchange for pollutant loading

reduction credits. Orphan sources fall outside current regulations or have no identifiable

owner or operator. Abandoned mines and areas of habitat destruction are two examples of

orphan sites that are prevalent in the watershed. Such trades could involve translating

reductions of one pollutant or habitat benefits into reduction credits for another pollutant.

Because there are multiple constituents of concerns some stakeholders believe that crosspollutant trading could achieve significant environmental improvements. Consider the

example of an industrial facility that faces additional nutrient loading reductions. If cleaning

up an orphan mine site, where loadings contain significant amounts of metal but few

nutrients, could provide nitrogen or phosphorus credits, the point source would probably be

more interested in the trade than if only metals credits were available. Cross-pollutant

trading might require the development of an index or series of trading ratios that would

convert one pollutant or water quality benefit into credits that are desirable to regulated point

sources. Cross-pollutant trades are being considered across (and within) such categories as

nutrients, metals, sediment, habitat, instream flow, and wetlands. The feasibility study is

one of several initiatives sponsored by the National Forum on Nonpoint Source Pollution

Cross-Pollutant Trading

EPA does not currently envision a situation in which “cross-pollutant” trading could

work under current regulatory conditions and technical limitations. Most (if not all)

trades to date have involved the same pollutant, such as nitrogen for nitrogen or

phosphorus for phosphorus. A few communities are investigating cross-pollutant

trading involving different pollutants, such as nitrogen for phosphorus or nitrogen for

zinc. 

Sufficient data are often unavailable to enable assessment of the impacts of different

pollutants, and therefore the relative value of pollutant load reductions. Without such

assessment, though, water quality managers are unable to predict the effects of trading. 

In the future, when environmental benefits can be thoroughly demonstrated, EPA will

consider the use of cross-pollutant trading.
APPENDIX C—EXAMPLES OF EXISTING AND

POTENTIAL FUTURE TRADING PROGRAMS
Examples of Existing and Potential Future Trading Programs

 Table 1. Existing Programs.

Program/Location How Is It Set Up? Who's Involved? Status

What's Being Traded

Trade Type(s)

Arkansas Nature Conservancy, AK U.S. Army Corps of Engineers (USACE) permittees pay USACE, Little Rock District At least 6 trades had occurred

wetlands

nonpoint/nonpoint

compensatory mitigation fees to The Nature (501-324-5296); Arkansas as of 3/93.

Conservancy. The Conservancy applies these fees to Nature Conservancy (501-

wetland acquisition and enhancement projects. A 663-6699).

mitigation ratio is based on types of wetlands.

Boulder Creek, CO The City of Boulder contributed to a riparian enhancement Denver Regional Council of Short-term results look

ammonia, nutrients

point/nonpoint

project (including riparian zone restoration and restoration Governments (303-455- promising; monitoring is in

of instream habitats) to alleviate an un-ionized ammonia 1000); EPA Region 8 (Bruce place to assess long-term

problem and defer expensive modifications at its POTW. Zander 303-312-6846). Also effects.

Studies had shown that POTW upgrades alone would be the City of Boulder and the

insufficient to reach water quality standards due to the Colorado Dept. of Health.

degraded condition of the creek. See TMDL Case Study

#8 (EPA-841-F-93-006; fax requests for document to

NCEPI, 513-569-7186).

Cherry Creek, CO Point sources can earn wasteload allocation credits by Denver Regional Council of Implementation of the program

phosphorus

point/nonpoint

installing, operating, maintaining, and monitoring nonpoint Governments (303-455- has been delayed because

source phosphorus controls. Before trading may begin, 1000); EPA Region 8 (Bruce nonpoint source loadings are

urban nonpoint source loadings must be reduced by half. Zander 303-312-6846). Also not yet halved and loadings

the Colorado Water Quality are still below the maximum

Control Commission. limit. 

Dade County, FL Clean Water Act section 404 permittees impacting USACE, Jacksonville District As of 3/93, the fund had

wetlands

nonpoint/nonpoint

wetlands in specific areas have the option to pay a fee to (904-232-3943); Dade received over $400,000.

satisfy mitigation requirements. Funds go into a Wetlands County (305-372-6789). 

Mitigation Trust Fund that supports improvements in the Also the Florida Department

East Everglades. of Environmental Resource

Management, and

Everglades National Park.

Fox River, WI Point sources were allowed to trade effluent allocations, Wisconsin Department of The program was first

BOD, nutrients

point/point

but only under limited circumstances: the facility buying Natural Resources (608- implemented in 1981, but only

reductions must be new, expanding, or not able to meet 266-2621). one trade has occurred since

discharge limits even with use of required technology. that time.

Trades where cost-savings is the sole objective are

prohibited. Trades are effective for a minimum of one

year, and a maximum of the time left on the permit.
Examples of Existing and Potential Future Trading Programs

Program/Location How Is It Set Up? Who's Involved? Status

What's Being Traded

Trade Type(s)

Laguna de Santa Rosa, CA The City of Santa Rosa ships treated wastewater to area EPA Region 9 (Dave Smith The city has upgraded to

nutrients

point/nonpoint

dairies and farms for application to pasture and some 415-744-2012). Also the tertiary treatment, and a

food crops. The city initially paid dairies to take the water; City of Santa Rosa, local TMDL was completed for

no payments are currently made due to the desirability of dairies and farms, North Laguna de Santa Rosa in

the water for the farms. This allows the city to avoid Coast Regional Water 1994. Wastewater transfers

discharging during summer months and is also beneficial Quality Control Board. continue and are recognized

to the dairies. in the city*s NPDES permit,

but these transactions are not

recognized as “formal” trades. 

Lake Dillon, CO At Lake Dillon (previously known as Dillon Reservoir), Northwest Colorado Council Program began operation in 

phosphorus

point/nonpoint, nonpoint/nonpoint

Colorado, the four wastewater treatment plants of Governments (970-468- 1984. Improvements in plant

discharging to the lake can receive credit for phosphorus 0295); EPA Region 8 (Bruce treatment efficiencies and

load reductions by purchasing nonpoint source Zander 303-312-6846). Also slower-than-anticipated

reductions. Currently, nonpoint/nonpoint trades are the the Denver Water Board. growth resulted in few

main focus of the program point/nonpoint source trades.

Maryland Nontidal Wetlands The Maryland Department of Natural Resources (MD MD DNR (410-974- As of 3/93, the state had

Compensation Fund, MD DNR) accepts payment in lieu of mitigation under certain 2985/3016) completed 15 fee-funded

wetlands

nonpoint/nonpoint

circumstances from Clean Water Act section 404 and projects and fee deposits

state permittees. Fees are deposited into a trust fund that reached approximately

pays for larger restoration projects conducted by the $200,000.

Department and its contractors.

Ohio Wetlands Foundation, OH The Ohio Wetlands Foundation, a private nonprofit Ohio Wetlands Foundation As of 3/93, the Foundation had

wetlands

nonpoint/nonpoint

organization, provides a mechanism to aggregate Clean (614-228-6647); U.S. Army not yet collected any fees but

Water Act section 404 mitigation requirements and create Corps of Engineers, was constructing wetlands

larger wetlands habitats. Eligible permittees pay fees to Huntington District (304-529- ahead of fee receipt.

the foundation in lieu of on-site or other off-site mitigation. 5487). Also the Ohio

The Foundation administers fees through a trust. Homebuilders Association

and Ohio Department of 

Natural Resources.

Pine Flatwoods Wetlands Mitigation The Louisiana Nature Conservancy (LNC) accepts fees USACE, New Orleans As of 3/93, LNC had collected

Trust, LA from Clean Water Act section 404 permittees as District (504-862-2250); LNC over $100,000 under this

wetlands

nonpoint/nonpoint

compensation for unavoidable wetland losses. LNC uses (504-338-1040). Also the program and was about to

the fees to support off-site preservation and activities for Louisiana Departments of make its first purchase.

long-term management of degraded pine flatwoods Natural Resources and

wetlands. Wildlife and Fisheries, and 

the US Fish and Wildlife

Service.
Examples of Existing and Potential Future Trading Programs

Program/Location How Is It Set Up? Who's Involved? Status

What's Being Traded

Trade Type(s)

Providence, RI The Providence, Rhode Island, Water Department is Providence Department of Ongoing.

salt (deicing chemicals)

point/nonpoint (drinking water)

paying the city's Department of Transportation $60,000 a Transportation (401-421-

year to use alternative deicing chemicals in the supply 7740); Providence Water

source recharge area. The alternative chemicals are Department (401-521-6300).

lower in sodium content than those typically used. As a

result, the Water Department is able to meet sodium

standards without resorting to additional in-plant

treatment.

Tar-Pamlico River Basin, NC In North Carolina's Tar-Pamlico River Basin, a group of Tar-Pamlico Basin The program began operating

nitrogen

point/point, point/nonpoint

wastewater treatment plants can receive credit for Association (919-551-1500); in 1992 and has provided

nitrogen loading reductions by paying $56 per kilogram of NC Dept. of Environment, incentive for point sources to

desired reduction into an Agricultural Cost Share Fund Health and Natural increase operations and

that supports best management practices in the basin. In Resources (919-733-5083); maintenance efficiency. The

comparison, the dischargers estimated that technological and the Environmental ability of point sources to

upgrades would have provided nitrogen reductions at a Defense Fund (919-821- reduce loads below the limit

cost of between $250 and $500 per kilogram. Notably, 7793). through plant operational

the point sources are treated as if they were a single point improvements resulted in few

source (the “bubble” approach) for purposes of trades until recently.

implementing the trading program. See TMDL Case

Study #12 (fax requests for document to NCEPI, 513-569-

7186).

Vicksburg District, U.S. Army Corps of The Vicksburg District accepts fees from Clean Water Act USACE, Vicksburg District As of 3/93, 7 permittees had

Engineers, MS section 404 permittees in lieu of compensation under (601-631-5276) participated and contributed

wetlands

nonpoint/nonpoint

certain circumstances. Funds support wetland restoration over $150,000.

and enhancement projects. Past fee recipients include

Ducks Unlimited, The Nature Conservancy, and other

public agencies involved in environmental efforts in

Louisiana and Arkansas. 
Examples of Existing and Potential Future Trading Programs

Table 2. Programs Under Development/Consideration.

Program/Location What’s Being Considered? Who's Involved? Status

What's Being Traded

Trade Type(s)

Chatfield Basin, CO Modeling is under way to determine TMDL, potential EPA Region 8 (Bruce Under development.

phosphorus

point/nonpoint

responsibilities, and trading potential. Zander 303-312-6846).

Chehalis River Basin, WA The Chehalis River was identified as a candidate for Washington Department of Trading opportunities will

pollutant(s) to be determined

point/nonpoint, nonpoint/nonpoint

trading in study done for the Washington Department of Ecology (360-407-3600). depend on how wasteload and

Ecology by Apogee Research, Inc. (1992). A Other stakeholders include load allocations are

subsequent scoping effort collected additional information the Chehalis River Council developed. 

(economic, regulatory, political, etc.) and confirmed and three county

potential for trading. A TMDL for the segment under conservation districts. 

consideration has recently been completed, and trading

opportunities remain uncertain. 

Chesapeake Bay tributaries, MD Under the state of Maryland*s nutrient reduction strategy Maryland Department of the Tributary-specific and sitenitrogen, phosphorus

point/nonpoint, nonpoint/nonpoint

developed for each major tributary to the Chesapeake Environment (410-631- specific issues are still being

Bay, some tributary plans include effluent trading as a 3680); EPA Chesapeake analyzed to determine trading

potential option. A pilot project to examine trading Bay Program (410-267- opportunities.

opportunities among six POTWs discharging to the Lower 5700).

Potomac River was begun but not completed. 

Clear Creek, CO Stakeholders are considering a program where point Clear Creek Watershed Stakeholders recently

pollutant(s) to be determined 

point/nonpoint

sources would “adopt” abandoned nonpoint sources Forum (303-692-3513); EPA completed a consensus-

(primarily mines) and clean up the sites, or otherwise Region 8 (Holly Fliniau 303- building process regarding the

reduce loadings in exchange for credits that could be 293-1603). Other trading concept. Next steps

applied to effluent discharge permits. Stakeholders are stakeholders include the will involve more detailed

initially considering all types of trading, including cross- Colorado Dept. of Health scientific and economic

pollutant and banking scenarios. and Coors. analysis. 

Little Deep Fork An intensive water quality study was conducted as part of Indian Nations Council of The TMDL is ongoing. Water

DO, phosphorus

source(s) to be determined

a TMDL development project and some potential for Governments (Richard quality managers are currently

trading was identified. The area is generally cattle Smith 918-584-7526); characterizing nonpoint

country, with some cropland, and urban areas. Oklahoma Conservation source loading and developing

Preliminary analysis indicates animal BMPs may Commission (Phillip and implementing BMPs. 

potentially be implemented in lieu of, or to delay, POTW Moershel 405-842-8744). Trading is scheduled to be

upgrades. considered after results of

these efforts are evaluated.
Examples of Existing and Potential Future Trading Programs

Program/Location What’s Being Considered? Who's Involved? Status

What's Being Traded

Trade Type(s)

Sacramento River, CA Stakeholders are discussing the potential for trading to EPA Region 9 (Dave Smith The current focus is to set up

metals

Source(s) to be determined 

address metals loading issues in the Sacramento River 415-744-2012). Also the a regional monitoring program

above the City of Sacramento. Interest is primarily due to City of Sacramento and the to better assess metals

high metals loadings from abandoned mines and Central Valley Regional loading sources and potential

agricultural chemicals relative to municipal and Water Quality Control Board. controls. Rough loading

stormwater loadings. estimates exist. Trades are

unlikely to occur before 1997.

San Joaquin River, CA The Environmental Defense Fund (EDF), the state of EDF (Terry Young 510-658- Trading may be a year or two

selenium

point/point, point/nonpoint

California, EPA, and agricultural interests have 8008). Also irrigation away. EDF has received

investigated options for using tradable discharge permits districts, Central Valley another grant to help market

to find least- cost solutions to selenium discharge control Water Resources Control trading. The proposal to

problems related to Central Valley irrigated agriculture Board, EPA, and the Natural reopen San Luis Drain, an

operations. See EDF*s "Plowing New Ground" report for Resources Defense Council. agricultural tailwater drainage

details. structure that discharges to

San Joaquin River, will impact

trading issues. The proposed

program might be a vehicle for

setting up load reductions and

drainage districts.

South San Francisco Bay, CA Three POTWs and a stormwater management agency EPA Region 9 (Dave Smith Parties have negotiated a

copper

point/point, point/nonpoint

were directed by the Regional Water Board to negotiate 415-744-2012). Also the Memorandum of Agreement

how to obtain a 900 lb/yr copper loading reduction needed Cities of San Jose, Palo Alto, and are now working on a

to attain a TMDL. The 900 lb goal is in addition to and Sunnyvale; the Santa stormwater source

individual wasteload allocations already set for each Clara Valley Nonpoint assessment to fill in

POTW and the stormwater utility. The four parties were to Source Pollution Control information gaps on

report back to the Board regarding how the reduction Program; and the San stormwater load reduction

target would be met and to identify specific responsibilities Francisco Regional Water feasibility.

for actions. Quality Control Board.
Examples of Existing and Potential Future Trading Programs

Program/Location What’s Being Considered? Who's Involved? Status

What's Being Traded

Trade Type(s)

Tampa Bay, FL Several trading initiatives are under consideration. In Tampa Bay National Estuary Trading is under

nitrogen, total suspended solids

point/point, point/nonpoint,

nonpoint/nonpoint

one, stakeholders may develop a trading program to Program (813-893-2765). consideration; implementation

supplement the allocation of nitrogen loads under a Other stakeholders include will depend on a variety of

pollutant loading reduction goal. In another, the City of Tampa Bay Regional scientific, economic, and

Tampa is considering a trading scheme under which Planning Council; City of political issues. 

some stormwater retrofit requirements placed on Tampa; and other industrial,

redevelopment projects in specific sections of the city municipal, and agricultural

would be waived. In exchange, either the city or the interests. 

developer would contribute funds to a “stormwater bank”

that would pay for larger projects elsewhere in the city. 

An offset program for specific tributaries also is being

considered, in which new and expanding point sources

would be required to partially or fully offset their N and/or

TSS loads through trading with other point or nonpoint

sources.

Truckee River, NV A not-yet-signed agreement among the U.S. Department EPA Region 9 (Dave Smith The details of this program are

nitrogen and flows

point/nonpoint

of the Interior (DOI), EPA, the state of Nevada, Reno- 415-744-2012, Cheryl still being worked out. The

Sparks municipal government, and the Pyramid Lake McGovern 415-744-2013); tribe is concerned that the city

Paiute Tribe will provide for DOI and Reno-Sparks to each University of California at wants to allocate all of the

pay $12 million per year to acquire water rights to be Berkeley (510-643-5364). increased assimilative

dedicated to instream flow down to Pyramid Lake. In Also DOI, Nevada Division of capacity to its wasteload

exchange for city water purchases, Nevada would revise Environmental Protection, allocation (despite paying only

a TMDL and permits to allow increased nitrogen Reno-Sparks, Indian tribes. half the cost) and prefers to

discharge to take advantage of increased assimilative keep much of the loading

capacity associated with flow augmentation. Reno- capacity in reserve

Sparks is seeking a State Revolving Fund (SRF) loan to unallocated. Some concerns

finance water purchases. In a related effort, EPA about model accuracy and

provided a grant to the University of California-Berkeley to whether the river is now

study the potential use of economic incentives for complying with water quality

pollution control for the Truckee River. standards also exist.

Yakima River Basin, WA Battelle*s Pacific Northwest Laboratory is working with Battelle (509-372-4342). Modeling capabilities are

pollutant(s) to be determined

pource(s) to be determined

stakeholders in the basin to address pollutant and water Other stakeholders include: under development and

quantity issues, and trading pollutants and/or water rights the WA Department of preliminary analysis is under

may be part of the solution. In an unrelated study Ecology, the Bureau of way.

commissioned by the Washington Department of Ecology, Reclamation the Yakama

the Yakima River was identified as a candidate for Indian Nation; and a

point/nonpoint source trading (See Chehalis River above). watershed council.
Examples of Existing and Potential Future Trading Programs

Table 3. EPA Studies.

Program/Location What’s Being Considered? Who's Involved? Status

What's Being Traded

Trade Type(s)

Boone Reservoir, TN This study examined the cost-effectiveness of both point EPA Office of Policy, No program developed.

nutrients

point/nonpoint controlling phosphorus, nitrogen, and BOD involved a

and nonpoint source controls (Sobatka, 1989). The study Planning, and Evaluation

concluded that the most cost-effective means of

combination of point and nonpoint source controls. 

Several agricultural BMPs were among the least

expensive choices, followed by upgrades at selected

POTWs. BMPs for unconfined animals, urban BMPs, and

septic tank renovations were among the most expensive.

(202-260-5363) sponsored

the study. Study conducted

in conjunction with

Tennessee Valley Authority.

Wicomico River, MD This case study simulation estimated the potential cost EPA Office of Policy, No program developed.

phosphorus

point/nonpoint

savings from point/nonpoint source trading in the Planning, and Evaluation

Wicomico Basin (Industrial Economics, 1987). The (202-260-5363) sponsored

results demonstrated that trading offers potentially

significant cost savings and water quality benefits.

the study.
APPENDIX D—REFERENCES
Appendix D-1

REFERENCES

USEPA. 1984. Technical Guidance Manual Environmental Protection Agency, Office of

for Performing Waste Load Allocations - Book Water, Washington, DC.

II Streams and Rivers - Chapter 1 Biochemical

Oxygen Demand/Dissolved Oxygen. EPA

440/4-84-020. U.S. Environmental Protection

Agency, Office of Water, Washington, DC.

USEPA. 1984. Technical Guidance Manual

for Performing Waste Load Allocations - Book

II Streams and Rivers - Chapter 2

Nutrient/Eutrophication Impacts. EPA 440/4-

84-021. U.S. Environmental Protection

Agency, Office of Water, Washington, DC.

USEPA. 1984. Technical Guidance Manual

for Performing Waste Load Allocations - Book

II Streams and Rivers - Chapter 3 Toxic

Substances. EPA 440/4-84-022. U.S.

Environmental Protection Agency, Office of

Water, Washington, DC.

USEPA. 1984. Technical Guidance Manual

for Performing Waste Load Allocations - Book

IV Lakes and Impoundments - Chapter 2

Nutrient/Eutrophication Impacts. EPA 440/4-

84-019. U.S. Environmental Protection

Agency, Office of Water, Washington, DC.

USEPA. 1984. Technical Guidance Manual

for Performing Waste Load Allocations - Book

VII: Permit Averaging. EPA 440/4-84-023. 

U.S. Environmental Protection Agency, Office

of Water, Washington, DC.

USEPA. 1987. Technical Guidance Manual

for Performing Waste Load Allocations - Book

IV Lakes and Impoundments - Chapter 3 Toxic

Substances Impacts. EPA 440/4-87-002. U.S.

USEPA. 1991. Guidance for Water Qualitybased Decisions: The TMDL Process. EPA

440/4-91-001. U.S. Environmental Protection

Agency, Office of Water. Washington, DC. 

USEPA. 1991. Technical Support Document

For Water Quality-based Toxics Control. 

EPA/505/2-90-001. U.S. Environmental

Protection Agency, Office of Water.

Washington, DC. 

USEPA. 1992. A Quick-Reference Guide: 

Developing Nonpoint Source Load Allocations

for TMDLs. EPA 841-B-92-001. U.S.

Environmental Protection Agency, Office of

Water. Washington, DC. 

USEPA. 1992. Incentive Analysis for Clean

Water Act Reauthorization: Point

Source/Nonpoint Source Trading for Nutrient

Discharge Reductions. Prepared for the EPA

Offices of Water and Policy, Planning, and

Evaluation, April 1992.

USEPA. 1992. Technical Guidance Manual

for Performing Waste Load Allocations - Book

III Estuaries - Part 1 - Estuaries and Waste

Load Allocation Models. EPA 823-R-92-003. 

U.S. Environmental Protection Agency, Office

of Water, Washington, DC.

USEPA. 1992. Technical Guidance Manual

for Performing Waste Load Allocations - Book

III Estuaries - Part 2 - Application of Estuarine

Waste Load Allocation Models. EPA 823-R-
Appendix D-2

92-003. U.S. Environmental Protection for the U.S. Environmental Protection Agency,

Agency, Office of Water, Washington, DC. Office of Policy, Planning, and Evaluation,

USEPA. 1992. Technical Guidance Manual

for Performing Waste Load Allocations - Book USEPA. 1994. Water Quality Standards

III Estuaries - Part 3 - Use of Mixing Zone Handbook. Second Edition. EPA 823-B-94-

Models in Estuarine Waste Load Allocations. 005a. Office of Water, U.S. Environmental

EPA 823-R-92-004. U.S. Environmental Protection Agency, Washington, DC. 

Protection Agency, Office of Water,

Washington, DC.

USEPA. 1992. Technical Guidance Manual Pollutants. Draft. U.S. Environmental

for Performing Waste Load Allocations - Book Protection Agency, Region 5, Chicago, Illinois.

III Estuaries - Part 4 - Critical Review of

Coastal Embayment and Waste Load Allocation

Modeling. EPA 823-R-92-005. U.S.

Environmental Protection Agency, Office of

Water, Washington, DC.

USEPA. 1993. Guidance Specifying

Management Measures For Sources of

Nonpoint Pollution In Coastal Waters. EPA

840-B-92-002. U.S. Environmental Protection

Agency, Office of Water. Washington, DC. 

USEPA. 1992. Compendium of WatershedScale Models for TMDL Development. EPA

841-R-92-002. U.S. Environmental Protection

Agency, Office of Water. Washington, DC. 

USEPA. 1993. Guidance Specifying

Management Measures For Sources of

Nonpoint Pollution in Coastal Waters. EPA

840-B-92-002. U.S. Environmental Protection

Agency, Office of Water, Washington, DC.

USEPA. 1994. President Clinton's Clean

Water Initiative. EPA 800-R-002. U.S.

Environmental Protection Agency, Office of

Water. Washington, DC. 

USEPA. 1994. The Use and Impact of Iron

and Steel Industry Intra-Plant Trades, prepared

Washington, DC.

USEPA. 1995. Revised Draft Lake Michigan

Lakewide Management Plan For Toxic

USEPA. 1995. Watershed Protection: A

Project Focus. Draft U.S. Environmental

Protection Agency, Office of Water. 

Washington, DC.

USEPA. 1995. Watershed Protection: A

Statewide Approach. EPA 841-R-95-004. U.S.

Environmental Protection Agency, Office of

Water. Washington, DC.

USEPA. 1995. Final Water Quality Guidance

for the Great Lakes. U.S. Environmental

Protection Agency. Federal Register, Thursday

March 23, 1995. 40 CFR Parts 9, 122, 123,

131, 132.

Young, T. and C. Congdon. 1994. Plowing

New Ground: Using Economic Incentives to

Control Water Pollution from Agriculture. 

Environmental Defense Fund. pp. 126-127.