WATERSHED‐BASED EFFLUENT TRADING: THE NONPOINT SOURCE CHALLENGE

I. INTRODUCTION The past decade has seen rapidly growing interest in the design and performance of environmental trading programs. This environmental policy relies on financial incentives and decision-making flexibility to reduce the costs of achieving an environmental objective. The use of and interest in trading programs span a wide range of environmental issues including air quality (Burtraw, 1996; Hall and Walton, 1996; Foster and Hahn, 1994; USGAO, 1994), land development (Barrows and Prenguber, 1975; Pizor, 1986; Tripp and Dudek, 1988), and wetland regulation (Scodari, et al., 1996; Shabman, et al., 1994). In water quality programs, regulatory agencies are devoting more resources to investigating and in some instances implementing trading systems as a way to manage effluent discharge and achieve water quality goals. In May 1996, the USEPA (1996) released a draft framework to encourage and facilitate the development of water quality effluent trading systems. While trading systems often differ in operational details, all trading systems offer two parties the opportunity to transfer regulatory requirements in order to lower control costs. Environmental trading programs express this transfer of regulatory responsibility in common units of exchange - a tradable commodity. In air and water trading, the exchange of discharge control requirements is expressed in terms of an "allowance" or "credit." Effluent trading programs are being promoted on both environmental and economic grounds. If a limited number of legally sanctioned discharge allowances of a targeted pollutant (expressed as a unit of weight like pounds or kilograms) are distributed to waste dischargers, an effluent trading system establishes an explicit cap or limit on effluent discharges. A trading program allows dischargers to reallocate discharge control responsibility without violating the overall effluent discharge cap. From an economic perspective, an effluent trading system is typically described as a way to save money while meeting the cap. Those who can control at lowest cost "over control" so that they can sell allowances to sources that have higher control costs. This simple description, however, fails to convey how a trading system creates a continuing financial incentive to search out and adopt new and improved forms of pollution prevention. The financial incentive offered by being able to sell or save excess allowances rewards sources that seek out different ways to reduce waste creation and discharge, including changes in operational processes and changes in production as well as changes in waste control technology. With effluent trading and its resulting pollution prevention, the allowances released for sale make room for new economic activities to discharge while maintaining water quality. A basic requirement of establishing a trading program involves creating a tradable commodity (Stephenson and Shabman, 1996). Defining a tradable commodity is contingent on being able to measure (quantify) and enforce emission or effluent discharge requirements. Measurement requires quantifying both the flow and concentration of discharge in order to express discharge in pounds, kilograms, tons, etc. released per unit of time. Enforcement provides performance assurances that measured discharges translate into actual reductions. Performance assurances involve compliance reporting and monitoring and penalties for rule violations. The challenge of designing and implementing watershed-based effluent trading systems is compounded by the existence of two different types of discharge sources - point and nonpoint. Point sources, such as industrial sites and municipal wastewater treatment plants (WWTPs) discharge effluents into receiving waters from identifiable points. Nonpoint source discharges from forestry and agricultural operations-and from urban area runoff from streets, yards, and construction activities - enter water bodies over a diffuse area (USEPA, 1996; Schleich, et al. …