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Water Quality Trading Conclusions

The Structure of the financial provision arrangment

The following are conclusions of the water quality trading study that was conducted in the Bear River Watershed.

  • The pollutant of interest, Total Phosphorus (TP), can be measured and traded in the form of tradable credits that reflect discharge reductions that match regulated water quality standards written into a TMDL regulation. TP can also be in the form of allowances of amount that can be discharged resulting in equivalent water quality outcomes in segments of the watershed.

  • Trading programs are an attractive alternative for the control of TP (and other nutrients) since the potential spatial relocation of nutrient discharges within a water body that may be the result of trading is less likely than other pollutants to cause localized water quality problems.

  • The driving forces of financial attractiveness to promote trading activity are the differences in abatement costs between discharge sources. There are considerable differences between point source and nonpoint source costs of reducing TP. There is considerable cost variation even for the implementation of the same Best Management Practice (BMP) that might be adopted to reduce TP.

  • TP attenuation and measurement of attenuation is important in driving trading activity. Seasonal delivery ratios have been developed from water quality modeling using field TP concentration data. Conditions for trade patterns can be developed from the water quality modeling and the resulting delivery ratios.

  • Two general types of trading strategies have been investigated and are recommended for the Bear River Watershed. These are: 1) cap and trade, and 2) cap and allowance market. Click here for a summary of the differences between these two types of trading strategies, including some observations on issues in implementation.

  • The basis and design of a “Market-Based” approach to the control of nutrients is different than strategies that have some elements of a market but do not focus on the market being driven by the participants in the market as they face incentives. The market-based strategy is set up by the regulator by the issue of allowances to discharge at levels that turn out to be the equivalent of the water quality goal.

  • Cap & Trade strategies for reduction usually adopt some form of financial arrangement for sources to adopt specified reduction technologies (BMPs) to reduce TP discharge. This strategy has been used as an offer to extend to nonpoint sources under Clean Water Act provisions. The offer of financial assistance generally does not necessarily define a market. Markets generally create financial incentives internal to the market for discharge reduction.

  • Where a “CAM” like strategy cannot be introduced and the regulator has to blend into current Clean Water Act provisions, there are some alternative strategies to be followed. However, such strategies will usually restrict the exchange flexibility and waste control flexibility that drive a market-based strategy.

  • A direct way to include nonpoint sources into a CAM-type program is to include them under a mandatory mass load cap. To be implemented in the focus trading area of the Bear River Watershed, there would probably have to be monitoring of the phosphorus at certain junctures (within subbasins) of drainage areas such in the Cub River drainage, other areas in the Middle Bear and the Little Bear rivers in addition to the assumed receptor point at the Cutler reservoir. However, if such measurements are taken, they can be applied with the estimated delivery ratios in order to get information on conveyance of the phosphorus loads to any set of receptor points in any of the drainages considered in this current study.

  • An interesting form of trading that has established precedence in the Neuse River project in North Carolina is the “GROUP COMPLIANCE PERMIT” which is apparently accepted under the NPDES permitting process of the Clean Water Act. Individual source limits in NPDES permits are assigned which establish a group cap. The NPDES-based discharge limits are then waived and converted into allowances so long as the source agrees to participate in a “discharger association” covered by the group compliance permit. This plan is sometimes designated as an “association group permit” system. This plan would actually be a partial cap system on the group sources that are in the association. Allowances summing to the partial cap are allocated to the association sources. Trading of allowances then takes place under the regulation of the group permit and the dischargers have discretion on control technology. However, failure to participate in the group and comply with meeting the cap, which is equated with the overall discharge limit, activates the NPDES permit.