In February 2019, the EPA’s assistant administrator for water issued a memo updating the Agency’s water quality trading policy “to promote market-based mechanisms.” The memo includes six principles intended to clarify aspects of the federal water quality trading program, provide tools and incentives to states and local governments to implement trading programs, and promote increased investment in conservation.

The Agency has now published a notice and request for comment on a guidance document that expands on one of those principles—"encouraging simplicity and flexibility in implementing baseline concepts.” Simply stated, the Agency’s major message in the notice is that “nonpoint sources [of pollutants] may not need to apply pollution controls to meet the baseline derived from a load allocation [the part of a total maximum daily load (TMDL) assigned to nonpoint sources] before pollutant reduction credits could be generated.” The notice describes several approaches stakeholders could take to effect this type of flexibility.

Key definitions

Water quality trading under the Clean Water Act (CWA) is an option for compliance with a water quality-based effluent limitation (WQBEL) in a CWA National Pollutant Discharge Elimination System (NPDES) permit. Under trading programs, permitted facilities facing higher pollution control costs may be able to meet their regulatory obligations by purchasing environmentally equivalent (or superior) pollution reductions from another lower-cost source.

Baselines are the limits or expectations that would apply absent trading, which are the basis for credit calculation. A buyer’s baseline would be its WQBEL, and it would purchase credits to achieve that limit. Under the preexisting policy, a seller’s baseline is the level of discharge it is otherwise required or expected to attain before generating credits. A nonpoint source seller would be expected to meet its TMDL allocation, or if there is no TMDL, it would be expected to meet any state and local requirements before it can generate credits.

Obstacles to implementation

While neither the CWA nor the EPA’s implementation regulations explicitly address water quality trading, the EPA has, for many years, interpreted the CWA to allow pollutant reductions from water quality trading and offsets to achieve compliance with CWA regulatory requirements, including WQBELs. The EPA has also long been aware that despite its efforts to support these types of programs, they have not been implemented to their fullest potential.

One problem that has dissuaded nonpoint sources from entering the trading market is their belief that under an approved or implemented TMDL, they must first implement costly up-front reductions. An associated concern is the expectation among regulatory authorities that the nonpoint source must meet the pollutant reduction baseline derived from the TMDL allocation before the nonpoint source can generate tradable credits.

Baselines not legally enforceable

In the notice, the EPA states first that load allocations applicable to nonpoint sources are not legally enforceable pollutant control requirements. “As a result, such load allocation baselines should not be considered to be requirements that must be met by the nonpoint source prior to being able to generate credits for sale into a market,” writes the Agency.

Accordingly, the notice states that the EPA recognizes that “any pollutant reductions the nonpoint source makes that are not included in the assumptions that support the TMDL load allocation … would be immediately available for use by point sources as credits.”

Implementation approaches

The notice recommends several approaches permitting authorities may adopt to encourage trading in light of the Agency’s new baseline interpretation. For example:

• Apply an incremental baseline approach that divides nonpoint source reductions into immediately available tradable credits and reductions assigned toward meeting the load allocation.
• Establish a variable percentage based on creating incentives for nonpoint source reductions in certain areas of a watershed; a nonpoint source’s existing best management practices (BMPs); or a community’s ability to pay.
• Include a compliance schedule in the point source’s CWA permit to account for the time it would take for a nonpoint source partner to generate sufficient pollutant reduction credits or offsets to achieve compliance with the permit’s WQBEL.
• Authorize a water quality standard (WQS) variance when it is not clearly known how or if a point source can buy enough pollutant reduction credits from nonpoint sources to meet its WQBEL. In this case, a WQS variance might be designed to ensure that at the end of the WQS variance, enough pollutant reduction credits would be generated by nonpoint sources to meet the point source’s WQBEL

Other possible approaches to simplifying the baseline include disaggregation (i.e., applying load applications differently to nonpoint sources in the same watershed instead of uniformly across the watershed) and authorizing in-lieu fee programs wherein permitted facilities pay into a government fund to support nonpoint source pollutant loading reductions. The in-lieu approach could help remedy trading obstacles such as affordability and geographic disparities.