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Market-based policies to curb pollution have been enormously successful in the fight against acid rain and are now being deployed in the fight against smog and climate change. State and local officials are harnessing this promising new tool to tackle the tough problem of water pollution that flows off city streets and farm fields.

Unlike water pollution from a single point, like a factory or sewage treatment plant, non-point source (NPS) pollution comes from multiple sources -- pastures, suburban lawns, construction sites, and even contaminants that fall from the air. States say that NPS pollution is today's leading remaining cause of water quality problems. While the Clean Water Act (CWA) of 1972 has done a great deal to clean up water pollution from individual sources, it is poorly suited to handle pollution from numerous sites that add up quickly when rain washes it into streams and rivers. This is due in part to CWA exemptions for certain types of run-off, such as water used for agricultural irrigation.

This NPS pollution can be curbed partially through better land management practices, such as calibrating agricultural fertilizer more carefully, keeping livestock away from fragile stream banks, and planting grass and tree "buffer zones" to filter runoff from parking lots or fields. Generally speaking, it is now more cost effective to control NPS pollution in these ways than it is to squeeze more efficiency out of equipment to control pollution from factories and other point sources.

"Water quality trading and similar market-based approaches truly are the wave of the future in environmental protection." -- Former EPA Administrator Christine Todd Whitman

This cost difference makes water quality problems ideally suited to market-based control solutions. "Cap and trade" programs, for example, set a limit on pollutants from all sources, distribute emission credits to polluters that reach that limit, allow polluters to meet their limit however they see fit, and create markets for trade in the excess credits of those who excel at cutting pollution. Under such a system, for example, rather than install expensive new filters to meet its water pollution limit, a factory might find it cheaper to buy excess credits from farmers who have cut more than their allotted share of pollution through improved land-management practices.

"Trading can be a cheaper answer to solving water quality problems in the United States and around the world," says Paul Faeth, managing director of World Resources Institute (WRI). Recently, WRI conducted a study of the cost of controlling phosphorous pollution in three watersheds in Minnesota, Michigan, and Wisconsin (see the "PPI Watershed Play"). It found that the cost of reducing phosphorous strictly from point sources would be considerably higher than costs associated with effluent trading between point and non-point sources.

A number of states including Idaho, Oregon, Minnesota, Connecticut, Maryland, Colorado, and North Carolina have launched water quality trading experiments. Among the most mature, North Carolina's program, launched in 1989, harnesses water quality trading to reduce pollutants in the Tar-Pamlico River Basin -- the fourth largest river basin in North Carolina and a major tributary to the Pamlico Sound. Together, the Pamlico Sound and neighboring Albemarle Sound constitute one of the most productive estuarine systems in the country. Based on the success of this effort, North Carolina recently launched another effort, patterned after the Tar-Pamlico program, to reduce nitrogen in the Neuse River Basin.

Water quality trading is also being put to the test out West. The Idaho Department of Environmental Quality (DEQ) and U.S. Environmental Protection Agency Region 10 have been studying how to use pollutant trading to meet water quality goals for the Lower Boise and Middle Snake rivers. Idaho's effort is part of a broader program in the Pacific Northwest supported by the EPA's office in the region. A full-time water quality trading coordinator, with considerable experience designing and implementing air emissions trading for EPA's acid rain program, oversees the development of trading systems in the region.

The Lower Boise River Effluent Trading Demonstration Project, for example, has been launched to determine whether trading can improve water quality at a lower cost. Federal, state, and local water quality managers, farmers, businesses, municipalities, and environmentalists participated in its design. Trading will not begin until officials set the limits on pollutants (known as total maximum daily loads) that will be allowed to flow into the Lower Boise watershed. In the meantime, Idaho DEQ has used the experience it has gained to issue draft guidelines to help other parts of the state launch similar programs. The guidelines specify the conditions under which pollutant trading may take place, establish record keeping and reporting procedures, and prescribe how to develop best-management practices for each watershed in which trading occurs.

Water quality trading can also be extended to heat from human sources, which spurs plant growth that robs water of needed oxygen. EPA Region 10, in cooperation with the Oregon Department of Environmental Quality, is developing a project to trade water temperature on the Tualatin River, just outside of Portland. The amount of heat, or "thermal load," of the effluent discharged by the area's two sewage treatment plants need to be reduced by 95 percent to stay within permitted levels. Rather than install expensive refrigeration systems, the facilities are proposing instead to restore areas along stream banks further up in the watershed, creating shade to keep water temperatures down. Clean Water Services, a wastewater and storm-water management utility in Washington County working with the Oregon DEQ, has said that it expects to complete 35 miles of stream restoration. Environmental managers are close to working out the technical details that will ensure the proposed trading system meets its objectives.

To help refine this promising new tool and to support state efforts, the EPA is currently supporting 11 state trading projects, each of which addresses a different type of water quality challenge. The EPA supplied more than $800,000 for the effort in fiscal year 2002 and EPA regional offices are providing technical and other support to the projects.

"Water quality trading and similar market-based approaches truly are the wave of the future in environmental protection," said former EPA Administrator Christine Todd Whitman. "They not only harness the power of the market, they build effective partnerships among EPA, state, local and tribal governments, and other stakeholders around shared values and common goals."

Resources For Action

Idaho Department of Environmental Quality "Pollutant Trading Guidance" and "Lower Boise River Effluent Trading Demonstration Project"
www.deq.state.id.us/water/wastewater/
pollutant_trading_main.htm

Oregon Department of Environmental Quality project to trade water temperature on the Tualatin River (see "Clean Water Services")
www.deq.state.or.us/wq/wqpermit/indvpermitdocs.htm

EPA's Water Quality Trading Website
www.epa.gov/OWOW/watershed/trading.htm

Region 10 Water Quality Trading Assessment Handbook
http://yosemite.epa.gov/

Additional Reading

National Forum on Water Quality Trading, EPA, Washington, D.C., July 22-23, 2003
www.epa.gov/owow/watershed/trading/conferences.html

"Fertile Ground: Nutrient Trading's Potential to Cost-Effectively Improve Water Quality," World Resources Institute, 2000
http://www.wri.org

Contacts

Lynda Hall
U.S. Environmental Protection Agency
Office of Wetlands, Oceans, and Watersheds (4501T)
1200 Pennsylvania Avenue, NW
Washington, DC 20460
(202) 566-1210
(202) 566-1331 (fax)
hall.Lynda@epa.gov

Claire Schary
U.S. EPA, Region 10
1200 Sixth Avenue
Seattle, WA 98101
(206) 553-8514
(800) 424-4EPA
(206) 553-7176 (fax)
schary.claire@epa.gov

Susan Burke
Idaho Department of Environmental Quality
Water Quality Division
1410 N. Hilton
Boise, ID 83706
(208) 373-0574
(208) 373-0576 (fax)
sburke@deq.state.id.us

Sonja Biorn-Hansen
Oregon Department of Environmental Quality
811 SW Sixth Avenue
Portland, OR 97204-1390
(503) 229-5257
(503) 229-5408 (fax)
biorn-hansen.sonja@deq.state.or.us

Jan Mazurek
Director
Center for Innovation & the Environment
Progressive Policy Institute
600 Pennsylvania Ave. SE Suite 400
Washington, DC 20003
(202) 547-0001
(202) 544-5014 (fax)
jmazurek@dlcppi.org

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