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Water: Water Quality Trading

Opening Remarks for National Forum on Water Quality Trading

G. Tracy Mehan, III
Assistant Administrator for Water
U.S. Environmental Protection Agency

July 22, 2003

Good morning. Judging by the attendance at this Forum there's plenty of interest in the topic. I believe this reflects a broad recognition of the new challenges facing the national and state water programs 31 years after passage of the Clean Water Act. But more on that later.

I would like to begin by thanking the organizations that cosponsored this Forum with EPA:

  • Association of State and Interstate Water Pollution Control Administrators,
  • Water Environment Federation, and the
  • U.S. Department of Agriculture Natural Resources Conservation Service.

Also thanks to the committee of folks from those organizations who brought this Forum to fruition.

Trading is an idea whose time has come. The idea has been studied for at least two decades and experiments conducted. EPA has supported the concept for years and issued a supportive policy statement and Draft Framework in 1996. The potential has been there and discussed for years, but a number of factors are now allowing trading in water arena to come into its own:

1. Experience. Pilot projects over the years have demonstrated trading implementation and taught us important lessons about program design.

2. Drivers. To get trading off the ground, there generally has to be a regulatory limit imposed which then creates an incentive to meet that limit at least cost. States are facing the need to develop and implement thousands of Total Maximum Daily Loads in coming years - this need provides a driver for trading programs that until recently has not been widely available.

3. Watersheds. The National Water Program has slowly but surely been heading away from an almost exclusive emphasis on end-of-pipe discharges and towards the more holistic watershed approach that considers all sources of pollution and encourages stakeholder based solutions at the watershed level. Trading is a natural fit with this watershed approach.

4. Cost. We're more acutely aware of the cost of clean water and understand that the cost will be prohibitive without efficient approaches

The cost savings provided by trading programs can be significant. In its analysis of the Clinton Administration's Clean Water Initiative, EPA concluded that the total potential savings from all types of trading (point to point, point to non-point and pretreatment) ranges from $658 million to $7.5 billion annually. As you'll hear later this morning, trading among point sources in Connecticut is expected to save over $200 million dollars while reducing nitrogen loads to eliminate seasonal hypoxia in Long Island Sound.

The stars are in alignment for trading to reach its potential for addressing water quality problems. That said, trading is still an innovation, something we're not used to doing. The practice is still evolving and will continue to evolve for some time. It is a work in progress.

As with most innovations, trading programs, and the programmatic or policy changes necessary to support them, won't happen overnight. And as with most innovations, trading requires active support and sustenance to take greater hold and thrive. Helping innovations along can also mean adding appropriate flexibility to existing ways of doing business.

EPA has recently taken a number of actions, in addition to sponsoring this Forum, to advance the practice of water quality trading.

  • January 2003 Policy on Water Quality Trading to signal clear EPA support for trading and identify how trading can be aligned with the Clean Water Act.

  • Funded ten trading projects last year, a number of which you'll learn about over the next two days.

  • Issued a policy on watershed based permitting, also January 2003. Complementary with the trading policy, the watershed based permitting policy expresses EPA support for watershed approaches and recognizes that effectively implementing watershed approaches requires more efficient and holistic ways to permit facilities that are subject to National Pollutant Discharge Elimination System (NPDES) permits.

  • Watershed-based permitting is an approach to developing NPDES permits for multiple point sources located within a defined geographic area (watershed boundaries). Through this approach, NPDES permitting authorities consider watershed goals and the impact of multiple pollutant sources and stressors, including nonpoint source contributions (though of course NPDES permits do not apply to nonpoint sources). Watershed-based permitting may encompass a vareity of activities ranging from synchronizing permit issuance within a basin to developing water quality based effluent limits using a multiple-discharger modeling analysis. You will hear about a couple different watershed based permits today and a two-hour workshop takes place tomorrow afternoon.

  • Another way EPA is facilitating trading is also related to permitting for NPDES sources. Those familiar with the NPDES program will probably know the Permit Compliance System (PCS) which is a repository for data on NPDES facility discharges and limits. The PCS is a legacy computer system in the process of a major upgrade. As part of this upgrade we are making changes to ensure that trades among point sources can be tracked with ease using PCS.

At EPA we've made it clear that we support trading and we'll continue to take actions we believe will advance trading programs consistent with Clean Water Act.

But the future success of trading doesn't lie solely or even primarily with EPA. It will depend on you and others like you who see the opportunities and want to seize them. Trading is all about partnerships and never more so than right now when we're still working to explore the possibilities and educate potential trading partners about the opportunities.

In particular, we welcome and are grateful for the active support of water quality trading by the U.S. Department Agriculture. Simply put, point source/nonpoint source trading won't happen without the support and participation of the agricultural community. As leaders in agricultural community USDA and others envision the opportunities that environmental credit trading offers producers and are working to apply programs in support of market incentives and approaches. A good example is the Conservation Innovation Grants under the Environmental Quality Incentives Program which are intended to stimulate adoption of market based systems to reduce agricultural runoff pollution.

Through our agricultural partners we can learn much about what program designs will be appealing to producers and take advantage of technical expertise in the area of nonpoint source load reductions. To advance point/nonpoint source trading, it is essential that we improve our ability to readily estimate nonpoint source loads and load reductions from management practices. EPA greatly values and appreciates USDA's commitment to work with us in this area.

Another exciting area of mutual interest is in multiple environmental credit markets, where producers and others could get revenue for taking actions that reduce water pollution, conserve soil, and reduce greenhouse gas emissions. We're exploring such a concept with our USDA partners and others in the Ohio River Valley.

Today existing trading programs - most of them in early stages or on a pilot scale - span the country and a range of water pollution challenges. California to Connecticut, Illinois, West Virginia, North Carolina. Dealing with nitrogen, phosphorus, sediment loadings, selenium, and effects of acid mine drainage.

And while there are important common elements, all the existing programs differ significantly from one another. Partly this is because we're still experimenting with different applications of trading in the water arena. Partly because, more so than air emissions trading, water quality trading programs are more local or regional in design and need to meet the needs of the full range of watershed stakeholders.

In conclusion, clearly the potential is there in terms of environmental results and cost savings or revenue opportunities. We will continue to learn lessons about which approaches work best for different pollutants and watershed conditions. And by the number of programs on the ground and number of people in this room the interest is there.

A next important step is to have a candid and productive dialogue among the various interests and potential partners in trading. As I said, trading is about partnerships, including partnerships among folks that don't have experience working together. We need to nurture dialogue, mutual understanding and respect for different interests, concerns so that we can find the intersection where many different interests converge for the good of all. This Forum is one opportunity to get that dialogue underway in spirit of partnership.

The Forum is designed for lively dialogue on an array of trading implementation issues. This give-and-take is valuable in itself, especially among the diverse group we have here representing agriculture, municipalities, industrial facilities, states water quality agencies, et al.

But we also hope that from the dialogue will emerge both some new ideas and some coalescing around what our key actions should be for moving forward, what can be done support trading programs

During the next two days we hope you will:

  • be inspired by the potential opportunities and environmental benefits that trading offers
  • gain understanding of different interests and concerns among potential water quality trading partners and how these can be addressed to mutual benefit; and
  • appreciate some of the challenges we'll need to address to advance future success of trading (e.g., nonpoint source load estimates) and approaches to these.

Enjoy the Forum and we look forward to hearing your questions and ideas. Again, on behalf of EPA and the Office of Water, I thank you for joining us in this important discussion which, as former Administrator Christie Todd Whitman said, "...will result in cleaner water, at less cost, and in less time."

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