National Pollutant Discharge Elimination System (NPDES)

Frequently Asked Questions about Water Quality Trading


What is Water Quality Trading?

Water quality trading (WQT) under the Clean Water Act (CWA) is an option for compliance with a water quality based effluent limitation (WQBEL) in a NPDES permit. EPA’s 2003 WQT Policy and 2007 WQT Toolkit for Permit Writers provide guidance to states, interstate agencies, and tribes on how to facilitate trading consistent with the CWA and its implementing regulations.

Water quality trading can provide greater flexibility on the timing and level of technology a facility might install, reduce overall compliance costs, and encourage voluntary participation of non-point sources within the watershed. Trading can provide ancillary environmental benefits such as carbon sinks, flood retention, riparian improvement, and habitat.

Trading is based on the fact that pollutant sources in a watershed may face very different costs to control the same pollutant. 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 source at lower cost.

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What are the benefits of trading?

Trading can produce substantial cost savings while meeting the same water quality goal. It may also offer greater flexibility on the timing and level of technology a facility might install. Trading can provide ancillary environmental benefits such as flood retention, riparian improvement, and habitat.

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Who is involved in trading?

A permitted facility or a point source might trade with another point source or with a nonpoint source. The partners might trade directly, or through a third party. Any party might act as champion for a trading program, but in the end it is the permitting authority that will establish what conditions are sufficient to meet the requirements of the NPDES permit. Trading works best when all stakeholders interested in their local watershed including conservation organizations and watershed groups, as well as permit holders, are involved in the development of the trading program.

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What is a credit?

A credit is a unit of pollutant reduction usually measured in pounds equivalent. Credits can be generated by a point source over-controlling its discharge or by a nonpoint source installing best management practices (BMPs) beyond its baseline.

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What is EPA’s Trading Policy?

In 2003, EPA issued the Water Quality Trading Policy ("policy") to provide guidance to states, interstate agencies, and tribes to assist them in developing trading programs. The policy discusses Clean Water Act (CWA) requirements that are relevant to water quality trading including: requirements to obtain permits, antibacksliding provisions, development of water quality standards including antidegradation policy, NPDES permit regulations, total maximum daily loads (TMDLs), and water quality management plans.

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What pollutants can be traded?

EPA's policy supports trading of nutrients (e.g., total phosphorus, total nitrogen) and sediment load reductions. The policy recognizes the potential for environmental benefits from trading of pollutants other than nutrients and sediments but states that these trades may warrant more scrutiny. Since the issuance of the policy, EPA has also seen a number of effective temperature trades. The policy does not support any trading activity that would cause a toxic effect, exceed a human health criterion or cause an impairment of water quality. EPA does not support trading of persistent bioaccumulative toxic pollutants at this time.

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When can trading occur?

EPA supports trading in unimpaired waters to maintain water quality standards as well as in impaired waters. EPA supports both pre-TMDL trading and trading under a TMDL. Trading scenarios include point source-point source trades, point source-nonpoint source trades, pretreatment trades, and intra-plant trades. EPA does not support trading that results in an impairment of an existing or designated use, adversely affect drinking water systems, or exceeds a cap established under a TMDL. In addition, the Trading Policy does not support trading to meet a technology-based effluent limit (TBEL). Trading can be used to meet water quality based effluent limits (WQBELs) only.

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What are baselines?

Baselines are the limits or expectations that would apply absent trading. These operate as the basis for credit calculation. A buyer’s baseline would be its water quality-based effluent limit (WQBEL), and it would purchase credits to achieve that limit. A seller’s baseline is the level of discharge it is otherwise required or expected to attain prior to generating credits. A nonpoint source seller would be expected to meet its TMDL load allocation or, if there is no TMDL, it would be expected to meet any state and local requirements before it can generate credits.

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What common elements should a credible trading program have?

  • Appropriate legal authority under the CWA and state or tribal law to develop and administer trading programs.
  • Units of trade: A common unit of trade, clearly defined.
  • Timing of credits: The creation and duration of credits should be considered. Credits generated and used within the same time period in order to comply with permit limits may be easier to document and may prevent localized exceedances of water quality standards.
  • Managing uncertainty: Trading programs include methods of managing uncertainty such as using trading ratios, monitoring, modeling, and BMP efficacy estimates.
  • Compliance and Enforcement: Trading programs have mechanisms for compliance and enforcement. These could include record-keeping, certifications, inspections, and reporting.
  • Public notice: Trading programs include adequate public notice, for example, through the TMDL and permit process and a public website.
  • Program evaluation: Trading program evaluations are used to modify and improve the program.

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What are common trading scenarios?

Trading might occur directly between two or more point sources or through an exchange. Trading might also occur between a point source and a nonpoint source, either directly or through an exchange. A credit exchange is where a third party such as a person, organization, or website, facilitates trading. Another unique feature a credit exchange might include is a reserve of credits held in case of failed trades. These are the basic trading scenarios; others may exist.

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What are trade ratios?

Trade ratios are used to ensure the amount of reduction resulting from the trade has the same effect as the reduction that would be required without the trade. Potential components of a trade ratio include:

  • Location: the location of the sources in the watershed relative to the downstream area of concern,
  • Delivery: the distance between the buyer and seller if the trade is to meet permit requirements at the outfall;
  • Uncertainty: the lack of surety of nonpoint source reductions;
  • Equivalency: the different forms of the same pollutant discharged from the trading partners, such as biologically available phosphorous and bound phosphorous; and
  • Retirement: additional water quality improvement.

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How can nonpoint source uncertainty be addressed?

When possible, edge-of-field or ambient monitoring is recommended to gauge the water quality impacts of BMPs. Modeling is another option; however, it should be combined with some monitoring to verify the model. Field testing of BMPs, the use of conservative assumptions for BMP efficacy, and uncertainty ratios can also reduce uncertainty.

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What is the Water Quality Trading Toolkit for Permit Writers?

The Water Quality Trading Toolkit for Permit Writers provides NPDES permitting authorities with the tools they need to incorporate trading provisions into permits. It is based on the 2003 policy, but expands that with detailed technical explanations and specific scenarios.

While the Toolkit is geared toward state and regional permitting authorities, all stakeholders including permitted entities, agriculture and other nonpoint sources, watershed groups, and other parties interested in trading, are welcome to use the Toolkit.

The Toolkit discusses the relationship between pollutant trading and NPDES permits. To be implementable and enforceable under the Clean Water Act (CWA), trading provisions involving permitted point sources should be incorporated into NPDES permits. The Toolkit provides guidance and sample permit language for states to consider when creating and implementing a CWA-based pollutant trading program, as well as detailed case studies of existing trading programs.

The Toolkit provides detailed guidance on the important issues to be considered in a trading program. It can be summarized in five keys to success. Every water quality trading program should strive to be:

  • Transparent,
  • Real (reductions),
  • Accountable,
  • Defensible, and
  • Enforceable.

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