Pollutant Trading

Discussion

22 July 2003

Why Allow Trading?

To make point sources payTo lure nonpoint sources into doing pollution

control so we can enforce on themTo increase the size of DEQTo allow discharges a mask to hide behind so

they can pollute moreTo distract EPA while we do other things

No portion of this slide is intended to be truthful, tasteful or factual in any fashion

•What problem does trading solve?

To let the market help allocate the assimilative capacity of a stream. Who wants to force existing sources to make additional cutbacks for future growth?

Who wants to decide which new applicant should get to use the allocation of pollutants for new growth?

Who wants to make cost decisions for the watershed?

What problems are caused by trading?

Finding the resources to set up the market Speculation

Need to force the commodity into the market place

All of the perceptions in the second slideYou are you changing the relationship between

stakeholders

Trading should allow us to distribute a scarce commodity (money) to protect a scarce resource (assimilative capacity) in the most efficient way possible

Policy Level Principles Necessary for Trading

Enforceability (for point sources of course)Full environmental protectionCertainty for stakeholders without expanding

EPA or DEQ authoritiesVisibilityRobust participation (getting government out of

day to day trading)

Practical Conditions Necessary for Trading

Market Driver regulatory requirement sets limit on effluent discharges

Definable commodity and market areaCost Differential

the financial incentive for entering into a trade must cover transaction costs

Ability - technical feasibility & adequate supply

Opportunity - tools for trading available Three watersheds evaluated; 2 successful - 1 failed

Market Drivers for Trading in Idaho

TMDLs• NPDES permits are the only enforceable mechanisms

AntidegradationIdaho State Legislature - no net increase statute

for impaired waters

Defining the Marketable Commodity

Nonpoint Source Trades Limited to Practices on BMP List

Nonpoint Source Baseline = TMDL Baseline Conditions

Water Quality Contribution Pre-TMDL Implementation Plan: each NPS project contributes between

10% and 20% of reduction to water quality by reducing marketable credits Post-TMDL Implementation Plan: credits created only by reductions

exceeding TMDL implementation plan requirements

Process for Adding New BMPs

Defining the Marketable Commodity

Measured Credits Monitoring the WQ Minimum design,

construction and O&M requirements

Calculated Credits Monitoring the BMP Design, construction and

O&M requirements Credit calculation Uncertainty discount

Defining the Marketable Commodity

Ratios apply to credit calculations to ensure equivalent reductions (Parma Pounds) River Location Ratios: transmission losses in the Boise River Drainage Delivery Ratios: transmission losses within a sub-

watershed Site Location Factors: potential for water re-use

Market places high value on high quality reductions

Lower Boise River Watershed

Mid Snake River

Ratios at work

Boise location ratio = 0.56, needs 10lbs. So 10lbs(.56)=5.6 Parma Pounds

Mason Drain Location ratio = .75, have 10lbs in excess of TMDL needs. So 10lbs(.75)=7.5lbs to sell.

Mid Snake River example = 1lb to 1lb for the full river reach

Boise River Demonstration Project Cost Differential

WWTPs Costs range from less than

$5/lbs to more than $200/lbs

Costs depend on current technology and options

PS-PS trading can save money

Agricultural Practices Costs range from about

$5/lbs to $50/lbs Cost are specific to both

site and control measure PS-NPS trading can save

money if transaction costs managed

Mid Snake River Example, Cost Differential

Twin Falls WWTP River Mile 608.5May have upto 325 lbs per day for 9 critical monthsCost of $25/lb per dayClear Springs at River Mile 600.7Would like to buy 40 lbs per day Cost of control is very unstable based on feed

ingredients (strategy is low ash fish food)

Cost Differential Example

Participant ALimit 100 lbs/day

Actual 200 lbs/day

Cost $100 lb/yr

BenefitCost w/o trading $10,000

Willing to pay $50 lb/yr

Cost w/trading $5,000

Participant BLimit 500 lbs/day

Actual 600 lbs/day

Cost $10 lb/yr.

Can reduce 200 lbs/day

Benefit Cost w/o trading $1000

Cost w/trading ($3,000)

Tools Available - The TMDL

Authorizes trading subject to permit & trading rules

Establishes adjustable WLA allocations/implementation

plans

Establish NPS load allocation

A mechanism for reasonable assurance

Evaluates the potential for local impacts and propose

remedies

Tools Available - The NPDES Permit

Adjustable permit limits that have conditions to prevent localized impacts

Point sources liable for trade performance

Reporting and documentation of trade Modified Discharge Monitoring Report form reports trades to EPA Monthly Trade Summary provides watershed-wide reconciliation

Permit audits Standard permit audits by EPA and DEQ NPS project reviews by SCC, under agreement to EPA & DEQ

To provide certainty to NPDES permit holders

Tools Available - The Private Contract

Willing buyer and willing seller. Establish a price.Establish the remedy for contract failure.

Certainty for the NPS delivery of reductions.Establish the amounts, parties, and duration of the

trade.Assign monitoring responsibilities

Tools Available - Trading RulesWater Quality Protection

Ratios apply to credit calculations to ensure equivalent reductions (Parma Pounds)

Nonpoint Source Mechanisms Nonpoint Source Trades Limited to Practices on BMP List

Water Quality Contribution Pre-TMDL Implementation Plan: each NPS project contributes 10% of

reduction to water quality by reducing marketable credits Post-TMDL Implementation Plan: credits created only by reductions exceeding

TMDL implementation plan requirements

Process for Adding New BMPs

Tools Available - The Clearing HouseTrade Execution & Tracking

Reduction Credit Certificates: certifies nonpoint source reductions, establishes credit, signed by point source

Trade Notification Forms: transfers credits from seller to buyer

Trade Tracking Database: records all trade transactions

Monthly Trade Summary: ensures watershed-wide trade reconciliation

Trade Tracking Audits: conducted by DEQ

Elements of the Trading Framework: Building Blocks

PermitMechanisms

Authorization & Limits on

Trading

Trade Execution & Tracking

TradingRules

NPS Credit

Mechanisms

Water Quality

Protection

TMDLMechanisms

Point - Point Trade Process

PSs Identify Trading Partners

PSs Negotiate

Private Contract

Trade Notification

Form Recorded

Seller's Location

Ratio Determines

"Parma Pounds"

DMRs and Trade

SummariesSubmitted

Credit Transferred

Buyer Limit Increases

Seller LimitDecreases

Point - Nonpoint Trade Process

PS & NPS Identify Trading

Partners

PS & NPS Negotiate Private

Contract

Determine Transferable

Credits

PS Submits DMR & Trade Summaries

BMP Constructed, Inspected, & Monitoring

Begins

Measured:monitoring &

ratios determine

credits

Calculated:credit

calculation & ratios

determine credits

Transfer Credit

Submit Trade Notification

Form

Buyer Limit Increases

Seller Account Decreases

Verify Reductions

Submit Reduction

CreditCertificate

Conclusions

We can make pollution a commodity and trade it.

There is a demand in many basins - but not all..

The tools necessary for trading are available and

can fit within existing programs.Trading framework summary is available from

IDEQ at WWW2.state.id.us/deq.