Welcome to the USDA-EPA Water Quality Trading Roadmap
Welcome to the USDA-EPA Water Quality Trading Roadmap
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Designing a Program
Why water quality trading?
Despite the significant progress USDA and EPA have made to improve water quality in the U.S., over half of the country’s streams, lakes, and estuaries are not meeting the water quality standards established under the Clean Water Act to provide clean drinking water, recreation, fish and wildlife habitat, and other designated uses.
The work ahead of us to achieve these standards will require all the tools at our disposal that can account for watershed dynamics, allow flexibility on how to achieve clear, enforceable goals, and target investment where it can most effectively improve water quality.
Water quality trading (WQT) provides one source the choice of installing onsite pollution reduction technology or working with other sources offsite to generate equal or greater pollutant reductions. Although WQT can offer flexibility in meeting Clean Water Act requirements, establishing a WQT program is challenging and can lead to disputes over:
• How much pollution reduction is expected from market participants prior to buying and selling credits
• How to cope with uncertain science or other risks
• Balancing multiple stakeholder perspectives when designing a WQT program
Because water quality is a local concern, and communities who develop WQT programs cater to their local needs, programs differ across the country. Despite this variation, the development of WQT programs includes a few common steps. These elements are useful to search for in the Roadmap to learn more about designing a WQT program.
1. Establishing or identifying regulatory framework to support trading
2. Deciding who is involved in the WQT market, how to define the trading area, and what’s being traded
3. Deciding on the eligibility requirements for participation in the WQT program
4. Deciding on methods and tools to quantify water quality benefits
5. Planning for risk and uncertainty in the trading program
6. Defining a “credit” of what’s being traded in the program
7. Establishing guidelines for project implementation
8. Establishing a way to review, certify, and track credits
9. Deciding on rules for compliance and enforcement
10. Creating a way to track progress and improve the program over time
11. Creating a process for transactions and stakeholder engagement
Adapted from the National Network on Water Quality Trading document, “Building a Water Quality Trading Program: Options and Considerations.”
Generating credits for sale is a key component of water quality trading programs. Here are some common questions that nonpoint sources, like farmers, ranchers and forest landowners, might search for in the Roadmap to learn more about selling credits.
How are credits generated?
Producers, ranchers, and forest landowners may generate water quality credits for sale in water quality markets. Often this first requires meeting a baseline, or a minimum level of water quality protection, before becoming eligible to trade. Once eligible, producers can install additional best management practices, or BMPs, that generate even more water quality benefits. These additional benefits can then be offered for sale on water quality markets. Examples of BMPs include:
- Tree planting
- Livestock fencing
- Wetland restoration
- Cover cropping
- Conservation tillage
- Nutrient management
How is a credit defined?
Typically, a credit is defined as a quantity of delivered pollution that has been reduced. In other words, a credit is equal to the amount of the pollution that actually meets a water body. Nitrogen and phosphorus are often the pollutants that are traded in WQT programs.
“Delivered” means that pollutant attenuation within the water body is taken into account within the definition of a credit. For example, denitrification and biological processes may diminish the amount of nitrogen in the stream as it moves through the watershed, thus one pound of nitrogen reduced upstream of the point of concern would not be as effective as one pound of nitrogen reduced at or near the point of concern. Different water quality trading programs define credits slightly differently. Search the Roadmap for your state to learn more.
How are credits calculated?
Water quality trading markets currently use a variety of tools and methods for calculating nonpoint source credits. These tools and methods attempt to estimate how a change in agricultural land use management or implementation of structural conservation practices impact runoff of nutrients and pollutants into water bodies. Examples of models used in water quality trading include:
- The Nutrient Tracking Tool
- The Chesapeake Bay Nutrient Trading Tool
Water quality trading markets take many forms. Depending on the trading program, the participants will vary as will market structure and administrative requirements. Searching for questions like those below can help to understand transaction models and program administration.
Who participates in a water quality market?
Water quality trading typically involves a variety of stakeholders including agricultural producers, permitted industrial and municipal facilities, government agencies at the federal, state, and local levels, nongovernmental organizations, and citizen groups. The role of each stakeholder group will vary from trading program to trading program, depending on the structure and functionality of the program. Use the Roadmap to search for a type of stakeholder to learn more.
How are trades conducted?
There are many transaction models used in water quality trading, including bilateral exchanges, sole-source offsets, auction mechanisms, and open exchanges. Many water quality markets also use brokers or aggregators to facilitate market transactions. An aggregator is similar to a banker in the wetland markets—they are a third party that works with landowners to develop and aggregate credits for sale. The aggregator then works directly with potential sellers to provide needed credits.
What are the types of trades?
There are several types of trades in water quality trading programs. In the regulatory context, trading has been used to:
1) offset existing discharges, or
2) offset new or expanded discharges.
In the voluntary context, trading can be utilized to:
3) meet water quality goals before a TMDL or other requirement is needed, or
4) create purely voluntary water quality benefits.
Within those types, there are point-to-point trades, point-nonpoint trades, and sometimes nonpoint-nonpoint trades. Use the Roadmap to learn more about the different types of trades.