Environmental Credit Trading as Tool for Meeting TMDLs March 14, 2001 -- Scottsdale, Arizona A Workshop Sponsored by WGA and Western States Water Council (WSWC)

Contents

Acknowledgments
Agenda
Panel I - Making the Case for Water Quality Trading 
Panel II - The Mechanics: Implementing a State Water Quality Trading Program as a Tool to Meet TMDL Requirements 
Panel III - Other Credit/Trading Programs and Opportunities 
Panel IV Multiple Credit Trading 
Discussion, Next Steps

Acknowledgments 

This workshop is one in a series of workshops funded by the U.S. Environmental Protection Agency. WGA appreciates the support and the expertise and good cheer of the EPA individuals who have worked with us. The considerable work of identifying topics, developing an agenda, selecting speakers, developing an invitation list and arranging logistics for the meetings fell to WGA's TMDLs Advisory Committee and WGA staff. The members of the advisory committee were selected because of their knowledge of TMDL issues and players, and because of their ability to capably represent the broad range of interests involved in TMDL issues. WGA aims to maintain the Advisory Committee throughout its TMDL work in order to continue reaping the benefits of the members 'wisdom and insights. WGA's TMDLs Advisory Committee includes the following individuals:

7:30 a.m. Continental Breakfast (Conference Center – Palo Verde Room)

08:00 Welcome and Introductions – WGA’s TMDL Program Co-Chair
            Gary Beach, Administrator, Water Quality Division, Wyoming DEQ

08:15 Panel I – "Making the Case for Water Quality Trading"

Moderator: Craig Bell, Executive Director, Western States Water Council

Panelists:

Bill Painter, U.S. Environmental Protection Agency

Kari Dolan, National Wildlife Federation

Paul Faeth, World Resources Institute

The opening panel will set the stage regarding the current issues and challenges associated with water quality trading, answering the questions, what are the problems faced by the states in implementing, enforcing, and funding environmental laws, regulations, and programs? Is a water quality trading program a viable alternative? What problems does a water quality trading solve? What are the benefits? etc.

09:30 Panel II - "The Mechanics: Implementing a State Water Quality Trading Program as a Tool to Meet TMDL Requirements"

Moderator – Karen Smith, Director Water Quality, Arizona DEQ

Panelists:

Dave Mabe, Director, Water Quality, Idaho DEQ

David Batchelor, Michigan Surface Water Quality Division

David Holm, Colorado Water Quality Control Division

Three states will present their water quality trading programs including a focus on how a trading program can be a tool for meeting TMDL requirements. They should provide the meeting participants with the basic items including; how it works, how you measure/count credits, follow-up actions related to credits, legal basis for program, relationship to other programs, etc.

10:45 Break

11:00 Panel III - "Other Credit/Trading Programs and Opportunities"

Moderator: Patrick Cummins, Program Manager, WGA Air Program

Panelists:

Ira Domsky, Deputy Director, Arizona Air Quality Division (air emissions trading programs)

Craig Denisoff, Vice President, Wildlands, Inc. (wetlands mitigation banking)

Michael Bean, Environmental Defense Fund (ESA habitat mitigation banking)

Michael Somerville, State Conservationist, NRCS, USDA (conservation programs under the Farm Bill)

The objective of this panel is to see how other pollution trading programs have worked, asking: What opportunities currently exist? What has worked? What hasn’t worked? What are the lessons learned? What are the opportunities for integrating programs to achieve multiple benefits?

12:30 p.m. Lunch

Speaker: John Pemberton, Majority Counsel, Senate Environment and Public Works Committee

John will provide his perspectives on upcoming legislative and budget issues associated with pollution trading.

02:00 Panel IV – "Multiple Credit Trading "

Moderator: Jim Souby, Executive Director, WGA

Panelist:

John Rogers, CH2M Hill

CH2M Hill will introduce the idea of multi-credit trading, beginning with a discussion of ‘Value Tent.’ The presenters will then show how pollution credits could be traded using the Internet.

03:00 Facilitated Discussion on Administering a Multi-Credit Trading System

Facilitator: Bruce Flinn, Coyote Consulting

A facilitator will lead all meeting participants in a discussion on a set of key questions focusing on how to administer trading programs, and including recommended actions that could be taken by the Governors.

04:30 Discuss Next Steps - Where do we go from here?

WGA TMDL Program Co-Chair – Gary Beach

WGA Executive Director Jim Souby

05:00 Summary of Meeting and Adjourn

WGA TMDL Program Co-Chair – Gary Beach

06:00 Reception

Bill Painter from the Environmental Protection Agency (EPA) provided several definitions of water quality trading including the following from an EPA policy statement on Effluent Trading in Watersheds, January 1996 that stated: . . . a source that can . . . cost-effectively achieve greater pollutant reduction that is otherwise required would be able to sell or barter the credits for its excess reduction to another source. He discussed key trades, principles of trades, and the types of trades by sources.

Many key issues need to be resolved for a successful trading program. Limiting trading to only certain pollutants or groups of pollutants, "poor" history of compliance, when has a credit been generated, credit duration, and trading ratios were all discussed. Enforcement and accountability and the relationship of trades to TMDL’s were discussed in detail.

• Watershed-based Trading:  Background and Issues - Bill Painter, EPA
• bio

The second panelist Kari Dolan from the National Wildlife Federation discussed her report " A New Tool for Water Quality Making Watershed-Based Trading Work for You". The paper outlines twelve safeguards to protect water quality during the trading process and concludes that trading can be an option to restore watersheds, particularly those that are chronically polluted from non-point sources. However, trading will only work when citizens get involved and stay involved.

• A New Tool for Water Quality: Making Watershed-based Trading Work For You - Kari Dolan, National Wildlife Federation
• bio

On behalf of Paul Faeth from the World Resources Institute, Dave Batchelor concluded that trading trading can be part of the answer to achieve better water quality . Trading has been successfully used to obtain cost-effective reductions in other areas of environmental concern, including lead, sulfur dioxide, and other air emissions.

While trading is the economically preferred approach for nutrient management problems, there are a number of significant concerns that must be addressed to ensure that trading is an environmentally effective and equitable solution which he has outlined in his paper "Fertile Ground: Nutrient Trading’s Potential to Cost-Effectively Improve Water Quality."

To meet a U.S. commitment under the Kyoto Protocol, Mr. Faeth raises the possibility of implementing a nutrient trading program under the Clean Water Act which would allow point-source dischargers to meet their permit obligations by paying farmers to reduce their nitrogen loads to the nation’s waterways. When nitrogen surpluses are reduced, nitrous oxide emissions are also cut, so nutrient trading can improve water quality, reduce greenhouse gas emissions, and give farmers an increase in net cash returns even with higher energy prices. This strategy is outlined in his paper "A Climate and Environmental Strategy for U.S. Agriculture."

• Fertile Ground and A Climate and Environmental Strategy for U.S. Agriculture - Paul Faeth, World Resources Institute
• bio

The Lower Boise River Effluent Trading Demonstration Project is the first effluent trading project in the Pacific Northwest. Dave Mabe from Idaho Department of Environmental Quality concluded that effluent trading is a business-like way of helping solve water quality problems by focusing on cost effective, local solutions to problems caused by pollutant discharges to surface waters. Typically, a party facing relatively high pollutant reduction costs chooses to compensate another party to achieve an equivalent or better, though less costly, pollutant reduction. Parties trade only if both are better off as a result of the trade. The Lower Boise River Effluent Trading Demonstration Project is highlighted on EPA Region 10's website below.

• Effluent Trading:  The Lower Boise River Demonstration Project - Dave Mabe, Director, Water Quality, Idaho DEQ
  - See also http://www.epa.gov/r10earth (Click on Water, Click on Water Related Topics, Click on Effluent Trading Projects, Click on Lower Boise Project)
• bio

Michigan is in the forefront of developing a statewide water quality trading program. Dave Bachelor from Michigan Department of Environmental Quality discussed opportunities to trade, process and legal authority, and trading rules. The Michigan system includes developing a water quality trading registry with Internet access and GIS application. The agricultural framework is voluntary and performance based. Formal Rules and a Public Hearing Report are included below with Dave’s Powerpoint presentation.

• Michigan's Water Quality Trading Program - David Bachelor, Michigan Surface Water Quality Division
  - See also Formal Rules and Public Hearing Report
• bio

J. David Holm , Colorado Water Quality Division in his presentation on "Moving Toward Watershed-Based Water Quality Trading" emphasized creating a climate of cooperation among stakeholders and working collaboratively toward a watershed management plan. There are unique challenges to water quality trading some of which include multiple regulatory jurisdictional boundaries, conflicting values and complexity. Trading principles were discussed in detail as well as the need to provide incentives to cleanup orphan sites and barriers.

• Moving Toward Watershed-Based Water Quality Trading - David Holm, Colorado Water Quality Control Division 
• bio

The Western Regional Air Partnership (WRAP) is a collaborative effort of tribal governments, state governments and various federal agencies to implement the recommendations of the Grand Canyon Visibility Transport Commission and to develop the technical and policy tools needed by western states and tribes to comply with the EPA’s regional haze regulations. Ira Domsky from Arizona Department of Environmental Quality provided an overview of the purpose of trading programs, types of trading programs and a history of air pollution trading programs.

• Air Pollution Trading Programs - Ira Domsky, Deputy Director, Arizona Air Quality Division
• bio

Craig Denisoff from Wildlands, Inc discussed wetland mitigation banking. The Army Corps of Engineers, Environmental Protection Agency, National Resources Conservation Service, Fish and Wildlife Service, and National Marine Fisheries Service are issuing final policy guidance regarding the establishment, use and operation of mitigation banks for the purpose of providing compensation for adverse impacts to wetlands and other aquatic resources. Mr. Denisoff's handouts include official policy on conservation banks from California Resources Agency.

• Mitigation Guidance and Mitigation Banking - Craig Denisoff, Vice President, Wildlands, Inc.
• bio

The Endangered Species Act habitat mitigation banking was discussed by Michael Bean, Environmental Defense Fund. The first wetland mitigation banks were established nearly two decades ago, but only recently several agencies with wetland conservation responsibilities could agree on uniform guidance concerning the establishment and operation of mitigation banks. Because endangered species and wetlands differ in the extent of legal protection provided to each and in the laws and programs pertaining to their conservation, the policies for endangered species mitigation and banking and wetland mitigation banking should differ as well. This report describes some of the issues and suggests solutions.

• Mitigation Banking as an Endangered Species Conservation Tool - Michael Bean, Environmental Defense Fund

• bio

Michael Somerville, State Conservation with the Natural Resource Conservation Service discussed conservation programs under the Farm Bill. These included the Conservation Reserve Program which protects highly erodible and environmentally sensitive lands with grass, trees, and other long-term cover and the Environmental Quality Incentives Program (EQIP). EQIP is a new program which combines the functions of the Agriculture Conservation Program, Water Quality Incentives Program, Great Plains Conservation Program, and the Colorado River Basin Salinity Control Program. Other programs include the Wetlands Reserve Program and Wetland Conservation (Swampbuster) Program.

• Michael Summerville, State Conservationist, NRCS, USDA
  National NRCS Web site, Arizona NRCS Web site, United States Department of Agriculture Web site
• bio

John Rogers from CH2MHill presented his paper on "Designing a Multi-Credit Trading System Using Watersheds as a Basis for Trade". This paper describes an approach for credit trading across multiple environmental media using a watershed as the basis of trade. This approach recognizes the ecosystem values of the watershed, i.e., it’s water, wetlands habitats, riparian forests, etc., and provides multiple incentives for restoration and improvement of ecosystems functions. In this approach, companies or other entities can invest in reforestation and earn tradable credits for carbon sequestration and water quality credits such as Total Maximum Daily Load (TMDL) best management practices.

This system has several advantages. First, multi-credit trading reduces the overall cost of environmental protection and restoration while still adhering to strict standards. The SO2 trading program instituted by the Clean Air Act Amendments of 1990 has provided a successful large scale demonstration of tradable rights systems. SO2 trading has been able to achieve equivalent (or better) pollution control at a fraction of the cost of conventional systems. Second, multi-credit trading delivers environmental protection and improvement across a broad range of values encompassed in the watershed. Finally, the ability to trade credits among various ecosystem values allows the achievement of overall watershed management objectives according to priority, starting with projects that give the most "bang for the buck."

• Summary of Facilitated Discussion on Administering a Multi-Credit Trading System - John Rogers, CH2M Hill
• bio 

1. TMDL trading makes sense – the question is how far do we really want to go? Multi-credit trading creates risks of taking on too much. There may be legal opposition to pursing creative solution. How do we address them?

2. There are other values (other than monetary) which the process may not capture.

3. We will need to quantify the other multiple benefits. We will need to do some analysis and maybe use pilots to do the analysis.

4. We will need to identify the "societal" value in restoring species.

5. How do we help folks to create the environment to restore species? The issue of a multi-credit system is an important policy question.

6. The market and system for multi-credit trading is already happening today. The issue is terminology (term multi-credit?) and the creation of more markets.

7. As with any program we will need to address private property issues.

8. Flexibility will be needed to give the markets the opportunity to achieve broad goals.

9. Most current water trading programs is designed around nutrients. Is there other water trading than can occur (California is trading sellineum)?

10. Multi-credit trading can not be viewed as a cure all, but it is another tool in the toolbox.

11. The Great Lakes Trading Network is an existing forum for trading that is working.

12. WGA and the states should seek the opportunities, rather than focus on barriers. The barriers are always present.

13. We must recognize the public perception and value of trust. We must be able to demonstrate ‘net’ environmental benefit from credit trading.

14. Before we trade, we will need to be able to quantify the values. This is currently difficult for Non-Point Sources (NPS). We may be leaping ahead if we aren’t able to quantify NPSs .

15. Some of the benefits from actions in watersheds will take years (time) to occur. The system will need to recognize that factor.

16. Public participation is key to developing trust. Once you gain their trust we can’t squander it.

17. We will need guidance on what is possible.

18. Do we really want to bundle it all together? Pieces of the existing programs are working. Will we be making it too difficult?

19. An opportunity exists to look at the WGA ESA legislative package and determine if some of the package provides opportunities for ‘rifle-shot’ fixes which congress could consider which would enhance the existing ESA trading program and future multi-credit programs.

20. WGA should work with congress to seek funding for some creative pilot programs.

21. Pilot programs would let the individual states define the nature and scope of the pilot trading program.

22. A new pilot program can’t be a ‘zero-sum’ program. It would have to be new money that is in addition to existing program funds. We can’t be expected to fund a pilot from existing program funds and distract from existing accomplishments.

23. Project Excel – a pilot program could be developed using the ‘good parts’ from Excel. It would be a corollary program for all natural resources. We would need to gather all stakeholders together to make it work – this is important but costly. Use the concepts of Excel but not the name.

24. We shouldn’t have pilot projects just for pilot project sake. Need to keep our focus on the goals – improving the natural resources.

25. The pilots should ensure that good science and verification are key components.

26. Project Excel failed because EPA is risk adverse. EPA may not be the right place for a multi-credit program. CEQ? To be successful the states will need to ‘own’ the pilots.

27. To the extent practicable, we need to standardize the measurement systems.

28. An opportunity exists to develop, in concert with the Department of Interior, new policy for trading of ESA credits. States and the public need guidance on mitigation banking (none currently exist). By developing this guidance it will provide an opportunity to integrate species mitigation into other programs. The guidance needs to be developed in a cooperative manner with participation by states and other key partners. National Marine Fishery Service and Department of Commerce should also be partners.

29. The states could also work to get their own policy framework together on water trading. EPA has draft guidance but we cannot expect it to be finalized in the near future. A state policy would greatly advance the discussion and might encourage EPA to move to finalization of their policy.

30. Outcomes should reflect upon agreed to metrics. Develop them at the state level or watershed with appropriate federal agency support.

31. An opportunity exists to develop WGA policy supporting water quality trading and guidance for TMDL trading. It should include statement of support for metrics. The policy statement should note the successes currently occurring in the wetlands, air, and ESA programs. It should also address the need to address and recognize western water law. The policy should recognize that a lot can be done with existing tools and it should encourage the full use of existing tools.

32. Can we get the federal land management agencies to ‘buy-in’ to trading for run-off from federal lands?

33. Policy and process will need to be clear that we will go above and beyond compliance with TMDL trading.

34. WGA could lead in the development of new policy – rather than asking federal agencies. There is several models currently available; i.e. Chesapeake Bay Program, EDF model, California and EPA draft policy. The current EPA draft guidance gives us the appropriate signals to move forward.

35. Need to consider the Unified Federal Watershed Policy in any new policy development and view it as a tool in the future.

SUMMARY WESTERN GOVERNORS’ ASSOCIATION
TMDL MEETING
MARCH 14, 2001

Five items appear to be fruitful to pursue by WGA.

The concept of ‘pilots’ to pursue new and creative ideas for a variety of trading options needs to be developed and provided to Congress in the next 60-90 days to seize any opportunities to include in current legislation. A number of ideas from the TMDL forum should be included: Project Excel ideas, new money for pilots, metrics, let states own them and develop the ‘pilots’ to meet their needs, etc.

A review of WGA’s draft ESA legislation should be undertaken to determine if opportunities exist to bring forward to Congress specific ‘rifle-shot’ items which may improve the implementation of the Act and also enhance the opportunities for creating markets for trading ESA based credits.

The governors could send a request to the Secretary of Interior and Commerce seeking them to work with the states to develop a conceptual framework for policy on the ‘trading’ of ESA based credits. This process would probably take 9-12 months to develop and a team of experts would need to be assembled to develop the initial draft. This framework is essential to future successes.

The governors could begin the development of a state ‘framework’ or ‘principles’ for water pollution trading based upon the draft work from EPA. The state document would then guide future work or would prompt EPA to move forward and finalize the existing draft document.

An opportunity exists to develop WGA policy supporting water quality trading and guidance for TMDL trading. It should include statement of support for metrics. The policy statement should note the successes currently occurring in the wetlands, air, and ESA programs. It should also address the need to address and recognize western water law. The policy should recognize that a lot can be done with existing tools and it should encourage the full use of existing tools.