Published in the Idaho State Bar Advocate Magazine, June/July 2016.

by Gregory M. George

Recent years have seen a raft of new ideas on how to reduce pollution of air and water. Most people have heard of the “cap-and-trade” policy proposed to reduce emissions of greenhouse gases.1 Similar ideas to reduce water pollution, however, have received less attention. Still, such ideas have been formed and developed into guidance at both the federal and state levels. Idaho, along with other states all over the country, has developed frameworks and guidance for water quality pollutant trading over the past several years. However, with the advance of such policies have come legal challenges from opponents arguing that pollutant trading fails to comply with the text and structure of the underlying laws — namely, the federal Clean Water Act.

This article will examine the fundamentals of water quality pollutant trading: why the idea was hatched, what it entails, how the state structures the process of water quality trading, and potential legal challenges ahead.

Overview of the Clean Water Act

Water quality pollutant trading is a market-based approach to reducing pollution in public waters. To understand the concept, it is important first to understand the legal problem it seeks to solve. The federal Clean Water Act (CWA)2 provides that, except as specifically permitted, “the discharge of any pollutant by any person shall be unlawful.”3 Most relevantly here, the CWA defines “discharge of a pollutant” to mean “any addition of any pollutant to navigable waters from any point source.”4 “Navigable waters” are defined as “the waters of the United States, including the territorial seas.”5

The term “pollutant” includes, among other things, solid waste, agricultural waste, garbage, chemical materials, and biological materials discharged into water.6 To count as “discharge of a pollutant,” the pollutant must come from a “point source.” A “point source” is “any discernible, confined, and discrete conveyance . . .”7 This definition expressly includes pipes, ditches, channels, tunnels, conduits, wells, concentrated animal feeding operations (CAFOs), discrete fissures, containers, rolling stock, or vessel or other floating craft, from which pollutants are or may be discharged.8

As part of the CWA, Congress created the National Pollutant Discharge Elimination System (NPDES). Under this program, the Environmental Protection Agency (EPA) “may . . . issue a permit for the discharge of any pollutant, or combination of pollutants” on the condition that the discharge either complies with specifically listed sections of the CWA or with “conditions as the [EPA] Administrator determines are necessary to carry out the provisions of this chapter.”9

The CWA requires each state to set water quality standards for all waters within its boundaries.10 The standards set water quality goals for specific water bodies.11 Every two years, each state must create a list of the water bodies for which the current pollution limitations are insufficient to meet the applicable water quality standards.12 The state must submit its list of such “impaired” water bodies to the EPA for approval.13

When a water body is placed on this list, the state has to establish a Total Maximum Daily Load (TMDL) of each pollutant that the water body can absorb and still meet the water quality standards.14 Each state must include TMDLs as part of its required water quality management plan.15 However, the CWA leaves to each state the responsibility to develop plans for meeting water quality standards and limiting pollution from point and nonpoint sources.16

The framework of water quality pollutant trading in Idaho

The basic purpose of water quality trading is to allow parties with high pollution-reduction costs to pay another party to reduce pollution by the same amount for less cost.17 In this way, it works similarly to “cap and trade” systems designed to reduce carbon emissions.18

The Idaho Department of Environmental Quality (DEQ) and EPA Region 10 (which includes Idaho) have used water quality pollutant trading to meet water quality goals. Specifically, a water quality trading framework has been developed for the lower Boise River in order to reduce phosphorus pollution.19

Water quality pollutant trading is recognized in Idaho’s water quality standards at Idaho Administrative Procedure Act (IDAPA) Section 58.01.02.055.06. This section of IDAPA states simply that “[d]evelopment of TMDLs or equivalent processes or interim changes under these rules may include pollutant trading with the goal of restoring water quality limited water bodies to compliance with water quality standards.”

In July 2010, the Idaho DEQ published guidance on water quality pollutant trading as an update to its November 2003 Draft Guidance.20 The 2010 guidance “sets forth recommendations DEQ believes should be considered when pollutant trading is conducted.”21

This guidance provides that pollutant trading allows point source dischargers like wastewater treatment plants and factories to “purchase controls of a particular pollutant elsewhere in the watershed instead of installing tighter controls for that pollutant at the discharger’s plant.”22 The point source discharger’s NPDES permit must include the conditions of pollutant trading.23

The Idaho DEQ requires certain information and a trading framework to authorize trading.24 The published guidance provides six pieces of information that should be developed before trading begins. First, a TMDL should be in place or under development for the pollutant(s) at issue. 25 Second, a market for trading should be identified (i.e., there should be a meeting of trading partners, a determination of whether the pollutant is viable for trading, and a determination of whether there are opportunities to make sufficient reductions of the pollutant in the watershed. 26 Third, a trading framework must be developed identifying the sectors that would trade, determining trading ratios for the pollutant, examining water quality conditions to identify localized impacts, and developing a trading framework document. 27

Fourth, the trading framework document should go public for comment for at least 30 days. Based on the comments received, appropriate changes are made to the document. Afterward, a final trading framework for the specific watershed is incorporated into Idaho’s Water Quality Pollutant Trading Guidance as an appendix.28 Fifth, if trading is not authorized by the TMDL, the TMDL is administratively updated to authorize trading for the watershed.29 Sixth, any additional conditions the NPDES permit writer determines are necessary under the approved trading framework are applied. At this point, trading can commence between the point source discharger under the trading framework for the watershed and consistent with the JPDES permit.30

The TMDL provides the framework for water quality pollutant trading in two ways: (a) it sets the overall cap on a specific pollutant; and (b) it divides the reductions amongst various pollution sources.31 To participate in water quality pollutant trading, dischargers need to have a good record of compliance with their NPDES permits; this includes having EPA-compliant Quality Assurance Program plans and monitoring.32

The mechanics of water quality pollutant trading in Idaho

Water quality pollutant trading has two major components: the trading parties (i.e., buyers and seller) and credits (which the trading parties buy and sell).33 Point sources and nonpoint sources create “credits” by reducing pollutants beyond the level set by their TMDL and NPDES permit.34 More specifically, point sources generate credits by reducing pollutant discharges below the NPDES limits initially set by the waste load allocation.35 Credits are stating in terms of an amount of a pollutant per unit of time.36 Nonpoint sources generate credits by using “best management practices” (BMPs) to reduce pollutant runoff.37 BMPs for nonpoint sources have specific design, maintenance, and monitoring requirements.38 A list of approved BMPs for each Idaho watershed is included in the appendices to the July 2010 DEQ guidance.39

Although the process is subject at every stage to governmental oversight, the trading parties effectuate their trades with private contracts. These contracts identify the parties, the pollutant reduction measures that will be undertaken, the trade amount, the effective date, the time period for which the trade is valid, the responsibilities of each party, the price, the payment provisions, and the remedies if a party fails to deliver credits.40 The contracts themselves are not submitted to any agency.41

When a point source discharger trades to another point source discharger, it can reduce its pollutant discharge below its effluent limit by a certain amount for a given month. The reduction creates the “credit” that can be sold to another point source. Selling a credit increases seller’s “effective discharge” by the amount of the credit, and buying a credit decreases the seller’s reported discharge by the same amount.42 Each point source is ultimately responsible for ensuring that its discharge, adjusted by credits bought or sold, meets its effluent limit.43 The EPA has authority to enforce applicable effluent limits against any point source that exceeds them.44

Nonpoint sources can reduce the amount of pollutant runoff by first selecting a BMP from the applicable BMP list.45 The pollution reduction is calculated according to the requirements of the chosen BMP.46 Such reduction can be turned into a credit, which the nonpoint source can then sell to a point source.47 Point sources can buy credits for a given month generated by a nonpoint source in the same month and thereby increase its allowed discharge for that month.48 The nonpoint source credits must be located on the same water bodies covered by the TMDL.49

If the EPA or the DEQ later determine by inspection that the BMP’s underlying pollutant reduction is invalid (i.e., it does not actually reduce pollution by the amount of the credit), then the credit is nullified, with the result that the point source’s effective discharge for the month covered by the credit is increased.50 The EPA and/or DEQ may verify pollution reductions by monitoring, trade information tracking (which includes a trade database), recordkeeping, and reporting.51 The verification processes are discussed further in the next section.

How pollution reductions are verified

Trading parties have to keep records showing the validity of the reductions in pollution underlying their credits, and must additionally document all trades.52

The EPA and DEQ review point source trades as part of the NPDES permit process.53 This review includes the point source’s Discharge Monitoring Report (DMR), which point source dischargers prepare for the EPA and/or state agencies. The DMR is reviewed and compared with the information submitted in the monthly Trade Summary Report the point source discharger submits to the EPA.54 The EPA and DEQ investigate any discrepancies between the documents.55

The Idaho Soil and Water Conservation Commission reviews the BMPs of nonpoint sources.56 EPA or DEQ agents may visit BMP sites to examine the BMP’s design, maintenance, and monitoring.57 Holders of NPDES permits are responsible for ensuring that BMPs are properly implemented and that the correct number of credits is produced.58

Potential challenges to trading

Like most environmental policies, water quality pollutant trading is not without controversy. Some opponents of the idea have mounted legal challenges, arguing that pollutant trading runs counter to the CWA. In 2013, environmental advocacy group Food and Water Watch (FWW) sued the EPA in federal district court in Washington, D.C. seeking to halt water quality pollution trading in the Chesapeake Bay watershed.59

In its complaint, FWW alleged that the CWA does not authorize pollution trading between point sources and nonpoint sources, or between a point source and another point source.60 FWW’s complaint stated that “[t]he CWA does not allow sources of any kind to exceed their TMDL allocations or wasteload allocations in exchange for pollution reductions in another location.”61 In other words, FWW argued that the CWA requires each source to stay within its own pollutant discharge limits, and bars sources from buying their way out through pollutant trading.

FWW contended that water quality pollutant trading “allows point sources to avoid or outright violate their NPDES permit by discharging greater amounts of pollutants than their waste load allocations permit.”62

In FWW’s view, this violates the CWA, which “[does] not allow for [point sources] to avoid any permit limitations — including technology based, water quality-based or wasteload limitations — through a pollution trading program.”63 Moreover, FWW cited the “anti-backsliding provision” of the CWA, which states that NPDES permits “may not be renewed, reissued, or modified . . . to contain effluent limitations which are less stringent than the comparable effluent limitations in the previous permit.”64

FWW also asserted that pollutant trading effectively amended the Chesapeake Bay TMDL without the required notice and comment period. The complaint stated that allowing one source to expand its discharge by purchasing credits “creates new load allocations that were not included in the final Chesapeake Bay TMDLs.”65 Doing so, FWW alleged, amounted to an amendment to the TMDL requiring the EPA to provide a formal notice and comment procedure.66 Because the EPA did not do so, FWW argued that the EPA violated the notice and comment procedures required under the federal Administrative Procedure Act at 5 U.S.C. § 553(b) and (c).67

The district court, however, did not rule on any of these arguments. Rather, it decided the case on other grounds (e.g., standing, ripeness, lack of a final agency action being challenged).68 So, water quality pollutant trading was unscathed. However, FWW continues its legal criticism of pollutant trading.69 It is reasonable to assume that it and/or other groups will litigate the issue in the future.

Endnotes

1. Cap and Trade: Basic Information, U.S. EnvironmEntal ProtEction agEncy, https:// www3.epa.gov/captrade/basic-info. html (last updated February 22, 2016).

2. 33 U.S.C. § 1251 et seq.

3. 33 U.S.C. § 1311(a).

4. 33 U.S.C § 1362(12).

5. 33 U.S.C § 1362(7).

6. 33 U.S.C § 1362(6).

7. 33 U.S.C § 1362(14).

8. Id.

9. 33 U.S.C § 1342(a)(1).

10. 33 U.S.C. § 1313(a)-(c); Pronsolino v. Nastri, 291 F.3d 1123, 1126 (9th Cir., 2002); 40 C.F.R. § 130.3. 11. 40 C.F.R. § 130.3.

12. 33 U.S.C. § 1313(d); 40 C.F.R. § 130.7(d)(1).

13. Id.

14. Id.

15. 33 U.S.C. § 1313(e)(3)(C); Pronsolino, 291 F.3d at 1127-28.

16. Pronsolino, 291 F.3d at 1128-29.

17. Water Quality Pollutant Trading, Idaho Department of Environmental Quality, https://www.deq.idaho.gov/water-quality/surface-water/pollutant-trading/ (last visited April 13, 2016). 18. See Cap and Trade: Essentials, U.S. Environmental Protection Agency, https:// www3.epa.gov/captrade/documents/ ctessentials.pdf (last visited April 13, 2016).

19. See Meeting #1: Foundations of Revising the Lower Boise River Water Quality Trading Framework, Lower Boise River Water Quality trading Program Technical Advisory Committee, (March 1, 2016), https:// www.deq.idaho.gov/media/60178059/ lower-boise-water-quality-trading-program-tac-meeting-030116.pdf

20. idaho dEPartmEnt of EnvironmEntal QUality: watEr QUality PollUtant trading gUidancE (July 2010). 21. Id. at 1.

22. Id. at 3.

23. Id.

24. Id. at 11.

25. Id.

26. Id.

27. Id.

28. Id.

29. Id.

30. Id.

31. Id. at 5.

32. Id.

33. Id. at 13.

34. Id.

35. Id.

36. Id.

37. Id.

38. Id.

39. Id. at 32-46.

40. Id.

41. Id.

42. Id. at 13-14.

43. Id. at 14.

44. Id.

45. Id.

46. Id.

47. Id.

48. Id.

49. Id.

50. Id.

51. Id.

52. Id. at 18.

53. Id. at 22.

54. Id.

55. Id.

56. Id.

57. Id. at 22-23.

58. Id. at 23.

59. Food and Water Watch v. United States Environmental Protection Agency, 5 F.Supp.3d 62 (D.D.C. 2013).

60. Complaint at 10, Food and Water Watch v. United States Environmental Protection Agency, 5 F.Supp.3d 62 (D.D.C. 2013) (No. 12-1639).

61. Id.

62. Id. at 9.

63. Id. at 10.

64. Id. at 9; 33 U.S.C. 1342(o).

65. Complaint at 14, Food and Water Watch v. United States Environmental Protection Agency, 5 F.Supp.3d 62 (D.D.C. 2013) (No. 12-1639).

66. Id.

67. Id.

68 Food and Water Watch, 5 F.Supp.3d at 73-85.

69. Water Quality Trading Schemes Quietly Upending Clean Water Act in More Than 20 U.S. States, Food and Water Watch (Nov. 18, 2015), http://www.foodandwaterwatch.org/news/water-quality-tradingschemes-quietly-upending-clean-wateract-more-20-us-states.

About Gregory George

Gregory M. George is an attorney at Macomber Law, PLLC in Coeur d’Alene. He earned his undergraduate degree in Economics from Whitworth University in 2008 and his J.D. from the University of Washington School of Law in 2012. He is a member of the Idaho and Washington State Bar Associations.

Note: This post is not legal advice, and should not be relied upon as such. Different sets of facts will likely lead to different legal conclusions. If you need assistance with real property matters, call Macomber Law, PLLC for a forty-five minute, no charge consultation to see if we can help.

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