Top officials in EPA’s Office of Water are looking to jump-start work on market-based programs, including water quality trading, in an effort to address nutrient-related water pollution across the country. A recently released memorandum reinforces EPA’s support for market-based approaches like trading and provides greater flexibility in key areas as compared to the Agency’s 2003 trading policy.

Since the release of the memo in February, NACWA has met with a number of stakeholders and heard from several senior EPA officials on the significance of the new policy. Based on this input and our analysis, NACWA members are strongly encouraged to review the new memo and seek to take advantage of EPA’s interest in providing more flexibility on meeting nutrient obligations.

This Advocacy Alert provides a brief overview of the memo and related developments.

New Memo Makes Critical “Updates” to Existing EPA Policy

David Ross, Assistant Administrator for the Office of Water, issued the new memorandum on February 6. Sent to the Regional Administrators for the Agency’s ten regional offices, the memo “updates” EPA policy on water quality trading, outlining six “Market-Based Principles” that are intended to facilitate broader adoption of such programs. 

According to the memo, the Agency’s original Water Quality Trading Policy, issued in 2003, “has not facilitated the widespread adoption of water quality trading…[and] the Agency now believes that the 2003 Policy may be too prescriptive to be widely effective and implementable.”

The new memo is intended to “clarify and expand the range of policy options available for states, tribes and stakeholders to consider,” and provides more flexibility in key areas, including banking of credits and implementation of baselines. Senior leaders in the Office of Water wanted to make more dramatic changes to the 2003 policy but were hemmed in by the Agency’s attorneys when crafting the new memo.

While focused on trading, the memo also encourages market-based programs more broadly, as well as “other collaborative approaches to achieving water quality improvements, including… coordinated point/nonpoint pollution reduction or offset projects,” an area that NACWA continues to pursue with EPA, the US Department of Agriculture (USDA) and national agriculture groups.

“Stop Letting Perfect Get in the Way of Progress”

In discussing the memo with stakeholders, including on a March 5 webinar, Principal Deputy Assistant Administrator for the Office of Water Anna Wildeman has stressed that the Agency wants to provide opportunities for innovation and creativity and to not let “perfect get in the way of progress” in terms of pursuing adaptive approaches to trading and market-based approaches that may involve learning along the way and making adjustments when necessary.

The new memo discusses six main areas or “principles,” as follows:

1. Watershed Scale – EPA wants to encourage trading at a larger scale. Existing language in the 2003 trading policy has been interpreted to limit trading to small watersheds. EPA is encouraging stakeholders to “think bigger.”
2. Adaptive Management – EPA stresses the need to develop programs that can be updated and improved over time and that they don’t need to be perfect from the start.
3. Banking – The 2003 policy put limitations on how banked credits could be used and time limits on how long they would be available. The new memo is pushing for more flexibility on this and also the inclusion of “look back” credits that would allow work done before a formal program is set up to be used to generate a credit, assuming the documentation is available to ensure the credit meets the program’s requirements.
4. Baseline – This has been a big sticking point in getting many point – nonpoint source trading programs off the ground. EPA referred to it as the “most significant barrier” to trading. The 2003 policy states that TMDL load allocations for nonpoints serve as the baseline and must be met before credits can be generated. In the new memo, EPA wants to look for ways to be more creative in how baselines are implemented, including not requiring all nonpoints in a watershed to have met the baseline before trading can begin.
5. Stacking – EPA wants to allow a single project to get credit under multiple programs, including nutrient reduction, wetlands mitigation and conservation (endangered species protection). This will involve other federal agencies as well, but EPA is interested in opening this option up to make nutrient control efforts more attractive to nonpoints.
6. Financing – The memo includes a special focus on financing nutrient work and EPA will be hosting a workshop in May or June to address this issue further.

What the Memo Doesn’t Do

One of NACWA’s advocacy priorities around trading and market-based approaches has been ensuring that utilities can get credit in their Clean Water Act permits for the work they do upstream with agriculture. In addition, NACWA members have stressed that policies on margins of safety and trading ratios have discouraged them from participating in these types of programs in the past.

The new memo is focused largely on new flexibilities intended to encourage nonpoint sources to participate in the program and doesn’t address many of the issues that clean water utilities have raised as barriers. NACWA is pursuing this further with EPA and wants to explore more flexibilities in Clean Water Act permitting and incentives to engage utilities before they are facing stringent permit limits.

Regional Contacts

EPA is establishing a single point of contact at each EPA region on trading and market-based approaches. The regional contacts are listed on EPA’s website.

Next Steps

EPA is interested in piloting the new flexibilities outlined in the memo in real projects around the country. If EPA is able to engage in some real-world examples, NACWA expects that we will see even more flexibility than what is outlined in the memo.

NACWA continues to engage with EPA, USDA and national agriculture groups to advance these conversations and will be participating in an upcoming meeting hosted by EPA and USDA on addressing nutrient control efforts, as well as the planned forum on financing nutrient control work. 

Members with questions can contact Chris Hornback, NACWA’s Deputy CEO.