Henry Balikov, CEP Goldman Environmental Consultants May 10, 2007 The Strategic Advantage of Water Pollution Credits: Leveraging the Lessons Learned from Trading Sulfur Dioxide and Creating a Business Strategy based on a Clean Water Commodity Market

© 2007 Goldman Environmental Consulting. All rights reserved. Page 2 Contents  Beyond Command and Control –Clean Air Credits –Carbon Credits –Clean Water Credits  Credits and Markets –Who would use them? –What is the benefit of using them? –Lessons learned from current programs  Be prepared. Strategic planning made easy

© 2007 Goldman Environmental Consulting. All rights reserved. Page 3 Why are we here?

© 2007 Goldman Environmental Consulting. All rights reserved. Page 4 Evolution  The evolution of pollution credits –Sulfur, Carbon, and Water  Who would use them?  What is the benefit of using them?

© 2007 Goldman Environmental Consulting. All rights reserved. Page 5 These systems can work  Clean Air Credits – are already a significant factor in overall pollution reduction  Carbon Credits – are capturing the imagination  Clean Water Credits – can make a contribution that is worth considering

 Title IV of the Clean Air Act has significantly decreased emissions from utilities.  In the first 12 years of the Acid Rain (cap and trade) Program, sources in the Program reduced their emissions of sulfur dioxide by over 33%. That resulted in over 5 million tons less of SOx. © 2007 Goldman Environmental Consulting. All rights reserved. Page 6 Clean Air Credits = +

© 2007 Goldman Environmental Consulting. All rights reserved. Page 7 Clean air credits: what are they? Started in 1990 Clean Air Act Initial focus on sulfur oxides from electric power utility units Now a “cap” on total allowed Units of SO2 are “retired” annually Unused can be banked forward

© 2007 Goldman Environmental Consulting. All rights reserved. Page 8 Clean air credits: how do they work?  Have the “markets” been as efficient as “command and control” alternatives?  How has the cost per ton of reduction compared to other methods or approaches?

© 2007 Goldman Environmental Consulting. All rights reserved. Page 9 Carbon Credits Redux

© 2007 Goldman Environmental Consulting. All rights reserved. Page 10 Carbon Credits Redux  Various markets already exist –Kyoto “international emissions” trading –EU-wide trading –Several national emissions trading programs –Voluntary reduction initiatives  California has committed to a 25% reduction in greenhouse gas emissions by 2020.

© 2007 Goldman Environmental Consulting. All rights reserved. Page 11 Clean Water Credits

© 2007 Goldman Environmental Consulting. All rights reserved. Page 12 Clean Water Credits  Emulate Clean Air Credits or find a different methodology?  Obstacles –Regional or basin-centric? –Onus is on the local government or regulatory body –Point source vs. non-point source –POTW vs. direct-discharger –How significant are mixing zones –How many pollutants are relevant? –Will the market(s) have “critical mass”?

© 2007 Goldman Environmental Consulting. All rights reserved. Page 13 Who would use them? Typical organizations POTW or direct? Who would manage the marketplace?  Typical organizations  POTW or direct discharger?  Who would manage the marketplace?

© 2007 Goldman Environmental Consulting. All rights reserved. Page 14 How would the trade work?  eBay for effluents?  Right now many are volunteering their reductions to have them “permanently retired”  NGOs are stepping up to track the reductions  For trading credits will there be brokers?  Will they be sanctioned by regulators?

© 2007 Goldman Environmental Consulting. All rights reserved. Page 15 What are the basic benefits?  Water Quality Standards remain in place  Creates a different incentive to improve –Efficiencies improve –Costs decrease  Collateral benefits

© 2007 Goldman Environmental Consulting. All rights reserved. Page 16 Why did Oregon get involved?  Oregon’s circumstances favorable to trading include the following: –There is a "driver" that motivates facilities to seek pollutant reductions, such as more stringent permit limits. –Some sources can control pollution less expensively than others. –There is something to trade. When all sources in a watershed are required to reduce pollutant loads by a large margin, opportunities for trading are reduced.  Oregon believes that where watershed circumstances favor trading, it can be a powerful tool for achieving pollutant reductions faster and at lower cost.

© 2007 Goldman Environmental Consulting. All rights reserved. Page 17 For Oregon, trading is a viable tool “Almost everyone starts out viewing trading negatively (it is seen as a way for polluters to get off the hook and buy their way out of meeting their legal obligations etc. etc.), once I have had about 20 minutes to show how we can and have used it to achieve actual gain (not just break-even) for the resource, they come around. It takes longer to win over regulators, and much longer to win over the permit holders who might actually do it. That is because they are concerned they will get sued. In a way this is a reasonable concern because there have been so many lawsuits over trivial issues.” Sonja Bjorn-Hansen

© 2007 Goldman Environmental Consulting. All rights reserved. Page 18 Part of the strategic plan  Toll road analogy – those who pollute should pay.  Part of business strategy.  The Choice:  pay to pollute, or  actually make money by NOT polluting and selling/trading clean water credits  Should there be a “use or lose” time limit?

© 2007 Goldman Environmental Consulting. All rights reserved. Page 19  Can we discuss? –What might be the interests of Stakeholders? –How to create a value proposition  Obtain professional guidance to help craft a pollution strategy and manage risk.  Limit exposure by cleaning up your act. Pollution and the bottom line

© 2007 Goldman Environmental Consulting. All rights reserved. Page 20 The fundamental process - Ask:  What is the desired end state?  What is today's situation? What is the gap from that desired state and why?  What specific actions must be taken to close the gap between today's situation and the ideal state?  What resources are required to execute the activities? Strategic planning made easy

© 2007 Goldman Environmental Consulting. All rights reserved. Page 21 Strategic Analysis  Assess –Stakeholders including customers and workforce –Competition –Technology –Supplier markets –The economy –The regulatory environment It is rare to find all six factors having critical importance

© 2007 Goldman Environmental Consulting. All rights reserved. Page 22 Some final thoughts  This should be part of an overall strategy for each organization.  Its value may be critical to managing key risks – reducing the environmental footprint is a proven way to reduce risk.  In a world where facilities frequently come under new ownership or management, it can help assure a better level of performance.  Obtain professional guidance to help craft a pollution strategy and manage risk.