Deliberative, Pre-decisional – Do Not Quote, Cite or Distribute 1 Chesapeake Bay Water Quality Trading

Deliberative, Pre-decisional – Do Not Quote, Cite or Distribute 2 What is Water Quality Trading? Voluntary exchange of pollutant reduction credits. Sources with higher pollutant control costs may purchase pollutant reduction credits from sources with lower control costs. How are Trading and Offsets Related? Trading is the economic activity used to purchase sufficient pollutant loadings to offset a facility’s excess discharge.  Trade = Economic  Offset = Pollutant

Deliberative, Pre-decisional – Do Not Quote, Cite or Distribute 3 What is Being Traded? Pollutant Reduction Credits :  A unit of pollutant reduction needed by a buyer usually measured in pounds equivalent.  Generated by a point source (regulated) over- controlling its discharge.  Generated by a non-point source (unregulated) from the installation of best management practices beyond those required for baseline.

Deliberative, Pre-decisional – Do Not Quote, Cite or Distribute 4 Baselines for Credit Generators A source that wants to sell pollutant reduction credits must first meet a baseline level of discharge. Point Source Pre-TMDL -WQBEL in permit TMDL -WQBEL in permit which is consistent with the TMDL wasteload allocation (WLA) Non-point Source Pre-TMDL -State and local requirements and/or existing practice TMDL -TMDL load allocation (LA)

Deliberative, Pre-decisional – Do Not Quote, Cite or Distribute 5 Trade Ratios In most cases, pollutant credits are not generated on a 1:1 basis. Rather a trading ratio is used to normalize differences between the sources’ discharges. There are four types of trade ratios:  Delivery or Location Ratios Account for fate and transport, pollutant attenuation  Equivalency Ratio Account for different forms of the same pollutant (e.g., total vs. dissolved nitrogen)  Uncertainty Ratio Account for uncertainty about the actual volume of credits produced (generally seen with PS-NPS trading)  Retirement Ratio Accelerate the rate of water quality improvement

Deliberative, Pre-decisional – Do Not Quote, Cite or Distribute 6 When Can Trading Not Occur? Trading cannot be used to meet technology-based effluent limitations. Trades cannot cause nonattainment of an applicable water quality standard. Trading cannot cause an exceedance of a cap established under a TMDL.

Deliberative, Pre-decisional – Do Not Quote, Cite or Distribute 7 EPA’s New Dischargers and Offsets Rulemaking Will address the appropriate use of offsets to compensate for new discharger loadings both prior to the issuance of a TMDL and where a TMDL is in place. Potential schedule: -March 2012: Options Selection -Summer 2012: Proposed Rule/Public Comment.

Deliberative, Pre-decisional – Do Not Quote, Cite or Distribute The Chesapeake Bay TMDL and Trading’s Role in Meeting its Goals The question is what can be done in the interim? In Section 10 and Appendix S of the Chesapeake Bay TMDL established on December 29, 2010, EPA states it will use the full scope of its authority to ensure offsets and trades for nitrogen, phosphorus, and sediment are fully consistent with the Clean Water Act, its implementing regulations and NPDES permits. Unlike the Clean Air Act, under the Clean Water Act EPA lacks clear authority to establish requirements for water quality trading programs. Thus, the offset appendix provides EPA’s “expectations” for water quality trading in the Chesapeake Bay under the new TMDL 8

Deliberative, Pre-decisional – Do Not Quote, Cite or Distribute The Chesapeake Bay TMDL and Trading’s Role in Meeting its Goals Appendix S (Offsets) outlines the minimum common elements for the Chesapeake Bay jurisdictions’ offset and trading programs. Authority Offsets Baseline: That any point or non-point source generating a credit has implemented practices or met any reductions necessary to be consistent with the Bay TMDL allocations. Minimum Controls: That any point or non-point source using a credit has implemented certain minimum controls (e.g., a discharger using a credit will meet on-site any relevant minimum technology based standards or secondary treatment standards). 9

Deliberative, Pre-decisional – Do Not Quote, Cite or Distribute The Chesapeake Bay TMDL and Trading’s Role in Meeting its Goals Eligibility Credit Calculation and Verification: Ensuring that credits are quantified using appropriate metrics and are verified to ensure that they are producing the expected reductions. For example, accounting for uncertainty of source reductions due to factors such as practice efficiencies related to the use of BMPs, a lack of required reporting compared to other sources, and/or lack of regulation of the source by federal, state and/or local regulations. This process also entails verifying the credit was and continues to be generated, via monitoring, inspection, reporting or some other mechanism. Issue is the scope of information gathering and inspection authority (non- point sources vs. point sources). 10

Deliberative, Pre-decisional – Do Not Quote, Cite or Distribute The Chesapeake Bay TMDL and Trading’s Role in Meeting its Goals Safeguards: Including in the basis and record for any offset, safeguards to ensure that the entire delivered load is accounted for and that water quality will be protected. Safeguards include restricting the use or generation of offsets by an unpermitted point source or a source in noncompliance with its NPDES permit. Additionally, EPA and states must ensure temporal consistency between the period when a credit or offset is generated and when it is used. 11

Deliberative, Pre-decisional – Do Not Quote, Cite or Distribute The Chesapeake Bay TMDL and Trading’s Role in Meeting its Goals Certification and Enforceability: Designating the process to be used and responsibility for credit/offset certification and ensuring the enforceability of permits and offset transactions. Must ensure an NPDES permittee remains accountable for meeting the water quality based effluent limits in its permit. After all, CWA Section 309 enforcement provisions do not apply to non point source credit generators. 12

Deliberative, Pre-decisional – Do Not Quote, Cite or Distribute The Chesapeake Bay TMDL and Trading’s Role in Meeting its Goals Accountability and Tracking: Developing accountability and tracking system(s) that are holistic and focused on performance outcomes while providing maximum transparency, operational efficiency, and accessibility to all interested parties. The systems should include the NPDES permit number or other identification of the purchaser of the offset or credit, where and when the credit was generated, and documentation of agreements between parties to the offset transaction. 13

Deliberative, Pre-decisional – Do Not Quote, Cite or Distribute The Chesapeake Bay TMDL and Trading’s Role in Meeting its Goals Nutrient-impaired Segments: Ensuring that offsets in nutrient-impaired water segments result in progress toward attainment of WQS in the impaired segment and do not lead to exceedances of WQS elsewhere. Credit Banking: Articulating whether aggregation and/or banking of offsets is permissible under the jurisdiction’s program and, if so, under what circumstances these will be allowed and the procedures for such activity. 14

Deliberative, Pre-decisional – Do Not Quote, Cite or Distribute The Chesapeake Bay TMDL and Trading’s Role in Meeting its Goals EPA intends to maintain regular oversight of jurisdictions’ offset and trading programs through periodic audits and evaluations. EPA will report its findings to the respective jurisdiction. First such review of jurisdictional offset and trading programs will take place in calendar year Expectation is that the findings of this review will inform offset and trading provisions included in the jurisdictions’ Phase II Watershed Implementation Plans (WIPs). 15

Deliberative, Pre-decisional – Do Not Quote, Cite or Distribute Bay Jurisdictions’ Existing Trading Programs Jurisdictions with existing water quality trading statutes, regulations and/or policies: Maryland,Pennsylvania, Virginia, West Virginia Jurisdictions that do not have water quality trading statutes, regulations and/or policies: New York, Delaware, District of Columbia 16

Deliberative, Pre-decisional – Do Not Quote, Cite or Distribute Review: Legal and Technical Considerations Baseline: that any PS or NPS generating a credit has implemented practices or met any reductions necessary to be consistent with the Bay TMDL allocations. Minimum controls: any PS or NPS using a credit has implemented certain minimum controls. Credit calculation and verification: ensure credits are quantified using appropriate metrics and verified to ensure they produce the expected reductions. Concerns exist about the scope of CWA Section 308 and how it applies to nonpoint sources. 17

Deliberative, Pre-decisional – Do Not Quote, Cite or Distribute Review: Legal and Technical Considerations Safeguards: Restrict the use or generation of offsets by an unpermitted PS or a source in noncompliance with its NPDES permit. Ensure the entire delivered load is accounted for and water quality will be protected. Accountability and tracking: holistic and focused on performance outcomes while providing maximum transparency, operational efficiency, and accessibility to all interested parties. Certification and enforceability: ensure an NPDES permittee remains accountable for meeting the WQBELs in its permit. CWA Section 309’s enforcement provisions do not apply to NPS credit generators. 18

Deliberative, Pre-decisional – Do Not Quote, Cite or Distribute Review: Legal and Technical Considerations Nutrient-impaired Segments: ensure that offsets in nutrient-impaired water segments result in progress toward attainment of WQS in the impaired segment and do not lead to exceedances of WQS elsewhere. Credit Banking: articulate whether aggregation and/or banking of offsets is permissible under the jurisdiction’s program and, if so, under what circumstances these will be allowed and the procedures for such activity. 19