February 8, 2019Client Alert

EPA Promotes Additional Flexibility for Water Quality Trading and Other Market-Based Water Quality Improvement Efforts

On February 6, the U.S. Environmental Protection Agency (EPA) announced updates to its water quality trading policy designed to promote implementation of market-based water quality improvement programs.

The announcement signals a shift in federal policy aimed at facilitating more effective and robust state, tribal and community water quality trading programs that both comply with the Clean Water Act and drive water quality improvements. The policy updates were included in a memorandum to EPA’s Regional Administrators from Dave Ross, Assistant Administrator for EPA’s Office of Water.

In the memorandum, EPA observed that the agency has long supported water quality trading and other market-based programs that promote water quality improvements at lower costs. Despite this support, existing mechanisms “have not been used to their fullest potential in part because the EPA’s existing policy may limit that potential,” the agency wrote.

For more than 15 years, EPA’s approach to water quality trading has been driven by its 2003 Water Quality Trading Policy. That policy set out “detailed and prescriptive recommendations” for the administration of trading programs. In light of technological innovation, EPA has concluded that this policy may be “too prescriptive to be widely effective and implementable.”

Rather than providing states with a detailed framework for designing water quality trading programs, EPA’s new memo embraces six “Market-Based Principles” that the agency hopes will “encourage creativity and innovation” in the development and implementation of such programs. While EPA did not withdraw its 2003 policy, recognizing that some small-scale programs have been implemented using that guidance, the agency clarified that the prior policy (like all agency guidance) does not carry the force and effect of law or contain standards or requirements with which a market-based program must comply. 

EPA’s new Market-Based Principles are as follows:

  • States, tribes, and stakeholders should consider implementing water quality trading and other market-based programs on a watershed scale. Among other things, EPA noted that working within larger geographic areas may promote more market opportunities and participation.
  • The EPA encourages the use of adaptive management strategies for implementing market-based programs. “Market-based programs should include adaptive management concepts to allow improvement and refinement over time without sacrificing regulatory certainty for existing market participants,” EPA wrote.
  • Water quality credits and offsets may be banked for future use. Banking of credits for future use rewards early adopters, reduces the risk of practice failures, and broadens and strengthens the market for buyers and sellers, EPA said.
  • The EPA encourages simplicity and flexibility in implementing baseline concepts. “Overly rigid and expensive baseline requirements are often a barrier to entry into a market-based program,” and may create regulatory and market uncertainty, EPA observed.
  • A single project may generate credits for multiple markets. EPA encouraged states to consider allowing single projects to generate multiple types of credits (e.g., air emission, water improvement, habitat and wetland restoration credits). “The ability to generate multiple types of credits may create additional financial incentives for landowners, conservationists and innovators to participate in market-based environmental improvement projects, and may promote portfolio diversification and increased financial opportunity for existing and future credit providers,” EPA said.
  • Financing opportunities exist to assist with deployment of nonpoint land use practices.  EPA encourages states to make use of innovative financing mechanisms and available federal support, including mechanisms listed in the memorandum.

EPA’s policy shift comes on the heels of a joint announcement with the U.S. Department of Agriculture calling for additional state-federal collaboration to reduce nutrient losses from nonpoint sources, such as agricultural land, to navigable waters.

As the federal and state conversation on nutrient reduction and water quality trading progresses, Michael Best can help convey stakeholder opinions to help create reasonable and effective market-based trading policies. With questions on this alert or water quality trading, contact your Michael Best attorney or one of the attorneys listed below.

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