Developing a water quality trading program in Washington

2017 Report to the Legislature As required by Substitute House Bill 2454

Washington State Conservation Commission Mark Clark, Executive Director October 2017

SCC-WQT-10-17 Please contact the SCC (360-407-6936) or TTY Relay (800-833-6388) to request this publication in an alternate

format.

Developing a water quality trading program in Washington Introduction This report is to satisfy the requirements of Substitute House Bill 2454, adopted in the 2014 Regular

Session of the Washington State Legislature (State of Washington, 2014). The report must build on the

Washington State Conservation Commission (SCC) Conservation Markets Study (SCC, 2009) and the

Washington State Department of Ecology (Ecology) Water Quality Trading Framework (Ecology, 2010

and 2011). Specifically, the SCC must, 1) explore whether there are potential buyers and sellers in

Washington watersheds for a water quality trading program, and 2) examine watersheds with total

maximum daily loads (TMDLs ̶ EPA’s framework for assigning pollutant loads to an impaired water body)

to assess whether there are potential buyers and sellers of credit, consistent with a voluntary water

quality trading framework for National Pollutant Discharge Elimination System (NPDES) permit holders.

The SCC must coordinate with stakeholders and ensure that Ecology concurs with the determination of

whether or not there is potential for a water quality trading program.

Background Broadly stated, water quality trading is a concept that allows market-based economic forces to achieve

water quality standards at lower overall cost than traditional approaches for specific watersheds. Costs

to implement technology-based pollutant controls for point source discharges are often extremely high

compared with non-point source runoff controls. These controls frequently are operational or non-

engineered best management practices (BMPs) for a given pollutant within a watershed, creating the

motivation for water quality trading. Through water quality trading, facilities that face higher pollutant

control costs to meet their regulatory obligations can purchase pollutant reduction credits from other

sources that generate these reductions at lower cost, thus achieving the same or better overall water

quality improvement (EPA, 2009).

To encourage states to implement water quality trading programs, the EPA published a policy in 2003

(EPA, 2003) that addresses issues left open by earlier policies and prescribes how water quality trading

programs can work within the context of the Clean Water Act. This policy addresses regulations related

to water quality trading program implementation, including requirements to obtain permits, anti-

backsliding provisions, water quality standards, anti-degradation policies, NPDES permit regulations, and

water quality management plans. Based on those requirements and interactions, the EPA policy allows

trading when:

Trading may be used to maintain high water quality in waters where water quality standards are

attained,

pre-TMDL trading in impaired waters to achieve progress towards or the attainment of water

quality standards; however, the reductions made to generate credits for pre-TMDL trading may

no longer be adequate to generate credits under a TMDL, and,

TMDL trading.

Additionally, the EPA policy allows trading only where:

All water quality trading occurs within a watershed or a defined area for which a TMDL has been

approved.

Last, the EPA policy identifies what pollutants may be traded:

Nutrients (e.g., total phosphorus and total nitrogen), or,

Sediment loads,

Pollutants other than nutrients and sediments that have the potential to improve water quality

and achieve ancillary environmental benefits, or,

Cross-pollutant trading for oxygen-related pollutants where adequate information exists to

establish and correlate impacts on water quality.

EPA policy elements are reflected in Ecology’s (2010) Draft Water Quality Trading Framework document,

which outlines additional requirements to achieve the elements of a satisfactory water quality trading

program:

transparency,

achieving real reductions,

accountability,

defensibility, and

enforceability.

Much of the framework for a water quality market depends on the specifics of a particular scenario. Any

determination that the lack of water quality program success is due to a lack of credit purchasers as

expressed in HB 2454 (State of Washington, 2014) seems pre-mature. Rather, as identified in Ecology’s

water quality trading policy response to comments (Ecology, 2011), the underlying causes that

contribute to a lack of willing buyers and sellers may be related to: issues of meeting load allocations,

scientifically defensible and acceptable methods of determining baselines and credits, ratios and

managing uncertainty, eligibility of specific best management practices (BMPs) to generate credit,

timing of credits, and credit accounting.

Many of these same issues appear in the SCC Conservation Markets Study (2009). This report looked

more broadly than water quality trading to include conservation marketplaces or “ecosystem services,”

such as greenhouse gas emissions (carbon markets), wetlands, or fish habitat, as well as water quality.

The report found that Washington agriculture (and forests) could supply substantial conservation gains.

Greenhouse gas emissions (or carbon markets) appear the most promising for early implementation.

Water quality markets also are promising, but will take longer to develop because a well-developed

regulatory system currently exists that is widely considered to be successful. It will take more specifics

about a particular market to evaluate whether current source controls or a point/nonpoint trading can

be used economically within this regulatory scheme. More importantly, the report identified that

regulatory certainty for landowners is needed:

“Farmers, ranchers, and foresters are especially concerned that after they begin providing and being compensated for conservation, it may become a regulatory requirement or

expose them to future lawsuits.”

On the buyers’ side, the report noted that:

“It appears that buyers will be looking carefully at signals from the regulatory agencies that conservation market products are acceptable as mitigation and compliance conditions

before widespread adoption is likely.”

Assessment of buyers and sellers To address the requirement that this report make an assessment of buyers and sellers, a spatial

approach was taken to identify requirements in Ecology’s water quality trading policy and map those

constraints alongside estimates of buyer and sellers. Simplified assumptions were made about

appropriate surrogates to represent buyers and sellers for TMDLs with pollutant types allowed by

Ecology’s draft water quality trading policy. Viable markets would be those TMDL areas with larger

numbers of both buyers and sellers to drive market economics. Likewise, TMDL areas with few buyers

and/or few sellers would make poor markets for water quality trading. This is because areas with few

sellers and many buyers would make credits more expensive than traditional treatment. Conversely,

areas with many sellers and few buyers would make investment in BMPs above and beyond the TMDL

baseline economically infeasible.

First, TMDL boundaries, both under development and implemented, were used to identify where, and

for what pollutants, trading might occur. TMDLs for toxics and fecal coliform bacteria were removed

from the data set. Some toxics TMDLs included sediment, so those were retained. Next, the Ecology GIS

data set describing outfalls was selected as a surrogate to indicate how many potential buyers might be

in a given TMDL area. Outfalls were then summed for each TMDL and mapped to show where the most

potential buyers might be for TMDL types contained in Ecology’s policy (Figure 1).

To identify potential sellers, several layers were combined (using the GIS principle of union) to extract

the area of cultivated and non-cultivated private agriculture that might represent land where BMPs

could be implemented to generate water quality trading credits. The layers included zoned agriculture,

the National Land Use/Land Cover data set for classes representing non-urban open space, and the

National Agriculture Statistics Service (NASS) crop data. Private forest lands were considered, but

excluded from analysis as it remains unclear whether BMPs already required under the Washington

forest practice rules would qualify as marketable credits in a water quality trading market. From the

union of those layers, public lands, open water, and cities were removed to derive a layer of possible

seller quantity of non-urban, non-forested lands. As with the “buyer” data, this layer representing

“seller” opportunity was summed for each TMDL type (non-toxic, non-bacteria) in Ecology’s water

quality trading policy (Figure 2). For reference, Figure 3 shows all outfalls (buyers) and both forest and

agricultural land (sellers) without the filter of TMDL boundaries. Note the very large number of outfalls

along the Interstate 5 corridor compared to the large amount of agricultural land available in eastern

Washington.

Lastly, the top and bottom 25 percent of TMDL areas with number of outfalls and area of potential

agriculture were identified and paired to estimate water quality market feasibility. In Table 1, TMDLs

with red cells for both number of outfalls (buyers) and area of potential non-point source sellers were in

the lower 25 percent for both categories and represent TMDL areas that likely would not support a

water quality trading market. Areas with buyer and seller ranking in the top 25 percent of all TMDL areas

are shown in green in Table 1 and comprise those TMDL areas where a water quality market holds the

most promise. Note that two — the Spokane River dissolved oxygen and the Yakima basin toxics TMDLs

— are either in the process of market development (Spokane) or have been the subject of possible

market talks for a long time (Yakima).

What’s interesting is that the greatest potential for water quality trading occurs in the Chehalis, Yakima,

and Spokane basins, and not Puget Sound. Contributing factors are both the pollutant type of the TMDL

and amount of non-point source private agricultural land available. While sellers (number of outfalls) is

greatest in the Puget Sound region (Figure 3), the TMDL types there are centered on toxics, bio-

accumulative pollutants, or fecal coliform bacteria, which are prohibited by Ecology and EPA water

quality trading policies. This eliminates the area with the most potential buyers from participation in

water quality trading markets.

The urbanized Puget Sound area also contains the least potential agricultural area for generation of

seller credits. Markets would be limited and less feasible as many buyers might be competing for limited

credits. Since markets are voluntary, one would expect buyers (permitted dischargers) to opt for less risk

and install traditional pollutant controls, rather than compete in a market for limited (and therefore

expensive) credits.

Figure 1. Number of outfalls per TMDL area in Washington that are water quality market-eligible. Water

quality trading in TMDL areas should have both a number of credit buyers and sellers. Here, outfalls

have been used as an index of number of buyers. TMDL areas are only those pollutant types where

trading would be allowed under Ecology’s water quality trading policy.

Figure 2. Relative area of private agricultural land per TMDL area in Washington that are water quality

market-eligible. Water quality trading in TMDL areas should have both a number of credit buyers and

sellers. Here, area of private agricultural land has been used as an index of number of sellers.

Figure 3. Map showing outfalls and private agriculture and forest lands in Washington. Note

preponderance of outfalls along the I-5 corridor in western Washington and the spatial disconnect with

areas of most agricultural land located in eastern Washington.

Table 1. TMDL areas with top (green) and bottom (red) 25 percent values for both number of outfalls

(buyers) and acres of private agriculture (sellers). TMDLs in red have few buyers and sellers and would

be poor candidates for market development. Conversely, TMDLs in green have the greatest numbers of

buyers and greatest number of potential seller credit area to match buyer demand.

Name Number of Outfalls Acres of Private Agriculture

Campbell Lake Total Phosphorus TMDL 0 526

Tarboo Creek Temperature TMDL 0 2,791

Erie Lake Total Phosphorus TMDL 1 237

Liberty Lake Total Phosphorus TMDL 1 2,186

Fenwick Lake Total Phosphorus TMDL 2 2

Newman Lake Total Phosphorus TMDL 2 3,685

Pend Oreille River TDG TMDL 3 2,009

Wapato Lake Total Phosphorus TMDL 4 -

Little Klickitat River Multi-parameter TMDL 4 370

Lower Columbia River TDG TMDL 229 193,944

Upper Yakima River Watershed DDT and TSS TMDL 381 388,873

Upper Yakima River Tributaries Temperature TMDL 395 325,416

Spokane River Dissolved Oxygen TMDL 502 783,555

Upper Chehalis River Basin Temperature TMDL 869 302,788

Upper Chehalis River Basin Dissolved Oxygen TMDL 869 302,788

Lower Yakima River Suspended Sediment and DDT TMDL 958 582,840

Yakima River Basin Toxics TMDL* 1767 1,078,486

*TMDL includes TSS and turbidity

Coordination with stakeholders To address the requirement that this report coordinate with stakeholders, a stakeholder discussion

meeting was held on October 16, 2017 at the King County Metro Services building. A range of tribes,

agencies, industry, consultants, agricultural interests, and environmental organizations specifically were

invited (in addition to an open invitation) and in attendance (Appendix A). Issues that were identified

included many previously noted as uncertainties for credit buyers and sellers, including:

Specific nature of the regulatory framework,

Baseline and need for non-point sellers to meet their baseline before credits are marketable,

Which pollutants are traded,

How credits are quantified,

Fate of pre-TMDL credits if TMDL is implemented,

Geographic scope limits credits to same watershed.

In addition, the issue was raised of how non-point source dischargers can legally sell any credits, even

under a TMDL, since they are prohibited by statute from any discharge to waters of the state.

Washington water pollution law (RCW 90.48.080 and 90.48.160) prohibits any discharge or potential to

discharge of any pollutant without a permit, so non-point sources generally (forest practices have some

protection under 90.48.420c) do not legally have an ability to discharge in any amount, even under a

TMDL where a load allocation has been assigned to them. This legal knot has a chilling effect on water

quality trading markets under a TMDL. Credit sellers (non-point dischargers) do not have regulatory

certainty that they are compliant with water quality regulations, in spite of installing pollution control

BMPs that go above and beyond the baseline required under the TMDL. This issue of regulatory

certainty was prevalent in the SCC Conservation Markets Study (2009) and appears to continue to hinder

specific discussion of water quality trading.

In spite of this uncertainty, meeting attendees agreed that further conversation is warranted,

specifically to learn what has and has not been successful in other parts of the country.

Conclusions Based on stakeholder participation in recent discussions and commitment to continuing discussions,

interest in the concept of water quality trading remains for both buyers and sellers, depending on

specifics of the TMDL. Without specifics, it is challenging for buyers to evaluate whether the purchase of

credits will be a certain route to permit compliance under a TMDL or whether the risk is too high and

investments are better made in technological solutions to pollutant reduction. For non-point source

sellers, the largest obstacle to serious consideration of water quality trading appears to be the

prohibition of any discharge, even under a TMDL, that makes advertising water quality trading credits

and participation in a market risky. More risk to buyers and sellers means reduced interest in water

quality trading markets, unless more regulatory certainty can be established.

Once regulatory certainty is resolved, the most likely water quality markets appear to exist in the

Chehalis, Yakima, and Spokane watersheds based on analysis of credit buyers and sellers using outfalls

as a surrogate for buyers and amount of private agricultural land as a surrogate for credit sellers.

Limitations on the types of pollutants that can be traded and imbalance of buyers or sellers precludes

market opportunities in other areas. In other areas —such as Puget Sound, where there are many

potential buyers, or eastern Washington, where there are many potential credit sellers — may have

better market opportunities in conservation markets with larger geographic boundaries, such as carbon

or wetlands markets that could be applied on a statewide basis.

Specifics of a particular market may then be developed to ascertain whether or not one of these

potential market areas has interested participants. Specifics include:

Non-point source baseline

Approved BMPs

Credit value of each BMP and ratios

Total credits available in the market

Monitoring, transparency, and enforcement

Credit retirement and marketplace reliability

Oversight and accountability

Recommendations Based on the conclusions presented above, several actions are recommended to move water quality

trading or markets forward.

1. Some form of regulatory certainty for non-point source credit sellers needs to be developed.

The form (statutory or rule-making) and scope (TMDL only, pre-TMDL) of providing regulatory

certainty will be challenging as any relief from RCW 90.48.080 for non-point source dischargers

may be viewed as an erosion of water quality protections broadly, rather than a tool to achieve

water quality standards (or prevent 303.d listing) economically.

2. Resolve the issue of how to allow individual credits to be sold before the baseline for all non-

point sources can be met. Waiting until all non-point sources have achieved baseline reductions

seems both unfair to early adopters and unlikely to happen in sufficient time to be of benefit to

potential buyers. As with the issue of regulatory certainty above, practical issues remain as to

how any solution is implemented (i.e. policy, Ecology rulemaking, or statute change). The EPA

Water Quality Trading Toolkit for Permit Writers (2009) specifically identifies state regulations,

policy, or guidance to establish a statewide or watershed trading framework, support local

trading frameworks, and address specific aspects of a trading program.

3. Expanding the consideration of water quality trading markets to other conservation markets

seems appropriate for a couple of reasons. Consistency in the rules or statutes for different

types of markets would be simpler for all concerned. Wetlands, habitat, and carbon trading

markets may be easier to launch given the regulatory and geographic restrictions associated

with water quality. Interest continues as evidenced by the SCC (2009) report and as brought up

again in the stakeholder meeting of October 2017.

4. Based on the number and variety of participants at the stakeholder meeting, conversations

need to continue. Funding and responsibility should be assigned to one agency. The SCC (2009)

report noted leadership as a primary finding. Continued work to evaluate how other states and

the EPA have worked through barriers and where other trading programs have failed would

inform how to move water quality trading programs forward in Washington.

References Ecology (2010). Washington water quality trading/offset framework. Draft for public comment.

Washington State Department of Ecology, Publication Number 10-10-064.

Ecology (2011). Draft water quality trading/offset framework; Summary of comments and response to

comments. Washington State Department of Ecology, Publication Number 11-10-027. April, 2011. 60

pp.

EPA (2003). Water quality trading policy. U.S. Environmental Protection Agency, Office of Water.

January 13, 2003.

EPA (2009). Water quality trading toolkit for permit writers. U.S. Environmental Protection Agency,

Office of Wastewater Management, Water Permits Division. EPA 833-R-07-004. Published August 2007,

Updated June 2009.

State of Washington (2014). Substitute House Bill 2454, Chapter 73, Laws of 2014, 63rd Legislature,

2014 Regular Session, Water Quality Trading Program. Filed March 27, 2014. Effective date June 12,

2014.

SCC (2009). Washington Conservation Markets Study Final Report. Prepared for the Washington State

Conservation Commission by Evergreen Funding Consultants. January 27, 2009. 32 pp.

Appendix A. List of stakeholder meeting invitees and attendees. Invited names in bold were in

attendance in addition to list of attendees below. Attendance was either in person or by telephone

conference line.

Invited Organization

Ben Rau Washington Department of Ecology

Bill Dunbar U.S. Environmental Protection Agency

Brandon Roozen Western Washington Agricultural Association

Chery Sullivan WA Department of Agriculture

Claire Schary U.S. Environmental Protection Agency

Dan Wood Washington Dairy Federation

Derek Sandison WA Department of Agriculture

Erika Britney ICF Consultants

Evan Sheffels Washington Farm Bureau

George Boggs Whatcom Conservation District

Heather Bartlett Washington Department of Ecology

Jack Field Washington Cattle Feeders Association

Jay Gordon Washington Dairy Federation

Jessie Israel Nature Conservancy

Joe Harrison Washington State University

Kat Morgan Nature Conservancy

Keith Bower Multiform Harvest

Kelly Susewind Washington Department of Ecology

Leif Fixen American Farmland Trust

Lucy Edmondson U.S. Environmental Protection Agency

Maia Bellon Washington Department of Ecology

Mark Clark Washington Conservation Commission

Mark Doumit Washington Farmland Protection Association

Mark Streuli Washington Farm Bureau

Monte Marti Snohomish Conservation District

Patrick Capper WA Department of Agriculture

Ron Shultz Washington Conservation Commission

Roylene Rides-at-the-door U.S.D.A. Natural Resources Conservation Service

Sarah Ryan Washington Cattleman's Association

Scott Dilley Washington Dairy Federation

Terry Williams Tulalip Tribe

Tom Davis Washington Farm Bureau

Attending Organization

Brian Brandt American Farmland Trust

Brian Cochrane Washington Conservation Commission

Bruce Wishart Puget Soundkeepers

Carrie Sanneman Willamette Partnership

Chris Townsend King County

Doug Navetski King County

Helen Bresler Washington Department of Ecology

Jane Dewell Port of Seattle

Jason Callahan Washington Forest Protection Association

Jennifer Coleson U.S.D.A. Natural Resources Conservation Service

Jillian Fishburn Washington Conservation Commission

Josh Monahan King Conservation District

Kat Morgan Nature Conservancy

Lisa Bertelson American Farmland Trust

Liz Whitefield Washington State University

Lori Blair Boeing

Lucy Edmonson U.S. Environmental Protection Agency

Martin Merz U.S. Environmental Protection Agency

Mary Catharine McAleer Washington Association of Business

Nick Peak U.S. Environmental Protection Agency

Rick Reinlasoder King County

Tom Bugert Nature Conservancy

Appendix B. Ecology letter of concurrence.