Water Quality Trading in the Lower Delaware River Basin: A ...

Nutrients are the most commonly traded water quality pollutant (Table 1-2).
Moreover, 76 percent of the systems involved nutrients. A handful of other systems
involve trading of BOD, sediment, and DO that are often related to nutrients. The most
common type of existing trading programs involves a cap and use of NPS reductions as
either offsets for PS expansions or in place of PS reductions. Fifteen programs, or 52
percent, fit this description.
Our review of trading systems has identified 3 stages of development and eight basic
structures that can be used to classify WQT systems (Figure 1.1). In the first stage,
developers of a WQT system must determine if trading will be based on a capped or
uncapped system. The second stage involves developing the structure of the trading
system and the procedures and rules for its operation and management. The final stage
involves how the system measures success, penalize noncompliance and reward
compliance. Regulatory review, modeling, and evaluation are involved in every stage of
the process.
This framework recognizes three trading structures for uncapped systems and five
structures for capped systems (Figure 1-1):
• Tax or Fee Systems (TF) – In these systems, regulators establish a tax or fee for
discharge. Dischargers may emit pollutant at any level they determine is
appropriate, but must pay a fee associated with the level of their discharge (e.g.
$/ton of effluent discharged). The system is considered uncapped because
regulators set the price and allow the quantity to adjust via the market. No
examples of this type of system are known for water pollution control.
• Free Market Purchase Systems (FMP) –In these systems, stakeholders who are
not dischargers purchase reductions from dischargers who do not have the
incentive to reduce pollution. The system is uncapped because the price of the
reduction determines the quantity of the reduction. A hypothetical example of
this system is the resort downstream of a wastewater treatment plant (WWTP)
that pays for extra water quality treatment to protect their resort.
• Public Funds Purchase Systems (PFP) – These systems are similar to the Free
Market Purchase Systems except that public funds are used to purchase
reductions. Moreover, a government or public agency pays a fee for reductions in
excess of reductions that the law requires. The system is uncapped because the
price of the reduction determines the quantity of the reduction. The Colorado
River Basin Salinity Control Program uses this type of system. The Bureau of
Reclamation, which manages the program, issues “Requests for Proposal” for
projects that will reduce salinity in the river. They then select and fund the most
cost effective proposal.
Five types of WQT systems are identified under capped conditions:
• Associations (A) – Associations are groups that broker or trade discharges to a
water body that has an established pollution limit (e.g. cap). In practice, the
associations purchase reductions from some dischargers and sell that reduction to
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