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

Historical Development of Water Quality Trading Systems
The restoration of the chemical, physical, and biological integrity of the nation’s
water resources is the aim of the Clean Water Act, and its precursor the Federal Water
Pollution Control Act (FWPCA). The initial focus of both legislations was on using the
Best Practical Treatment (BPT) and Best Available Treatment (BAT) to control major
discharges and meet water quality standards. These major dischargers were generally
selected on the basis on their size and toxicity of their discharges, although they typically
represented only a small percentage of the total discharges entering the waterways. As a
result of these efforts the biological oxygen demand from industrial sources and
municipal sources decreased by 71% and 46% respectively between 1974 and 1981
(Boyd 2000), in spite of expanding economic activity and increasing population.
While traditional command and control type water pollution control strategies have
improved the nation’s water quality, the costs of environmental protection have risen and
they have not been able to effectively deal with NPS pollution. Moreover, total spending
for construction of water and waste water facilities increased from around $0.2B in 1960
to around $6B (1960 $) in 1982 (Portney and Stavins 2000). Additionally, the
Environmental Protection Agency (EPA) expanded its budget and its staff from around
$0.5B and 4,000 employees in 1970 to around $7B (1999 $) and 18,000 employees in
1999 (Rothenberg 2002). Some of this cost increase is related to the fact that initial
efforts “picked the low hanging fruit” and that marginal costs of water treatment increase
with increasing standards (Cropper and Oates 2000).
During the decades after the passage of the CWA, EPA recognized that water quality
problems persisted and would require innovative strategies for resolution. Based upon
the apparent success of the emissions trading associated with the Clean Air Act that is
discussed below, WQT has been proposed. In 1996, EPA issued a draft framework
which provided basic information for anyone interested in trading and signaled EPA’s
support for trading (EPA 1996). In the following years EPA learned from ongoing pilot
projects. After more than a decade of development EPA presented the Final Water
Quality Trading Policy on January 13, 2003 (EPA 2005a). The policy is designed to
encourage voluntary watershed-based trading programs that will reduce CWA
compliance costs. The policy encourages trading involving nutrients or sediments and
supports cross-pollutant trading for oxygen-related pollutants when adequate information
exists. The report also estimates that nationwide the flexible, market-based trading
approaches to improving water quality could save $900 million dollars annually. These
market-based approaches are also expected to create economic incentives to develop
emerging technology that will help obtain a greater efficiency in improving the quality of
the nation’s waters (EPA 2001). A unique attribute of WQT is it’s reliance on watershedbased
cooperation and negotiated settlements, in contrast to the existing patchwork of
various statutory and market incentive programs that were historically driven by short
term single purpose objectives and conflict rather than consensus and long-term
management (Deason et al 2001).
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