January 01, 2017

Water Quality Trading: Setting the Record Straight

Brooks Smith, Shannon Varner, and Patrick Fanning

The United States has made great strides toward improving the quality of our nation’s waters, but much work remains to be done. Although the Clean Water Act (CWA or the Act) has been successful in driving many water quality improvements, meeting the “fishable/swimmable” goals of the Act remains elusive and will require new and innovative tools. Water quality trading (WQT) is one such tool that more efficiently and affordably improves water quality, while also attracting new stakeholders and private capital to supplement the good start made by existing stakeholders such as our federal, state, and local governments and the regulated community. Despite the many benefits and increasing use of this tool, some continue to swim against the tide when it comes to WQT. The Fall 2015 issue of Natural Resources & Environment (NR&E) featured an article by Zach Corrigan of Food and Water Watch (FWW) titled “The Case Against Water Quality Trading.” We take this opportunity to briefly address concerns raised in that article and provide the other side of the coin on WQT.

WQT is an implementation tool that helps accelerate the restoration of water quality. In its simplest form, WQT involves a transaction between a credit buyer and a credit seller, wherein the buyer faces a permit obligation to reduce its pollutant loading, which the seller is able to meet by achieving this reduction more cost effectively than the buyer. So, the buyer pays the seller for having taken the steps necessary to achieve this reduction (at a lower cost than the buyer could obtain on its own), and the seller transfers the resulting “credits” (expressed in terms of the amount of pollutant loading that was reduced) to the buyer to apply toward the buyer’s compliance obligation. Typically, the transaction also includes an extra “environmental lift,” or portion of each trade retired (i.e., not used to meet permit obligations), resulting in even broader environmental improvement.

Over a decade ago, the Environmental Protection Agency (EPA) issued a National Water Quality Trading Policy “to encourage voluntary trading programs that facilitate implementation of TDMLs [total maximum daily loads], reduce the costs of compliance with CWA regulations, establish incentives for voluntary reductions and promote watershed-based initiatives.” 68 Fed. Reg. 1608, 1610 (Jan. 13, 2003). Since then, EPA, the U.S. Department of Agriculture (USDA), other federal agencies, states, and many other stakeholders have contributed time, money, energy, and thought-leadership to promote on-the-ground WQT projects and initiatives that have helped advance the development of WQT. More recently, EPA and USDA pledged additional support for growing WQT markets. See Ann Mills (USDA deputy undersecretary for Natural Resources and Environment) and Ellen Gilinsky (senior policy advisor, EPA Office of Water), EPA and USDA Pledge Actions to Support America’s Growing Water Quality Trading Markets, EPA Connect (Aug. 1, 2016), https://blog.epa.gov/blog/2016/08/epa-and-usda-pledge-actions-to-support-americas-growing-water-quality-trading-markets/ (last visited Nov. 9, 2016). All of these efforts are ongoing and continue the evolution and improvement of WQT. Prime examples include broad-based groups such as the National Water Quality Trading Alliance, the National Network on Water Quality Trading, and the Mississippi River Collaborative.

Rather than engage these many stakeholders and attempt to address its issues of concern with WQT directly, FWW launches its attacks and criticism from outside the arena. In addition to the attack on WQT in this publication, FWW also has self-published reports criticizing WQT, unsuccessfully sued EPA over its “authorization” of WQT in the Chesapeake Bay TMDL, and threatened to file other lawsuits against WQT-based permits if and when they are issued. To address our nation’s serious water quality problems, we need as many tools as possible to improve water quality. To date, however, FWW has refused to step into the arena to help continue the evolution of this critical tool for improving water quality.

In his NR&E article, Mr. Corrigan claimed that the “biggest issue” with WQT “is that there is no language whatsoever in the Act authorizing [it].” But as the courts have long recognized, the explicit language of a statute is just the starting point. If Congress has spoken directly to the precise question at issue, then that is the end of the matter. If Congress is silent or its intent is unclear, however, then the courts have looked to whether the implementing agency’s interpretations of a statutory gap or ambiguity are reasonable. The agency’s interpretations “are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute.” See Chevron v. NRDC, 467 U.S. 837 (1984). The Chevron framework has been applied routinely to EPA interpretations under the CWA, including in a fairly recent challenge to EPA’s TMDL for the Chesapeake Bay. In that case, upholding EPA’s interpretations, the U.S. Court of Appeals for the Third Circuit opined as follows:

In this context, requiring another “clear statement” of congressional intent for every ambiguous term in a highly technical statute, before accepting an interpretation that could affect our federal structure, would defeat one of the central virtues of the Chevron framework: Congress may leave interstitial details to expert agencies and need not think through at the drafting stage every possible permutation of agencies’ plausible future interpretations.

Am. Farm Bureau Fed’n v. EPA, 792 F.3d 281, 302 (3d Cir. 2015).

Although Congress did not explicitly authorize WQT, a number of provisions in the Act support EPA’s favorable interpretation of WQT, and no provision clearly prohibits it. For example, the overriding objective of the CWA is to “restore and maintain the chemical, physical and biological integrity of the Nation’s waters.” 33 U.S.C. § 1251(a). Under proper conditions, WQT helps to promote this objective. Additionally, WQT is not a federal function but rather a state one, and the Act provides states with authority to reduce and eliminate pollution. 33 U.S.C. § 1251(b). Finally, states are primarily responsible for adopting standards, assessing water conditions against those standards, establishing TMDLs for waters that are not meeting standards, and implementing a “continuing planning process” for state water quality decision making. See 33 U.S.C. § 1313(c), (d) and (e). WQT fits naturally into the continuing planning process as one of several tools for implementing water quality standards.

FWW’s claim that silence is prohibitory flies in the face of relevant, comparable cases where courts have ruled just the opposite. For example, in the Chesapeake Bay TMDL lawsuit, the federal district court was pressed with various arguments as to why EPA acted unlawfully. One of those arguments focused on EPA’s interpretation requiring “reasonable assurance” that the allocations assigned in a TMDL (including those to nonpoint sources) were reasonably likely to be achieved. Although Congress said nothing about “reasonable assurance” in the Act, the court had no difficulty concluding that it was a practical and rational interpretation grounded in § 1313(d). See Am. Farm Bureau Fed’n v. EPA, 984 F. Supp. 2d 289 (M.D. Pa. 2013). Another argument focused on EPA’s decision to issue allocations not just in the states bordering Chesapeake Bay, but in upstream states as well. The court concluded that “[a]lthough nothing in the CWA specifically authorizes EPA to take this holistic, or watershed approach, it is equally true that nothing in the CWA prohibits such an approach.” Id.

WQT is grounded in this very same holistic, or watershed approach. Instead of focusing exclusively on one contributing source of pollution, WQT enables states to consider other contributing sources, and to authorize a more cost-effective, equitable distribution of the burden of reducing pollutant loads. This kind of watershed approach is fundamental to achieving the objectives of the CWA, and it is well within the authority reserved to the states to prevent, reduce and eliminate pollution.

Mr. Corrigan raises several additional concerns about WQT in his article, all of which are unwarranted or are currently being addressed in WQT programs across the country. For example, he claims that WQT “ossifies” the technology-driver that Congress embedded in the CWA. While the Act certainly imposes both technology and water quality-based requirements on regulated point sources, technology requirements serve as the floor establishing minimum requirements to be met, whereas water quality-based requirements serve as the ceiling. WQT is never used to meet technology requirements. Instead, as the name implies, water quality trading is exclusively focused on meeting water quality-based requirements of the CWA.

Opponents of WQT have suggested that WQT enables regulated point sources to obtain relaxed limits or otherwise avoid compliance with more stringent limits. This cannot be, because the CWA prohibits a permit from being issued without an affirmative demonstration from the permitting agency that the permit is sufficiently stringent to “provide for compliance with the applicable requirements of [the] CWA” and “ensure compliance with the applicable water quality requirements of all affected States.” See 40 C.F.R. § 122.4(a) and (d). Second, all of the limits and conditions in a National Pollutant Discharge Elimination System (NPDES) permit are directly enforceable by the applicable state, EPA, and even interested citizens. See 33 U.S.C. §§ 1319 and 1365. WQT opponents also have suggested that WQT deprives the public of its right to public participation and transparency. We disagree. WQT for permit compliance will be reflected in the permit itself, even if simply by reference to an underlying state rule that outlines the procedures and substantive requirements for WQT. All NPDES permits come with public process safeguards that ensure meaningful opportunities for public review and comment on draft permit limits and conditions, as well as public access to all records submitted by a permittee to demonstrate compliance with those limits and conditions. WQT is thus on the same footing as all other NPDES permitting requirements in terms of both public participation and transparency. Further, tracking programs for WQT are used across the country (such as Pennsylvania’s Markit or Maryland’s NutrientNet system).

Finally, Mr. Corrigan raises the specter of “hot spots,” a shorthand reference to localized exceedances of applicable water quality standards. We agree that hot spots must be prevented. But this is already assured by law. As noted above, an agency is “prohibit[ed]” from issuing an NPDES permit if the permit cannot assure compliance with applicable water quality standards. See 40 C.F.R. § 122.4(a) and (d). As confirmed by EPA’s Environmental Appeals Board and the courts, permitting agencies must make an affirmative demonstration that their permits, as drafted, in fact do comply with applicable water quality standards. EPA took pains in its National Water Quality Trading Policy to confirm that the agency does not support any use of credits or trading activity that would cause an impairment of applicable water quality standards (i.e., hot spots).

There is no sinecure for water quality restoration in our country, and there is no single or simple solution to address our complex water quality problems. To achieve the goals of the CWA, states need a full complement of tools, not all of which may be needed or appropriate all of the time. WQT is one such tool. As the use of WQT continues to increase and address a more diverse and challenging range of water quality problems, it is increasingly clear that this water quality tool offers unique and unparalleled opportunities to accelerate the pace and scale of water quality restoration, while at the same time reducing compliance costs and promoting additional environmental benefits.

Brooks Smith, Shannon Varner, and Patrick Fanning

The authors practice in the Environmental and Natural Resources section of the Richmond, Virginia, office of Troutman Sanders LLP where Mr. Smith is a partner, Mr. Varner is of counsel, and Mr. Fanning is an associate. They may be reached at brooks.smith@troutmansanders.com, shannon.varner@troutmansanders.com, and patrick.fanning@troutmansanders.com, respectively. This article is based on one originally published on the website of the National Water Quality Trading Alliance (NWQTA), at www.wqtalliance.com/wp-content/uploads/2016/07/The-Case-for-Water-Quality-Trading.pdf, on July 27, 2016, and is published here with permission. The authors are counsel to NWQTA.