March 01, 2018

Effluent Trading under the Clean Water Act

Mark A. Ryan

Two recent articles in Natural Resources & Environment on effluent trading take opposite views on the legality and policy advantages of the practice. See Zach Corrigan, The Case Against Water Quality Trading, 30 Nat. Resources & Env’t, no. 2, Fall 2015 at 15, and Brooks Smith et al., Water Quality Trading: Setting the Record Straight, 31 Nat. Resources & Env’t, no. 3, Winter 2017 at 53. This article looks at an actual example of a trade and how the trader dealt with the legal, policy, technical, and financial issues that arose. Trading, I argue here, if done correctly, has the potential to reduce costs while continuing to protect the environment.

The Clean Water Act (CWA) has been in place for 45 years, and it has successfully remedied many of the nation’s water pollution problems. Rivers no longer catch fire as the Cuyahoga River did in 1968, and the beach closures that were common prior the passage of the CWA in 1972 largely are a thing of the past. Problem areas remain, but fish and other aquatic organisms generally enjoy a healthy environment in which to grow. All of this, of course, comes at a price, and the costs to a discharger that must obtain a National Pollutant Discharge Elimination System (NPDES) permit can run into the many millions of dollars for nutrient treatment, for example.

The city of Boise approached the U.S. Environmental Protection Agency (EPA) in 2010 with the idea to remove phosphorus from an unregulated agricultural drain (ag drain) that discharged to the Boise River downstream of the city’s sewage treatment plant (POTW). In exchange, Boise sought offset credits at the POTW for the phosphorus removed from the drain. The idea was simple. The ag drain was rich with phosphorus from farm-field runoff and thus was relatively easy to treat. At the time, a total maximum daily load (TMDL) for phosphorous was planned for the Boise River, and that TMDL was expected to result in very stringent phosphorous limits in the city’s future discharge permits. Boise was anticipating having to spend many millions of dollars to achieve the new effluent limits. The plan was to treat the ag drain water to remove more phosphorus from the river at a lower cost to the taxpayer.

The Dixie Drain project, as it came to be known, was a challenge despite the simple principle upon which it was based. I was the EPA attorney assigned to the matter, and immediately we ran into roadblocks in the law. Although the CWA does not prohibit trading, it also does not specifically allow for it, and many of the statutory and regulatory requirements of the CWA make trading difficult. Given the limitations of the law, EPA has given lukewarm endorsement to trading, but that may change under the Trump administration. Some environmental groups have embraced trading, while others oppose it. The states are not unanimous in their support for trading. They too are limited by the CWA and its implementing regulations.

Despite its appeal, there are many problems with trading, and this article highlights just a few. (The Corrigan and Smith articles touch on some of these issues as well.) To discharge pollutants to a water of the United States, the CWA requires an NPDES permit. Permits require compliance either at the end of the discharge pipe or at the edge of the mixing zone. It is illegal for a discharge to “cause or contribute” to a violation of state water-quality standards in the receiving waters.

If the trade is with a source downstream of the permitted facility, water-quality standards in the river may be violated between the point of discharge and the trading source. For example, in the case of the Dixie Drain, Boise built the ag drain treatment system 20 miles downstream of the POTW. The POTW discharges more phosphorus to the river than it otherwise could in exchange for removing even more phosphorus 20 miles downstream. That trade results in less phosphorus in the river, but for the intervening 20 miles, the Boise POTW has the potential to cause or contribute to a violation of water-quality standards. The net environmental benefit to the river downstream of the Dixie Drain is positive, but the CWA regulations do not allow for any in-stream water-quality violations, which includes that 20-mile stretch.

Even if the trade were with an upstream source, it could run into problems because the POTW may still cause or contribute to an exceedance of water-quality standards, even though there is a net reduction in pollutant loading to the river. Care must be taken when contemplating a trade that the water-quality modeling is done correctly to demonstrate that no section of the river will be affected adversely by the trade.

Another problem we encountered was whether the treatment system built to remove phosphorous from the Dixie Drain was a regulated point source. If it is a point source, costs of the system go up significantly because the Dixie Drain treatment system would have to obtain and comply with an NPDES permit. The Dixie Drain treatment system mostly removed pollutants from the river, which shouldn’t require an NPDES permit. But to achieve the removal efficiencies needed to make the project practical, Boise had to use chemicals to precipitate out the particulate matter that bound up much of the phosphorous. This resulted in a discharge of small amounts of polyaluminum chloride, which we determined required an NPDES permit. This leads to the question, if the NPDES permit for the offset is only for the polyaluminum chloride being added, does that permit require limits for all pollutants being discharged? Care must be taken to minimize the characterization of the trade or offset as a point source to avoid expensive treatment requirements on the trading end.

Another issue is whether a project is a trade or an offset. Under some trading policies, one may not be able to trade with oneself. Since the city of Boise owns the POTW and the Dixie Drain treatment system, the project technically is an offset. If the offset is permitted, does it receive a second, independent NPDES permit, or is it considered another outfall under the POTW permit? If the latter, the permit must be modified and reissued, going through public notice and comment. How does the offset affect the load allocations for other nonpoint sources in the applicable TMDL? Is the Dixie Drain, which routes water out of the drain, removes phosphorous, then routes it back to the drain, a water transfer? If so, is a permit required? If the Dixie Drain treatment system is a point source, does it receive a load allocation under the TMDL? Can Boise get credit for removing phosphorous above the baseline set in the TMDL? Is a water right required for the diversion?

Given these and other legal limitations on trading, how does one go about getting a project approved, and is it worth the effort? These types of projects often are discretionary on the part of the regulators. Nothing requires EPA or the state to approve a trade, and each is unlikely to do so unless presented with an appealing project. In my opinion, there are two critical components to an approvable project. First, one must show the regulators that the trade is worth the effort. If it will generate only marginal environmental benefit, it may not be worth the substantial financial and time commitments by both the traders and the regulators necessary to gain regulatory approval.

Second, the proponent ideally should be able to show that the environmental benefit is quantifiable and enforceable. The key advantage to the approval of the Dixie Drain project was the enforceability of the offset. Because Boise can accurately measure how much phosphorous it removes from the Dixie Drain, EPA (Idaho is not yet authorized to issue permits) can be assured that the credits it gives at the POTW are being offset. Many proposed trades are not based on measurable discharges like the Dixie Drain, but on best management practices (BMPs), which are difficult to quantify and therefore challenging to enforce. For example, if a trade requires contracting with farmers to install buffer strips, how do we know how much sediment and/or nutrient runoff from the fields is happening? BMP trades are based on modeling, modeling is not always accurate, and enforcement of BMPs is resource intensive.

The ability to accurately quantify the amount of pollutants removed from the Dixie Drain made the trade enforceable. If you can show the agency that any failure to remove the required amounts of pollutants will result in either an enforcement action or a reduction in the offset at the original point source, the project is more likely to be approved. This is not to say that a BMP-based trade should not be undertaken. But the level of proof to show that the BMPs actually work may make it more difficult to win regulatory approval.

Finally, it is not enough to win over the regulators. One must ensure that there are no angry neighbors or citizen groups. Given the lack of clear authority for trading in the CWA regulations, the potential exists for legal challenges to the approval of any project. For this reason, on the Dixie Drain, we sat down early with the main citizen groups in the area and got them on board with the idea of cleaning up an otherwise unregulated ag drain with a net benefit to the Boise River. To their credit, the environmental groups did not challenge the project. It since has been constructed and is now operational.

In the end, one cannot lose sight of the gain made in water quality in the Boise River. The city of Boise now is removing 10 tons of phosphorous a year from a section of the river that is impacted heavily by ag runoff. The project proved more technically challenging than originally anticipated, and the city ultimately spent as much on the Dixie Drain as it would have spent on an upgrade to the POTW. But the city achieved a much better environmental result, and it also has proved that trades can be done responsibly and can be approved by the regulators. Future projects could learn much from Boise’s pioneering efforts and achieve the same environmental benefits, but hopefully at a lower cost than traditional compliance strategies might produce.

Mark A. Ryan

Mr. Ryan is a principal with the firm of Ryan & Kuehler PLLC in Winthrop, Washington. He is a member of the editorial board of Natural Resources & Environment and is the long-standing editor of the ABA’s Clean Water Act Handbook. He may be reached at mr@ryankuehler.com.