Water Quality Trading

Water quality trading is an innovative, market-based approach that if used in certain watersheds can achieve water quality standards more efficiently and at lower cost than traditional approaches.

To generate tradable credits, a source would need to reduce loadings below the allocation set by the regulatory authority. A source buying credits would be able to increase its discharge over what would otherwise be allowed, but only by the amount of the credits purchased from another source (or sources) and subject to other conditions specified in the permit and trading program.

In water quality trading there are point source and nonpoint source participants. Point source on the most basic level, is pollution that comes from a single, discrete place, typically a pipe.  Nonpoint source refers to pollution from diffuse sources such as runoff from agricultural areas.

Trading between point source buyers and nonpoint source sellers provides an opportunity to meet water quality standards by capitalizing on the cost discrepancy of reducing pollutants at a point source than reducing pollutants at a nonpoint source.

Taking the concept of PES into account a water quality trading system could look like the figure to the right:

If a goal of the trading program is to accelerate achievement of water quality standards a credit retirement ratio can be applied.  These ratios retire a percentage of all credits generated, and these credits cannot be sold. Therefore, the overall loading to the waterbody is reduced with each trade yielding net water quality improvement.  Where retirement ratios are used, they should always be greater than 1:1 because their purpose is to accelerate water quality improvements and usually are set by the regulator responsible for the water quality.