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  • April 03, 2019

    Recent Developments in Water Quality Trading

    Two recent developments in water quality trading at the federal and state level may change how trading occurs in Wisconsin. Vanessa Wishart discusses the developments and what they may mean for Wisconsin.

    Vanessa D. Wishart

    In accordance with the Clean Water Act, persons who discharge pollutants to waters of the state are classified into two groups: point sources and nonpoint sources.

    Point sources, such as municipal treatment plants and manufacturers, discharge into waters of the state pursuant to a Wisconsin Pollutant Discharge Elimination System (WPDES) permit issue by the Department of Natural Resources (DNR). WPDES permits contain limitations on pollutants.

    Nonpoint sources include runoff from farm fields and urban areas. Nonpoint sources are not required to obtain WPDES permits. Point sources may comply with certain limits, including phosphorus limits, by trading with other point sources and nonpoint sources for “credits.”

    Vanessa D. Wishart Vanessa D. Wishart, U.W. 2011, is a senior associate with Stafford Rosenbaum in Madison, where she concentrates her practice on water, wastewater, and remediation and redevelopment issues.

    A couple of recent developments at the federal and state level may change how trading occurs in Wisconsin.

    Current Trading Framework

    Wis. Stat. section 283.84 establishes the option for trading pollution credits. This statute provides that the DNR “shall administer a program for the trading of water pollution credits that is consistent with” the Clean Water Act.1 The DNR “may authorize a person required to obtain a [WPDES] permit to increase the discharge of pollutants above levels that would otherwise be authorized” if that person enters into an agreement with a point source or a nonpoint source to offset pollution reductions, or into an agreement with a local government unit or the DNR to facilitate pollution reductions.2

    According to statute, a trading agreement may only occur if all of the following apply:

    • the agreement results in an improvement in water quality;

    • the increase and reduction in pollutants involve the same pollutant or water quality standard; and

    • the increase and reduction in pollutants occur within the same basin or portion of a basin, as determined by the DNR.3

    While section 283.84 authorizes the trading program in Wisconsin, it does not provide substantial detail on how trades are accomplished. DNR guidance has therefore created the majority of trading protocol in Wisconsin.4

    DNR imposes a number of conditions on acceptable trades:

    • Geographic reach. Trades are generally only allowed between sources that contribute to the same stream segment, and the source acquiring the trade to fulfill a permit requirement generally must be downstream from the source generating the credits.

    • Trade ratios. Trade ratios are designed to address the uncertainty factor in determining whether a credit generator such as a nonpoint agricultural source will in fact be able to reduce the pollutant being traded to the necessary level. Trade ratios are left to DNR’s discretion, but the most common ratios are in the range of 2:1.

    • Baseline/credit threshold. A key issue when conducting a trade with a nonpoint source is defining the point at which trades are given credit. In general, DNR and the U.S. Environmental Protection Agency (EPA) provide for trading credits only when the pollutant reduction is below a threshold requirement. This issue often arises in the context of waterbodies under a Total Maximum Daily Load (TMDL). If, for example, a TMDL requires a farm field to have a phosphorus index (PI) of 6, and the field is currently at a PI of 10, credits for trading will only be given for reductions below 6; no permanent credits will be given for the reduction from 10 to 6.

    Because of restrictions explained above, many point sources have not viewed trading as a viable compliance option. Barriers to compliance through trading have included difficulties finding and verifying credits, uncertainty in the success of practices, steep trade ratios, and limitations on geographic area. As it stands now, DNR has approved 15 trades across the state, and there are 11 more under development.

    However, a couple of recent developments at the state and federal level may make trading a more flexible compliance option for point sources.

    EPA Trading Developments

    On Feb. 6, 2019, EPA released a memo outlining a new water quality trading policy. The goal of this new policy is to provide for more flexible, market-based approaches to trading.

    This memo identifies six market-based principles designed to “encourage creativity and innovation in the development and implementation of programs that reduce pollutants in our Nation’s waters:”

    1) The memo explains that states “should consider implementing water quality trading … on a watershed scale.” EPA has stated that “[w]orking within a larger geographic area may facilitate greater market opportunities and participation.”5
    2) EPA is encouraging “the use of adaptive management strategies for implementing market-based programs,” according to the memo. This principle acknowledges that “[d]emanding too much precision in measuring or predicting pollutant reductions can be an impediment to market-based solutions.”6 EPA is recommending that regulators involved with trading programs “should allow modeling and measurement strategies to evolve and improve over time, without sacrificing certainty for market participants.”7
    3) EPA is promoting banking water quality credits and offsets for future use. This policy “encourages early adoption of pollutant reduction practices, reduces risks associated with practice failures,” and aims to “broaden and strengthen” the credit marketplace.8
    4) The memo states that “EPA encourages simplicity and flexibility in implementing baseline concepts.” EPA states that “[d]ocumented current conditions can provide a simple and appropriate baseline.”9 Of particular importance in Wisconsin, where there are approved TMDLs, states “should consider whether it is appropriate to apply the load allocation baseline uniformly across the watershed, or instead apply it on a geographic basis within the watershed to maximize water quality improvements and minimize the risk of hot spots.” This may mean more flexible approaches to establishing a baseline that could allow more opportunity for credit generation.
    5) The memo provides that a “single project may generate credits for multiple markets.” EPA explains that projects that “generate multiple types of credits may promote more holistic resource improvements” and “create additional financial incentives” for trading participants.10
    6) The EPA encourages development of financing opportunities to assist with the deployment of nonpoint land use practices. EPA itself offers financial technical assistance and support through the Water Finance Center, and “encourages the use of innovative financing mechanisms.”11

    It is not yet entirely clear how this new policy will impact trading in Wisconsin, but it suggests a national-level attempt to remove some of the standard barriers to trading such as geographic reach and baseline/credit thresholds.

    Establishment of a Trading Clearinghouse in Wisconsin

    On Feb. 13, 2019, a new bill, LRB-1244/SB 91, was introduced by Republican state Sens. Robert Cowles, of Allouez, and Jerry Petrowski, of Marathon, and state Rep. Joel Kitchens, of Sturgeon Bay, to create a third-party water quality pollutant trading clearinghouse. The legislation aims to increase the opportunities provided for water quality trading under current state law.

    The proposed legislation attempts to promote opportunities for water quality trading through the creation of a third-party clearinghouse. The clearinghouse would buy credits from credit generators, verify these credits in concert with the Department of Natural Resources (DNR), and sell credits to point sources for WPDES permit compliance. The clearinghouse would be contracted through the Department of Administration and subject to oversight from DNR.

    Trades would also potentially be available on a broader geographic basis. The proposed legislation creates Wis. Stat. section 283.84(1m)(e)1, which provides that in a clearinghouse trade, the increase in pollutants and reduction in pollutants to occur within the same “applicable hydrologic area, as determined by the department.” It further defines “applicable hydrologic area” as “the largest area possible within this state to facilitate implementation of this section while achieving water quality standards and any applicable federally approved total maximum daily load allocations.”

    A hearing was conducted on this legislation on March 19, 2019, and this legislation will likely see revisions. However, at least in concept, this legislation could create a potentially more flexible type of trading option available to point sources in Wisconsin for permit compliance.

    Conclusion: Stay Tuned

    It remains unclear to what extent the EPA memo will impact DNR’s flexibility with respect to conventional trading, and as explained above, the clearinghouse legislation is likely to see further rounds of revision. Nonetheless, both of these developments provide potential sources of flexibility in point source compliance options in Wisconsin that are worth following.


    1 Wis. Stat.§ 283.84(1)

    2 Wis. Stat. § 283.84(1)(a)-(e)

    3 Wis. Stat. § 283.84(1m)

    4 See A Water Quality Trading How To Manual, Guidance Number 3400-2013-03, Wisconsin Department of Natural Resources, Sept. 9, 2013.

    5 “EPA’s Water Quality Trading Policy,” public webinar, prepared by the EPA Office of Water, PowerPoint presentation, March 5, 2019, on file with author.

    6 Id.

    7 Id.

    8 Id.

    9 Id.

    10 Id.

    11 Id.


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