Energy & Environment

Trading For Clean Water

States and localities are intrigued by proposals to create market mechanisms for solving intractable water-pollution problems.
by | April 2004

For thousands of years, the shady forests that grew along the banks of Oregon's Tualatin River kept the water chilly enough for salmon, steelhead and cutthroat trout. The temperature began to rise, however, as pioneer farmers cleared dense tree stands to plant fields, and subsequent development channeled surface runoff into the 700-square- mile watershed. The Tualatin got warmer still when two sewage- treatment plants were built in the 1970s and started discharging 70- degree effluent into its waters. Now, federal and state regulators are holding Clean Water Services, the multi-county district that serves the suburbs west of Portland, responsible for cooling the Tualatin down so native cold-water fish can swim upstream for spawning.

One solution would be for CWS to spend $150 million on refrigeration equipment to chill the treated effluent before it is released. But the agency recently received permission to try a cheaper, and quite possibly more effective, alternative: It plans to start paying local farmers $1.5 million over the next five years to plant Douglas fir, red alder, Pacific willow and other native trees along the Tualatin and its upstream tributaries. For the nation's water-pollution police, "it's really radical letting somebody plant trees instead of doing technology-based things," says Sonja Biorn-Hansen, of the Oregon Department of Environmental Quality.

In return for allowing Clean Water Services to scrap plans for installing the costly equipment, Oregon water-quality officials will require the agency to bring temperatures all along the river down twice as much as chillers alone would have accomplished. "Our regulators gave us 20 years for the trees to grow," but to meet that goal "we'll need somewhere between 15 and 40 miles of shade," says Bruce Cordon, the district's project coordinator.

In addition to reducing Clean Water Service's costs by better than 90 percent, the arrangement will help curtail soil erosion, control polluted farm runoff, replenish streamside habitat and help salvage the state's imperiled salmon and trout populations. This tree-planting approach is one of the nation's boldest experiments in relying on old- fashioned market incentives to control pollution as efficiently as possible.

In the past decade, full-fledged exchanges have developed for trading air-emissions credits to address acid rain from Midwestern power plants and more recently for greenhouse gases. The Tualatin River deal and other similar examples are generating interest in a systematic approach to swapping effluent credits--at least within individual watersheds--as a way of solving intractable water-pollution problems. SHARING THE CLEAN-UP BURDEN

Despite enormous investments in cleaning up factories, sewage- treatment plants and other end-of-pipe pollution sources, more than half of the nation's 2,000 watersheds still don't comply with federal Clean Water Act goals for making waters fit for fishing, swimming and drinking. That's largely because pollutants running off farmers' fields, golf courses, parks and lawns are still clogging streams and lakes with sediment, raising their temperatures, and clouding waters with excessive loads of phosphorus, nitrogen and other oxygen- consuming nutrients. Landowners who release these widely dispersed "non-point" pollutants are exempt from the 30-year-old law requiring corporations and municipal sewage systems to obtain government permits that force them to clean up the effluent they release.

In an effort to fill in the regulatory gap, pollution-control agencies have begun the process of enforcing "total maximum daily loads," which impose contaminant limits and temperature standards for streams, rivers and lakes. They've also begun broadening the regulatory focus to take in entire watersheds, including contaminated non-point runoff as well as point-source releases, and designing strategies for spreading the burden of bringing pollutant loads down to TMDL limits.

Local sewage agencies and businesses will still be on the regulatory hook if tighter limits go into effect. But ratcheting point-source discharges down even more to comply with tighter TMDLs would be an expensive proposition. At the same time, farmers and other landowners can reduce their own "non-point" runoff much more cheaply by adopting sensible soil-management practices. The U.S. Environmental Protection Agency calculates that the nation could save $900 million and still meet water-quality goals with trading mechanisms that let big polluters buy marketable credits from landowners who can then use the cash to curtail "non-point" runoff from their property.

EPA has been backing trading experiments since 1996. Minnesota approved a prototype trading venture in a 1997 permit that allowed Rahr Malting Co. to start discharging barley-processing byproducts into the lower Minnesota River. To offset the 150 pounds of nutrients it releases daily, the company has spent $255,000 to keep twice that much out of the river by paying four farms within the watershed to plant native grasses, build livestock fences and adopt other measures to curb erosion that would otherwise carry nutrients into the system.

For the most part, however, trading proposals to cut the costs of controlling water pollutants have yet to catch on. In an analysis published last year of 37 pilot programs, a consultant and a University of Maryland professor concluded that "despite the compelling economic logic...very few nutrient-credit trades have actually taken place."

Connecticut has implemented a limited pollutant-trading scheme among 79 sewage-treatment plants to help them deal with steadily tightening limits on nutrient-laden effluent that reaches Long Island Sound. The state's sewage agencies must collectively reduce their nitrogen discharges by nearly two-thirds to reverse nutrient loads that are depleting oxygen levels in the sound's waters. Trading began in 2002, with the state setting the value of credits that plants must acquire if they don't meet discharge standards as the limits are ratcheted down; the state in turn buys excess credits that other facilities earn because they have already invested in tighter controls and therefore are reducing nitrogen discharges below the current standard.

Advocates of market mechanisms think pollutant trading will have to play a much more significant role for governments to supplement point- source controls by finally curbing non-point releases as well. Michigan, Maryland and Virginia have launched pilot trading efforts for controlling farmland nutrients that wash into the Great Lakes and Chesapeake Bay. North Carolina set up a nutrient trading system in 1991 for 14 point-source dischargers in the Tar-Pamlico Basin; the program finances state assistance for farmers to control phosphorus and nitrogen runoff, but no trading has taken place.

Around Colorado's Lake Dillon reservoir, resort towns have adopted phosphorus controls and sold credits to sewage systems. Outside Denver, a few small-scale phosphorus trades have been made along the Cherry Creek Basin, but a full-fledged market hasn't developed. EPA and Idaho regulators are backing the Boise sewage system's proposal for phosphorus trading on the Lower Boise River with local farmers, but the plan was stymied several years while federal and state officials debated setting TMDL levels for phosphorus downstream in the Snake River system.

Wisconsin's Natural Resources Department has conducted studies to assess the potential for similar arrangements between cities and farmers along three major watersheds. So far, however, just one municipality, Cumberland (population 2,400), has taken the plunge into trading with nearby farmers. The projected cost of installing phosphorus controls at the city's 450,000-gallons-per-day sewage treatment plant was $150,000, plus $35,000 a year for chemicals and operating expenses. For just $20,000 a year, the city is instead paying farmers to cover the cost of shifting roughly 1,000 acres to no-till planting. That has kept twice as much phosphorus from eroding into the Red Cedar watershed as retrofitting the treatment works would have accomplished. Cumberland and Wisconsin DNR officials acknowledge that trading works only because Barron County's soil conservation manager has been doing all the legwork to identify potential trades at no cost to city coffers. Other Wisconsin cities found trading doesn't make economic sense for meeting the state's phosphorus limit, at least at its current level. THE TROUBLE WITH TRADES

To function, any market requires both willing buyers and willing sellers. The Bush administration is pumping money into new pilots, but EPA and many states have yet to follow through on imposing rigid TMDLs that would stimulate demand for effluent credits from factories and sewage systems. Meanwhile, controlling non-point runoff remains voluntary; and direct federal and state subsidies for best management practices make trading less attractive for landowners. What's more, enforcing trades requires considerable work by state regulators to make sure goals are met. "I like pollution trading," says James Klang, a Minnesota Pollution Control Agency engineer who monitors the Rahr Malting agreement, "but there is upfront knowledge of the watershed that you have to have before you enter into it."

Environmentalists, meanwhile, contend that trading in effect grants big point sources a right to keep polluting more than they should while rewarding farmers for improvements they should be making anyway. "The way we see it, there's nothing to trade, because their responsibilities are already there," says Brian Wegener, the watershed coordinator for Tualatin Riverkeepers, an Oregon conservation organization. Despite such doubts, Minnesota is working to renew the Rahr permit; and the planned trading efforts seem likely to come together in the next year on both the Tualatin and Boise rivers in the Pacific Northwest.

"You're never going to see a big market like you have in air," says Claire Schary, a former EPA acid-rain trading expert who now oversees the Tualatin and Boise proposals from the agency's regional office in Seattle. But, she adds, trading still makes sense for dealing with some pollutants in watersheds "if you have a big point source that's bumping up against a limit in its permit."


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