The Bay states are moving forward to develop nutrient credit trading programs to help achieve Chesapeake cleanup goals, but a recent paper analyzing legal issues involving trades cautions that the courts have expressed differing views of such programs.

The paper, completed by the National Sea Grant Law Center, said two rulings last year split over the question whether a new or expanding discharger can offset its pollution through reductions from another source-a key element of any trading program.

"Although EPA has been encouraging states to embrace water quality trading, courts are just starting to consider the legality of such programs," the paper said.

The review was requested by the Bay Program's Scientific and Technical Advisory Committee, which has raised questions about Pennsylvania's recently enacted trading program.

The review, led by Stephanie Showalter, director of the law center, said Pennsylvania's program-the first in the nation to heavily promote trades between regulated dischargers such as treatment plants and unregulated sources such as farms-could face a number of challenges.

But the first hurdle for it and other programs, including an emerging trading initiative in Virginia, is the extent to which trades are allowed under the Clean Water Act.

Trading advocates have often touted the ability to buy and sell pollution credits as a way to achieve overall pollution reduction goals at less cost. In theory, a source that can cost-effectively achieve pollution reductions may sell credits to another facility while meeting overall environmental goals at less cost. Advocates often cite air pollution trading programs, which helped to reduce the cost of cutting acid rain emissions.

But the white paper cautions that significant differences exist among the air and water programs. Trading was a specific part of the Clean Air Act Amendments of 1990. The Clean Water Act does not address trading.

Especially problematic is differing interpretations of when-and if-the Clean Water Act allows one discharger to offset pollution through reductions elsewhere, especially if the discharges involve an "impaired" water body such as the Chesapeake Bay.

An impaired water body is one that fails to meet state water quality standards. In the Bay's case, those standards include precise amounts of dissolved oxygen and water clarity that must be present.

EPA regulations prohibit issuing a permit for a new or expanding discharger that will "cause or contribute" to the impairment of a water body.

Two recent court cases offered widely different interpretations of what "cause or contribute" means.

In a Minnesota case, the cities of Annandale and Maple Lake proposed the construction of a new wastewater treatment plant that would increase phosphorus discharges into the North Fork of the Crow River by 2,000 pounds a year. The river is impaired because of phosphorus levels.

The Minnesota Pollution Control Agency approved the plan because the new discharges would be offset by a planned upgrade to a nearby plant that would decrease phosphorus levels by 53,500 pounds a year.

The agency concluded that because of the net reduction of phosphorus, the new plant would not contribute to a violation of water quality standards.

The Minnesota Supreme Court, in a 2-1 decision last May, agreed that assumption was reasonable. It noted that the Clean Water Act does not offer guidance about how states should accommodate population growth, and therefore the state agency had leeway to make policy judgments based on its scientific and technical knowledge.

"Nothing in the language of the regulation or the structure of the CWA prohibits the MPCA from considering offsets in this situation," the court ruled.

But the dissenting opinion argued that while the offset would result in a net pollution reduction, the river would still violate water quality standards. The new facility would still be contributing to that violation, the dissenting opinion contended.

In a unanimous opinion last October, the U.S. Ninth Circuit Court reached a similar conclusion as the dissenting opinion in the Minnesota case.

It ruled that the EPA could not issue a permit to a mine to discharge copper into an impaired Arizona creek even though the company had agreed to remediate an inactive mine upstream to reduce copper loadings.

Friends of Pinto Creek, an environmental group, charged that the new permit represented a new discharge into an impaired water and therefore violated the Clean Water Act.

The court agreed. It said the "plain language" of regulations implementing the Clean Water Act is "very clear that no permit may be issued to a new discharger if the discharge will contribute to the violation of water quality standards."

Although the EPA argued that the pollution would be offset by remediation actions, the court said nothing in the Clean Water Act or its regulations "provides an exception for an offset when the waters remain impaired and the new source is discharging pollution into that impaired water."

The objective of the Clean Water Act and its regulations, the court ruled, "is not simply to show a lessening of pollution, but to show how the water quality standard will be met" if a new discharge is allowed in an impaired water body.

The court did say an offset might take place under certain conditions if a Total Maximum Daily Load is in place. A TMDL is a budget that sets the maximum amount of pollution that can be discharged by each facility into a water body and still meet water quality standards.

The court suggested that if a TMDL was complete and had a compliance schedule showing how and when the water body would attain standards, an offset could be allowed as it could be shown that the discharger was not contributing to an impairment.

The court also suggested that the EPA may have to establish compliance schedules for largely unregulated nonpoint sources if point sources alone do not clean up the waterway.

For now, that ruling has prohibited the EPA from approving any new permits for impaired water bodies in Western states covered by the Ninth Circuit unless there is a TMDL and a compliance schedule.

It's too early to say what that will mean for programs elsewhere, including in the Bay watershed, Showalter said.

"I would suspect that as other courts look at it, they will come out either way," she said. "It is quite likely that another circuit court would use a similar way of looking at it as the Minnesota court did and end up with split circuits, so it will take either a Supreme Court case or Congress to say trading is allowed."

Turning to Pennsylvania's program, which has been criticized by the Scientific and Technical Advisory Committee and others for lacking adequate safeguards, the white paper said the state's program may face "a number of hurdles."

Aspects of the state's program, such as allowing one-to-one trades between point sources and nonpoint sources such as farms-despite uncertainties involved with nonpoint source reductions-may make it difficult to demonstrate that the action is not contributing to a violation of water quality standards, the paper said.

"But none of that is going to matter if it's not legal under the Clean Water Act," Showalter said. "The first issue for Pennsylvania is the national issue about whether these offsets are even allowed when you are dealing with an impaired water."

The paper, "Pennsylvania's Nutrient Trading Program: Legal Issues and Challenges" is available at www.chesapeake.org/stac/Pubs/WQTwhitepaper.