After years of interest but scant activity, the EPA is trying to kick-start water quality trading programs with a new policy that sets the framework for states to develop their own trading initiatives.

In January, it released a “Water Quality Trading Policy,” which sets out a guidelines under which states are free to develop trading programs that could win EPA approval.

“Our new Water Quality Trading Policy will result in cleaner water, at less cost, and in less time,” said EPA Administrator Christie Whitman. “It provides the flexibility needed to meet local challenges while demanding accountability to ensure that water quality does improve.”

The EPA policy spells out how trading programs — in which one pollution source meets its regulatory obligations by purchasing credits from facilities that have exceeded their obligations or from non-regulated sources — can be developed to be consistent with the Clean Water Act.

For the most part, trading programs developed under the policy are likely to be spurred by the need to implement Total Maximum Daily Loads. TMDLs are pollution budgets designed for waterbodies that fail to meet water quality standards.

A TMDL sets a cap on the maximum amount of pollution that a waterbody can receive and still meet water quality standards, and assigns reductions to various sources of pollution.

In many places, TMDLs mean sharp reductions for industries, wastewater treatment plants and other facilities because they have discharge permits which fall under regulatory controls. But in many cases, those pollution reductions could be more cheaply accomplished by unregulated nonpoint sources of pollution, such as agricultural runoff.

“You are going to see trading as a tool because in many places it is going to be the only way that people are going to be able to get support to do the TMDLs,” said David Batchelor, a senior policy advisor with the EPA.

The policy also allows pre-TMDL trading — like that which may take place in the Bay watershed — to achieve water quality improvements before a TMDL is required. But trades may not be used to delay the implementation of a TMDL under the policy. Nor may trades be made that would result in pollution levels exceeding the cap established by the TMDL.

In addition, trading programs may be developed to offset the impacts of growth — which increases pollution in a watershed — to maintain water quality standards.

For the most part, the EPA policy envisions trades that deal with nutrients or sediment, although it does not rule out trades involving toxics that do not bioaccumulate in animals.

Under the EPA’s policy, trades must take place within a watershed, or an area defined by a TMDL, to help ensure that water quality standards are maintained throughout the waterbody. No trades are allowed that would allow local violations of water quality standards.

In addition, trading programs must have enforcement mechanisms “that ensure legal accountability” for any credits that are purchased. In general, the EPA calls for permit holders who engage in trades to be responsible for ensuring that water quality improvements called for in their permit actually happen

“We are not letting point sources trade away their requirements to meet permit limits,” Batchelor said. “And by providing guidance on how trading could be built into the permits, we are increasing accountability and enforceability of trading programs through the permit program.”

Batchelor said the lack of a trading policy had hindered the development of state programs because the Clean Water Act, unlike the Clean Air Act, does not specifically allow trading. As a result, states were reluctant to develop programs that might be rejected by the EPA.

In addition, he said, trading programs face “institutional inertia” within bureaucracies. “Many of the traditional regulators at both the federal and state levels frankly do not understand markets,” he said. “They are skeptical. They prefer command and control. Their preferred approach would be to do what they have done for 20 years, which is issuing permits to everybody.”