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National Forum on Synergies Between Water Quality Trading and Wetland Mitigation Banking

Jeremy Sokulsky

Water quality trading, also known as nutrient trading, holds the promise of saving billions of dollars for waste-water treatment plants and industrial polluters in the United States. But despite its enticing promise, water quality trading has yet to take-off on a widespread scale. In contrast, mitigation banking, which allows businessmen to buy and restore wetlands and then sell wetlands credits to developers needing to offset wetlands damage elsewhere, has boomed during the last decade. The Ecosystem Marketplace's Water Markets Analyst, Jeremy Sokulsky, reports back from an EPA conference where mitigation bankers, regulators, environmentalists and scientists recently put their heads together to explore the "synergies between water quality trading and wetland mitigation banking." Can mitigation banks help water quality trading expand in the United States?

Water quality trading, also known as nutrient trading, holds the promise of saving billions of dollars for waste-water treatment plants and industrial polluters in the United States. But despite its enticing promise, water quality trading has yet to take-off on a widespread scale. In contrast, mitigation banking, which allows businessmen to buy and restore wetlands and then sell wetlands credits to developers needing to offset wetlands damage elsewhere, has boomed during the last decade. The Ecosystem Marketplace's Water Markets Analyst, Jeremy Sokulsky, reports back from an EPA conference where mitigation bankers, regulators, environmentalists and scientists recently put their heads together to explore the "synergies between water quality trading and wetland mitigation banking." Can mitigation banks help water quality trading expand in the United States? The United States Environmental Protection Agency (EPA) and the Environmental Law Institute (ELI) recently convened the National Forum on Synergies Between Water Quality Trading and Wetland Mitigation Banking in Washington D.C. Fifty leading wetland mitigation bankers met with policy makers, environmental watchdogs and consultants from across North America to discuss the potential and pitfalls of trading water quality credits under the growing umbrella of the American mitigation banking industry. Interest in water quality trading is driven by the idea that, by purchasing pollution reduction credits from farmers, dischargers could use ecosystem services to offset their pollutant loads at least cost (read more on the thinking behind water quality trading). Mitigation bankers, in particular, are advocates of establishing a compliance driven market for water quality credits because they are already involved in restoring wetlands, which filter water naturally, so they are well positioned to bundle water quality credits with wetland credits (for more on wetland mitigation banking click here & here). Some regulators also back the expansion of water quality trading in the U.S. for economic reasons. Diane Regas, Director, Office of Wetlands, Oceans & Watersheds, United States Environmental Protection Agency (EPA), sums up her position in one sentence, "We need water quality trading as a tool to get better results for less money." Others, however, are less enthusiastic about the prospects of allowing industrial polluters to buy pollution credits from farmers. "This is a zero sum game!" exclaims Albert Ettinger from the Environmental Law and Policy Center. "So, why would I trade a system where I have certainty of enforcement for one where I have no enforcement?"

Similar but different

Both wetland mitigation banking and water quality trading produce credits that may be used to offset impacts by a regulated activity. Wetland banks develop credits as functional equivalent to acres of wetlands. In the case of water quality trading, these credits come in the form of pounds of pollutants not discharged to a stream or lake. "The purpose of a wetland mitigation bank is to make the regulatory process easier for the permittee and the permit reviewer," says David Urban of Land and Water Resources, Inc. (read the presentation) Wetland mitigation bankers must prove to a Mitigation Bank Review Team of regulators from federal, state and local agencies that they are creating functional wetlands. This Team approves the bank and determines the number and type of credits the bank may sell. Frequently these same regulators approve the permit for the credit purchaser as well. Urban contends that water quality trades should also ease the regulatory process. The regulatory setting for water quality permits, however, requires approval from only one or two agencies that generally deal with just a few large permits. The direct long-term relationship between the regulator and permit holder may reduce the potential benefit of water quality trading when compared to mitigation banking. Dennis King, Professor from the University of Maryland sees both wetland mitigation banking and water quality trading better served by a central board which he equates to an environmental SEC, referring to the United States Securities and Exchange Commission. This body of third party reviewers would create an efficient and viable approval process for transactions. King says the "law of large numbers" will give assurance that as trades proliferate the combined benefit of the trades would lead to the overall offsets expected. This would reduce the need for extensive and costly monitoring on each project. As wetland and conservation bankers, Craig Denisoff explains "We are in the mortuary business. Bankers are required to set a price which will need to cover the land, development costs and manage the site forever." Water quality credits, in contrast, are generated on a daily, seasonal or yearly basis in the form of pounds of pollutants and are sold to offset pollutant discharges that occur on the same day, season or year. The timing is determined by each watershed's specific trading rules. Urban makes the point that a wetland mitigation bank offsets impacts from several locations on the landscape and aggregates them at one location. By contrast, water quality trading does the opposite, creating nutrient offsets on farms and degraded streams across a watershed to offset nutrients being discharged at a single point.

Tough to measure

Measuring the absence of something across a diffuse area is notoriously difficult. The first step in quantifying the reduction of pollution discharges from a farm is establishing the baseline level of pollution before any conservation measures are undertaken. In order to create a water quality credit a farmer must demonstrate the amount of pollution coming off his land before water quality trading even begins. This requirement creates significant up-front costs for those interested in entering the water quality market, acting as a disincentive to potentially interested farmers. Wetland mitigation banks also face difficulties when it comes to measuring the impact of land use changes and restoration work ( read more on this topic), but through the years they have refined a number of methodologies for assessing the functions of restored wetlands through periodic monitoring of plant cover and the presence of water. The headway wetland mitigation banks have made in quantifying the ecosystem services they provide has given some bankers hope that water quality impacts, too, will some day be understood well enough to support a real market. "We can, we must monitor!" advocates Don Hey, The Wetlands Initiative. Through Nitrogen Farming Don sees the promise of using wetlands to treat water from impaired rivers at a scale that can be efficiently tracked. This, of course, remains to be seen, so for the time being many are left debating the difficulty of measurement when it comes to water quality trading and, with it, the difficulty of enforcement. Legal liability indeed proved the most popular topic of debate at the recent EPA/ELI conference.

Tough to enforce

Mitigation bankers efficiently sell severance of liability for developers destroying a wetland and take on the legal responsibility of replacing the wetland. Ettinger notes that because conditions in permits allowing the destruction of wetlands are difficult to enforce against individual developers, bankers give the environmental community a defined target to hold responsible for success. This is not the case for those sections of the Clean Water Act regulating pollution discharges to water. Municipal and industrial pollution dischargers have strict permits under the National Pollutant Discharge Elimination System (NPDES). These permits define monitoring and reporting requirements that work in engineered systems with water flowing out of a single pipe or facility to a river or estuary. Environmental lawyers, like Ettinger, are adept at enforcing these permit limits where factories are concerned but, find it difficult to enforce the same standards when pollution reduction strategies are spread across the large areas of land abutting lakes, streams and rivers. The Clean Water Act and environmental advocates, make transferring legal liability from NPDES permit holders to trading partners very unlikely. Instead, trading partners are encouraged to use contractual remedies where the credit seller compensates the buyer if they fail to produce the committed credits. While this tool has some use, it leaves both parties with uncertain legal battles looming in the future that reduce the value of water quality trading when compared to wetland mitigation banking. And they are right to worry. The EPA has little regulatory authority over politically powerful farmers and ranchers. But, for better or worse, trading is seen as the EPA's only method of reaching out to the agricultural community and unleashing the low cost opportunities to reduce the pollutants running off their land.

Eyes on the prize

With the focus on legal liability and permit compliance, environmentalists and policy makers need to step back and ask the courageous question, are we driving toward the right goals? Permit compliance should not be the end goal. Professor James Karr of the University of Washington argues that the environment would be better served by focusing on biological endpoints. This would give an incentive for polluters to analyze their overall watershed to most efficiently allocate resources and use ecosystem services to improve aquatic systems. Multiple credit markets also may provide more holistic incentives for entrepreneurs and land-owners. Some of these changes are already in the works. In the current round of World Trade Organization talks, negotiators are pushing to reduce traditional agricultural subsidies with the expectation that government funds would instead be directed to farmers for purposes of purchasing ecosystem services. The U.S. Department of Agriculture (USDA) already employs an environmental indicator based approach in its allocation of $3 billion of conservation funds each year through the Farm Bill programs. The United States can learn from the payment for ecosystem services programs in Costa Rica and Mexico. In return, Costa Rica and Mexico could learn from the credit generation and tracking systems being developed to support water quality trading in the United States.

Setting the course

The 1995 Wetland Mitigation Banking Guidance issued by the U.S. Army Corps of Engineers and EPA gave a basic direction to assist regulators and bankers in approving mitigation banks. It is credited with enabling the growth of mitigation banking. The EPA issued a Water Quality Trading Guidance in 2003 and is considering developing another to help move trading systems forward. The USDA is also developing guidance for market-based environmental credit trading and how credits may be sold in combination with other incentive programs. All agree that water quality trading is just one tool to reach water quality goals. Trading holds the promise of bringing private capital to the pollution control table. Particularly in areas with growing populations, water quality trading will enable communities to offset their growth in pollution while valuing ecosystem services of the land surrounding urban areas. While much of the talk at the National Forum on Synergies Between Water Quality Trading and Wetland Mitigation Banking focused on regulatory and scientific uncertainty, one thing is certain. Wetland mitigation bankers have a lot to gain by adding the returns from water quality trading to the bottom of their income statements. Jeremy Sokulsky is the Lead Water Markets Analyst for Ecosystem Marketplace. He can be reached at jsokulsky@ecosystemmarketplace.com. First posted: July 27, 2005

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