EPA, which has been working intensely with states to reduce the nutrient load in the Chesapeake Bay, also has turned its attention to the Mississippi River Basin. The agency believes that water quality trading can help reduce nutrient and sediment runoff. A water quality trading program, as envisioned by EPA, operates like a cap-and-trade program.

The Clean Water Act requires a state to identify impaired water bodies and, for each, develop a total maximum daily load (TMDL). The TMDL for a given water body establishes the level of pollutants that each point source, such as a wastewater utility, and nonpoint source, such as a farm, may discharge without adversely affecting the water quality standards. This value would serve as the cap on pollutant levels for trading purposes.

Reductions below an established baseline could be voluntarily sold to a facility that cannot make further feasible reductions due to cost or lack of means. The trading program thus could reduce the overall cost of compliance.

In water quality trades involving point and nonpoint sources, farmers are usually the sellers because they have the ability to generate credits by planting tree buffers along streams or by implementing nutrient management plans. The farmers can, in turn, sell the credits to wastewater utilities or other point sources to meet their cap, or be assigned pollutant loads cheaper than through installing costly treatment equipment.

According to Marc Ribaudo, a senior economist at USDA’s Economic Research Service, however, participation of farmers in water quality trading may be limited if the starting point, or baseline for trading nonpoint sources of pollution, is based on more stringent agricultural practices than those in current use.

Baselines that assume stringent pollutant controls would limit farmers’ ability to generate credits. For example, Virginia law will discourage farmers from participating in trading because the state has set very stringent baseline criteria for nonpoint sources. Virginia requires the presence of five water quality management practices — a soil conservation plan, a nutrient management plan, a cereal crop cover, stream buffers and livestock fencing — as the baseline for trading.

Baselines are essential to any trading program because they determine the amount of credits that can be generated by additional control measures. There is not much left to implement after employing all five practices.