Chapter 1

The Effluent Trading Pilot

      The Effluent Trading Pilot project explored the use of a "trading" mechanism as a means for companies to meet local pretreatment limits for the level of metals in the effluent they discharge to a Publicly-Owned Treatment Works (POTW). Trading allows industrial permittees to achieve the required overall additional reductions in pollutant levels more economically. Controlling metals levels in effluent can be very expensive. Yet when the control measures are instituted, a facility may be able to reduce the levels of metals in its effluent more than is required. For some facilities, instituting the control measures would be so expensive that they would have to shut down some production processes or go out of business. Trading allows facilities within the same POTW service area to work together to control the discharge of metals in a manner that is less expensive for all parties. A company that has instituted control measures that have brought its metals levels down below the local limits can "sell" these excess reductions. One or more companies with effluent levels in excess of the local limits can buy the reductions as a means of complying with the local limits. A buying company and a selling company negotiate a price for the metals credits, and the permits of the trading partners are adjusted to reflect the amount of credits sold in the trade.

      The Passaic Valley Sewerage Commissioners (PVSC)  operate a large treatment plant in Newark, NJ that treats the domestic and industrial wastewaters of northeastern New Jersey. The heavily industrialized service area encompasses all of the land draining into the Passaic River from the Great Falls in Paterson to Newark Bay. This area consists of 47 municipalities in portions of Passaic, Bergen, Essex, and Hudson counties with a total population of about 1.3 million. There are 306 major industrial plants within the PVSC service area. In order to meet local pH and heavy metals limits, approximately 236 of these facilities need to treat their effluent prior to discharging it to the PVSC sewer system. Exhibit 1-1 shows the communities within the PVSC service area.

      The Pilot Team worked with PVSC and its industrial permittees to establish a trade of local pretreatment limits for metals. To accomplish this, the Pilot Team facilitated the process of identifying potential trading partners and negotiating a trading agreement. The pilot project began in November 1996. The Pilot Team first contacted each of the industrial dischargers in the PVSC service area to ask if they would be interested in working with other facilities to establish trades. Interested companies were invited to a meeting at which the framework for trading was described and questions concerning trading were answered. The Pilot Team continued to assist these companies in their efforts to establish trades over the next several months and eventually oversaw the drafting and approval of a trading agreement between two facilities that took effect on July 1, 1997.

Summary of Key Findings

      Prior to this pilot project, no effluent trade was in place between companies discharging effluent to a POTW. Because of this, the Pilot Team decided that an important aspect of this project would be to document its experience establishing effluent trades. Through this report, the Pilot Team hopes to share the lessons learned during this project concerning the benefits of trading, as well as barriers to trading and approaches to overcoming them. This section highlights some of the key findings of this effort to establish effluent trading. These and other findings are described in greater detail in subsequent chapters of this report.

Benefits of Trading

      Effluent trading among indirect dischargers within a sewer service district can produce a variety of benefits for the environment, industrial facilities, and the POTW itself. Trading among facilities in the PVSC service district benefits the environment because the rules and regulations governing trading in this district require that trades incorporate an overall reduction in the amount of pollutants discharged from participating facilities. Trading also provides greater flexibility to facilities in meeting local limits. This flexibility encourages wider and more timely compliance with local pretreatment limits and can lead to economic savings for facilities that buy and sell effluent credits, which ultimately can help to sustain local economic conditions. The POTW benefits from trading through an enhanced public image as a proactive and effective regulatory agency that is concerned with ensuring that facilities meet local limits that are protective of the environment, while alleviating any potential negative impacts of regulations on the local economy by allowing them to pursue innovative compliance approaches.

The Trading Process

      The Pilot Team spent considerable effort exploring the process of establishing trades to identify both key steps in trading and some of the barriers that facilities face as they attempt to establish trades. Several of these steps and barriers are highlighted below.

• Need for local regulations authorizing trading - Trading of pretreatment limits is possible only for local limits since there is no allowance for trading of Federal (categorical) limits. However, in order for trading to occur in a given POTW service district, the POTW must first incorporate trading into its rules and regulations. As such, POTWs may want to consider issuing trading regulations even if there appears to be little demand for it among their industrial permittees at the current time. This will streamline the process should trading become a desirable compliance tool and allow facilities to implement trades to meet local pretreatment requirements more quickly and efficiently.
  
  
• Timing of trading negotiations - The Pilot Team concluded that it is most productive for the concept of trading to be introduced to the industrial user community at the same time new local pretreatment limits are being developed or existing ones are being revised. This allows potential trading partners to begin discussions early on in the process of planning how they will meet the new or revised limits. Early discussions can improve their ability to develop and implement more economical and efficient approaches to treatment that fully consider the potential for a coordinated approach to pretreatment among several trading facilities.
  
  
• Lack of information - This was identified as a significant barrier to establishing trades under this pilot project. During the course of this effort, the Pilot Team attempted to address this through conducting extensive outreach to PVSC industrial permittees to inform them of the potential to use trading as an approach to meeting the upcoming compliance deadline for PVSC's local limits and to assist them in identifying suitable trading partners. The experience of the Pilot Team suggests that the process of developing trades in other POTW service districts would benefit from either establishing similar trading teams or POTWs taking a larger role in promoting and facilitating trading negotiations.

Transferability of Trading to Other POTWs

      Through the Effluent Trading Pilot in the PVSC service district, the necessary measures and factors to be considered when developing a trading program were identified, and a number of stumbling blocks to moving a trading program from theory to implementation, along with solutions, were documented. The following information should be useful in considering whether and how effluent trading can be successfully extended to other POTW service districts.

• There is no magic number of permittees a POTW should have in order to establish a trading program. Special circumstances, such as a shared need among permittees for a similar type of treatment facility, can make trading appropriate even for a POTW with a small number of permittees.
  
  
• The ability of a POTW to implement trades relies on three factors:
  • Having technically-based defensible local pretreatment limits - This allows a POTW to readily address any questions regarding the adequacy or appropriateness of the local limits to which trading applies.
    
    
  • Incorporating trading into its rules and regulations or sewer use ordinance - POTWs can implement programs for trading local pretreatment limits, but must first establish the proper legal authority through their rules and regulations.
    
    
  • Having or establishing a strong pretreatment enforcement program - This provides incentives for industrial permittees to seek alternative methods for achieving compliance and sends a clear message that they will be held accountable for meeting the terms of their trades. It also fosters public confidence that the POTW will effectively oversee trades while continuing to protect human health and the environment.

Organization of this Report

      The following chapters of this report document the benefits and challenges of establishing this effluent trade and explore the transferability of trading to other POTWs. Chapter 2 provides background on PVSC and its regulations that allow for trading to meet local limits. Chapter 3 summarizes the benefits of a trading program - for the environment, industry, and POTWs. Chapter 4 outlines the key elements that the Pilot Team feels are necessary for establishing a successful trading program and provides more general background information on trading. The fifth chapter explores various barriers that the Pilot Team had to overcome before the trade could be finalized, and Chapter 6 provides insights into how best to address these barriers and effectively promote trading in future efforts. The final chapter, Chapter 7, addresses the transferability of trading to other POTWs, and the components a POTW must have in place in order for trading to occur.

      The appendices to this report provide materials used by the Pilot Team in designing and implementing this project - PVSC's Rules and Regulations pertaining to trading, calculating effluent trading quantities, guidance on developing a trading agreement, the introduction letter sent to permittees, and questions and answers regarding effluent trading. Also included is a comparison between effluent trading and the SO₂ trading program and a glossary of effluent trading terms.

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