Chapter 3
Trading of local pretreatment limits between indirect dischargers within a sewer service district is beneficial to the environment, industrial facilities, and the POTW. The specific rules and regulations governing trading in the PVSC service district are beneficial to the environment because they require trades to incorporate an overall reduction in the discharge of chemicals from participating facilities. Trading also benefits the environment by encouraging wider compliance with local limits among facilities, and reducing incentives for facilities to locate in areas with less stringent limits, thereby encouraging real reductions in loadings. The greater flexibility in meeting local limits afforded by trading also can lead to economic savings for industrial facilities that buy and sell effluent credits and help sustain local economic conditions. In addition, trading improves the effectiveness of POTWs as regulators by providing increased opportunities for facilities to comply with local limits. These benefits of trading are summarized in Exhibit 3-1 and described in greater detail throughout the chapter.
PVSC's trading regulations have a requirement that 20 percent of the effluent credits sold in a trade must be reserved, or "banked." Thus, there is a built-in mechanism for reducing the total quantity of pollutants discharged by facilities that trade. For example, if one facility agrees to sell 2.5 lbs./day of copper effluent credits, the buyer(s) can use only 80 percent of this amount or 2.0 lbs./day. The remaining 0.5 lbs./day of copper effluent credits must be banked.
Some critics of effluent trading argue that it does not truly reduce discharges of industrial pollutants even if there is a requirement to bank 20 percent of the traded effluent credits. For example, if a facility that has already installed pretreatment equipment to meet the limits and is currently discharging substantially below the limit is allowed to trade its excess reductions with a facility that is currently above the limit, the total permitted discharges from these two facilities would be higher than if the second facility were required to meet the limit through pretreatment or pollution prevention measures. However, without the trade, the first company is free to increase its pollutant loadings up to the limit at any time. Such an increase may occur as control technology equipment ages and perhaps becomes less effective, or as a facility changes or expands its operations. Under a trading agreement, though, this facility (the seller) is locked into a lower pollutant discharge level based on the quantity traded. The trade will provide an incentive for a facility to maintain the effectiveness of its control equipment or, in the case of expanding operations, to incorporate pollution prevention or additional control measures to stay within this lower discharge limit. Thus, the 20 percent of the allotment banked is a secured reduction.
In addition to the 20 percent reduction in pollutant loadings, a trading program may also allow companies to realize economies of scale associated with installing larger treatment systems at a single facility rather than smaller ones at two or more facilities. These economies of scale can have a positive effect on the environment. Companies may reduce their use of treatment chemicals, as well as the generation of hazardous waste from their use. They also may reduce their use of electricity and water.
Finally, trading encourages facilities to find creative and cooperative solutions to environmental compliance as an alternative to "local limits shopping" - the practice of locating a facility in an area with less stringent local pretreatment limits. In this way, trading can lead to real reductions in loadings rather than a redistribution of loadings across jurisdictional boundaries.
Benefits to Industrial Facilities
Under conventional approaches to meeting local limits, each facility within a POTW service district must install additional pretreatment equipment or institute pollution prevention measures to achieve compliance with any new local pretreatment limits. Pretreatment trading is intended to provide facilities added flexibility in meeting these local limits, which can lead to greater economic efficiency and cost savings. In addition to direct economic benefits, facilities can benefit from increased public recognition associated with a good environmental compliance record. As described below, these benefits apply to both the sellers and buyers of effluent credits.
Sellers
The primary benefit for a facility to sell effluent credits is financial. Selling excess reductions can help a facility recover some of the costs associated with the installation and operation of environmental controls or pollution prevention measures. The extent and nature of the financial benefits depends on the specific circumstances of how a facility achieves the excess reductions.
Under one scenario, a facility can achieve excess reductions by intentionally designing its pretreatment system with excess capacity to allow for future increases in production levels. If a facility does not actually increase its production for some period of time, it may have excess reductions to sell. In this case, entering into a trading agreement until it needs the full treatment capacity would allow a facility to recoup some of the additional cost associated with the greater degree of treatment.
A facility also may achieve excess reductions unintentionally through its effort to design and operate a system to meet the local limits with an ample cushion to allow for operational fluctuations. For example, a facility may over-engineer a treatment system in an effort to account for uncertainty over how well the system will perform. Some of this serendipitous excess could be sold to help offset the capital investment or operating costs associated with upgrading the pretreatment system.
Alternatively, the potential for trading excess reductions could serve as an incentive for a facility to explore and ultimately implement creative approaches to pretreatment that can achieve greater reductions. Similar to the two previous scenarios, the seller who institutes control measures and achieves excess reductions beyond those required to meet the local limits can recover a portion of its treatment costs by selling some or most of these reductions. To the extent that the price obtained for the excess reductions exceeds the incremental costs of achieving them, the seller gains financially.
Buyers
There are many benefits of trading for the buyer of metal credits. Below, we highlight a few.
By increasing its level of compliance with local limits, the buyer benefits from avoiding fines and reducing monitoring costs. The reduction in monitoring costs results from the need to collect and analyze fewer effluent monitoring samples. PVSC permittees are generally required to monitor their discharge on a monthly basis. Typically, a facility samples its discharge early in the month. If the sample meets the local limits, no additional sampling is necessary for the remainder of the month. But if the initial sample exceeds the local limits, the facility needs to take additional samples to determine if the monthly average discharge levels meet the local limits. Thus, purchasing additional effluent credits as a "cushion" can reduce the number of monitoring samples taken by a facility. In addition to these direct cost savings, the facility will benefit from the public recognition for improved compliance.
Like sellers, the primary benefit of trading for buyers is financial. Buying excess reductions from another facility can provide a more cost-effective means of meeting local limits. The presumption is that a facility will choose to purchase credits when it can obtain them at a price less than the cost of developing and installing its own pretreatment upgrade. This may be particularly true if a facility is close to meeting the local limits, but has occasional exceedances due to fluctuations in its processes or production levels. The incremental cost of reducing its discharge or restricting its production to meet the local limits may be greater than the cost of purchasing a "cushion" that will allow it to operate comfortably within the local limits.
Cooperative Pretreatment
When facilities are able to negotiate a trade prior to installing pretreatment equipment measures, they may be able to achieve even greater financial savings. This can occur because facilities will be able to evaluate both what control measures should be used and at which of the trading facilities they should be installed. This will allow them to choose the most economical control strategy.
Effluent trading benefits POTWs and the community at large in several ways. First, allowing trading as an approach to meeting local limits can improve relations between a POTW and its industrial permittees (IPs). POTWs demonstrate increased willingness to work with IPs in developing more economical approaches to meeting local limits, and the process of establishing and negotiating viable trades introduces an element of cooperation into the relationship between POTWs and IPs, which can lead to reduced litigation and legal expense for both parties.
Second, trading can provide an economic boost for a community by alleviating constraints that POTW local limits may impose on operations at existing or new facilities. This may be especially true when a POTW needs to revise local limits due to a changing industrial base or to meet more stringent criteria. An existing IP may have already made substantial expenditures to meet federal or current local limits and be unable to afford the additional cost of complying with the revised local limits (e.g., installing additional pretreatment equipment, etc.) and remain competitive. Similarly, a new IP may not be able to afford the level of pretreatment needed to meet the local limits. In either of these cases, the reduced compliance costs associated with trading could help to increase or maintain the economic base of the community. Thus, it may be beneficial to the community for the POTW to incorporate effluent trading into its regulations.
Third, effluent trading also enhances the public image of a POTW as a proactive and effective regulatory agency. Through incorporating trading into its local regulations, a POTW shows that it 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.
As evidenced by the strong support this pilot received from the stakeholder group for the New Jersey Chemical Industry Project, effluent trading can provide a more efficient way to protect the environment, an outcome that benefits everyone.
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Last Revision: March 9, 2000
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