Chapter 4

      In this chapter, general background information on trading is presented with a focus on the necessary components of a successful trading program to meet local pretreatment limits such as the one developed in this project. These components include adopting POTW regulations to allow trading, the requirements for being a buyer and a seller, and improving the environment. The chapter also outlines several key steps in developing trades, including calculating the trading quantities, the elements of a trading agreement, and trading negotiations and pricing. This chapter concludes with a discussion of the timing for developing a trading program relative to instituting new or revising existing local limits, and the importance of the POTW's compliance and enforcement record in establishing an effective trading program. Since this is apparently the first trade completed between facilities in a POTW service area, it is hoped that the experience gained through this effort will help guide others in developing and implementing successful trading programs.

Background on Trading

      This project focuses on trading local limits between facilities that are indirect dischargers (i.e., those that discharge into a sewer system). Yet trading can also occur between facilities that discharge directly into a body of water (direct dischargers). Direct dischargers (point sources) can also trade with non-point sources, such as farms. Usually the same pollutant must be traded and among direct dischargers, nutrients are the most commonly traded class of pollutants. For the PVSC local limits, metals were traded, copper for copper, zinc for zinc, etc.

      Trading of local limits is allowed by EPA and encouraged as a way to meet local pollutant limits. Trading of Federal (categorical) limits is prohibited, however. These Federal limits are technology-based pretreatment standards and are applicable to specific industry groups. Many POTWs impose additional local pretreatment limits. These limits serve a variety of purposes, including protecting the quality of specific bodies of water, preserving the integrity of the POTW's treatment system, and improving or maintaining biosolids quality. For more information on trading, see the Draft Framework for Watershed-Based Trading,¹ or visit EPA's Office of Water trading web site.

Components of a Trading Program

Local Limits

      The cornerstone of effluent trading of local pretreatment limits is defensible local limits, developed on a sound technical basis. Solid data on current pollutant levels in biosolids and local receiving water bodies, pollutant loadings, fate and transport, as well as target levels for achieving goals for both ambient water quality and biosolids reuse are necessary for calculating defensible local limits. Details on setting local limits can be found in Chapter 7 of this report, Transferability of Trading to Other POTWs.

POTW Regulations

      When local limits are developed, the regulations issued by the POTW should include a specific allowance and encouragement for facilities to consider the use of effluent trading as a means of meeting the upcoming local pretreatment requirements. PVSC did this in Section B-104 of its Rules and Regulations (see Appendix A). The PVSC rules state:

• trading is a permissible way to meet local limits of heavy metals;
  
  
• the buyer and seller must submit documentation of an acceptable trade to PVSC for approval; and
  
  
• the trade must meet certain conditions, including:
  • the minimum amount that can be purchased or sold;
  • the minimum increment that can be purchased or sold;
  • only 80% of amount purchased can be used;
  • a buyer can purchase credits for a single metal from only one seller, but can purchase different metals from different sellers;
  • a seller can sell surplus reductions of a metal to multiple purchasers (up to ten); and
  • the amounts traded must be converted to average concentration values for the traders' permit limits.

      The general permit provisions of PVSC's rules also provide procedures to address situations where a trade fails or is canceled. If a facility buys credits from a company, and the company goes out of business unexpectedly, the buying facility would lose the purchased credits. PVSC rules and regulations would allow the buyer a reasonable time to come into compliance. This would apply also if the seller were to discontinue the production process from which the metal reductions came.

      During this pilot project, PVSC revised its regulations to meet the needs of some smaller businesses by decreasing the minimum amount and increment that can be purchased or sold and increasing the number of purchasers with which a seller can trade.²

      POTWs may want to consider issuing regulations that allow pretreatment trading even if they do not believe that trading is in demand in their service area at the current time. Industrial facilities and government agencies sometimes differ on the importance they place on various factors that affect decisions relating to trading. This can lead to different opinions of the attractiveness or feasibility of specific approaches to controlling pollution. Issuing regulations now to allow trading to occur within a POTW service area will streamline the process should trading become a desirable compliance tool for the POTW's IPs. This will allow facilities to meet local pretreatment requirements more efficiently.

Environmental Improvement

      PVSC's regulations stipulate that a buyer can use only 80 percent of the metals purchased. This banking of credits not only provides for an immediate benefit to the environment, but also provides an additional measure of assurance that trading will not cause increased pollutant discharges.³ An explanation of this concept is provided in Chapter 3, The Benefits of Trading.

      Trading could be a way for facilities to come into compliance with new local limits more quickly through buying effluent credits, leading to more timely environmental protection. The possibility of trading could also motivate facilities that wish to be sellers to take more effective metals reduction measures. Increased rates of trading will lead to increased banking of metal credits and improved environmental conditions.

Sellers

      A seller of metal(s) credits in this effort is a facility that has had levels of one or more metals in its discharge that were formerly above those allowed by the applicable new PVSC local limits and has instituted control measures that have brought its levels down below these limits to achieve reductions greater than needed to comply with the new requirements. The reduction may have come from installation of end-of-pipe control equipment, but not from discontinuing the process that produced the metals discharge. In addition, the use of pollution prevention that leads to reductions in metals discharges can also qualify a facility to be a seller. Thus, in order to be a qualified seller, the selling facility must have taken some positive action to reduce the metal(s) in its effluent. This reduction must have been instituted since September 1994, the date when PVSC passed its new local pretreatment rule, and must be documented.

Buyers

      A buyer is a facility that has metal(s) discharges that may exceed the new local limits, and would like to meet its new requirements by purchasing a seller's excess reductions of that metal.

Process of Developing a Trade

Identifying Trading Partners

      The Pilot Team conducted an outreach effort to ask facilities if they were interested in participating in the pilot. PVSC then helped each interested facility evaluate its qualifications for trading. Since that time, PVSC has worked to update its capabilities to process and retrieve analytical data on discharges by its Industrial Permittees (IPs) and thus can now more easily identify qualified trading partners. Other POTWs with either fewer IPs - and a knowledge of each IP's processes - or the ability to process and retrieve detailed data on discharges by its IPs may be able to identify qualified trading partners more readily and contact these IPs directly to determine their interest in trading. Absent this information, an outreach campaign like the one used in this pilot can be employed. Refer to Chapter 6, Approaches for Promoting Trading within a POTW Service Area, for further discussion.

Calculating Trading Quantities

      As potential trading partners are considering how much of a credit to purchase or sell, they should consider how their current or planned production levels will affect compliance with the local limits, and how much of a "cushion" they will need. They should consider their ability to lower their pollutant discharge levels themselves through pollution prevention or simple and inexpensive technological improvements, the stability of their processes and possibility of an upset, changing market conditions and production levels, and the requirement that part of the purchased pollutant credit would be banked. Both buyers and sellers need to consider their own business needs when calculating the amounts to be traded so that they can comfortably operate within their adjusted permit limits.

      Because PVSC local limits (and permit requirements) are expressed as concentrations and the metals credits traded are in pounds per day, it is necessary to convert from the effluent concentrations and volume of the seller to determine the quantity of each metal that can be sold. A buyer also needs to convert from the pounds per day of each metal purchased (minus 20 percent) back to a concentration level based on its discharge volume. To facilitate this step in developing trades, the Pilot Team provided each prospective trading partner with a series of sample calculations. These sample calculations are provided in Appendix B.

Trading Negotiations

      In developing a trading agreement, traders must negotiate in good faith. Yet it is quite possible for potential trading partners to approach negotiations with different assumptions on the type (and cost) of treatment that is appropriate, what costs should be shared, timing of the trade, and price. During the trading negotiations, the trading partners in this pilot discovered that they had little information to guide their negotiations. Because this type of trade had apparently never been done before in the United States, there was no precedent for various aspects of the agreement, including pricing, timing, and renewal terms. In addition, fewer than twenty potential trading partners had expressed an interest in trading, and this included only two potential sellers. This meant that the market for metal(s) credits within the PVSC service area was small and poorly defined, and the trading partners had to think through the ramifications of each option and determine how to address the issues on their own.

      The trading partners in this pilot worked together to identify each other's assumptions about the components of their agreement. Of particular importance were the issues that affected price. One issue was whether the buyer should share in the research and development costs, especially since this trade was negotiated and completed after the seller had researched and installed state-of-the-art equipment and the buyer had no involvement in choosing the equipment and evaluating whether it was possible to find a less-costly option. In retrospect, it is recommended that trading partners begin discussions very early in the process of preparing to meet new local limits, so that they have the opportunity to work together to develop the most cost-effective methods. For more information, see the "Timing" section below.

      The Pilot Team agreed that it was not the role of regulatory agencies to influence price and that the price could range from the marginal cost to the seller of further reducing its metals discharge to the cost the buyer would need to incur to reduce its discharge levels to comply with the new limits. Yet, beyond that, the trading partners realized that there were a number of ways one could think about trading and the resulting "appropriate" price could vary considerably. If the seller has already installed pretreatment measures, the income from selling the extra reductions could be considered a windfall gain (minus transaction costs of negotiations and legal fees). Buyers used this perspective to argue that the price should be fairly low. By purchasing metal(s) credits, the buyer, however, would be avoiding the cost (and risk) of installing and maintaining equipment (or other metals reduction measures) and minimize the possibility of exceeding the pretreatment limit. Thus, the sellers saw the value of purchased metal(s) credits to buyers as quite high, implying that the price should be high. It was also noted that the transaction could be viewed as a cost-sharing arrangement, assuming the selling price per metals credit would be close to the total cost of researching and installing new equipment divided by the number of credits "produced." This approach could still lead to differences over the "appropriate" price if the parties had differing views of appropriate technology and the associated costs differed significantly.

Trading Agreements

      Trading agreements are legally binding contracts between trading partners. The Pilot Team provided guidance to the potential trading partners to help them prepare trading agreements. This guidance noted that each agreement should contain the amounts to be traded (considering the 20 percent banking and their "worst case" operating conditions), the price and terms of payment, the time frame of the agreement, timing of renewals and adjustments, provisions for either party to end the agreement, and enough information on how each party would fulfill its obligations so that PVSC could evaluate the environmental credibility of the agreement. This guidance is presented in Appendix C. The specific elements of the trading agreement signed under this pilot project are outlined in Exhibit 4-1.

Approving the Trade

      Once the trading partners have negotiated the trade and developed a trading agreement, the details of the trade set forth in this agreement should be reviewed by the POTW to ensure that the partners will comply with the POTWs regulations. Specifically, the POTW should confirm that the seller has implemented appropriate treatment or pollution prevention measures to reduce the amount of the traded pollutant in its effluent, both trading partners are in compliance with other POTW requirements and can reasonably comply with the terms of the agreement (i.e., the permit limits resulting from the trade). Once the POTW approves the trade, it adjusts the permit limits of the trading partners, lowering the limit for the seller by the amount of the trade and raising the limit for the buyer by the amount of the trade minus the 20 percent that is banked.⁴

Other Elements of Trading

Timing the Development of a Trading Program

      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 limits are being developed or existing ones are being revised. That way trading partners can begin discussions early on in the process of planning how they will meet the new or revised limits. For example, it may be more economical to install additional treatment at one facility than at another, or certain types of treatment may be more economically feasible when trading is employed than when each facility institutes its own controls. Facilities may wish to explore the feasibility of joint ventures to evaluate and employ control measures. This early discussion would allow facilities to find the most economical ways of complying with their limits.

      If a POTW has established trading in its regulations, the concept of trading could also be introduced during enforcement actions as an alternative to the facility installing more pretreatment. Trading may also allow a facility to come into compliance more quickly.

POTW Credibility

      A strong compliance and enforcement program is an important factor in successfully implementing effluent trading because it sends the message to industrial users that they will be held accountable for carrying out the terms of their trading agreements, and serves to assure the public that the POTW can be trusted to effectively administer the program. As such, it is critical that the POTW has accurate and complete data to support its compliance and enforcement efforts and to enhance the credibility of its established local pretreatment limits. The POTW should have good records of the flow and pollutant loadings of each industrial permittee, a regular inspection system with complete documentation, and a record of prompt and effective enforcement of violations.

¹ US EPA, Office of Water (4102), EPA 800-R-96-001, May 1996.   GO BACK

² PVSC's rules adopted on September 30, 1994 set the minimum amount that could be traded at 1.0 pounds per day, the minimum increment was 0.5 pounds per day, and a seller could sell credits for a particular metal to as many as five buyers ("user sites"). On July 18, 1997, PVSC revised these amounts to a 0.1 pound per day minimum amount, 0.05 pound per day minimum increment, and a seller could sell credits for a particular metal to as many as ten buyers.   GO BACK

³ This reduction of traded pollutant loadings represents an added environmental benefit of the PVSC trading regulations. It is not required, however, and POTWs should apply these extra reductions carefully to avoid constraining opportunities for trades. (Draft Framework for Watershed-Based Trading, EPA 800-R-96-001, May 1996, pp. 6-10)   GO BACK

⁴ Each of the trading partners is then responsible for meeting its own adjusted permit level. Thus, one partner would not be penalized if the other trading partner has a violation. If one partner consistently fails to meet the permit levels set under the trade, PVSC may adjust the trade agreement and the associated permit limits.    GO BACK

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Last Revision: March 9, 2000
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