Chapter 5
This chapter discusses some of the organizational and social factors observed during the process of developing a trade in the PVSC service area. The Pilot Team believes that many of these factors are likely to affect other trades. Given the current organizational structures, roles, and practices among facilities and POTWs, and how these may change while using trading to reduce pollutant levels, it is important to understand these factors and their effect on trading local pretreatment limits to reduce uncertainties and develop a successful trading program.
Although trading has been allowed under PVSC's rules since September 1994, there were no substantive trading negotiations until more than two years later in February 1997 when the NJ Chemical Industry Project started to facilitate trading. The first trade occurred in July 1997. This lack of trading activity can be largely attributed to the many uncertainties that posed barriers to trading. How could a company identify other potential trading partners? How would those companies react if another company, especially a competitor, asked to make a deal with them on reducing pollution through effluent trading? What would a trading agreement look like? What effect would trading have on company operations? If one of the trading partners had a process upset or went out of business, how would that affect the permit of the other partner?
Trading of local pretreatment limits was such a new concept to companies that they seemed quite puzzled about how it would work. This confusion went beyond the basic mechanics of trading.
- Many companies, especially small companies, have only enough resources to keep up with the
minimum requirements from the various agencies they deal with. The relationships companies have
with regulatory agencies are generally straightforward: find out what the requirements are and
comply with those requirements or risk being fined or worse. They did not think they had the
resources to learn about a new approach, which seemed foreign.
- Most companies never discuss their operations with other companies. The need to guard
proprietary information and avoid any suspicion of collusion is a strong disincentive for
cooperation. Could a company disclose the minimum information necessary to effect a trade
without disclosing confidential business information?
- Some companies wondered if raising their profiles would attract increased scrutiny or
criticism. How would the POTW react to companies involved in a trade? Would there be any
increased inspections? How would environmental groups and the general public react to trading?
Would they see trading as a benefit or a threat to environmental quality?
- Companies sophisticated enough to understand the trading approach still wondered how they
could put the pieces together to implement a trade. Searching the POTW files to find suitable
trading partners, approaching companies they did not know to educate them on trading and ask them
to consider negotiating a trade, as well as figuring out all the attendant details, seemed
insurmountable.
- What about timing? Facilities that could be sellers were already meeting the new limits while the potential buyers were "under the gun" to meet the new requirements. Would the timing of trading negotiations, just months before the compliance deadline for the new requirements, affect their ability to negotiate a fair agreement?
In addition, the regulatory agencies initially perceived their roles as developing and disseminating information about trading and its advantages (a role for EPA) and developing and promulgating rules to allow trading (a role for PVSC). No agency saw hands-on facilitation of the trading process as its role. This added to the companies' perception that they would need to make a substantial effort if they wanted to trade, and they would have to do it alone.
These uncertainties, associated with every step toward effecting a trade, added to the perceived costs of trading.
The NJ Chemical Industry Project's Effluent Trading Pilot was able to overcome these uncertainties and help facilities to successfully complete a trade. Working in partnership with PVSC, NJ DEP, and EPA Region 2, the EPA-sponsored pilot project facilitated the process of identifying potential trading partners and negotiating a trading agreement. The project manager sent a letter (see Appendix D) to each of the industrial dischargers in the PVSC service area, asking if they would be interested in working with others to establish trading. Meanwhile, the Pilot Team worked out the details of what would be needed to help companies complete a trade. The interested companies were invited to a meeting where the group discussed:
- the process of developing a trade;
- what is and is not acceptable under PVSC rules;
- what to consider when developing a trading agreement;
- the review and approval process for trades;
- how the "banking" of effluent credits would work;
- how discharge permits would be changed to reflect trades; and
- how their permits would be affected by changes to a trading partner's status.
Many of these issues were addressed in a set of "questions and answers" developed by the Pilot Team (see Appendix E). After the meeting, each company was later sent a list with the names and phone numbers of all interested companies.
Still some barriers persisted. Many companies were unsure what the repercussions of trading would be. Some companies chose not to participate because they thought trading might provide a business advantage to their competitors. The minimum allowable amounts that could be traded were too high for many small companies. In response, PVSC reduced the minimum trading quantity and increment to allow smaller companies with less metals in their effluent to participate.
As previously discussed in Chapter 4, negotiations over the price of the trade were complicated - each company had a different view of what was fair. Some companies called EPA asking for guidance on price. The Pilot Team agreed that it would be inappropriate for a regulatory agency to influence the price of a trade. EPA agreed to look into hiring a neutral mediator if that became necessary, but it did not - the partners reevaluated their accounting and were able to forge an agreement.
One factor that affected the price negotiations was assumptions about what costs the trading price should cover. One of the sellers had researched and installed state-of-the-art equipment to reduce pollutant levels in its effluent, and believed the price should cover part of that development cost. Buyers believed they should not pay development costs, especially since they had no say in what control technology was used. Furthermore, they felt that their incremental costs of meeting the local limits outright would be less than the seller's development costs. All of the trading partners agreed that discussions about trading as a way to reduce pollutant levels should begin early - soon after local limits are found to be necessary - to allow them to develop the most cost-effective control approaches.1
The approaching June 30, 1997 deadline for meeting the new local limits placed more pressure on the potential buyers than the seller. The seller was already meeting the new local limits. The buyers were above the new limits, or below the new limits but close enough that they desired a "cushion" to cover process fluctuations. The buyers still had to find a way to ensure that they would be able to meet the new local limits by the June 30 compliance deadline.
In the end, two companies were able to negotiate an agreement. In describing the negotiations, the trading partners noted that they had known each other prior to initiating the tracking process and this was a great help in reaching an agreement.
Once PVSC reviewed and approved the agreement, PVSC modified the discharge permits for each company, effective July 1, 1997. Some additional companies may find that trading can be used to allow a cushion for fluctuations in their processes and production levels. Trading may also be an attractive alternative for companies that find they cannot meet the new local limits by other means.
Improving the Climate for Trading
Although the Pilot Team was successful in facilitating trading of local limits within the PVSC service area, it seems like only a small proportion of the companies that could meet their local limit requirements through trading actually considered doing so.
Is it Easier to Trade in Air?It seems that trading has caught on much more for air SO2 emissions trading than for water effluent trading. What are the differences between these programs? The most important difference seems to be the level of hands-on negotiations. See Appendix F for a comparison of some key differences between SO2 trading and trading local pretreatment limits. |
Are there actions that regulatory agencies can take to increase the number of facilities using effluent trading to meet local limits? Yes. For example, the Pilot Team can disseminate the lessons they learned from the Effluent Trading Pilot as is being done in this report and through articles and conferences. EPA can disseminate the lessons of this pilot to its Regional Pretreatment Coordinators and encourage them to take steps to increase the opportunity for trading in their Region, and can also encourage states and POTWs. States can get the word out to POTWs. POTWs can write their rules to allow trading (see PVSC's rules on trading in Appendix A) and then get the word out to their industrial users. As discussed above, many of the barriers to trading stem from uncertainties and fears of the implications of trading, not just the basic mechanics. Knowledge can help to reduce those fears.
Is forming an "Effluent Trading Team" similar to the one established for this Pilot Project an effective way to facilitate trading in other POTW service areas? Yes. Based on the experience of this project, local trading teams would be most effective in promoting trading at times when new or revised local limits are being developed and implemented. Each team, consisting of members from the local POTW, the state, and industry, could set out a process and guidance for trading within the POTW service area. (See materials used in this pilot in Appendices B, C, D and E.) Teams also could get the word out to local industrial users to let them know trading is an option for meeting their local limits and how they can participate, and disseminate lists of potential trading partners. Once the basic procedures are set and the information is sent out, the teams' role would be to answer questions and facilitate solutions to any problems that arise.
While the basic mechanics of effluent trading are relatively simple, it is important to recognize that trading requires organizations to think differently and alter their well-established relationships. These organizations are made up of people, and changing the way people operate and relate to each other will take some time and effort. Yet it is possible to do so and achieve the benefits that change can provide.
1 For more information on the trade negotiations, please refer to Chapter 4, Elements of a Successful Trading Program. GO BACK
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