Chapter 6
In the course of designing and implementing the Effluent Trading pilot, it became clear that the facilities' lack of familiarity with the concept of effluent trading and finding potential trading partners were significant barriers to establishing a successful trading mechanism.
Thus, in the initial stages of the pilot, the team was faced with several issues related to encouraging the concept of trading, including:
- What would be the process of informing potential traders that trading is allowable within
the current regulatory framework?
- How do we identify potential traders within a given sewer service district?
- How do we link potential buyers to sellers?
The Pilot Team conducted extensive outreach to PVSC industrial permittees to address these issues and facilitate the trading process. This outreach included sending a letter inviting PVSC's industrial permittees (IPs) to participate in a pilot project on trading local limits - either as a potential trader or an advisor - and convening a meeting of 20 potential traders in February 1997 based on the response to this letter.1 Following the meeting, the pilot team compiled and distributed a list of facilities that indicated some interest in trading. This list of potential traders included information on how to contact the facilities and indicated each facility's interest in the project - i.e., buyer or seller, specific metal and amount needed to buy or available to sell. Potential traders utilized this information in initiating trading negotiations with other participating facilities.
The Pilot Team maintained contact with all potential traders to provide assistance in expediting any trading negotiations. In some instances, potential traders had additional questions about the trading requirements; these conversations served as a good forum for continued information exchange. The Pilot Team provided potential buyers with important information on the requirements of trading and sellers and, in turn, potential traders provided the pilot team with updates on any trading negotiations.
At present, a buyer and seller have signed a trading contract for the exchange of copper credits. In addition, the Pilot Team expects that other facilities may pursue trading as a compliance strategy once they evaluate how effective their pretreatment equipment is in meeting the local limits. Some facilities may find that trading can provide a needed cushion between their pollutant discharge level and the local limits that allows for routine fluctuations in their processes and production levels. Others may find that they have achieved excess reductions by installing pretreatment upgrades and may wish to recoup some of their capital investment or operating costs by selling credits to other facilities. Companies also may discover that there are economy-of-scale benefits in developing a cooperative approach to pretreatment.
Despite this success, Pilot Team members have expressed concern that perhaps additional outreach measures and an increased focus on small volume dischargers would have attracted additional PVSC industrial permittees to the concept of effluent trading. Some of the Pilot Team's thoughts on ways to more effectively promote trading in future efforts are outlined below.
Lack of Information on Trading Programs and Potential Traders
The lack of information on trading programs is a significant barrier to facilities using effluent trading as an approach to meet their local discharge limits. In the case of the Effluent Trading Pilot, many PVSC permittees were unaware of existing PVSC regulations that allow trading. This was true despite the fact that PVSC had modified its regulations in 1994 to allow it, and had sent a copy of the modified rule and a fact sheet to each of its permittees. EPA's outreach letter to PVSC permittees served as an additional introduction to effluent trading for these facilities.
The Pilot Team has emphasized that additional outreach measures are needed to increase awareness of existing trading programs and assist in informing potential traders. Appropriate types of outreach to potential traders may include mailings, press releases, and articles in trade journals. These types of outreach, when used in combination, may be more effective than the single outreach letter used in this pilot.
As part of an outreach program, it would be important to develop and distribute guidance on trading. These materials could include:
- A list of qualifications for buyers and sellers.
- A technical guide on trading explaining the regulations and how to calculate trading
amounts.
- Common questions and answers about trading.
Lack of information about other potential traders is also a barrier to establishing trades. Potential traders have claimed that limited access to appropriate discharge monitoring data hinders their efforts to find partners. Although discharge monitoring data are available to the public, they are available only from the regulatory agencies (e.g., POTWs). Examining discharge monitoring data from a POTW is a time-intensive process, and potential traders regard this activity as a significant barrier to pursuing effluent trading options.
Presently, PVSC is in the process of developing a database that will include discharge monitoring data. This database may help facilities within this sewer district locate potential trading partners more easily, but not all POTWs or municipalities will have such extensive computerized records. One possible approach to improving the ability of facilities to find trading partners is to establish information clearinghouses that potential traders could contact to help identify potential trading partners within a particular sewer service area.
While increased access to monitoring data can help identify potential traders, these data are not always sufficient for this purpose. For example, these data can identify which facilities exceed a local limit and may be in need of purchasing effluent credits; however, the monitoring data for a facility that has already installed pretreatment or pollution prevention measures will show low pollutant discharges without providing any indication that the facility may be an eligible seller of effluent credits.
A possible solution to the limitations imposed by the nature of monitoring data involves the POTW playing a larger role in identifying potential sellers in one of two ways. First, POTW staff may be familiar with the compliance history of many of the facilities in the service district and, thus, have an initial indication of which ones have achieved excess reductions through the installation of pretreatment or pollution prevention measures and are potential sellers. Second, a POTW can actively promote the availability of trading and help buyers and sellers more readily identify themselves.
Small volume dischargers face additional barriers to establishing trading agreements. Small volume dischargers are often small companies that lack the resources to research and negotiate trades. Despite the Pilot Team's outreach efforts, only a few small volume dischargers actively pursued trading negotiations with a seller of metal credits. Small volume dischargers contacted as part of this pilot project expressed their interest in purchasing a small amount of metal credits (e.g., 0.1 pounds per day of copper). Some of these facilities have purchased new pollution control equipment that has not yet been proven to meet the new discharge limits. Therefore, purchasing a small amount of metal credits would provide these facilities with some cushion to ensure that they are in compliance. The need to purchase only a small amount of metal credits is also a result of their low effluent volumes - in some cases less than 5,000 gallons per day.
Small volume dischargers have also encountered some difficulty in pricing. It is difficult to obtain favorable pricing for small quantity trades because of the transaction costs.2 Also, because price information remains proprietary, potential traders do not have ample guidance for price negotiations. While this is true for both large and small companies, it seems to be a larger concern for small companies.
A brokerage service or consortium approach may help overcome these barriers. A trading broker could offer services of locating potential trading partners and conduct price negotiations with potential trading parties. In a consortium approach, a seller of credits could form a comprehensive trading arrangement among a group of facilities within a sewer service district. These techniques could serve as an incentive for small volume dischargers to seriously pursue trading negotiations.
Another potential solution to barriers encountered by small volume dischargers is for the POTW to assume a more active role in brokering or promoting trades. POTW staff are aware of discharge monitoring information for all IPs within their sewer service district and understand the regulations pertinent to potential trades. Therefore, POTWs may be well positioned to encourage trading by facilitating efforts to search for trading partners. For example, when new limits are proposed, POTWs could distribute information on which IPs might be interested in trading. This information could also be distributed to facilities that apply for new hookups to the POTW as a means of introducing them to trading. In addition, the POTW could provide this information as part of its enforcement response to violations.
1 The letter encouraged companies to participate in the pilot as advisors if they did not think of themselves as potential traders, but were simply interested in learning more about trading or in contributing their ideas on how to structure or encourage it. GO BACK
2 Possible transaction costs include management costs of negotiating a trade and the legal costs to prepare a contract. GO BACK
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