Water Pollution: Some States Have Trading Programs to Help Address Nutrient Pollution, but Use Has Been Limited

Nutrient pollution—caused by excess nitrogen and phosphorus entering water bodies—poses significant risks to the nation's water quality. Nutrients can enter water bodies from point sources and nonpoint sources. The Clean Water Act establishes the basic structure for regulating discharges of pollutants, including excess nutrients. Under the act, authorized states—assisted and overseen by EPA—set limits on nutrients impairing a water body and limits on point source discharges. EPA encourages states to use nutrient credit trading to address nutrient pollution. According to EPA, trading allows a point source to meet nutrient discharge limits by buying pollutant credits from a source that has reduced its discharges more than required.

GAO was asked to examine nutrient credit trading programs. This report describes (1) the extent to which nutrient credit trading programs have been used and what the outcomes of the programs have been, (2) how states and EPA oversee nutrient credit trading programs, and (3) what key factors stakeholders view as affecting participation in nutrient credit trading. GAO reviewed EPA documents and interviewed EPA officials to gather information on trading programs. GAO then selected a nongeneralizable sample of three programs with the most trades in 2014 (based on the most recent available data); reviewed program documents; and interviewed EPA, state, and program officials and other stakeholders about the programs.

In 2014, 11 states had 19 nutrient credit trading programs, and trading provided flexibility for some point sources, such as wastewater treatment plants, to meet nutrient discharge limits, according to Environmental Protection Agency (EPA) data and officials. The majority of nutrient credit trading during 2014 occurred in three state programs—programs in Connecticut, Pennsylvania, and Virginia. A review of trading data from these programs showed that most point sources participating in the three state programs did not purchase credits in 2014 to meet their discharge limits, which are established in National Pollutant Discharge Elimination System (NPDES) permits under the Clean Water Act. For the point sources that did purchase credits in 2014, state officials in the three states told GAO that the total amount in pounds of nutrients that point sources purchased as credits was generally small. Nevertheless, state officials explained that nutrient credit trading was useful because it allowed point sources to manage risk, reduce the cost of compliance, and better manage the timing of upgrades of nutrient removal technology.

States oversee nutrient credit trading programs, and EPA helps ensure that programs are consistent with the act. States oversee nutrient credit trading programs by approving and verifying the generation of credits to ensure that credits represent real reductions in nutrient pollution. A state's approval and verification process varies depending on whether the credit generator is a point or nonpoint source, such as runoff from agricultural and urban areas. For point sources, the states GAO reviewed followed a process for verifying credits that is based on the existing oversight process for NPDES permits. Because nonpoint sources do not have NPDES permits, states use a separate process to approve and verify that nonpoint sources' pollution reduction activities have generated credits for trading. When questions or concerns arise, EPA uses its oversight authority to ensure that trades and trading programs are fully consistent with the act. EPA officials told GAO that they conduct oversight primarily through the regional offices, which (1) review NPDES permits, (2) review and comment on state regulatory frameworks for trading, (3) conduct periodic on-site inspections, and (4) provide national-level guidance and training to state programs and stakeholders.

According to stakeholders, two key factors have affected participation in nutrient credit trading—the presence of discharge limits for nutrients and the challenges of measuring the results of nonpoint sources' nutrient reduction activities. Officials from the three states GAO reviewed and other stakeholders cited the importance of discharge limits for nutrients as a driver to create demand for trading. Without such a driver, point sources have little incentive to purchase nutrient credits. The challenges of measuring nutrient reductions by nonpoint sources create uncertainties about the value of credits generated by nonpoint sources. In part, because of these uncertainties, the states GAO reviewed either did not allow nonpoint sources to trade or created special rules for nonpoint sources. State officials and stakeholders also told GAO that even if a program allows nonpoint sources to trade, point sources often prefer to trade with other point sources because they have similar permit and monitoring requirements.

Nutrient pollution, caused by excess nitrogen and phosphorus entering  the environment, poses significant risks to the nation’s water quality and  presents a growing threat to public health and local economies. Excess  nutrients can enter water bodies from point sources, such as industrial  facilities and wastewater treatment plants, and from nonpoint sources,  such as runoff from agricultural and urban areas. Nutrient pollution  contributes to a trend of increasing numbers of harmful algal blooms in  surface waters. These blooms can release toxins that can contaminate  drinking water sources and adversely affect recreation, tourism, and  fisheries. For example, in 2014, about 500,000 residents of Toledo, Ohio,  lost access to public drinking water for 4 days because of algal toxins in  the city’s drinking water. The National Aquatic Resource Surveys,  conducted by the Environmental Protection Agency (EPA) and state and  tribal partners, have shown that nutrient pollution is a widespread issue  affecting the nation’s waters. The 2012 survey of lakes, issued in  December 2016, found that 40 percent of the nation’s lakes had high  levels of phosphorus and 35 percent had excessive levels of nitrogen  associated with harmful ecological impacts.

The Clean Water Act, enacted in 1972, establishes the basic structure for  regulating discharges of pollutants, including excess nutrients, into the  waters of the United States and regulating quality standards for surface  waters. The act requires states to establish water quality standards that  protect public health and the environment and consider aquatic wildlife  and human consumption and recreation, among other uses. The act also  requires EPA to maintain and improve water quality by assisting and  overseeing states’ efforts, among other responsibilities. States are  required to monitor and assess the conditions of water bodies, and those  that do not meet state water quality standards are considered impaired.  The Clean Water Act generally requires states to develop a pollutant  budget, known as a “total maximum daily load” (TMDL), for each pollutant  impairing a water body. In the case of nutrient impairment to a water  body, a TMDL would reflect the maximum amount of that nutrient that the  water body could contain and still be considered in compliance with water  quality standards.

The act also made it unlawful to discharge any pollutant except in  compliance with law, which requires that point sources must obtain a  permit before discharging into navigable waters. Through its National  Pollutant Discharge Elimination System (NPDES) program, EPA requires  every point source to hold a permit limiting pollutant discharges, including  discharges of nutrients where appropriate. Under the act, EPA can  authorize state, tribal, and territorial governments to implement the  NPDES program, enabling them to develop NPDES permits and enact  other administrative and enforcement aspects of the NPDES program.  Currently, 46 states and one territory are authorized to administer and  enforce the NPDES program. For these entities, EPA retains oversight  responsibilities at multiple levels across the agency, including its  headquarters and 10 regional offices, and carries out those  responsibilities by establishing monitoring requirements, enforcement  provisions, and reporting requirements.

Unlike point sources, nonpoint sources are not subject to regulation under  the Clean Water Act. Nonpoint source pollution, including pollution from  nutrients, remains a leading cause of impairment of the nation’s waters,  according to EPA. In 1987, Congress amended the Clean Water Act,  adding section 319 to explicitly address nonpoint source pollution through  a cooperative, grant-based program with states, which funds projects to  reduce nonpoint source pollution and restore impaired water bodies.  Through this program EPA awards federal funds to states to develop and  implement nonpoint source management programs.

In recent years, EPA has called on states and stakeholders to take further  actions that support or enhance the agency’s efforts to reduce nutrient  pollution’s effects on public health. As part of this effort, EPA has  continued to support water quality trading as an approach to help address  nutrient pollution. Water quality trading can address water quality  impairments from sediments and temperature, but most often trading is  used to address nutrients; specifically, total nitrogen and total  phosphorus. This type of water quality trading is also known as nutrient  credit trading and is the focus of this report. According to EPA, nutrient  credit trading allows a point source to meet its obligations for compliance  with a nutrient discharge permit limit by purchasing pollutant reductions,  or credits, created by another source or sources that achieved nutrient  reductions beyond what was required often through a market-based  approach. In their role as NPDES permitting authorities, states take the  lead in developing nutrient credit trading programs. Sellers of nutrient  credits may be point or nonpoint sources, depending on the framework of  an individual trading program. In 1992, when we last reported on water  quality trading to address water pollution, we identified four trading  programs nationwide, with only one trade made at the time of the report’s  issuance. The limited activity in water quality trading nationwide was  attributed largely to uncertainties surrounding the use of trading. Since  2003, EPA has developed policy and guidance to facilitate the  development of water quality trading programs. In 2013, EPA and the  U.S. Department of Agriculture (USDA) signed a partnership agreement  to implement and coordinate policies and programs encouraging water  quality trading.

You asked us to review issues related to nutrient credit trading. This  report (1) examines the extent to which nutrient credit trading programs  have been used and what the outcomes of the programs have been, (2)  describes how states and EPA oversee nutrient credit trading programs,  and (3) describes what key factors stakeholders view as affecting  participation in nutrient credit trading.

To examine the extent to which nutrient credit trading programs have  been used and what the outcomes of the programs have been, we first  reviewed an internal EPA list of water quality trading programs and  estimated trades for 2014, the most recent data available at the time we  conducted our review. EPA officials explained that the data reported by  states to EPA varied somewhat in completeness and consistency. For  example, not all programs reported data on the number of trades for  calendar year 2014. To gather additional information about EPA’s list of  programs, we emailed or interviewed officials from all 10 EPA regions to  obtain confirmation on the presence or absence of trading programs in  each state in 2014. We identified 7 EPA regions that had some form of  water quality trading program in one or more of the states in their regions.  We interviewed EPA regional officials to determine which of the programs  (1) included point sources with NPDES permits that allowed for water  quality trading and (2) were established for the specific purpose of trading  nutrient credits (i.e., nutrient credit trading programs). From this list of  nutrient trading programs, we then selected a nongeneralizable sample of  three programs to examine in more detail. We selected three programs  that in 2014 had the most trades and the most participating point sources.  Because these programs were judgmentally selected, the results of our  review of these programs cannot be generalized. To gather information  about the establishment and structure of the programs, number and type  of trades in 2014, and outcomes of the programs, we reviewed program  documents. Specifically, we reviewed state laws and regulations, NPDES  permits, watershed implementation plans, program rules and policies,  annual summaries of nutrient credit purchases and sales, and  assessments of state trading programs when available. We also  interviewed state and program officials and other stakeholders  knowledgeable about these programs.

To describe how states and EPA oversee nutrient credit trading  programs, we reviewed relevant federal laws, regulations, and EPA  policies and guidance related to nutrient credit trading. We also  interviewed agency officials from EPA’s Office of Water and the 7 EPA  regions with nutrient credit trading programs. In addition, we reviewed  documents and interviewed state and program officials and other  stakeholders for our nongeneralizable sample of three nutrient credit  trading programs.

To describe what key factors stakeholders view as affecting participation  in nutrient credit trading, we spoke with officials from EPA’s Office of  Water, officials from the 7 EPA regions with nutrient credit trading  programs, and officials and stakeholders from the nongeneralizable  sample of three nutrient credit trading programs. We also reviewed  documents and interviewed officials for one nongeneralizable multi-state  trading program to provide an additional example of the key factors and  how they affect participation in nutrient credit trading programs. Finally,  we interviewed representatives of stakeholder groups, such as those  representing wastewater treatment facilities, national organizations for  water issues, and agricultural conservation districts. Appendix I contains  more detailed information on the objectives, scope, and methodology of  our review.

We conducted this performance audit from August 2016 to October 2017  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

This section provides a brief background into nutrient pollution, federal  and state activities to address water pollution, and nutrient credit trading.

According to EPA, nutrient pollution is one of America’s most widespread,  costly, and challenging environmental problems. Nutrients are natural  parts of aquatic ecosystems that support the growth of algae and aquatic  plants, which provide food and habitat for fish, shellfish, and smaller  organisms that live in water. However, when too many nutrients enter the  environment, often as the direct result of human activities, the air and  water can become polluted. The primary sources of nutrient pollution are  fertilizer, animal manure, wastewater treatment plants, power plants,  storm water runoff, cars, detergents, failing septic tanks, and pet waste.  (See fig. 1.)

Too much nitrogen and phosphorus in surface waters can cause algae to  grow faster than ecosystems can handle. Significant increases in algae  can harm water quality and habitats. Large growths of algae, called algal  blooms, can severely reduce or eliminate oxygen in the water, leading to  the illnesses and death of large numbers of fish. Some algal blooms are  harmful to humans because they produce elevated levels of toxins and  bacteria that can make people sick if they come into contact with or drink  contaminated water or consume tainted fish or shellfish. According to a  2016 memorandum from EPA, nutrient pollution contributes to a trend of  increasing numbers of harmful algal blooms in surface waters and  consequentially a growing threat to public health and local economies.  For instance, in 2016, algal blooms occurred along U.S. coastlines from  Alaska to Florida, closing beaches, affecting tourism and local  economies, and resulting in a state of emergency declaration in four  coastal counties in Florida and more than 250 health advisories  nationwide.

Federal and State Activities to Address Water Pollution

The Clean Water Act establishes a nationwide approach improving and  maintaining the quality of rivers, streams, lakes, and other surface water  bodies. Under this approach, states—overseen by EPA—are to set water  quality standards, monitor water quality, and assess water quality against  the applicable standards. Water quality standards define the water quality  goals of a water body, or portion thereof, by designating the use or uses  to be made of the water and by setting criteria necessary to protect the  uses. These standards establish an additional legal basis for controlling  pollution entering the waters of the United States from point sources,  such as wastewater treatment plants. Water quality standards include  the following, among other things: designated uses of the water body, such as the protection and  propagation of fish, shellfish, and wildlife;  criteria to protect designated uses, such as specific criteria or levels  for toxic or nutrient pollutants that could harm aquatic life; anti-degradation requirements that describe the conditions under  which water quality may be lowered in surface waters while still  protecting existing uses and high quality waters; and other general policies to address implementation issues.

To protect a water body’s designated uses, a state must establish  numeric criteria, or, where numeric criteria cannot be established or as a  supplement to them, narrative or biomonitoring criteria. EPA has  encouraged states to incorporate numeric criteria into water quality  standards and TMDLs for water bodies with nutrient impairments because  they require less interpretation to implement than narrative criteria.  Numeric criteria express precise, measurable levels of particular  chemicals or conditions allowable in a water body. In contrast, narrative  criteria express in a qualitative form how to protect a designated use of a  water body. Narrative criteria often describe the desired conditions of a  water body as being “free from” certain negative conditions. For instance,  to protect a designated use, narrative criteria could require that a  particular water body be free from floating non-petroleum oils of vegetable  or animal origin. According to EPA, under most circumstances, water  quality criteria that limit specific toxic pollutants are expressed  numerically. However, according to EPA officials, most water quality  criteria that limit nutrient pollutants are expressed narratively. EPA has  provided support to states on how to develop numeric criteria through  written guidance, webinars, and workshops. According to EPA officials  and data, however, there has been limited state progress in developing  numeric criteria for nutrients. As of 2017, six states had at least one  statewide numeric criterion for either nitrogen or phosphorus for some  water bodies.

Through the monitoring and assessment process, states are to identify  water bodies that do not meet established water quality standards and  are therefore considered to be impaired. The Clean Water Act generally  requires—for each water body that a state has identified as impaired— that the state develop a TMDL for each pollutant impairing the water  body. A TMDL reflects the calculation of the maximum amount of a pollutant that a water body can receive, while meeting and continuing to  meet water quality standards for that particular pollutant. A TMDL  determines a pollutant reduction target and allocates load reductions  necessary to meet that target to both point and nonpoint source(s) of the  pollutant, although under the Clean Water Act only point sources can be  required to reduce pollutants. For a point source, legal discharge limits  based on the targets identified in the TMDL are incorporated into an  NPDES permit. An NPDES permit can be issued as an individual permit  to a single facility, written to reflect site-specific conditions of that facility,  or as a general permit for multiple facilities with similar operations and  types of discharges. For example, Connecticut uses a general permit to  implement the Long Island Sound TMDL. This permit authorizes 79  wastewater treatment facilities to discharge nitrogen into the sound and  includes a specific nitrogen limit for each facility.

Under the Clean Water Act and EPA’s regulations, states or EPA can  typically determine the most appropriate geographic area and pollutants  for each TMDL. The Chesapeake Bay TMDL is the largest TMDL that  EPA has developed. This TMDL identifies the necessary nutrient pollution  reductions across the bay jurisdictions, which encompass seven states in  a 64,000-square-mile watershed, and comprise 276 smaller TMDLs for 92  individual Chesapeake Bay tributaries. Similarly, the Long Island Sound  TMDL identifies the necessary nitrogen pollution reductions for parts of  Connecticut and New York that discharge into the sound. In contrast,  many TMDLs cover a single water body, such as a lake or a segment of a  river.

Unlike its approach for point sources, the Clean Water Act’s approach to  curtailing nonpoint source pollution is largely voluntary. One of the  primary ways that EPA addresses nonpoint source nutrient pollution is  with the section 319 program. Through this grant-based program, EPA  funds voluntary projects aimed at reducing nonpoint source pollution,  particularly runoff from agricultural production. Grants from this program  support a wide variety of activities including the development and  implementation of best management practices (BMP), which are used to  reduce or eliminate the introduction of pollutants into receiving waters.  Some common agricultural BMPs include planting strips of trees or  shrubs along stream banks to serve as buffers or planting cover crops,  such as clover, in fields near water bodies to reduce nutrient runoff.

EPA also encourages states to use nutrient credit trading to help address  nutrient pollution. Nutrient credit trading programs are designed to allow a  point source to purchase pollutant reduction credits from another point  source or a nonpoint source in the same watershed with the intent of  meeting the discharge limits established in an NPDES permit. These  limits establish a baseline that credit generators must discharge below  before they can sell credits. According to EPA guidance, point sources  that exceed their discharge limit can buy credits to be compliant with their  permits, and point sources that have discharged below their limits can sell  credits. Because the Clean Water Act does not require nonpoint sources  to meet nutrient reduction targets established in a TMDL, there is no  demand to buy credits. However, nonpoint sources can sell credits in  some programs once these sources have reduced pollution below the  targets established in the TMDL for the watershed or geographic area. To  provide states with guidance on developing and implementing trading  programs, EPA issued its Water Quality Trading Policy in 2003 and its  Water Quality Trading Toolkit for Permit Writers in 2007. According to  the EPA toolkit, states have the flexibility to structure a trading program to  meet state needs including the type of entities allowed to trade; the types  of pollutants traded, such as nutrients; and the mechanism for carrying  out the trades. Additionally, the legal and policy framework for trading  programs can vary.

The Clean Water Act does not explicitly identify trading as an option to  comply with NPDES permits. According to EPA’s guidance, however, the  act provides authority for EPA and states to develop a variety of programs  and activities to control pollution; including trading programs, provided  that these programs are consistent with the act. For instance, trading  must not violate any of the act’s provisions, such as the anti-degradation  policy, which maintains and protects the existing uses of water bodies, or  the anti-backsliding policy, which prohibits the modification of existing  NPDES permits with less stringent standards than those established in  the previous permit.

Eleven States Had Nutrient Credit Trading Programs in 2014, and Trading Provided Flexibility for Some Point Sources to Meet Nutrient Discharge Limits in the 3 States We Reviewed

According to EPA data and interviews with EPA officials, in 2014, a total  of 19 nutrient credit trading programs existed in 11 states. The majority of  nutrient credit trades occurred in 3 states—Connecticut, Pennsylvania,  and Virginia. Most point sources participating in these 3 state programs in  2014 did not purchase credits. However, EPA and state officials and  stakeholders told us that trading provided point sources with flexibility that  allowed them to manage risk, reduce the cost of compliance, and better  manage the timing of upgrades of their nutrient removal technology.

Eleven States Had a Total of 19 Trading Programs in 2014, and 3 States Accounted for the Majority of Trades, According to EPA

In 2014, a total of 19 nutrient credit trading programs existed in 11 states,  according to EPA data and interviews with EPA officials. These 11 states  were California, Connecticut, Florida, Georgia, Idaho, Minnesota, North  Carolina, Ohio, Pennsylvania, South Carolina, and Virginia. Three of the  states—Georgia, Minnesota, and North Carolina—had more than one  nutrient credit trading program. Each program covered a specific  watershed, portion of a watershed, municipality, or permit holder (see fig.  2). See appendix II for a list of the 19 programs.

EPA documents and officials indicated that trading may be less viable in  some locations than in others. EPA’s documentation discusses factors  that can affect the viability of trading. For example, trading should occur  within an area—such as a watershed—that is appropriately defined to  ensure that trades will maintain water quality standards within that area.

In a 2008 evaluation of water quality trading, EPA identified other  location-specific conditions that influence whether trading occurs,  including the regulatory environment, the nature of participants, and  watershed characteristics. EPA officials in Region 9 explained, for  example, that they do not see strong demand for nutrient credit trading in  their region because there are not many nutrient impaired watersheds  with a favorable combination of point sources that need credits and willing  credit generators.

Trading activity varied among the 19 programs. According to EPA data,  not every state with a trading program had trades in 2014. According to  EPA data and officials, the majority of nutrient credit trades occurred in 3  states—Connecticut, Pennsylvania, and Virginia—which were also the  largest programs in terms of the number of participating point sources.  According to state data and officials, the number of trades in these states  in 2014 ranged from 31 to 151. (See table 1.)

Under EPA guidance, each state has the flexibility to establish or approve  a nutrient credit trading program or programs to meet its own situation.  The three programs we reviewed are each structured somewhat  differently. Specifically, see the following:

Connecticut adopted legislation for a nutrient trading program in  2001. The state also issued a general permit in 2002 that allows 79  point sources in the Long Island Sound watershed to trade nitrogen  credits. Connecticut’s program does not allow nonpoint sources to  generate credits. All nutrient credit trades are automatically processed  annually by the state credit exchange, known as Connecticut’s  Nitrogen Credit Exchange Program. Connecticut state officials  explained that, at the end of the year, the exchange compares each  point source’s total pounds of nitrogen discharged to its discharge  limit. Each point source that discharges less than its limit receives a  payment from the exchange. Each point source that discharges more  than its limit—and thus would be out of compliance with the general  permit if it failed to secure credits in a timely manner—is billed for the  credits needed to bring it into compliance with its discharge limits.  Because these transactions are conducted annually, the number of  trades reported for Connecticut in 2014 is the same as the number of  participating point sources that purchased credits in 2014.

Pennsylvania established its trading policy and guidance in 2005.

The state issues individual NPDES permits to point sources that allow  for trading both nitrogen and phosphorus credits in the Chesapeake  Bay watershed. In this program, both point sources and nonpoint  sources may generate credits to sell to point sources for compliance  with permit limits. Like Connecticut, Pennsylvania has an exchange  for buying and selling credits, which is called PENNVEST. Unlike  Connecticut, the exchange does not automatically conduct trades at  the end of the year. Instead, point sources and nonpoint sources can  choose whether to use the exchange to buy or sell credits, or whether  to conduct sales outside the exchange. Pennsylvania officials told  us that sales typically occur outside the exchange. According to  Pennsylvania officials, the proportion of trades going through the  exchange has been less than 10 percent annually since 2014.

Virginia established its trading program through state legislation in  2005. The state uses a general NPDES permit that allows point  sources within the Virginia portion of the Chesapeake Bay watershed  to trade nitrogen and phosphorus credits. The general permit does not  normally allow point sources to use credits generated by nonpoint  sources for compliance with the general permit. Point sources  covered under this permit generally trade with each other through the  Virginia Nutrient Credit Exchange Association, although there can be  a handful of bilateral trades, according to Virginia officials and state  data.

Most Point Sources Participating in the Three State Programs We Reviewed Did Not Purchase Credits, but Trading Provided Flexibility, According to Officials

In the three states we reviewed, most point sources participating in the  trading programs did not purchase credits to meet nutrient discharge  limits, according to state data and officials. Officials from each state  explained that many point sources have upgraded their nutrient removal  technology in order to help them meet discharge limits. For example, from  2002, when Connecticut’s trading program began, through 2014, 53 of  the 79 point sources in Connecticut’s trading program had invested in  new technology to improve nutrient removal, according to state  documents. As a result, many of those point sources generate nutrient  reductions that they can sell as credits and do not usually need to  purchase credits, according to state data and officials. Most point sources  in the three states we reviewed did not purchase credits in 2014. (See  table 2.)

The percentage of point sources in those trading programs that did  purchase credits to meet discharge limits ranged from 14 to 49 percent,  depending on the state. Specifically, see the following:  In Virginia, 14 percent of point sources in the trading program  purchased credits in 2014—the lowest percentage in the states we  reviewed. Virginia officials told us that few point sources purchased  credits because many point sources upgraded their nutrient removal  technology before implementing the TMDL in anticipation of the  stricter discharge limits and were able to meet discharge limits without  purchasing credits.

In Pennsylvania, 29 percent of point sources in the trading program  purchased credits in 2014. Officials in Pennsylvania told us, however,  that the demand for credits has continued to drop as point sources  upgrade their nutrient removal technology. They said that most point  sources that were planning to upgrade have done so.

In Connecticut, 49 percent of point sources in the trading program  purchased credits in 2014—the highest percentage of the states we  reviewed. According to Connecticut’s 2014/2015 program report, the  number of point sources that bought credits in 2014 was due to (1)  increased discharges from three large wastewater treatment facilities  that were under construction that year and (2) cold weather that  affected the ability of point sources to remove nutrients from their  discharges using biological processes. For comparison, 35 percent of  point sources bought credits in Connecticut in 2015. A member of the  Nutrient Credit Exchange Advisory Board in Connecticut told us that  since the program began in 2002, the number of point sources that  have needed to buy credits has generally decreased over time as  these facilities have upgraded their nutrient removal technology. State  officials expect this trend to continue in the future as more point  sources complete their technology upgrades.

For the point sources that did purchase credits in 2014, state officials in  the three states we reviewed told us that the total amount (in pounds) of  nutrients that point sources purchased as credits to meet their individual  discharge limits was generally small relative to the aggregate discharge  limits (see table 3). In addition, the number of credits purchased by point  sources was generally much less than the number of credits generated  (see table 4). However, because the three programs collect data  differently, we could not make comparisons across all three states for  both measures. Specifically, for two of the states—Connecticut and  Virginia—we were able to compare the amount (in pounds) of nutrients  purchased to the aggregate discharge limit, but we did not have  comparable data for Pennsylvania. For the number of credits purchased  relative to the number of credits available, we were able compare the  data for Pennsylvania and Virginia, but we could not make the  comparison for Connecticut. Nevertheless, the available state data show  that the amount (in pounds) of nutrient credits purchased in these three  programs in 2014 was generally small.

The state data for 2014 showed that the amount of nutrient credits  purchased in these three programs was generally small. Specifically, see  the following:

Point sources participating in Connecticut’s nutrient credit trading  program in 2014 purchased about 645,000 pounds of nitrogen credits  to meet individual discharge limits. In total, point sources in the  program had an aggregate discharge limit of about 3.3 million pounds  for nitrogen. Point sources in Connecticut purchased the most pounds  relative to the aggregate discharge limit among the states we  reviewed—about 20 percent. However, in 2014, point sources  removed far more nutrients—5.3 million pounds of nitrogen—than the  645,000 pounds purchased.

Point sources participating in Virginia’s nutrient credit trading program  in 2014 purchased about 164,000 pounds of nitrogen credits and  35,000 pounds of phosphorus credits to meet individual discharge  limits. In total, point sources in the program had an aggregate  discharge limit of about 19 million pounds for nitrogen and 1.6 million  pounds for phosphorus. Therefore, the pounds of nitrogen and  phosphorus traded in Virginia in 2014 represented about 1 percent  and 2 percent, respectively, of the aggregate discharge limit for these  nutrients. In addition, the number of credits purchased by point  sources in Virginia was less than the number of credits generated.  Specifically, point sources in Virginia purchased about 164,000  nitrogen credits out of 6 million nitrogen credits generated, and about  35,000 phosphorus credits out of 797,000 phosphorus credits  generated.

Officials in Pennsylvania told us that the amount of nutrients traded in  their program was small relative to the aggregate discharge limits, but  they could not provide data in terms of pounds that we could use to  make the comparison. However, data from Pennsylvania show that  the number of credits purchased by point sources was generally much  less than the number of credits generated. Specifically, point sources  in Pennsylvania purchased about 805,000 nitrogen credits out of 1.9  million nitrogen credits generated, and about 85,000 phosphorus  credits out of 111,000 phosphorus credits generated.

In the three states we reviewed, most credits sold were generated by  point sources, not nonpoint sources. As previously discussed,  Pennsylvania was the only state we reviewed that allowed nonpoint  sources to generate and sell credits. Of the credits sold in Pennsylvania,  a relatively small percentage was sold by nonpoint sources. Specifically,  nonpoint sources sold 36 percent of all nitrogen credits purchased in  2014 and 11 percent of all phosphorus credits. According to state  officials, there were seven nonpoint source sellers of credits, including at  least four sellers that aggregate credits generated by multiple agricultural  operations.

Although most point sources in these states did not buy credits in 2014,  EPA officials, state officials, and point source stakeholders told us that  nutrient credit trading was important because it gave point sources  flexibility in meeting nutrient discharge limits. According to officials and  stakeholders, this flexibility allowed point sources to manage risk, reduce  the cost of compliance, and better manage the timing of upgrades of point  sources’ nutrient removal technology. Specifically, see the following:

Managing risk. Although each point source’s permit contains specific  discharge limits, a point source’s actual discharge varies from year to  year. For example, an official from the Virginia Nutrient Credit  Exchange Association explained that point sources will forecast their  anticipated discharge over a 5-year period. However, there can be  considerable variance from the forecast for any given year because  of, for example, unpredictable weather, which can upset biological  nutrient removal processes. Therefore, nutrient trading gives point  sources insurance against unexpectedly high discharges by allowing  them to “true up” at the end of the year by buying credits from point  sources that discharged below their limits. This reduces the risk that  an individual point source faces noncompliance with its permitted limit.

Reducing the cost of compliance. Stakeholders said that upgrading  nutrient removal technology to meet discharge limits is economically  feasible for some point sources but is potentially unaffordable for point  sources with fewer financial resources and smaller economies of  scale. For example, one point source credit buyer in Connecticut told  us that the buyer’s facilities had invested in upgrading nutrient  removal technology, but any additional upgrades to meet the  discharge limits would not be economically feasible. The buyer  explained that, within a trading program, those point sources with  lower pollution control costs can generate additional reductions in  pollution, which they can use to generate credits to sell to those point  sources with higher pollution control costs. As a result, trading can  make nutrient reduction efforts more cost-efficient system-wide.

Managing the timing of upgrades. Trading helps point sources  better manage the timing of upgrades to their nutrient removal  technology, according to state officials and point source stakeholders.  For example, a point source stakeholder in Virginia told us that it  would have been difficult for all point sources to upgrade at once to  meet the new discharge limits established in the NPDES permit under  the TMDL, since there was a limited pool of engineers and  construction companies that could install these upgrades, and that  trading gave point sources time to schedule upgrades over several  years. Additionally, in Pennsylvania, a point source credit buyer  explained that the point source planned to complete a multi-year $34  million upgrade of its facilities in 2017 to meet discharge limits that  came into effect in October 2012. To meet discharge limits in the  meantime, the point source developed a program to purchase  nitrogen credits from local nonpoint sources that would implement  cover crop conservation practices to generate the necessary  reductions. Therefore, trading allowed the point source to meet  discharge limits during the period it was planning and completing the  upgrade.

Although nutrient credit trading has provided point sources with flexibility  in meeting discharge limits, trading is not responsible for reducing nutrient  pollution, according to EPA, state, and other stakeholders. These  stakeholders told us that pollution reduction largely results from nutrient  discharge limits in permits and the nutrient removal technology that point  sources invest in to meet or reduce below those limits.

States Oversee Nutrient Credit Trading Programs by Approving and Verifying Credit Generation, and EPA Reviews Permits That Allow for Trading

States oversee nutrient credit trading programs by approving and  verifying credit generation to ensure that credits represent real nutrient  pollution reductions. EPA reviews permits, conducts periodic evaluations  of point source facilities to ensure that trading is consistent with the Clean  Water Act, and issues national-level guidance for nutrient credit trading.

States Approve and Verify Credit Generation

States oversee nutrient credit trading programs by approving and  verifying credit generation to ensure that credits represent real nutrient  pollution reductions. A state’s approval and verification process varies  depending on whether the credit generator is a point or nonpoint source.  For point sources, the states we reviewed followed a process for verifying  credits that is based on the existing oversight process for NPDES  permits. Because nonpoint sources do not have NPDES permits, states  use a separate process to approve and verify that nonpoint sources’  pollution reduction activities have generated credits for trading.

Process for Approving and Verifying Point Source Credits

States we reviewed approve credit generation by point sources by  including language that allows for trading in point sources’ individual or  general NPDES permits. In Connecticut and Virginia, point sources  covered under the states’ general permits are automatically approved to  generate nutrient credits for trading. In Pennsylvania, point source  facilities with language that allows for trading in their individual permits  and that meet requirements in the state’s watershed implementation plan  are approved to generate credits. In all three states, the language that  allows for trading in these permits includes the individual discharge limit  for each point source, which is called a baseline, for trading purposes.  An approved point source is able to generate credits when it reduces its  discharge below its baseline.

To verify point source credits, the states we reviewed each use an  oversight process based on its NPDES authority to oversee permits that  include discharge monitoring and reporting, and inspections. Federal  regulations require point sources with NPDES permits to periodically  monitor compliance with the effluent limitations established in their  permits and report the results to the permitting authority. Specific  monitoring and reporting requirements, including the frequency of  monitoring, are included in each permit. State officials in the three states  we reviewed all told us that they use discharge monitoring reports to  determine how many credits a point source has generated. For example,  according to the terms of the general permit for nutrient discharges in  Virginia, point sources must sample nitrogen and phosphorus from one  time per month to three times per week, depending on the volume of  discharge. By February 1 of each year, point sources must submit total  annual nitrogen and phosphorus discharges to the Virginia Department of  Environmental Quality using a discharge monitoring report, which covers  discharges during the previous calendar year. State officials in Virginia  told us that they review these reports for data quality and determine which  point sources generated credits and which point sources must buy credits  to meet discharge limits. Any credits that point sources intend to use for  compliance during the previous calendar year must be purchased by  June 1.

In addition, state officials in all three states told us that they conduct  periodic inspections of point source facilities to ensure that facilities are  appropriately monitoring and reporting nutrient discharges as required  under their permits. For example, officials in Pennsylvania told us that for  point sources, the state’s Department of Environmental Protection  conducts periodic inspections of point sources to ensure that they are  meeting requirements that allow them to generate credits. These officials  said that they generally inspect each facility at least once per year.

Process for Approving and Verifying Nonpoint Source Credits

In Pennsylvania, according to state officials and program documents,  such as state regulations, a nonpoint source that seeks to generate  credits must submit a request for credit certification. The request includes  a description of how the nonpoint source intends to reduce nutrient  pollution, such as through a BMP, and information about steps the  nonpoint source will take to verify the credits including any relevant  calculations, maps, and photographs. State officials review the request for  technical acceptability and consistency with program requirements before  approving credit generation.

To verify nonpoint source credits after the credit-generating activity has  taken place, officials in Pennsylvania told us that they review information  about the performance of that activity, such as a BMP. According to the  Pennsylvania Department of Environmental Protection’s website, officials  review documentation to ensure that the credit-generating activity was  implemented as described in the verification plan submitted with the  certification request, and that all program requirements are met. In  addition to reviewing documentation, officials may conduct activities such  as monitoring the credit-generating activity, inspecting sites, and  performing compliance audits. For example, as part of the verification  process, a nonpoint source credit generator official told us that they had  to provide before and after photos of the cover crop that was intended to  prevent nutrient pollution in a local water body. They said that they  provided documentation that the crops were planted at a certain time and  were the appropriate types of crops. In addition, they provided  calculations related to the crops planted and types of soil they were  planted in, before the credits could be verified.

EPA Reviews Permits and Conducts Periodic Evaluations of Point Source Facilities to Ensure That Trading Is Consistent with the Clean Water Act

EPA oversees trading programs as part of its oversight of NPDES to  ensure that they are fully consistent with the Clean Water Act and its  implementing regulations, in particular when questions or concerns arise,  according to EPA policy. EPA officials told us that they conduct oversight  primarily through the regional offices, which (1) review NPDES permits;  (2) review and comment on state regulatory frameworks for trading; and  (3) evaluate point source facilities by collecting discharge information and  conducting periodic on-site inspections to ensure, for example, that  sampling and record keeping practices are in order. Additionally, EPA  headquarters provides national-level guidance and training to state  programs and stakeholders.

According to EPA officials, EPA’s regional offices review NPDES permits  that allow for trading to ensure that these permits meet the standards of  the Clean Water Act and are consistent with EPA’s policy and guidance  on trading. The regional offices can object to these permits, if necessary.  EPA can request changes to permits to ensure that they align with federal  requirements. Although EPA does not review every NPDES permit, it will  generally review permits that allow for trading because these permits  could be considered more complicated, controversial, or challenging,  according to EPA officials.

In the states we reviewed, officials told us that EPA has reviewed NPDES  permits that allow for trading and has at times requested that states make  changes to the permits. For example, officials in Pennsylvania told us that  EPA has reviewed 180 permits from large facilities in the state’s trading  program and objected to 14 of them, requiring state officials to modify  those permits. Officials in Virginia said that EPA has reviewed its general  permit that allows for nutrient credit trading. Virginia officials said that,  during the most recent EPA review, the agency issued a formal objection  to the permit and asked the state to increase the sampling frequency in  the permit’s monitoring guidelines. As a result, Virginia modified the  permit to satisfy EPA’s request.

Review of State Regulatory Frameworks for Trading and Evaluation of Facilities

In addition to reviewing NPDES permits, EPA regional officials told us that  they review and comment on states’ regulatory frameworks for trading.  Officials said that they review these frameworks to identify any issues in  developing and implementing the programs and that they request that  state permitting agencies make changes when necessary. For example,  in 2012, EPA Region 3 completed reviews of all six states and the District  of Columbia in the Chesapeake Bay watershed, including the trading  programs for both Virginia and Pennsylvania. After reviewing  Pennsylvania’s trading program, EPA raised concerns about the state’s  calculation of the baseline for nonpoint source credit generation. In  response to EPA’s concerns, officials in Pennsylvania told us that they  made changes in the way nonpoint source credits are calculated.

EPA’s involvement in reviewing state trading frameworks can vary,  according to EPA and state officials. For example, because of specific  authorities written into the Chesapeake Bay TMDL, EPA Region 3 plays a  very active role in reviewing state trading programs, according to officials  from Region 3. By comparison, Connecticut state officials told us that  since EPA Region 1 granted its initial approval of Connecticut’s trading  program, there has been little direct involvement by EPA in overseeing  the program.

Stakeholders in the states we reviewed and EPA regional officials told us  that EPA conducts periodic evaluations of point source facilities by  collecting discharge monitoring data and conducting inspections.  Officials at EPA Region 3 told us that they conduct inspections of  facilities, review records and sampling procedures, and evaluate credit  generators. A nutrient credit generator in Pennsylvania told us that EPA  has audited the facility’s process for converting nutrient-rich manure into  energy, mineral products, and nutrient credits. State officials in Virginia  and Connecticut told us that they report nutrient discharge data to EPA  for review.

In addition to oversight activities conducted by the regions, EPA conducts  some oversight of nutrient credit trading at the national level. EPA’s  oversight at the national level involves: (1) setting national guidance for  trading, (2) offering training on nutrient credit trading to state officials and  stakeholders, and (3) periodically collecting some data on nutrient credit  trading programs. Specifically, see the following:

Guidance. EPA has issued three documents that provide guidance to  states to assist them in developing and implementing nutrient credit  trading programs: EPA’s 2003 Water Quality Trading Policy; the 2004  Water Quality Trading Assessment Handbook; and the 2007 Water  Quality Trading Toolkit for Permit Writers, which EPA updated in  2009.

Training. EPA has offered training for NPDES permit writers to help  them better understand how to write NPDES permits that incorporate  provisions for nutrient credit trading, according to EPA officials. EPA  and USDA also sponsored a 3-day water quality trading workshop in  September 2015 in Lincoln, Nebraska, on a range of different subjects  related to water quality trading. According to the workshop’s summary  document, over 200 attendees participated, including water resource  professionals; third-party environmental market makers; academics;  representatives of federal, state, and local governments;  representatives of non-governmental organizations; and agricultural  and environmental stakeholders.

Data collection. According to EPA officials, there is no requirement  for permittees to report data about trading programs at a national level  and EPA has no systematic way to collect this information. However,  EPA manually collects some trading data, such as the names of  programs with permits that allow for trading, which provides the  agency with a general understanding of the extent to which trading is  being used nationally. Officials told us that they plan to update  national trading data at least every 2 years and make them available  online in the fall of 2017.

The Presence of Discharge Limits and the Challenges of Measuring Nonpoint Sources’ Nutrient Reductions Affect Participation in Trading Programs, According to Stakeholders

Stakeholders cited two key factors that have affected participation in  nutrient credit trading—the presence of discharge limits for nutrients and  the challenges of measuring nutrient reductions resulting from nonpoint  sources’ implementation of BMPs.

First, officials from the three states we reviewed, and other stakeholders  we interviewed, cited the importance of discharge limits for nutrients as a  driver to create demand for nutrient credit trading. Without such a driver,  point sources have little incentive to purchase nutrient credits. According  to EPA guidance, discharge limits—most commonly established in a  TMDL—are the leading driver for nutrient credit trading markets. For the  Pennsylvania and Virginia programs, the nutrient discharge limits are  established in the Chesapeake Bay TMDL. For the Connecticut program,  nutrient discharge limits are established in the Long Island Sound TMDL.  The TMDL nutrient discharge limits are ultimately translated into  discharge limits in the NPDES permits for point sources.

Pennsylvania officials explained how discharge limits serve as a driver for  trading. Officials stated that although the state established its nutrient  trading program in 2005, the TMDL for Chesapeake Bay was not  established until 2010. Officials noted that in the first years of the  program, little trading took place because point sources did not have to  meet nutrient discharge limits. Once EPA established the TMDL for the  Chesapeake Bay—and Pennsylvania established discharge limits for  point sources in the NPDES permits—demand for nutrient credit trading  increased, according to Pennsylvania officials. Officials explained that if  point sources had not yet upgraded their nutrient removal technology, and  could not meet the NPDES permit discharge limits, they could buy  nutrient credits to comply with discharge limits. EPA officials added that  demand for trading could increase over the long term because of  economic or population growth.

In addition to programs in the three states, we also reviewed a program in  the Ohio River Basin where nutrient credit trading activity has been  limited, according to program officials. This multi-state trading program  allows point and nonpoint sources in Ohio, Indiana, and Kentucky to  generate and sell nutrient credits, and was designed as a pilot to test  nutrient credit trading in case discharge limits were established. Program  officials told us that while some credits have been generated and sold,  participation in the program has been limited because there is no  requirement—in either a TMDL or numeric water quality standards—for  the point sources in these states to meet discharge limits. As the program  is currently implemented, they said that credits are not purchased by point  sources to comply with discharge limits but rather by corporations to meet  internal sustainability goals or by philanthropists who want to invest in  BMPs that address nutrient pollution in the Ohio River Basin.

Unlike point sources, the Clean Water Act does not require nonpoint  sources to meet nutrient discharge limits established in TMDLs or  numeric water quality standards, and as a result, EPA said there is no  federal regulatory driver creating demand for nonpoint sources to  participate in nutrient credit trading programs.

The second factor affecting participation in trading programs relates to the  challenges of measuring nutrient reductions that result from nonpoint  sources’ implementation of BMPs. According to EPA officials and  guidance, federal and state agencies typically do not directly monitor  nonpoint source pollution or the effectiveness of BMPs because the  diffuse nature of nonpoint source pollution makes monitoring costly and  impractical. Instead, agencies and other stakeholders rely on models to  estimate the amount of pollution discharged by nonpoint sources and the  effectiveness of BMPs. These models incorporate information about  variables such as land use, soil type, and precipitation to estimate the  amount of nutrients that will be reduced as the result of implementing a  specific BMP. Even with these models, EPA guidance recommends that  the programs use a rule that calls for nonpoint source credit generators to  generate credits at a greater than a one-to-one basis to account for  uncertainties in modeling. According to this guidance, the rule can also  mitigate other uncertainties such as how well BMPs are designed and  maintained and the risk of a BMP failing to produce the expected results.

In part because of this uncertainty, two of the states we reviewed did not  allow nonpoint sources to generate credits in their programs. State  officials in Connecticut told us that it was easier for Connecticut to  implement nutrient trading with point sources, as their discharges are  easy to quantify. State officials in Virginia told us that point source to  nonpoint source trading is complicated and they felt that they could meet  their TMDL reduction goals solely with point source reductions.

Pennsylvania does allow nonpoint sources to generate and sell credits  but the state has developed a rule to help address some of these  uncertainties. Specifically, Pennsylvania implemented a rule in 2016  requiring nonpoint sources to generate three nutrient credits for every  nutrient credit sold. This rule was developed as an interim step to address  EPA’s concern that the state’s calculation of the baseline for nonpoint  source credit generation was not consistent with the reductions needed to  meet the Chesapeake Bay TMDL goals. Pennsylvania’s rule, however,  appears to have reduced the use of nonpoint source credits. State  program data show that in 2016 approximately 115,000 nitrogen credits were available from nonpoint sources after the implementation of the rule,  almost one-third the approximately 381,000 nitrogen credits that were  available in 2014. An official at a wastewater treatment facility in south  central Pennsylvania told us that the rule increased the cost to generate  nonpoint source credits and reduced the number of nonpoint source  credits available in Pennsylvania’s trading program. Specifically, to meet  its discharge limits in 2014, this facility purchased approximately 75,000  nitrogen credits, 52,000 of which were generated from local farmers who  installed BMPs on their land. In 2016, after the rule was implemented, the  same facility purchased 95,000 nitrogen credits, only 5,000 of which were  generated from local farmers. According to the point source officials, they  could no longer rely solely on purchasing credits generated from local  farmers because there were fewer nonpoint source credits available to  purchase in 2016. To meet the discharge limit, this facility purchased the  remaining credits they needed from other point sources because nonpoint  source credits were not available. Pennsylvania officials told us that the  decline in the number of nonpoint source credits is mostly due to the new  rule. However, they said that other factors such as the low price of credits  have also decreased the incentive to generate nonpoint source credits.

According to EPA officials, the program should implement a stricter  baseline, based on the pollution reduction targets established in the  Chesapeake Bay TMDL. Pennsylvania officials told us that if they make  the baseline requirements stricter, there may be no incentive for nonpoint  sources to generate credits because it would be much more difficult to  meet the minimum requirements and the cost of generating credits would  be prohibitive.

State officials and stakeholders also told us that even if a program allows  nonpoint sources to trade, point sources often prefer to trade with other  point sources because they have similar permit and monitoring  requirements and are both legally liable for meeting discharge limits.  Trading between point sources provides buyers with the assurance that  the credits they purchase represent actual reductions and can be used for  compliance with an NPDES permit.

On September 12, 2017, we provided a draft of this report to EPA for  review and comment. On September 29, 2017, EPA responded by email  stating that its Office of Water had reviewed the draft report and EPA had  no comments.

We are sending copies of this report to the appropriate congressional  committees, the Administrator of the Environmental Protection Agency,  and other interested parties. In addition, the report is available at no  charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, please  contact me at (202) 512-3841 or gomezj@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff members who made key  contributions to this report are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

This report (1) examines the extent to which nutrient credit trading  programs have been used and what the outcomes of the programs have  been, (2) describes how states and the Environmental Protection Agency  (EPA) oversee nutrient credit programs, and (3) describes what key  factors stakeholders view as affecting participation in nutrient credit  trading.

To examine the extent to which nutrient credit trading programs have  been used and what the outcomes of the programs have been, we first  spoke with EPA headquarters and EPA regional officials and reviewed  EPA data. EPA does not have a formal definition for water quality trading  programs, of which nutrient credit trading is a subcategory, and is not  required to keep information on these programs. EPA periodically gathers  some limited information on trading programs, including the type of  trading program, location, facilities participating, and estimated trades.  The most recent data EPA had at the time we conducted our review were  for 2014. EPA officials explained that the completeness and consistency  of the data reported by states to EPA varied somewhat. For example, not  all programs reported trading data for calendar year 2014. To verify the  accuracy of EPA’s list of trading programs, we interviewed or e-mailed  officials from all 10 EPA regions to confirm the presence or absence of  trading programs in each state in 2014. For the 7 EPA regions with some  form of trading program in their regions, we interviewed regional officials  to gather more information about the type of trading conducted and  whether there was trading activity in 2014.

Using EPA’s information as a starting point, we developed a modified list  of nutrient credit trading programs that existed in 2014. For our modified  list, we excluded two programs, one from Region 5 and one from Region  10, from EPA’s data that did not trade nutrient credits. Based on our  discussion with EPA officials, we also excluded trading programs that let  residential septic system owners “trade” credits to encourage wastewater  treatment facilities to take their systems online. We also excluded one  program that included three states—the Ohio River Basin Interstate  Water Quality Trading Project —because none of the participating states  have discharge limits in their permits. In the process of interviewing EPA  regions, we also added one program from Region 4 and two programs  from Region 5 that EPA officials told us had been inadvertently left off  EPA’s 2014 list.

From this list, we then selected a nongeneralizable sample of the three  nutrient credit trading programs—Connecticut, Pennsylvania, and  Virginia—which appeared to have done the most trading and had the  most participating point sources in 2014 for a more detailed examination.  Because these programs were judgmentally selected, the results of our  review of these programs cannot be generalized. For these three  programs, we reviewed state laws and regulations, National Pollutant  Discharge Elimination System (NPDES) permits, watershed  implementation plans, program rules and policies, annual summaries of  nutrient credit purchases and sales, and assessments of state trading  programs when available. We also interviewed state and program officials  and other stakeholders, such as point source and nonpoint source credit  generators and buyers, to gather information on the programs, including  structure, participants, number and type of trades, authorizing  mechanisms, and outcomes.

Specifically, to determine the number of trades we asked each state for  its official list of trades from 2014, the most recent year for which we  could get complete data from all programs. We counted each time a point  source purchased credits as one trade. In addition, we asked states to  provide us the number of point sources that purchased credits and the  number of point sources in the trading programs, which we used to  determine the percentage of point sources that purchased credits. The  states post the number of point sources that purchased credits online,  and the number of point sources in the program is identified in state  documents.

We also asked the states for the number of credits purchased and the  aggregate discharge limit for point sources to determine the percentage  of credits purchased in pounds of nutrients relative to the aggregate limit.  The aggregate discharge limit is the maximum allowable discharge for  point sources in the program. Because this limit represents the maximum  amount of pollution allowable to meet water quality standards, it served  as a point of reference for comparing the amount of discharge that was  traded. We took these numbers from state records, and they are derived  from the total maximum daily load, according to EPA policy. According to  Virginia and Connecticut officials, in their programs one credit is equal to  one equalized or delivered pound of pollution—that is, a pound of  pollution after accounting for the delivery ratio. Pennsylvania could not  provide us the number of pounds purchased. According to Pennsylvania  officials, a nutrient credit does not equal a pound of pollution in their  program because they use trading ratios, such as delivery ratios. This  means that credits generated from different sources represent different  nutrient reductions depending on where they are relative to the polluted  water body. However, the aggregate discharge limit does not represent  the pounds of nutrients that could have been traded, since the volume of  trading was limited by the supply of credits, which was less than the  aggregate discharge limit in Virginia and Pennsylvania. Specifically, to  show this, we used state data on the number of credits generated and  compared them with the number of credits purchased. Connecticut does  not have data on the number of credits available. To assess the reliability  of the state data, we visually reviewed the data for completeness and  interviewed state officials responsible for collecting and using data about  their quality assurance protocols and their confidence in the data. We  found the data to be sufficiently reliable for our purposes and confirmed  all final numbers with state officials.

We interviewed state program officials in all three states to better  understand the extent to which nutrient credit trading programs have  been used and what the outcomes have been. During these interviews,  we discussed the management of the programs, reviewed state trading  data, and discussed the benefits and challenges of nutrient credit trading.  We visited Pennsylvania to meet with program officials and stakeholders.  Specifically, we met a representative of a credit aggregator that buys and  sells credits from nonpoint source generators and toured a wastewater  treatment facility that generates credits and a facility that generates  nutrient credits by processing chicken manure into energy. We also spoke  with buyers and sellers of nutrient credits in Connecticut and officials from  the nutrient credit exchange in all three states. We did not audit these  state trading programs or analyze their effectiveness or efficiency in  meeting discharge limits or water quality standards.

We also conducted a literature review of academic and economic  journals. We searched peer-reviewed journals for articles published from  2011 through 2016 discussing water quality trading or nutrient credit  trading. We did not find any additional trading programs in the United  States that had not already been identified.

To describe how states and EPA oversee nutrient credit programs, we  reviewed relevant federal laws, regulations, and EPA policies and  guidance related to nutrient credit trading. We reviewed state  requirements for implementing the NPDES program, under the Clean  Water Act and implementing regulations, which defines responsibilities  applicable to states that serve as permitting authorities for overseeing  point source permittees’ monitoring and reporting. These same authorities  are used by states to oversee state trading programs. The Clean Water  Act does not specifically authorize water quality trading, according to EPA  officials; however, EPA has developed trading guidance for states  interested in developing trading programs. We reviewed this guidance,  specifically, EPA’s 2003 Water Quality Trading Policy and 2007 Water  Quality Trading Toolkit for Permit Writers. We also reviewed state  documents, such as watershed implementation plans, that identify trading  program rules, and interviewed state officials and other stakeholders for  our nongeneralizable sample of three nutrient credit trading programs. In  our interviews we asked state officials how they oversee their trading  programs. In particular, we asked how they approve point and nonpoint  sources to generate credits, verify that a credit represents a real reduction  in nutrient pollution, and monitor the buying and selling of credits to  ensure that permit obligations are met. We also interviewed officials from  EPA’s Office of Water and the 7 EPA regions with nutrient credit trading  programs and asked them to describe EPA’s oversight role at the regional  and national level.

To describe what key factors stakeholders view as affecting participation  in nutrient credit trading, we spoke with officials from EPA’s Office of  Water, the 7 EPA regions with nutrient credit trading programs, and  officials and stakeholders from the nongeneralizable sample of three  nutrient credit trading programs. In addition, we reviewed documents and  interviewed officials for one nongeneralizable multi-state trading program  in the Ohio River Basin. We reviewed this program to better understand  the key factors that can affect participation in nutrient trading programs.  We interviewed officials from the institute that developed the program and  corresponded with state officials from Kentucky and Ohio, two of the  states involved in the Ohio Basin program. Finally, we interviewed  representatives of stakeholder groups, such as those representing  wastewater treatment facilities, national organizations for water issues,  and agricultural conservation districts to get a broad perspective on the  key factors that affect participation in nutrient credit trading programs.

Appendix II: Nutrient Credit Trading in the United States in 2014

We identified 19 nutrient credit trading programs in 11 states and seven  Environmental Protection Agency regions, in 2014.The 11 states that  had programs are: California, Connecticut, Florida, Georgia, Idaho,  Minnesota, North Carolina, Ohio, Pennsylvania, South Carolina, and  Virginia (see table 5).

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the individual named above, Janet Frisch (Assistant  Director), Chuck Bausell, Mark Braza, Ellen Fried, Patrick Harner, Karen  Howard, Greg Marchand, Emily Ryan, Jason Trentacoste, and Daniel Will  made key contributions this report.  .

Nitrogen and phosphorus naturally occur in water bodies such as rivers and lakes. Wastewater from factories and runoff from streets and farms can add more of these nutrients to water bodies, degrading water quality.

Some states limit the amount of nutrients that certain pollution sources can discharge. Eleven states have "credit trading" programs that allow sources to meet their limits by buying credits from sources that are below their limits.

While few pollution sources have traded credits, the programs offered flexibility to some sources to meet their limits until they can upgrade their pollution removal technology.