June 26, 2002

Environmental Protection Agency's Proposed Water Quality Trading Policy

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Proposed Water Quality Trading Policy

Stated Purpose:

To accelerate support of permit-trading for improving water quality

Summary of RSP Comment:

The U.S. EPA's announced intention to accelerate support of permit-trading for improving water quality is timely and commendable (67FR34709). The timing is right because the standard technology-based regulatory approaches, born in the 1970s, cannot meet the challenge for controlling nonpoint-source pollution or for achieving meaningful gains in the control of point-sources. These approaches also lack the flexibility needed to serve as a foundation for building water-shed or river-basin approaches for managing improved water quality. They lack incentives for the discovery and implementation of superior water pollution control strategies.

Improvements in information technology now make it possible to monitor outcomes at lower cost and, therefore, to emphasize river basin and watershed management as opposed to managing point sources. These same improvements in information technology also make it possible to realign responsibility for improving water quality. States, localities, and watershed associations can experiment with a variety of institutional arrangements, incentive systems, and technical innovations. The federal EPA can focus its efforts on monitoring outcomes, achieving consistency in the measurement of water quality, and sharing the knowledge that is learned from experience.

EPA’s permit trading proposal provides an excellent opportunity for the agency to draw on 30 years’ experience with input regulation and to venture forward with a rich set of outcome-focused control experiments. On the basis of our review of experience with trading and the possibilities offered by the proposal, we offer the following recommendations:

  • EPA’s permit trading policy should focus strictly on outcomes, not on inputs.
  • The new permit trading policy should be expanded to include and encourage the use of all forms of economic incentives.
  • The EPA should allocate agency resources to the improvement of watershed modeling capabilities.
  • The agency should pursue modification of the Clean Water Act to allow, by statute, alternate institutions for improving water quality.

Having come up with a new and improved way to pursue water quality goals, the EPA needs to engage in some creative destruction--it should make an effort to phase out, or to delegate, those aspects of its water quality regulations that have become obsolete and are standing in the way of progress in improving water quality.