Spinning Water Quality Trading: Pros and Cons

I recently came across two sources using language to spin water quality trading as a good thing, and as a real baddie. The Pros come from a Washington Post editorial spinning water quality trading as a means to improve water quality, and the Cons come from a Food & Water Watch press release with really loaded language painting water quality trading as the worst thing since mortgage-backed derivatives. Let the spinning begin!

Photo source: flickr sparktography

Pros (source: Washington Post editorial 9/30/2012):

Cost-efficiency: “The potential of a trading system to reduce pollution and save money is too great for state governments to ignore… A farmer who can cheaply cut his runoff beyond what regulators require could be awarded credits and sell those to a nearby water treatment plant that would have to install very expensive equipment to meet its required cuts in pollution. The farmer makes money, the plant saves money and the EPA’s pollution cap is met efficiently. A May study from the Chesapeake Bay Commission… estimated that such a program applied across the bay’s watershed could reduce cleanup costs by as much as 36 percent — if properly executed.”

Verification and monitoring: “One answer to the critics is that all the transactions that occur under the trading program are subject to EPA approval, and the agency can reject any that would unreasonably foul local waters. Another is that trading could save many tens of millions of dollars a year. If a slice of that goes to monitoring and verifying claimed reductions in pollution, the system would have more integrity, and everyone could still come out ahead.”

Cons (source: Food & Water Watch press release 10/3/2012):

It’s not authorized in the Clean Water Act: “This “pay-to-pollute” trading program represents a dramatic departure from the successful industrial pollution controls established by the Clean Water Act (CWA)… However, the trading provisions of this plan are not authorized under the CWA and likely means that the Bay will remain polluted for decades to come…”

Unmonitored/unverified: “The TMDL, as finalized, allows for unmonitored “nonpoint” sources of pollution, mainly agricultural operations, to claim unverified reductions in nitrogen and phosphorus discharges and sell these alleged reductions to “point” source industries like power plants and wastewater treatment plants.”

Anti-financial services industry sentiment: “Why would we put Wall Street, the same industry that brought us the financial crisis, in charge of protecting the Bay? ….It’s essentially an entitlement program for the financial services industry and polluters.” (-Food & Water Watch Executive Director Wenonah Hauter) “We cannot rely on the worst polluters of the Bay and Wall Street traders to lead the efforts to revive this invaluable natural resource.” (-Friends of the Earth President Erich Pica) The Obama administration has been promoting water quality trading, which is favored by the financial services industry…”

IMHO this last point is an extreme hyperbole. The US financial services industry represents 15% of market capitalization of the S&P 500 or around $1.9 trillion annually. The tiny amount of water quality trading that might go on… even if it amounted to something in the ballpark of the annual sales of mitigation credits in the US… would amount to 0.10% of the financial services industry.