Pricing Water Pollution: Top 10 Lessons from Ontario’s Water Quality Trading experience

In my previous blog post I explained how water quality trading (WQT) works and how this market-based instrument enhances the cost effectiveness of pollution control policies. When applied successfully, WQT translates into net environmental benefits to watersheds and lower costs to pollutant dischargers than the ones incurred when just using technological upgrades to meet a regulatory standard. In this second blog post I identify the top 10 lessons learned from Ontario’s small – but significant – experience with WQT.

These lessons are by no means ranked in any order of preference or importance. In this list I recap insights gained during interviews with Ontario’s WQT program proposers and operators, including former policy makers and representatives from the Lake Simcoe, Nottawasaga and the South Nation conservation authorities.

1. Misconceptions exist- “WQT is just a license to pollute”: Program administrators explained that watershed residents often associated the terms “trading” and “credits” with a quick way to get away with further degrading already polluted water. Program proposers, including representatives from conservation authorities and the provincial government, organized multiple meetings with members of the watershed community in order to clarify misconceptions and explain that the main goal of a WQT system was to secure no net increase in nutrient loadings and, in many cases, achievement of an overall loadings’ reduction.

2. Simplicity works: Although in the US complex market structures have been established (including registries, multiple brokers and exchange markets), experience in Ontario suggests that simpler platforms can be used to achieve similar goals. To avoid transaction costs, developers purchase credits from the program administrator who in turn funds projects (decisions are made by a multi-stakeholder committee) that generate Phosphorus (P) reduction credits. This often increases the incentives of the credit generators to participate because they don’t have to spend time looking for a buyer or negotiate a credit price.

3. Scientists are your friends: For the two implemented WQT projects in Ontario (In the Nottawasaga Valley and South Nation River)- and the one currently being considered for the Lake Simcoe watershed – extensive studies were conducted to determine the existing pollution levels within a watershed and the different sources of pollution. Research was carried out in partnership with consultants and universities to calculate P reductions and scientifically estimate the number and types of projects needed to attain these reductions. Where there was uncertainty regarding the behaviour of a pollutant in a watershed, higher trading ratios were established. In the South Nation River there’s a 4:1 ratio- for every 1 Kg of P introduced into the water, 4 kg of P must be removed elsewhere in the watershed.

4. Think local: Although all the proposed and implemented WQT programs in Ontario have been developed to reduce water pollution associated to P loadings, each trading structure was designed in a way that would respond to physical, geographic, demographic and socioeconomic conditions unique to each watershed. It is also important to mention that WQT would not be suitable to every watershed in Canada. Among other things, there must be varying pollution reduction costs for different polluters in the watershed in order for trading to be an attractive and viable solution.

5. Invite people to the table: A crucial aspect to the South Nation River program’s success was effective engagement of different parties; including provincial government officials, municipal representatives, academics, agricultural associations and farmers. In this watershed, a multi-stakeholder committee makes decisions regarding the trading program and all site visits and project inspections are done by local farmers, which generally enhances communication and trust among participants. In Lake Simcoe, a Stakeholder Sounding Survey eventually led to simplification of the proposed WQT plan and to changing its name from a more complex market and credit terminology to just “P offsetting”.

6. Clearly define roles and responsibilities "Don't put the blame on me!”: A key document in the successful achievement of the trading program in the South Nation River was the “The Statement of Roles and Responsibilities”, which stated agreed to facts and established the trading ratio. Most importantly, it clearly defined the roles and responsibilities of each group and it absolved the supplier of the credit – normally the farmer – from liability should the buyer of credits be in non-compliance due to inadequate P reductions. Originally, farmers were weary of the scheme as they did not want to be blamed for the poor water quality. The Nottawasaga WQT scheme also adopted the same approach of absolving farmers from liability.

7. There’s no need to reinvent the wheel - the role of conservation authorities: In Ontario’s WQT experience,conservation authorities have played a central role as program administrators and sole brokers. Conservation authorities are community-based watershed organizations set up to manage the natural resources of watersheds in Ontario. As such, they have worked within the watersheds for many decades and have built trust with local landowners by working together on a wide range of conservation projects. They also have professional expertise as their projects are led by biologists, foresters, planners, engineers and water quality experts. With their experience and credibility it is reasonable that agricultural associations, landowners and regulators agreed to have them as administrators of the existing WQT programs. In other parts of Canada, where conservation authorities don’t exist, conservation and agricultural organizations – with a credible and long-standing relationship with local communities – could build partnerships in order to deliver similar trading programs.

8. A legal enabler is necessary: At the time when the South Nation River trading scheme was introduced in 1999, there were no legal parameters for WQT in Ontario. However, the Ministry of the Environment had stopped issuing discharge permits to wastewater treatment plants and a solution had to be found that would be cheaper and more efficient than simply making technological upgrades to point source dischargers. As a result of this zero discharge policy in the South Nation River, WQT was introduced. It wasn’t until 2008 when amendments were made to section 75 of the Ontario’s Water Resource Act to allow the Lieutenant Governor in Council to make regulations to establish WQT systems. The bringing into force of this amendment (It has not yet been brought into force) would be a significant step because it would be the first time WQT is legislated in Canada and could set the stage for a more expansive WQT strategy in Ontario.

9. Someone to champion your cause can go a long way: Despite the importance of a regulatory or policy driver, administrators and proponents of a WQT scheme often mentioned that without a Champion – a group or individual often in a position of authority in the government – that would advocate for trading water quality credits, these proposals would often fail to become a reality. In the Lake Simcoe watershed the development of WQT feasibility study was in great part made possible because the provincial government invested efforts to improve the lake’s water quality through the Lake Simcoe Protection Plan and supported innovative solutions – like WQT – to reduce nutrient loadings through its Showcasing Water Innovation program.

10. WQT is one tool in the toolbox: Like all other market-based mechanisms, WQT should not be considered as an alternative to regulation but rather as an economic instrument that can be used to compliment and build on other environmental regulations and policies; including implementation of discharge permits and pollution limits, education and training; and promotion of adoption of agricultural best management practices.

This wraps up my list. By looking at these local programs we see that WQT is not new to Canada; it has already been applied and proven to provide a flexible and cost effective way to reduce water pollution. By taking stock of lessons learned with Ontario’s local successes, other areas in the province – and the rest of the Canada – could consider the application of WQT as part of their broader water quality improvement strategy.

The findings used to write this 2-part blog form part of a more extensive project on Understanding Environmental Markets in Ontario. In it, we will explore the challenges and opportunities surrounding environmental markets in the province, including WQT. The project’s conclusions will be released in the form of a report coming out early next year.