Pricing Water Pollution: Water Quality Trading in Ontario

Ontario has lots of water. It’s a fact that the province holds about a third of the world’s fresh water. Unfortunately, it’s also a fact that elevated nutrient levels – particularly phosphorus – in Ontario’s streams, rivers and lakes pose a huge risk to this vital resource. Excessive phosphorus loads from industrial and agricultural sources can lead to algal blooms, which can threaten aquatic habitat and make water unsafe for swimming and drinking.

To address this, my colleague Michelle recently raised water pollution pricing as part of the solution to manage phosphorus releases to Lake Erie. She’s not the only one; Environmental Defense’s recent Clean, Not Greenreport also calls on the Ontario Government to look into market based mechanisms to tackle algal blooms in the Great Lakes. In a 2-part blog (this is 1 of 2), we’ll look at how water quality trading (WQT) can help keep water clean and the lessons that can be extracted by looking at Ontario’s small, but relevant, experience using this market-based tool.

Although we often hear about trading of greenhouse gas emissions (GHG) and carbon offsets, WQT schemes don’t get much news coverage. However, these have been used for over twenty years in different parts of the world as a way to allow participants to reduce water pollution at lower costs and with more flexibility than traditional regulatory approaches. In the United States there are over 23 WQT programs and transactions to date in these markets total over $94 million.

But what is WQT? And how does it work? It is a marked-based approach designed to improve water quality and in which pollutants are treated as commodities. Facilities with high water pollution reduction costs are allowed to purchase pollution reduction credits from other dischargers in the watershed in order to meet a regulatory standard. This provides greater flexibility and cost savings to market participants. Unlike GHG cap-and-trade systems, WQT schemes are usually localized and, to be successful, should be designed in a way that they respond to the unique conditions and needs of each watershed. Despite the particularities of each program, we can still divide WQT systems into two broad categories: closed systems and open systems.

The diagram below shows the differences between the two categories. In the first one, all market participants are regulated and must trade permits among themselves, whereas in an open system, voluntary participants can choose to enter the market and sell reduction credits – or offsets – to regulated players.

Point Sources: Point source dischargers are those facilities that discharge pollutants via a measurable and identifiable source such as a pipe. These include factories and wastewater treatment plants.

Non-Point Sources: Pollutants’ sources cannot be attributed to a single discharge pipe. Examples include runoff from municipalities, agricultural lands and golf courses.

In Southern Ontario, where the land has been expansively developed for agricultural and urban purposes, studies have shown that non-point sources are largely responsible for elevated levels of nutrients in the water. Regulating these non-point sources can be costly and inefficient, given the difficulties of tracking and monitoring these diffuse dischargers. For this reason, open WQT systems are a natural fit – they offer the possibility of combining regulation of point source emitters (such as wastewater treatment plants) with the creation of economic incentives for people to invest in water quality improvement projects for non-point sources (typically in agricultural lands).

The South Nation River Total Phosphorus Management is a small but significant WQT program, operating along the South Nation River watershed, just an hour south of Ottawa. This program was established in 1999 and represents Ontario’s – and Canada’s – first experience with WQT. In the South Nation River 90% of Phosphorus loads are attributed to non-point sources, mainly from agricultural lands. Under the program, regulated point source emitters – mostly municipal wastewater treatment plants – have the option to either increase their levels of treatment to minimize phosphorus loadings or offset any additional nutrient loads by funding less costly projects to reduce phosphorus elsewhere in the watershed. A similar program has also been implemented in the Nottawasaga watershed and a proposal to establish a phosphorus offsetting scheme is currently being considered for the Lake Simcoe region.

WQT approaches can provide clear economic advantages; in the South Nation River the costs of controlling non-point phosphorus loads are 7-10 times cheaper than controlling point sources. Similarly, the Nottawasaga’s nutrient trading program resulted in $10 million cost savings to the local municipality! Market-based approaches such as these work when the overall environmental benefit to a watercourse is equal, or even better, than the one achieved with just technological upgrades of point source dischargers – and can do so with greater flexibility and lower cost.

Stay tuned for my next blog where I’ll unveil the top 10 lessons that can be extracted from Ontario’s experience with WQT.

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.