Nature of Activity: The Michigan Department of Environmental Quality is developing a rule for a Water Quality Trading Program, a statewide, voluntary program aimed at improving water quality through trading. A participating source could generate credits to trade with other sources by reducing its effluent load below levels required by water quality-based effluent limitations. Trading could occur among sources in a watershed under one of two general scenarios, termed by the State as "closed trading" or "open trading." "Closed trading" may occur in situations after a loading cap and allocations have been established for sources in a watershed, either through a TMDL or through a TMDL-equivalent watershed management plan. "Open trading" may occur in situations where a source faces a water quality-based effluent limitation, but where an overall cap and allocations to watershed sources (through a TMDL or a TMDL-equivalent watershed management plan) have not yet been established. Open trading may occur either in an area where water quality standards are being attained (in which case the source likely faces a water quality-based limitation because of anti-degradation concerns) or in an area where standards are not yet attained (in which case the water quality-based limit probably exists so as to obtain progress toward attainment in advance of a TMDL or equivalent). Under any of these situations, some fraction of the credits generated when a source implements reductions below required levels must be retired and will be unavailable for trading.

Environmental Problem: The program would protect water quality in areas where standards have been attained, or contribute to attainment (often in conjunction with TMDLs or watershed management plans) in areas where standards have not yet been achieved.

Pollutant(s) / Pollution Type(s): The rule is designed for nutrient trading. However, trading for other types of pollutants and cross-pollutant trading may be approved on a case-by-case basis.

Trade Types: The rule is designed for point/nonpoint and point/point trading, however intra-plant trades would be allowed on a case-by-case basis.

Stage of Implementation: The rule has been under development since the mid-1990's. The latest draft of the rules was presented to the MI DEQ Surface Water quality Division management in September, 1999. Formal rulemaking is expected to begin by early 2000. The program is expected to be fully operational by mid 2000.

Relation to TMDL: MI DEQ is proposing to allow two kinds of "closed" trading -- when a cap and allocations for the sources have been established either through a TMDL or through a TMDL-equivalent watershed management plan.

Number of Potential Participants: Many under this State-wide program.

Trading Ratios: 10% of point source reductions and 50% of nonpoint reductions will be retired. An additional percentage of each trade may be retired depending on factors such as distance from the receiving waters.

Estimated Cost Savings: Modeling of the Saginaw Basin predicts savings of $10 - $20/lb of phosphorus reduced.

Available Written Information: A 1998 report by the Great Lakes Trading Network and a feasibility study by the MI DEQ Surface Water Quality Division. The MI DEQ web site on trading contains a full text of the draft rule. The next Great Lakes Trading Network report is expected in December, 1999.

Innovative Aspects: The rule would allow both "closed" and "open" trading. A trading registry would be established and made public. The rule would establish strict and dual liability for generators and users of credits, and penalties for failure to generate promised reductions. A large portion of traded credits would be retired, contributing to environmental progress.

Obstacles: Lack of information, misperceptions about trading, and differences between the State and EPA over what may be legally permissible.

Web Sites: Michigan: http://www.epa.gov/surf2/states/MI

Contact: David Batchelor, MI DEQ, (517) 373-2677, batcheld@state.mi.us