Watershed-based trading is an innovative way for water quality agencies and community stakeholders to develop commonsense, cost-effective solutions to water quality problems in their watersheds. It is a flexible alternative that allows the communities within a watershed to grow and prosper while retaining a common commitment to water quality.

Communities, industries, and regulatory agencies around the country have shown great interest in watershed-based trading recently as an innovative approach to achieve water quality benefits in a more cost-effective manner than traditional approaches allow. Even with all the interest, actual implementation of trading programs has been limited. The EPA Draft Framework for Watershed-Based Trading provides a strong overview of the trading concept, but potential trading partners need more hands-on guidance to transform this concept into a viable, working trading program.

Effluent trading, watershed-based trading, and trading water quality improvements are terms that describe efforts by watershed stakeholders to identify the pollutant sources within a specified area, examine opportunities to reduce pollutant loads, and implement the load reduction opportunities to meet environmental objectives in a cost-effective manner. In a trade, one source (the buyer) pays or arranges for another source (the seller) to reduce its pollutant load below a specified level. In an exchange, the buyer receives credit toward its loading target, as if it had achieved the load reductions itself. The buyer may deal directly with the seller, or it may work through a third party; the seller may or may not be subject to an effluent limit or load allocation, depending on the type of program and how the parties agree to conduct business. Those involved in trading typically use the term "trade" to refer to a single transaction between two sources. The term "trading project" refers to one or a couple of trades, and the term "trading program" refers to a framework that can support numerous trades and trading projects over a long period of time.

There are three general approaches to trading: open or market-based, closed, and fully closed. Open trading is based on and supplemental to existing regulations, geared toward pre-total maximum daily load (TMDL), non-water quality limited segments. They are typically voluntary and often used to maintain ambient environmental standards and provide cost-effective means of complying with technology-based standards. Open programs can provide operational flexibility by allowing sources to compensate for production increases and offset growth in developing areas. Closed trading sets a limitation, or cap, on effluent discharge for a geographical area and for a specified group of dischargers. Unlike open trading, a fully closed trading system takes the closed trading concept and applies it to all effluent discharge sources in a given watershed. This TMDL-based approach sets the allocations for background, nonpoint, and point sources equal to the total permissible watershed load.

Open and closed trading programs offer tremendous opportunities for improving air and water quality at lower costs, providing operational flexibility, and encouraging the development of emerging technologies to control and measure/monitor discharges in the environment.

The Cherry Creek Basin Water Quality Authority's trading program in Denver, Colorado, offers a unique opportunity to comprehensively document development and implementation of a watershed-based trading program. This report focuses on the Cherry Creek program while highlighting several other trading programs. By identifying the similarities and differences in program design and linking those key elements to scientific, economic, and institutional conditions in the watershed community, this report examines some lessons, guidelines, and patterns emerging from the growing field of trading.