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Water-quality trading opens the door for nonprofits to restore ecosystems, then sell those benefits to a wastewater utility.
Nature can provide the most cost-effective, energy-efficient water treatment processes on the planet. A simple row of trees planted along a streambank, for example, can cool the water and mitigate algae blooms, reducing the need for expensive filtration technology. Also called nature-based solutions, green infrastructure protects, restores, or mimics natural water systems. The concept is gaining traction: utilities recognize that they can eliminate the need to build or upgrade energy-intensive treatment plants by implementing large-scale, nature-based solutions. But there are often fiscal and logistical challenges to harness nature’s potential.
Water-quality trading offers a mechanism for utilities to fund such green infrastructure projects by paying outside parties to restore natural ecosystems instead of spending on a plant upgrade. States such as Wisconsin and Oregon have successfully fostered water-quality trading programs, and others, including Colorado, are working on policies that officials hope will generate lasting momentum for water-quality trading programs.
Enacted in 2024, Colorado Senate Bill SB24-037, a.k.a. “Study Green Infrastructure for Water Quality Management,” aims to identify new pathways to restore rivers and watersheds in Colorado, improve water quality, and reduce emissions associated with water and wastewater treatment. Water-quality trading typically involves nonprofits restoring ecosystems, quantifying the benefits, and then selling those benefits to a wastewater utility. “It’s a lot cheaper for them to go pay for projects outside of their fenceline, as opposed to upgrading inside,” says Alex Johnson, a fellow at the Mortenson Center for Global Engineering and Resilience at University of Colorado Boulder (CU) and chief strategy officer of Virridy, a company focused on implementing nature-based solutions. “So the trade is with a contracted entity that’s signing up farmers and changing practices and planting trees. They quantify the water-quality benefits, and then they sell those benefits, usually as credits, to the regulated entity.”
People hope that SB24-037 will catalyze Colorado’s water-quality trading market, Johnson notes. His team at CU is working with researchers from Colorado State University (CSU) to “look at the gaps that have kept that solid policy foundation from getting used, and then work with the utilities and the regulators to see if we can bring some case studies along and solve those gaps.”
After the Environmental Protection Agency released the Water Quality Trading Policy under the Clean Water Act in 2003, Colorado became an early leader in the field, but “not much has happened since,” Johnson says. This is largely because of the complex challenges associated with water-quality trading, he adds, but even so, it’s often the most economic option for water utilities. “Not everywhere, but in many, many places, there’s much better bang for the ratepayer dollar in investing in large-scale, nature-based solutions than there is in going all the way to advanced tertiary filtration.”
Industrial wastewater treatment is both expensive and energy-intensive. “On a dirty energy grid, there are a lot of emissions associated with increasing or upgrading facilities with gray infrastructure,” explains Tessa Landon, a graduate research assistant at the Mortenson Center and Virridy’s watershed carbon program manager. “Wastewater treatment plants account for 2 percent of energy use and the equivalent of 45 million tons of CO2 per year.”
This could be big. This could be tens of millions of dollars going into wetlands and streamside shade and cover cropping and irrigation upgrades and getting livestock out of direct access to rivers and streams in Colorado.
– Alex Johnson, water commodity specialist
As a result of the SB24-037 bill, a team of researchers and government officials is developing three state-funded pilot projects in Colorado to demonstrate the use of green infrastructure and water-quality trading. In early 2025, stakeholders selected three pilot projects in Longmont, the Yampa Valley, and Castle Rock to replace conventional infrastructure with nature-based solutions and study the outcomes. In Longmont, for instance, a cooling pond will replace a cooling tower, while livestock and nutrient management along with riparian revegetation and constructed wetlands will replace a tower and reverse osmosis in the Castle Rock area. The Yampa Valley project incorporates all of these nature-based strategies to avoid tertiary filtration, a cooling tower, and reverse osmosis.
The final goal of the pilot projects is to develop legislative recommendations with the Colorado Department of Public Health and Environment to promote green infrastructure and water-quality trading, but Johnson says the clock is ticking. “We see a pretty time-limited opportunity to not do the big facility upgrades that currently are in the pipeline, and instead spend those ratepayer dollars in the places where they’re most effective,” he notes. “This could be big. This could be tens of millions of dollars going into wetlands and streamside shade and cover cropping and irrigation upgrades and getting livestock out of direct access to rivers and streams in Colorado.”
“That’s ambitious,” he acknowledges, “especially given 20 years of not being able to get it off the ground. But certainly, the bill sponsors and the researchers at CU and CSU see it as kind of a golden opportunity, just given the combination of regulatory pressure and where the science is right now.”
