Since the 1980s, Maui County’s wastewater treatment plant has discharged millions of gallons of recycled water into groundwater. Over several months, this pollution migrates to the ocean where it affects the health of coral reefs. Under the Clean Water Act, any addition of any pollutant from any point source to a navigable water requires a costly and time-consuming permit. Yet the county has never obtained a permit, believing that the conveyance of the pollution by groundwater rather than a pipe rendered the permit requirement inapplicable.

This week, the Supreme Court confronted the question whether a permit is required. But, if the oral argument is any indication, the answer is anything but clear. And that opaqueness raises significant concerns about how pollution can be addressed effectively while also giving fair notice to property owners. Although the Court’s consideration was limited to the statute as it exists today, the debate among the justices highlights the need for free-market solutions rather than continued reliance on vague or unwieldy regulations.

The difficulty stems from the fact that the Clean Water Act establishes two, somewhat murky categories of pollution. Discharges of pollutants from “point sources” require the costly permit, while discharges from “nonpoint sources” are regulated under more forgiving state standards. A point source is “any discernible, confined and discrete conveyance” and a nonpoint source is everything else. The classic example of a point source is a pipe discharging pollution directly into a river. The classic nonpoint source is a farmer spraying fertilizer on a field, some of which gets washed away by rain which eventually reaches a river miles away.

However, farmers generally spray fertilizer with equipment that would qualify as a point source if sprayed directly into a regulated water. So why should it matter that the fertilizer is conveyed from the field to the stream by stormwater rather than by the equipment directly? And what if the field is 10 feet from the river rather than 10 miles?

The justices seemed concerned about both these questions and may not have found any satisfactory answers. Several justices questioned Maui County’s argument that a permit is only required when a pipe or other conveyance directly discharges pollution into a water. Justice Breyer wondered whether a win for Maui County would create a roadmap for polluters to avoid the permitting requirement entirely.

JUSTICE BREYER: So what happens if you just take the pipe and you decide what we’ll do is we’re going to end the pipe 35 feet from the river or from the ocean or something? Now you know perfectly well that it’ll drip down into the ground and it’ll be carried out into the navigable water. In your theory, that isn’t covered? . . . Then what we have is, I take it, an absolute road map for people who want to avoid the point source regulation. All we do is we just cut off the –cut off the — the pipes or whatever, five feet from the ocean or five feet from the navigable stream or five feet from — you see?

On the other hand, other questions suggested equal dissatisfaction with the argument that a permit is required any time pollution can be traced back to a point source, no matter how far away.

JUSTICE ALITO: Let’s take an example of the ordinary family out in the country that has a septic tank, and they buy it from somebody who installs them and they get the building permit that’s required by that rural municipality. And then it turns out that some of –some things are leaching out of the septic tank 10 years later and making its way into waters of the United States. So they would be violating — they would be violating the Clean Water Act for lack of a permit and would be subject to all the penalties that go with that for every day of the violation?

Justice Breyer seemed to share this concern:

JUSTICE BREYER: I learned in the eighth grade, and it may be wrong, that water does run downhill — (Laughter.) — and that virtually every little drop of rain that falls finds its way to the sea. And — and that’s an overstatement but not too much. So it’s not just the septic tank; the miner gets up and every morning he throws his shaving water outside the house at Mount — at Pikes Peak, okay? Now, there’s a very good chance that that will end up in a river, and . . . therefore, [the theory in this case] puts all kinds of people in the position of having to get a permit. Have you ever tried to do that? That’s a big complicated thing. Okay? . . . I am worried about 500 million people or something suddenly discovering that they have to go apply for a permit [from] the EPA.

It seems likely that the Court will reject this broad theory of liability, based on the fundamental fairness and administrability concerns. But it remains to be seen whether the justices will find their own middle ground or accept Maui’s narrow theory.

Ultimately, the debate highlights a shortcoming of the Clean Water Act’s basic approach. The law’s fundamental goal is to improve water quality, not to favor certain ill-defined categories of pollution over others. But it is inconceivable for a federal permit scheme to tackle the full problem because federal agencies will never have the time or resources to permit every minute and distant contributor to water quality challenges. Nor could people ever reliably predict which actions would require a permit and which wouldn’t.

Markets can overcome these challenges however, by focusing limited resources where they can do the most good and incentivizing people to find new opportunities to reduce pollution. Recognizing this, the Environmental Protection Agency has promoted the creation of markets for water quality where pollution sources are not easily regulated. And the results of these experiments have been impressive.

In North Carolina, for instance, a water quality market for the Tar-Pimlico River produced large gains from trade. As Bruce Yandle explained in a 2008 article for PERC Reports:

In some cases, a farmer could spend $13 to reduce a unit of nitrogen discharge that would cost a [water utility] nearly $35 to accomplish. To get reductions, farmers installed buffer strips along creek sides and found ways to use discharge from swine operations for fertilizing pastures. By way of improved [water utility] operations and contracting with farmers, the Tar-Pamlico River Basin Association achieved major reductions in point- and nonpoint-source nutrient discharge.

Achieving the same results under the permitting regime at issue in Maui County would have been incredibly complex. A federal agency would not only have to identify all the sources of pollution but predict how much different sources could reduce this pollution and at what cost. Without a market to reveal this information, the agency would be left to speculate.