Market-based mechanisms for addressing environmental externalities have the potential to reduce environmental harms at lower cost and with greater efficiency than more traditional command-and-control approaches. However, the use of “cap and trade” mechanisms also entails overcoming a number of challenges including institutional capacity, initial allocation, and distributional equity, among others. This dicussion will focus on an innovative use of market-based mechanisms as an alternative to command-and-control regulation for controlling water pollution. Amelia Letnes from the U.S. Environmental Protection Agency will discuss the lessons of the U.S. experience in applying water quality trading.