Emission, Compliance, and Market Analyses
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The NOx Budget Trading Program (NBP) was a market-based cap and trade program created to reduce the regional transport of emissions of nitrogen oxides (NOx) from power plants and other large combustion sources that contribute to ozone nonattainment in the eastern United States. NOx is a major precursor to the formation of ground-level ozone, a pervasive air pollution problem in many areas in the East. The NBP was designed to reduce NOx emissions during the warm summer months, referred to as the ozone season, when ground-level ozone concentrations are highest. In 2009, the NBP was replaced by the Clean Air Interstate Rule (CAIR) NOx ozone season program, which started requiring emission reductions from affected sources in an expanded geographic area on May 1, 2009.
Over the next few months, the U.S. EPA will release several reports summarizing progress under the NBP. The first report in this four-part series, released in May, presented 2008 data on emission reductions, compliance results, and NOx allowance prices. This is the second report in the series, and it further evaluates progress under the NBP in 2008 by analyzing emission reductions, reviewing compliance results, investigating factors affecting market price, and exploring control options used by sources. Detailed emission results and other facility and allowance data are also publicly available on EPA’s Data and Maps Web site. To view emission and other facility information in an interactive file format using Google Earth or a similar three-dimensional platform, go to EPA's Interactive Mapping site.
At a Glance: NBP Results in 2008
Ozone Season Emissions: 481,420 tons
- 9% below 2008 cap
- 62% lower than in 2000 (before implementation of the NBP)
- 75% lower than in 1990 (before implementation of the 1990 Clean Air Act Amendments)
Compliance: Nearly 100%
- Only 2 units out of a total 2,568 units were out of compliance by a total of 63 tons
- Continues trend of near-perfect compliance since start of program in 2003
Controls: 70% of NBP units have NOx controls
- Emission rates for all units have dropped by 45% since 2003
- Emission rates for units without controls have dropped by over 50% since 2003
Allowances: Prices and activity are down but there is still a substantial bank and an active market
- 28% price decline in 2008, from a high average price of $825/ton in January to a low of $592/ton in November
- 275,367 unused NBP allowances transferred for future use under the Clean Air Interstate Rule (CAIR)
Overview of the NOx Budget Trading Program: Market-based Emission Reductions
The NOx State Implementation Plan (SIP) Call, promulgated in 1998, was designed to address the problem of ozone transport across the eastern United States. It required states to reduce ozone season NOx emissions that contribute to ozone nonattainment in other states. EPA created a cap and trade program, the NBP, as a cost-effective alternative to achieve the required reductions. All 20 affected states and the District of Columbia (DC) chose to meet mandatory NOx SIP Call reductions primarily through participation in the NBP.
Over the past six ozone seasons, the NBP significantly lowered NOx emissions from affected sources, contributing to improvements in regional air quality across the Midwest, Northeast, and Mid-Atlantic.
Cap and trade programs such as the NBP and the Acid Rain Program (ARP) set a cap on overall regional emissions and allocate allowances to each affected source. Each allowance authorizes a certain number of emissions — in this case, one ton. This approach provides individual sources with flexibility in complying with emission limits. Sources may sell or bank (save) excess allowances if they reduce emissions and have more allowances than they need, or purchase allowances if they are unable to keep emissions within their allocated budget. As a group, the participating sources cannot exceed the cap. The cap level is intended to protect public health and the environment and to sustain that protection into the future, regardless of growth in the affected sector. The cap also lends stability and predictability to the allowance trading market and provides regulatory certainty to affected sources. Cap and trade programs like the NBP and the ARP have proven highly effective in reducing emissions from multiple sources, while meeting environmental goals, and improving human health.
Affected States and Compliance Dates
Compliance with the NOx SIP Call was scheduled to begin on May 1, 2003, for the full ozone season. However, litigation delayed implementation for 12 states not previously in the Ozone Transport Commission’s (OTC) NOx Budget Program. The eight states previously in the OTC adopted the original compliance date of May 1, 2003, in transitioning to the NOx SIP Call (see Figure 1). These OTC states included Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, and Rhode Island, as well as the District of Columbia.
Eleven states not previously in the OTC NOx Budget Program began compliance on May 31, 2004, one month into the normal ozone season. These states were Alabama, Illinois, Indiana, Kentucky, Michigan, North Carolina, Ohio, South Carolina, Tennessee, Virginia, and West Virginia. Finally, Missouri began compliance with the program on May 1, 2007.
Figure 1: NOx SIP Call Program Implementation
Only portions of Alabama, Michigan, and Missouri were affected by the program. In addition, Georgia was originally slated to begin compliance with the NBP in 2007 along with Missouri. However, on April 16, 2008, EPA finalized a rule to remove the requirements of the NOx SIP Call for Georgia in response to a petition, and Georgia never participated in the NBP.
There were 2,568 affected units under the NBP in 2008, including some units that may not have operated nor had emissions during the 2008 ozone season. For example, some units provide electricity only on peak demand days, and may not operate every year.
Most of the units in the NBP were electric generating units (EGUs), which are large boilers, turbines, and combined cycle units used to generate electricity for sale. Figure 2 shows that EGUs constituted 88 percent of all regulated NBP units. The program also applied to large industrial units that produce electricity or steam primarily for internal use. Examples of these units were boilers and turbines at heavy manufacturing facilities, such as paper mills, petroleum refineries, and iron and steel production facilities. These units also included steam plants at institutional settings, such as large universities or hospitals. Additionally, some states included other categories of units, such as petroleum refinery process heaters and cement kilns.
States could also choose to allow individual sources that were not affected by the NBP to opt in to the trading program. Opt-ins were limited to fossil fuel combustion devices that vent all emissions through a stack and that met EPA’s stringent Part 75 emission monitoring requirements. Potential opt-in sources had to apply for a state NBP opt-in permit. If approved, these sources were issued opt-in allowances, which were in addition to the state’s base budget. In 2008, there were three states with five total opt-in units under the program.
Key Components of the NBP
The NBP was an ozone season (May 1 to September 30) cap and trade program for electric generating units (EGUs) and large industrial combustion sources, primarily boilers and turbines. The program had several important features:
Regionwide Cap: The sum of state emission budgets that EPA established under the NOx SIP Call to help states meet their air quality goals to protect human health and the environment.
Limited Allowances: Authorizations to emit, known as allowances, were allocated to affected sources based on state trading budgets. The NOx allowance market enabled sources to trade (buy and sell) allowances throughout the year.
Compliance Alternatives: Sources could choose among several options to reduce NOx emissions, such as adding emission controls, replacing existing controls with more advanced technologies, optimizing existing controls, or switching fuels.
Stringent, Complete Monitoring: To accurately monitor and report emissions, sources used continuous emission monitoring systems (CEMS) or other approved monitoring methods under EPA’s stringent monitoring requirements (40 CFR, Part 75).
Compliance Determination: At the end of every ozone season, each source had to surrender sufficient allowances to cover its ozone season NOx emissions (each allowance represents one ton of NOx emissions). This process is called annual reconciliation.
Automatic Penalties: If a source did not have enough allowances to cover its emissions, EPA automatically deducted allowances from the following year’s allocation at a 3:1 ratio. Units out of compliance in 2008 had to surrender 2009 CAIR NOx ozone season allowances.
Allowance Market and Banking: If a source had excess allowances because it reduced emissions beyond required levels, it could sell the unused allowances or bank (save) them for use in a future ozone season. On January 1, 2009, EPA transferred NBP banked allowances for use under the CAIR NOx ozone season program.
EPA uses two baseline years for measuring progress under the program:
1990: This baseline represents emission levels before the implementation of the 1990 Clean Air Act Amendments.
2000: This baseline represents emission levels after the implementation of NOx regulatory programs under the 1990 Clean Air Act Amendments but before implementation of the NBP.
Figure 2: Number of Units in the NBP by Type in 2008
Figure 3: Ozone Season NOx Emissions from All NBP Sources
Ozone Season NOx Reductions
In 2008, NBP sources emitted 481,420 tons of NOx during the summer ozone season, an overall decrease of 24,880 tons from 2007. Emissions in 2008 were 62 percent below 2000 levels, 75 percent below 1990 levels, and 9 percent below the 2008 cap. Figure 3 (on previous page) shows the total ozone season NOx emissions for all affected sources in the NBP region in 2008 compared to pre-NBP baseline years (1990 and 2000) and prior NBP compliance years (2003 through 2007). It also presents the allowances allocated for 2008, which constituted the cap (the sum of the state budgets) for the program (528,453 tons). Note that all data for 2003—2008 in this section were gathered from EPA's data systems as of April 1, 2009.
Many of the NOx reductions since 1990 are a result of other programs implemented under the Clean Air Act, such as the Acid Rain NOx reduction program and other state, local, and federal programs. The significant decrease in NOx emissions after 2000 largely reflects reductions achieved by the OTC NOx Budget Program, which operated between 1999 and 2002, and the NBP, which began in 2003. The large drop in emissions between 2003 and 2004 was a result of the entry of the non-OTC states into the NBP. The majority of states subject to the NOx SIP Call started to participate in the NBP on May 31, 2004.
Although Missouri did not participate in the NBP until 2007, its emissions are included for all years in Figure 3 to more effectively capture and express trends due to the program. For more detailed information on state budgets and emissions subject to compliance, see Appendix A and Figure 6.
Ozone season NOx emissions decreased substantially, by 43 percent, between 2003 and 2008, while heat input remained relatively flat over the same period. As Table 1 shows, total heat input increased by approximately two percent from 2003 to 2008, with gas-fired units primarily responsible for this growth in heat input. Furthermore, the average NOx emission rate for all units remained stable between 2007 and 2008, maintaining the 45 percent overall drop in emission rate since the program began in 2003. Because heat input has not significantly changed since the start of the program, other factors, such as fuel choice and added NOx controls, have contributed to this improvement.
Table 1 shows that between 2007 and 2008, ozone season emissions decreased for all fuel types, primarily reflecting a six percent decline in 2008 ozone season heat input.
Table 1: Comparison of Ozone Season NOx Emissions, Heat Input, and NOx Emission Rates for All NBP Sources, 2003—2008
|Units by Fuel Type|| Ozone Season NOx Mass Emissions
|Ozone Season Heat Input
| Ozone Season NOx Emission Rate
What Is Heat Input?
Heat input, often expressed in million British thermal units (mmBtu), is a measure of the energy content of fuel. It is standardized across fuel sources to allow comparisons among them. For example, a cubic foot of natural gas releases a different amount of energy than a gallon of oil when burned. Heat input also offers an indication of energy demand. For example, high electricity consumption for air conditioning on a hot day will be reflected in high heat input levels at EGUs.
What Is Emission Rate?
Emission rate is the measure of how much pollutant (NOx) is emitted from a combustion unit compared to the amount of energy (heat input) used. In this report, emission rate is expressed as pounds of NOx emitted per mmBtu of heat input. Emission rates enable comparison of a combustion unit's environmental efficiency given its fuel type and usage. A lower emission rate represents a cleaner operating unit—one that is emitting fewer pounds of NOx per unit of fuel consumed.
State-by-State NOx Reductions
Ozone season NOx emissions decreased from levels in the baseline years in all states that participated in the NBP. EPA projects that the CAIR NOx ozone program, which started in 2009, will bring a continued decline in emissions in states across the region (see Figure 4).
In the 2008 ozone season, the total emissions from NBP sources were 47,033 tons (9 percent) below the regional emission cap. Fourteen states and the District of Columbia had emissions below their allowance budgets, collectively by 70,960 tons. Another six states (Alabama, Indiana, Kentucky, Michigan, Ohio, and Pennsylvania) exceeded their 2008 budgets by a total of 23,927 tons, indicating that some sources within those states covered a portion of their emissions with allowances banked from earlier years or purchased from the market.
In any given year, emission control programs experience variation in emissions from individual units due to a wide range of conditions, including weather, electricity demand, transmission constraints, fuel costs, and compliance strategy. As Appendix B shows, 17 states had lower NBP ozone season emissions in 2008 compared to 2007, while only three states and the District of Columbia had increased emissions. The drop in emissions between 2007 and 2008 was primarily the result of lower electricity demand, with regionwide heat input declining six percent from 2007 levels. Only one state (Maryland) experienced a relatively sharp decline in NOx emissions that coincided with a decline in NOx emission rate, with the average rate for NBP units falling from 0.23 lb/mmBtu to 0.16 lb/mmBtu. Other states saw only subtle differences in their NOx emission rate (changes of 0.02 lb/mmBtu or less). The District of Columbia saw an increase of 0.06 lb/mmBtu, reflecting the year-to-year variability in emission rate given the District's small set of affected units.
In total, sources in all states reduced NOx emissions dramatically since the start of the program, despite a slight increase in heat input. Detailed unit-level data are available in Appendix 1.
Figure 4: State-level Ozone Season NOx Emissions from NBP to CAIR, 1990—2010
High Electric Demand Days
Since the inception of the NBP in 2003, overall seasonal NOx emissions decreased each year through 2008 as NBP emission reduction requirements led EGUs to install pollution control equipment. Even with these seasonal reductions, periods of hot weather and related high electricity demand often elevate peak NOx emissions on a given day. High demand for electricity is heavily tied to weather and is driven primarily by the use of air conditioning on hot days. It is significant that during the 2008 ozone season, emission levels on peak demand days were lower than those seen in previous years. For example, Figure 5 shows that in contrast to past years' peak NOx levels (early August 2007, late July/early August 2006, late July 2005, and mid-July 2004) daily emissions peaked in early June 2008 at a lower level (4,203 tons) than all prior NBP years.
Further EPA analysis found that the average NOx emission rate for the 10 highest electric demand days (as measured by megawatt hours of generation) consistently fell every year of the NBP, from 0.277 lb/mmBtu in 2003 to 0.156 lb/mmBtu in 2008. This 44 percent drop occurred despite a slight increase in electricity demand for 2008 compared to 2003.
Figure 5: Comparison of Ozone Season Daily NOx Emissions for All NBP Units, 1990—2010
High electric demand days often coincide with National Ambient Air Quality Standards (NAAQS) exceedances. Because of continued nonattainment in some portions of the NBP region, EPA, states, and others are investigating additional programs and policies that could provide further emission reductions from targeted sources on these days. With the promulgation of a new, tighter ozone NAAQS in March 2008, stakeholders will likely continue to focus on these types of targeted measures, such as demand-side strategies (e.g., energy efficiency, demand response, clean distributed energy sources), fuel switching, selective non-catalytic reduction (SNCR), water injection, and smarter trading. Smarter trading is a potential market design strategy that uses weather and atmospheric chemistry forecasts to vary the price of NOx allowances to more finely control the impacts of NOx emissions on ozone formation.
In addition, stakeholders are also pursuing NOx reduction strategies for the mobile source sector, such as commuter car taxes in major metropolitan areas.
Under the NBP, affected sources had to hold sufficient allowances to cover their ozone season NOx emissions each year. Sources could maintain the allowances in compliance accounts (established for each unit) or in an overdraft account (established for each facility with more than one unit). Sources could buy or sell allowances throughout the year, but had only two months at the end of the ozone season to complete their transactions to ensure their emissions did not exceed allowances held. After the two-month period, EPA froze activity in compliance and overdraft accounts and reconciled emissions with allowance holdings to determine program compliance.
Table 2: NOx Allowance Reconciliation Summary for the NOx Budget Trading Program in 2008
|Total Allowances Held for Reconciliation (2003 through 2008 Vintages)||755,684|
|Allowances Held in Compliance or Overdraft Accounts||673,336|
|Allowances Held in Other Accounts*||82,348|
|Allowances Deducted in 2008||482,476|
|Allowances Deducted for Actual Emissions||481,147|
|Additional Allowances Deducted under Progressive Flow Control (PFC)||1,329|
|Banked Allowances (Carried into 2009 CAIR NOx Ozone Season Program)||273,208|
|Allowances Held in Compliance or Overdraft Accounts||188,003|
|Allowances Held in Other Accounts**||85,205|
|Penalty Allowances Deducted*** (from 2009 CAIR NOx Ozone Season Program Allocations)||189|
There were 2,568 units affected under the NBP in 2008. Of those units, only two units at separate facilities failed to hold sufficient allowances to cover their emissions (63 tons total). One gas-fired combined cycle unit was out of compliance by only one ton while the second unit, at an industrial cogeneration facility, was out of compliance by 62 tons. Affected facilities transitioned to the CAIR NOx ozone season program on May 1, 2009. Accordingly, the two units out of compliance automatically surrendered first year (2009) CAIR NOx ozone season program allowances on a 3:1 basis, or 189 allowances total.
As of April 1, 2009, the reported 2008 ozone season NOx emissions by NBP sources totaled 481,420 tons. Because of variation in rounding conventions, changes due to resubmissions by sources, and allowance compliance issues at two units, this number is higher than the number of emissions used for reconciliation purposes shown in Table 2 (481,147 tons). Therefore, the total number of allowances deducted for actual emissions in Table 2 differs from the number of emissions shown elsewhere in this report.
|Reported emissions (tons):||481,420|
|Rounding and report resubmission adjustments (tons):||-210|
|Emissions not covered by allowances (tons):||-63|
|Total allowances deducted for emissions:||481,147|
Table 2 summarizes the allowance reconciliation process for 2008, and the textbox on this page provides details on how reported emissions for the 2008 ozone season translated into allowances deducted for those emissions.
Banking in 2008
In general, under cap and trade programs, banking allows sources that decrease emissions below the number of allowances they are allocated to save the unused allowances for future use. Banking can produce environmental and health benefits earlier than required and provides an available pool of allowances that could be used to address unexpected events or smooth the transition into deeper emission reductions in future years. Figure 6 shows the allowances allocated each year, the allowances banked from the previous year, and the total ozone season emissions subject to allowance holding requirements for NBP sources from 2003 to 2008. With emissions well below the regional budget in 2008, the bank grew to 273,208 allowances by the end of the 2008 ozone season. Additionally, 2008 marked the fifth of six compliance years in which sources achieved more reductions than required under the NBP and were able to bank allowances for use in future years.
Figure 6: NOx Allowance Allocations and the Allowance Bank, 2003—2008
On May 1, 2009, the NBP transitioned to the CAIR NOx ozone season program. As part of this process, EPA transferred the bank of NBP allowances to CAIR NOx ozone season accounts for use under CAIR in 2009 and beyond. In addition, EPA transferred some allowances from the primary reserve accounts of two states. These 2,159 allowances were not counted in Table 2 because they were allocated by the state after reconciliation was completed. In total, EPA transferred 275,367 allowances from the NBP to the CAIR NOx ozone season program.
The NBP included progressive flow control provisions, designed to discourage extensive use of banked allowances in a particular ozone season. Flow control was triggered when the total number of allowances banked for all sources exceeded 10 percent of the total regional budget for the next year. When this occurred, EPA calculated the flow control ratio by dividing 10 percent of the total regional NOx trading budget by the number of banked allowances (a larger bank thus resulted in a lower flow control ratio). The flow control ratio established the percentage of banked allowances that could be deducted from a source's account on a 1:1 ratio of one allowance per ton of emissions. The remaining banked allowances, if used, had to be deducted at a 2:1 ratio of two allowances per one ton of emissions. In 2008, the flow control ratio was 0.22, and 1,329 additional allowances were deducted from the allowance bank under the flow control provisions.
Flow control, however, will no longer apply in 2009 and beyond with the transition to CAIR. Thus, the transferred NBP allowances may be used under CAIR with no restrictions or time limits on a straight 1:1 basis.
How Controls Work
Low-NOx burners and overfire air ports are combustion controls that change the proportion of air to fuel in the combustion zone. This causes combustion to occur in stages, lowering the flame temperature and promoting complete combustion.
With a lower flame temperature, less of the nitrogen (N2) from air is converted to NOx. Minimizing the time of N2 exposure to high combustion zone temperatures also minimizes NOx formation.
Selective Catalytic Reduction (SCR) is an add-on post-combustion control that converts NOx, created during the combustion process, back to N2. Ammonia (NH3) is injected into flue gas before it travels through a fixed bed of catalyst material. The catalyst promotes a reaction between NOx and NH3 to form water vapor and nitrogen. SCR can be applied to a wider range of sources than SNCR (see below) and delivers higher NOx removal rates.
Selective Non-Catalytic Reduction (SNCR) is an add-on control that is used in boilers to convert NOx back to N2. It involves injecting a reagent (ammonia or urea) into the furnace just after the combustion zone. In this high temperature zone, a non-catalytic reaction takes place, converting NOx to N2 and water vapor (and carbon dioxide if urea is used).
Continuous Emission Monitoring Systems
Accurate and consistent emissions monitoring is the foundation of a cap and trade system. EPA has developed detailed procedures (40 CFR Part 75) to ensure that sources monitor and report emissions with a high degree of precision, accuracy, reliability, and consistency. Sources use continuous emission monitoring systems (CEMS) or other approved methods. Part 75 requires sources to conduct stringent quality assurance tests of their monitoring systems, such as daily and quarterly calibration tests and a semiannual or annual relative accuracy test audit. These tests ensure that sources report accurate data and provide assurance to market participants that a ton of emissions measured at one facility is equivalent to a ton measured at a different facility.
While many NBP units with low levels of emissions did not have to use CEMS, the vast majority over 99 percent of the NOx emissions under the NBP were measured by CEMS. Coal-fired units were required to use CEMS for NOx concentration and stack gas flow rate (and if needed, a diluent carbon dioxide or oxygen gas monitor and stack gas moisture measurement) to calculate and record their NOx mass emissions. Oil-fired and gas-fired units could use a NOx CEMS in conjunction with a fuel flowmeter to determine NOx mass emissions. Alternatively, for oil-fired and gas-fired units that either operated infrequently or had very low NOx emissions, Part 75 provided low-cost alternatives for NBP sources to conservatively estimate NOx mass emissions.
In all, about 70 percent of NBP units used CEMS in 2008, including 100 percent of coal-fired units, 66 percent of gas-fired units, and 28 percent of oil-fired units. The relatively low percentage for oil-fired units was consistent with the decline in oil-fired heat input, as most of these units were used infrequently and qualified for reduced monitoring.
Sources could select from a variety of compliance options to meet the emission reduction targets of the NBP in ways that best fit their own circumstances. Compliance options included:
- Installing NOx combustion controls, such as low NOx burners;
- Installing add-on emission controls, such as Selective Catalytic Reduction (SCR) or Selective Non-Catalytic Reduction (SNCR);
- Using banked allowances or purchasing additional allowances from other market participants that reduced emissions below their allocations;
- Decreasing or stopping generation from units with high NOx emission rates, or shifting to lower emitting units, during the ozone season; and
- Using combinations of the above options.
NOx Controls in 2008
Of the 2,563 units that operated in 2008 (out of a total of 2,568 affected units), approximately 30 percent were non-controlled (see Table 3), a share that has remained stable since the start of the program in 2003. Figure 7 shows, however, the average ozone season NOx emission rate for all non-controlled units dropped dramatically, by over 50 percent, from 0.425 lb/mmBtu in 2003 to 0.211 lb/mmBtu in 2008. The following section presents results from an EPA examination of this striking drop in emission rate among non-controlled units.
The group of non-controlled units in the NBP included coal-, oil-, and gas-fired units. While the overall number of units did not change significantly from 2003 to 2008, the fuel mix shifted, primarily from coal to gas. Figure 7 illustrates this trend as the number of non-controlled coal-fired units dropped by 34 percent, from 182 units in 2003 to 120 in 2008, while gas units increased by 17 percent, from 261 to 306.
Further evidence of this shift can be seen in the trends in heat input, a measure of fuel consumption indicating how intensely various units are operating. As Figure 7 indicates, ozone season heat input for non-controlled coal units decreased significantly since the start of the program. In 2003, coal made up 68 percent of non-controlled heat input; by 2008 that share had dropped below 50 percent. During this same period, oil usage also fell by over 50 percent. The drop in utilization of coal and oil units was made up by gas, which experienced a 65 percent increase in heat input between 2003 and 2008, with gas accounting for nearly 40 percent of the non-controlled heat input in 2008. Because the NOx emission rate of gas units without any controls is considerably lower than coal or oil, this fuel switching accounts for much of the improvement (lower emission rate) in the non-controlled units as a group.
Table 3: NBP Operating Units by Control Type in 2008
|Control Type||Number of Units||Percent of Total|
Fuel switching, however, does not entirely explain the drop, given that the improvement in NOx emission rate holds across all three fuel types (see Figure 7). One of the assumptions that underlies cap and trade programs is that the "dirtiest" units are more likely to either be retired, used less often, or be retrofitted with controls. Out of the 132 NBP units that retired since 2003, 91 were non-controlled, and 33 of those were coal-fired boilers with decades of service stretching as far back as the end of World War II. EPA examined whether the assumption about the dirtiest units holds true for the NBP by comparing the performance of the 33 retired, non-controlled, coal-fired units to similar units that stayed in service.
The 2003 ozone season NOx rate for the 33 coal-fired units that retired was 0.797 lb/mmBtu. These units were dirtier than average, and had a considerably higher emission rate compared with the average 2003 emission rate of 0.538 lb/mmBtu for the group of all 182 non-controlled, coal-fired units (see Figure 8). Also, by the end of the NBP, not only had 33 of the coal-fired units retired, an additional 41 units were retrofitted with NOx controls. After ranking the non-controlled, coal-fired units by their 2003 NOx emission rates, EPA found that nine of the top ten least efficient units either retired or added controls by 2008. With the less efficient units taken out of service each year and the addition of controls on many of the remaining units, the NOx emission rate for this group of units fell 40 percent from 2003 to 2008.
In conclusion, sources in a cap and trade program may take a variety of measures to meet compliance obligations, including fuel switching, retiring less efficient units, and adding controls. This examination of non-controlled units demonstrates that all three strategies were at work in the NBP.
Figure 7: Summary Ozone Season Data, 2003—2008
Figure 8: Comparison of Ozone Season NOx Emission Rate for Retired versus Active Non-Controlled Coal Units, 2003—2008
NOx Allowance Prices
The 2008 NOx allowance market experienced a 28 percent price decline—beginning the year at $825 per ton in January and climbing as high as $1,413 during the middle of the year before falling to a period-end closing price in November of $592 per ton (see Figure 9).
In 2008, the final year of the NBP before CAIR went into effect, NBP emissions were 5 percent below 2007 levels. Not surprisingly, the downward tendency of allowance prices that occurred from 2003 to 2007 continued into 2008 (although there was a sharp price spike in August following the court decision to vacate CAIR). During the ozone season, NBP sources emitted 47,033 tons fewer than their overall budget, and the allowance bank increased to 273,208. This increase contributed to the lower allowance prices. These banked allowances have been converted to CAIR NOx ozone season allowances as of January 1, 2009 and will be available for compliance purposes under CAIR.
Figure 9: NOx Allowance Spot Price (Prompt Vintage), January 2008—November 2008
In a cap and trade program, sources may purchase allowances as part of their compliance strategy. Because abatement costs are not the same for all sources, the flexibility offered by cap and trade programs (e.g., choice of controls, efficiency, buy/sell/bank allowances) allows sources to achieve emission targets at a lower cost than through a command and control program. By allowing sources to buy, sell, and bank allowances in order to comply with the program's emission reduction requirements, a market for emission allowances can emerge, and the allowance price should ultimately reflect the marginal cost of emission reductions. Emission control decisions can then be made based on the cost of control options relative to the market price of allowances. The allowance price motivates those who can reduce their facility's emissions at a relatively low cost to make those investments and then sell their surplus allowances to those with higher marginal reduction costs.
What Is the Difference between Marginal Cost, Operating Cost, and Capital Cost?
In the context of the NBP allowance market, marginal cost is the cost to reduce one additional ton of NOx emissions. Operating costs are the day-to-day costs of operating and maintaining an emission control technology. Capital costs are the one-time setup cost of installing a control technology, after which there will only be recurring operating costs.
Looking ahead to the CAIR NOx allowance markets (ozone season and annual), it is EPA's expectation that the CAIR NOx annual cap will absorb most of the capital costs of controls (i.e., SCRs). These capital costs will most likely be reflected in allowance prices in the CAIR NOx annual market, while the NOx ozone season allowance prices will primarily be driven by the operating costs of controls. The final 2008 NBP NOx allowance price was below the total expected control cost, and continued to reflect the variable costs of SCR operation. Therefore, EPA sees the SCR operating cost acting as a surrogate price floor for the CAIR NOx ozone season allowance price at least until EPA promulgates a new rule to replace CAIR.
On July 11, 2008, the U.S. Court of Appeals for the D.C. Circuit issued a ruling vacating CAIR in its entirety. EPA and other parties requested a rehearing, and on December 23, 2008, the Court revised its decision and remanded CAIR to EPA without vacatur. This ruling leaves CAIR and the CAIR Federal Implementation Plans (FIPs) including the CAIR trading program in place until EPA issues new rules to replace CAIR. EPA estimates that development and finalization of a replacement rule could take about two years.
As currently written, the CAIR NOx ozone season program includes six additional eastern states (Arkansas, Florida, Iowa, Louisiana, Mississippi, and Wisconsin) and full state coverage in Alabama, Missouri, and Michigan. The 2009 CAIR NOx ozone season cap is 580,000 tons.
Transaction Types and Volumes
NOx allowance transfer activity includes two types of transfers: EPA transfers to accounts and private transactions. EPA transfers to accounts include the initial allocation of allowances by states or EPA, as well as transfers into accounts related to special set-asides. This category does not include EPA transfers used to retire allowances. Private transactions include all transfers initiated by authorized account representatives for any compliance or general account purposes.
As Figure 10 shows, trends in market activity continue to show an active market based on a look at overall NOx allowance transfer activity. Although the overall volume was lower in 2008 than in previous years, the market remains active.
To help better understand the trends in market performance and transfer history, EPA classifies private transfers of allowance transactions into two categories:
- Transfers between separate and distinct economic entities, which may include companies with contractual relationships such as power purchase agreements, but excludes parent-subsidy types of relationships. These transfers are categorized broadly as "economically significant trades."
- Transfers within a company or between related entities (e.g., holding company transfers between a unit compliance account and any account held by a company with an ownership interest in the unit).
While all transactions are important to proper market operation, EPA follows trends in the economically significant transaction category with particular interest because these transactions represent an actual exchange of assets between unaffiliated participants.
Figure 10: Cumulative NOx Allowances Transferred, 1998—2008
As mentioned, there was a noticeable drop in trading activity in 2008 compared to previous years. In 2008, economically significant trades represented only about 25 percent of the total private trades (down from 35 percent in 2007). The volume of economically significant trades also decreased in 2008, falling from approximately 247,000 in 2007 to 131,000 in 2008 (see Figure 11).
Figure 11: Breakdown of Private NOx Allowance Transfers, 1998—2008
Industrial sources continued to participate in the allowance market, accounting for just over 10 percent of the economically significant trade volume, an increase from 2007 levels. In 2008, as in prior years, industrial sources transferred far more allowances to others than they received. Most of these trades were between industrial sources and electric generating companies or brokers, with very few trades involving an industrial source as both buyer and seller.
It is worth noting that more facilities found themselves at or below current cap levels as they reduced NOx emissions in anticipation of CAIR and thus shifted fewer allowances among their units. It is the drop in economically significant trading by nearly half, however, that is most striking because it signifies a dramatic turnaround from the growth in trading in recent years. This decline in trading is, in large part, a result of uncertainty regarding the value of allowances due to the litigation surrounding CAIR.
Role of Brokers and Their Fees
Brokers play an important role in the emissions allowance markets. They primarily facilitate and conduct trades between willing buyers and sellers, undertaking the direct costs of identifying trading partners and transacting sales at a price acceptable to both parties. In the allowance trading market, the fees charged by brokerage firms are often considered to be transaction costs. These fees are the direct costs associated with buying and selling allowances.
Costs for services are fairly standardized and are generally low compared to the value of allowances—usually within the 1 to 2 percent range of allowance values typically quoted in the economics literature.1 There is sufficient competition amongst the brokerage houses that any attempt at charging fees in excess of market standards would likely be bid down through existing competition and entry of more businesses able to provide brokerage services. In many instances, larger clients can negotiate fees even lower than market averages. In addition, if a company needs some expert analysis or opinions to maximize the value of its allowances, it may agree to pay additional fees unrelated to the actual execution of the trades. For example, brokers may collect and provide historic and current price information for a cost.
While the majority of transactions are conducted through brokers, emission allowances and derivatives (i.e., futures contracts) may also be traded on exchanges such as the New York Mercantile Exchange (NYMEX) and the Chicago Climate Exchange. The fees charged for conducting business on exchanges appear to be markedly lower than the fees charged by brokerage firms. On a per ton basis, these exchange fees as applied to CAIR NOx allowances translate to less than $1.00 per ton for seasonal NOx and up to $2.50 per ton for annual NOx. These fees are both below the broker fees charged for transactions between two parties.
Appendix A: State Trading Budgets, 2003—2008
Appendix B: Ozone Season NOx Emissions (Tons) from NBP Sources, 1990—2008, and 2008 State Trading Budgets
|All NBP States||1,923,831||1,256,237||849,220||609,029||548,649||507,603||506,300||481,420||528,453|
1 Personal communication with Gary Hart, ICAP-United, June 25, 2007 as quoted in Napolitano, S., J. Schreifels, G. Stevens, M. Witt, M. LaCount, R. Forte, & K. Smith. 2007. "The U.S. Acid Rain Program: Key Insights from the Design, Operation, and Assessment of a Cap-and-Trade Program." Electricity Journal. Aug./Sept. 2007, Vol. 20, Issue 7.
Schennach, Susanne M. 2000. "The Economics of Pollution Permit Banking in the Context of Title IV of the 1990 Clean Air Act Amendments." Journal of Environmental Economics and Management. 40, 189-210.
LECG, LLC. "Emissions Trading Market Study." Report to the Ontario Ministry of Environment. July 2, 2003.