Summary of EPA Discussion Papers on Emissions Trading Issues (March 2004)

In conjunction with the Ozone Transport Commission (OTC), EPA prepared the OTC NO_x Budget Program 1999-2002 Progress Report (PDF) (21 pp., 962 K) in March 2003. As a follow up to that report, the OTC states suggested three program areas for further detailed analysis:

Industrial source participation
Progressive flow control
Impacts of trading on local emission patterns

In response, EPA has prepared a series of papers on these topics (links provided below). EPA analyzed emissions and allowance data, discussed program implementation with market participants and analysts, and considered the impact of the transition to the NO_x Budget Trading Program under the NO_x SIP Call.

The analyses and some key findings include:

Industrial Source Participation in the OTC NO_x Budget Program (PDF 16 pp., 73 K)

The inclusion of industrial sources was beneficial to the OTC program without imposing disproportionate burdens on these sources.
Although these sources represented only a modest portion of the ozone season emissions from all budget sources (about 6 percent), industrial sources achieved low cost reductions and provided low cost allowances to the market. Not only were industrial sources in a position to sell allowances at the beginning of the program, they also continued to reduce emissions over the 1999-2002 period.
These actions helped reduce the overall cost of achieving the regional emissions budget and provided less expensive allowances for use by electric generating sources, which helped reduce the cost of compliance for that sector as well.

Progressive Flow Control in the OTC NO_x Budget Program (PDF 16 pp., 73 K)

Flow control requires that some portion of banked allowances will be surrendered on a 2:1 basis (two allowances for each ton of emissions) if the bank of allowances becomes large (over 10 percent of the total regional budget). This provision was established to provide a disincentive to using a high level of banked allowances in a particular ozone season raising concerns regarding seasonal air quality. The use of flow control in the OTC NO_x Budget Program was triggered in 2000 as a result of the high number of allowances banked after the 1999 ozone season. Flow control remained in effect through the 2002 ozone season.
Data indicates that flow control had little impact on emission levels, on the sources in the program, or on the functioning of the allowance market.
While over 26,000 allowances were surrendered on a 2:1 basis under flow control from 2000 through 2002, about 90 percent of the allowances were banked OTC allowances that would have no value in 2003 and beyond under the transition to the NO_x Budget Trading Program.
Ten percent of allowances were surrendered on a 2:1 basis; sources appeared to be motivated by factors such as administrative convenience or market access and experience.
These transactions reflected less than 0.5 percent of all allowances surrendered from 2000 through 2002.
Overall, although flow control may not have added significant benefits to the OTC program during this period, it did require continuing administrative effort to ensure sources utilized the mechanism correctly.

Impacts of Trading on Local Emission Patterns (PDF 21 pp., 844 K)

Caps (or budgets) and emissions trading programs are designed to reduce emissions regionally thereby improving regional air quality.
Given the flexible nature of a trading program, the expectation is that reductions achieved at individual plants can vary significantly providing impetus to examine whether trading will shift emissions from one area to another and the potential for creating adverse impacts in specific local areas.
One method of analyzing whether trading created local emission impacts is to compare the ozone season emissions for affected sources in a local area to the sources' initial allowance allocations. This analysis focuses on sources that obtained additional allowances beyond their allowance allocation.
Most localities show affected source emissions below allowance allocation levels.
Most of these areas also had significant reductions from 1990 baseline levels, collectively reducing emissions by about 53 percent.
The local areas with the highest level of baseline emissions generally saw the greatest reductions.
Some local areas had affected source emissions above allowance allocations. It is not clear that the emission levels in these local areas would be any different under a traditional command and control regulation. These areas often had emission rates in line with (or lower than) rates that would be expected under a program that did not allow emissions trading.
The 1999-2002 period was the initial phase of NO_x trading in the OTC region, and results from 2003 and beyond may alter the patterns of local emissions versus allowance allocations.
Substantial emission reductions occurred across the region and across all the states, so that the local emissions do not appear to have interfered with the goal of the OTC program to reduce NO_x transport through broad regional reductions.
Trading has not negatively affected program implementation or goals, and did not result in widespread increased emission levels at the local level. It will also be important, however, to analyze local emissions in the context of the broader air quality program goals.
Further analyses in conjunction with the NO_x SIP Call will be conducted on local emissions and regional air quality in future assessments.

Summary of EPA Discussion Papers on Emissions Trading Issues (March 2004)

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