2008 HighlightsOverview of the NOx Budget Trading Program | Key Components of the NBP | Key Results | Clean Air Interstate Rule | Appendix A: Ozone Season NOx Emissions (Tons) from NBP Sources, 1990-2008, and 2008 State Trading Budgets
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.
The NBP was established through the NOx State Implementation Plan (SIP) Call, promulgated in 1998. All 20 affected states and the District of Columbia (DC) chose to meet mandatory NOx SIP Call reductions primarily through participation in the NBP. From the beginning of program implementation in 2003 to 2008, the NBP dramatically reduced NOx emissions from power plants and industrial sources during the summer months, contributing significantly to improvements in ozone air quality in the eastern United States. In 2009, the NBP was replaced by the Clean Air Interstate Rule (CAIR) NOx ozone season trading program, which required emission reductions from affected sources in an expanded geographic area and went into effect May 1, 2009.
From May to September 2009, the U.S. Environmental Protection Agency (EPA) released three reports detailing progress under the NBP. This final document highlights the key results from the previous reports and discusses the transition from the NBP to the CAIR NOx ozone season program.
For more information on the NBP, please visit the program’s website. 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 the Clean Air Markets Interactive Mapping page.
Overview of the NOx Budget Trading Program
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 how they comply with emission limits. Sources may sell or bank (save) excess allowances if they reduce emissions and have more than they need, or purchase allowances if they are unable to keep emissions below their allocated budget.
As a group, the participating sources cannot exceed the cap and each individual source cannot emit more than the allowances it holds for compliance. 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.
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:
- Affected States and Compliance Dates: Compliance with the NOx SIP Call was scheduled to begin on May 1, 2003, for the full ozone season for 20 states and the District of Columbia. However, litigation delayed full implementation for 12 states not previously in the Ozone Transport Commission’s (OTC) NOx Budget Program. The OTC states (Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, and the District of Columbia) adopted the original compliance date of May 1, 2003, to transition to the NOx SIP Call (see Figure 1). Eleven states not previously in the OTC NOx Budget Program (Alabama, Illinois, Indiana, Kentucky, Michigan, North Carolina, Ohio, South Carolina, Tennessee, Virginia, and West Virginia) began compliance on May 31, 2004, one month into the normal ozone season. Finally, Missouri began compliance with the program on May 1, 2007.
Figure 1: NOx SIP Call Program Implementation
- Regionwide Cap: The cap was 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 must surrender allowances to cover emissions while having the flexibility to lower allowance needs by 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, with one allowance required for each ton of NOx emissions. This process is called annual reconciliation. Progressive flow control provisions, which took effect when the size of the allowance bank exceeded 10 percent of the regional budget for the subsequent year, meant that EPA could require a certain portion of banked allowances to be deducted at a ratio of two allowances per ton of emissions.
- 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 in the CAIR NOx ozone season program.
Affected Units: 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:
- 88 percent of all regulated NBP units were EGUs (see Figure 2).
- The program also applied to large industrial units that produced electricity or steam primarily for internal use. Examples of these units are boilers and turbines at heavy manufacturing facilities.
Figure 2: Number of Units in the NBP by Type in 2008
Ozone Season Emissions: Since the program began in 2003, the NBP has successfully reduced ozone season NOx emissions throughout the region. Figure 3 and Appendix A show that in 2008, NBP ozone season NOx emissions totaled approximately 481,420 tons and were:
- 9 percent below 2008 cap.
- 62 percent lower than in 2000 (before implementation of the NBP).
- 75 percent lower than in 1990 (before implementation of the 1990 Clean Air Act Amendments).
Figure 3: Ozone Season NOx Emissions from All NBP Sources
State-by-State NOx Reductions: Ozone season NOx emissions decreased from levels in the baseline years in all states that participated in the NBP (see Figure 4):
- Fourteen states and the District of Columbia had emissions below their allowance budgets.
Figure 4: State-level Ozone Season NOx Emissions from NBP to CAIR, 1990-2010
High Electric Demand Days: Even with seasonal NOx reductions, periods of hot weather and related high electricity demand often elevate peak NOx emissions on a given day:
- During the 2008 ozone season, emission levels on peak demand days were lower than those seen in previous years (see Figure 5).
- 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.
Figure 5: Comparison of Ozone Season Daily NOx Emissions for All NBP Units, 2003-2008
Compliance: Through a wide range of pollution control strategies, sources achieved nearly 100 percent compliance in 2008:
- Only 2 units (out of 2,568 units) were out of compliance by a total of 63 tons, and 189 allowances were retired as a penalty.
- Continuous trend of near-perfect compliance since start of program in 2003.
Allowances: Prices and activity were down in 2008 but there is still a substantial bank and an active market:
- 28 percent price decline in 2008, from an average price of $825 per ton in January to $592/ton in November.
- Market observers should not confuse temporary price fluctuation in response to major regulatory changes (more or less regulation) with price volatility.
- 275,367 unused NBP allowances transferred for future use under CAIR.
Continuous Emission Monitoring Systems: Although 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 (see Figures 6 and 7):
- About 70 percent of NBP units used CEMS in 2008, including 100 percent of coal-fired units.
Figure 6: Monitoring Methodology for the NBP by Number of Units in 2008
Figure 7: Monitoring Methodology for the NBP by Ozone Season NOx Emissions in 2008
Controls: Sources could select from a variety of compliance options to meet NBP emission reduction targets, including installing control technologies, optimizing existing controls, switching fuels, retiring units, and reducing output:
- Average NOx emission rate for all units has dropped by 45 percent since 2003.
- 70 percent of NBP units have NOx controls; they produced 96 percent of megawatt hour output in 2008.
Ozone: Ground-level ozone has decreased since implementation of the NBP in 2003 (see Figure 8):
- Analyses of ozone trends using various metrics show regionwide ozone reductions ranging from 10-14 percent in the NBP region (in 2003, EGUs throughout the eastern United States plus large industrial sources in the NBP region were responsible for 21 percent of ozone season NOx emissions in the eastern United States).
- There is a strong association between areas with the greatest reductions in NOx emissions and downwind sites exhibiting the greatest improvements in ozone.
Figure 8: Seasonal Average 8-Hour Ozone Concentrations in the NBP Region, 1997-2008
Nonattainment Areas: Based on 2006-2008 air monitoring data, ozone air quality improved in almost all of the 104 areas in the eastern United States designated to be in nonattainment for the 1997 8-hour NAAQS:
- 88 areas (85 percent) now have ozone air quality that is better than the level of the 1997 standard (see Figure 9).
- 13 areas continue to exceed the standard but have experienced an average of 10 percent improvement in ozone.
- In total, over 103 million Americans in eastern counties that were out of attainment in 2004 are now living with cleaner air.
- Given that the majority of relevant NOx emission reductions occurring after 2003 are attributable to the NBP, it is clear that the NBP is the most significant contributor to these improvements in ozone air quality.
Figure 9: Changes in Ozone Nonattainment Areas in the East, 2001-2003 (Original Designations) versus 2006-2008
Human Health Benefits: Studies continue to show a significant link between exposure to air pollution, particularly PM2.5 and ozone, adverse health effects including respiratory and cardiovascular effects, and premature death:
- NOx reductions due to the NBP have led to reductions in ozone and PM2.5 that are estimated to have saved 580-1,800 lives in 2008.
Ecosystem Protection: Changes in ozone and nitrate concentrations due to the NBP have contributed to improvements in ecosystems in the East:
- Ozone: The eastern United States has experienced a decrease in areas with significant ozone damage to seven ozone-sensitive tree species. Ozone has a strong effect on the health of many plants and can increase their susceptibility to disease, insects, fungus, and other environmental stresses, such as harsh weather.
- Nitrate: There has been a 33 percent reduction in total ambient nitrate concentrations in the East. Nitrate deposition can be harmful to sensitive ecosystems, vegetation, and water bodies by causing acidification, eutrophication, changes in biological communities, and an increased sensitivity to changes in the environment.
Clean Air Interstate Rule
CAIR was issued on March 10, 2005, in order to build on the emission reductions under the NBP and the ARP. The rule was designed to permanently lower emissions of SO2 and NOx in the eastern United States. CAIR, as promulgated, was designed to help states address ozone nonattainment and attain the NAAQS for PM2.5 by reducing transported precursors, SO2 and NOx. CAIR is also intended to improve visibility in Class 1 areas, including national parks, monuments, and wilderness areas. To do this, it created three separate compliance programs: an annual NOx program, an ozone season NOx program, and an annual SO2 program.
Each of the three programs uses a two-phased approach, with declining emission caps in each phase. The first phase began in 2009 for the NOx annual and NOx ozone season programs, and will start in 2010 for the SO2 annual program. The rule also establishes a second phase for all three programs beginning in 2015. Similar to the NOx SIP Call, CAIR gave affected states NOx emission budgets and the flexibility in their state implementation plans (SIPs) to reduce emissions using a strategy that best suits their circumstances, including EPA-administered, regional cap and trade programs as one option.
All 28 states and the District of Columbia chose to be part of the EPA-administered regional CAIR trading programs. Monitoring and reporting according to EPA’s stringent regulations for the NOx programs began in 2008; monitoring and reporting for SO2 began in 2009.
Figure 10: Transition from the NBP to CAIR
Litigation and CAIR Replacement Rule
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 programs—in place until EPA issues new rules to replace CAIR.
While the court did not impose a deadline by which EPA must issue the replacement rules, EPA estimates that development and finalization of replacement rules could take about two years. EPA is committed to issuing rules to replace CAIR that will help states address the interstate air emissions transport problem in a timely way and that fully comply with the requirements of the Clean Air Act and the opinions of the D.C. Circuit Court.
Current CAIR Implementation in NBP States
All NBP states, except Rhode Island, are included in the CAIR NOx ozone season program (see Figure 10). Furthermore, the CAIR NOx ozone season program includes six additional eastern states (Florida, Iowa, Louisiana, Mississippi, Arkansas, and Wisconsin) and full state coverage in Alabama, Missouri and Michigan. The 2009 CAIR NOx ozone season cap is 580,000 tons.
NBP states affected by CAIR transitioned to the CAIR NOx ozone season program on May 1, 2009. In addition, most NBP states (except Rhode Island, Massachusetts, and Connecticut) are also subject to emission reductions under the CAIR annual NOx programs to help states attain the NAAQS for PM2.5. States meet their NOx SIP Call obligations using the CAIR NOx ozone season trading program and, as a result, CAIR allows states to include all of their NBP sources in the CAIR NOx ozone season program (even if they would not otherwise be affected by CAIR). Most states used this flexibility, and those that did not are pursuing other strategies to meet their 2009 NOx SIP Call reduction requirements from their NBP sources. Rhode Island has decided not to join the CAIR trading program but must continue to meet its NOx SIP Call reduction requirements.
The 2009 CAIR NOx ozone season emission cap for EGUs is at least as stringent as the NBP, and in some states is tighter. The trading budget for any NBP state that includes its industrial units under CAIR will remain the same for those units as it was in the NBP. CAIR also allows sources to bank and use pre-2009 NBP allowances for CAIR NOx ozone season program compliance on a 1:1 basis, thereby giving sources in those states the incentive to begin reducing their emissions sooner. Flow control no longer applies in 2009 and beyond, so transferred NBP allowances may be used under CAIR on a straight 1:1 basis with no restrictions or time limits.
Furthermore, sources outside of the NBP region can buy and use pre-2009 NBP allowances in the CAIR NOx ozone season trading program. Finally, in order to be in compliance, NBP sources that did not have enough allowances in their accounts at the end of the reconciliation period to cover their 2008 ozone season emissions surrendered 2009 CAIR allowances at a 3:1 ratio.
Appendix A: 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|