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pdfThe NOx Budget Trading Program:
2008 Emission, Compliance, and Market Analyses
T
he 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. For
more information on the NBP, please visit: . Detailed
emission results and other facility and allowance data are
also publicly available on EPA’s Data and Maps Web site at
. To view emission and other facility information in an interactive file
format using Google Earth or a similar three-dimensional
platform, go to .
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 an average price of
$825/ton in January to $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
native 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.
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 alter-
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 allow-
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.
July 2009
The NOx Budget Trading Program: 2008 Emission, Compliance, and Market Analyses
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.
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
• 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.
ance 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
2
Compliance Deadline
May 1, 2003
May 31, 2004
May 1, 2007
Source: EPA, 2009
The NOx Budget Trading Program: 2008 Emission, Compliance, and Market Analyses
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.
Figure 2: Number of Units in the NBP by Type in 2008
Unclassified EGUs
3 (<1%)
Industrial Units
319 (12%)
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. For example,
some units provide electricity only on peak demand days,
and may not operate every year.
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.
Emission Reductions
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.
Coal EGUs
715 (28%)
Oil EGUs
433 (17%)
Notes:
• The three “unclassified” units represent units in long-term shutdown or other non-operating status that remained identified as
affected units under the NBP and that had not retired prior to
the 2008 ozone season.
• Percentages add up to more than 100 due to rounding.
Source: EPA, 2009
Figure 3: Ozone Season NOx Emissions from All NBP Sources
2,200
2,000
Emissions (thousand tons)
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.
Gas EGUs
1,098 (43%)
1,800
1,924
1,600
1,400
1,200
1,256
1,000
800
849
600
609
400
528
549
508
506
481
2005
2006
2007
2008
200
0
1990
2000
2003
2004
Ozone Season
Ozone Season NOx Emissions
Total State Trading Budgets
Notes:
• Data reflect full ozone season emissions in all years for all states.
The year 2000 baseline value has been adjusted to correct a misprint in Figure 5 of the 2007 NBP report.
• The 2008 total state trading budgets include opt-in allowances,
where applicable (New York, Ohio, and West Virginia).
Source: EPA, 2009
3
The NOx Budget Trading Program: 2008 Emission, Compliance, and Market Analyses
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.
and emissions subject to compliance, see Appendix A and
Figure 6 on page 7.
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
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.
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.
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.
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
Table 1: Comparison of Ozone Season NOx Emissions, Heat Input, and NOx Emission Rates for All NBP Sources, 2003–2008
Units by
Fuel Type 2003
Ozone Season NOx Mass Emissions
(thousand tons)
Ozone Season Heat Input
(billion mmBtu)
Ozone Season NOx Emission Rate
(lb/mmBtu)
2004
2005
2006
2007
2008
2003
2004
2005
2006
2007
2008
2003
2004
2005
2006
2007
2008
Coal
800
564
494
475
475
456
4.91
4.91
5.10
5.06
5.15
4.93
0.32
0.23
0.19
0.19
0.18
0.18
Oil
26
25
32
14
13
9
0.27
0.25
0.31
0.17
0.17
0.13
0.19
0.20
0.20
0.16
0.15
0.14
Gas
24
20
23
19
19
16
0.59
0.70
0.85
0.87
0.99
0.85
0.08
0.06
0.05
0.04
0.04
0.04
Total
849
609
549
508
506
481
5.77
5.86
6.27
6.10
6.30
5.91
0.29
0.21
0.18
0.17
0.16
0.16
Notes:
• Tons are rounded to the nearest 1,000, and the heat input values are rounded to the nearest 10 million mmBtus. Totals in final row may not
equal the sum of individual rows due to rounding.
• The average emission rate is based on dividing total reported ozone season NOx emissions for each fuel category by the total ozone season
heat input reported for that category, and then rounding the emission rate to the nearest 0.01 lb/mmBtu. The average emission rate expressed for the total uses total NOx mass divided by total heat input to represent the heat input-weighted average for the three fuel categories.
• Fuel type, as shown here, is based on the monitoring plan primary fuel designation submitted to EPA; however, many units burn multiple
fuels. Also, one primary wood-fired boiler is classified with the coal-fired units based on its secondary fuel.
Source: EPA, 2009
4
The NOx Budget Trading Program: 2008 Emission, Compliance, and Market Analyses
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.
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, Ken-
Figure 4: State-level Ozone Season NOx Emissions from NBP to
CAIR, 1990–2010
tucky, 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, online at .
High Electric Demand Days
1990 Emissions
2000 Emissions
2008 Emissions
2010 Projection
Scale: Largest bar equals 241,000 tons of NOx emissions in Ohio,
1990.
Note: Projected emissions in 2010 represent estimated reductions
due to the implementation of CAIR.
Source: EPA, 2009
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/
5
The NOx Budget Trading Program: 2008 Emission, Compliance, and Market Analyses
Figure 5: Comparison of Ozone Season Daily NOx Emissions for
All NBP Units, 2003–2008
7000
Emissions (tons)
6000
5000
4000
3000
2000
1000
May
Jun
Jul
Aug
Sep
Month
2004
2005
2006
2007
2008
Note: The relatively high May 2004 daily emissions represent the
delayed May 31st compliance date that year for non-OTC states.
Source: EPA, 2009
mmBtu in 2008. This 44 percent drop occurred despite a
slight increase in electricity demand for 2008 compared to
2003.
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 noncatalytic 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.
6
Annual Reconciliation
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.
8000
2003
Compliance Results
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
Table 2: NOx Allowance Reconciliation Summary for the NBP 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
Allowances Deducted for Actual Emissions
Additional Allowances Deducted under Progressive Flow
Control (PFC)
Banked Allowances (Carried into 2009 CAIR NOx Ozone
Season Program)
482,476
481,147
1,329
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
Notes:
* “Other Accounts” refers to general accounts in the NOx Allowance Tracking System (NATS) that can be held by any source,
individual, or other organization, as well as state accounts.
** Total includes 2,857 unused new unit allowances returned to
state holding accounts.
*** These penalty deductions are taken from 2009 vintage year
CAIR NOx ozone season allowances, not 2008 allowances.
Source: EPA, 2009
The NOx Budget Trading Program: 2008 Emission, Compliance, and Market Analyses
Reported emissions (tons):
Rounding and report resubmission
adjustments (tons):
Emissions not covered by allowances (tons):
Total allowances deducted for emissions:
481,420
-210
-63
481,147
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.
Table 2 (on page 6) 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.
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
Figure 6: NOx Allowance Allocations and the Allowance Bank,
2003–2008
700
600
Tons (in thousands)
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.
500
400
300
200
100
0
2003
2004
2005
Year
2006
2007
2008
Banked Allowances from Previous Year
Allowances Allocated for Current Year*
Ozone Season Emissions**
Notes:
* Allowances allocated may include those issued by states from
base budget, compliance supplement pool (CSP) (available only
for the first two years of compliance), and opt-in allowances.
Not all budgeted allowances were necessarily issued by the
states each year.
** This graph represents only those emissions from states that
were subject to compliance each year. Thus, the 2003 total
ozone season emissions includes emissions only from OTC
states. The 2004 total represents emissions from non-OTC
states in the NBP (except Missouri) during a shortened control
period (May 31 to September 30) and OTC states during the full
control period (May 1 to September 30). The 2005 and 2006
emissions represent the full ozone season for all participating
NBP states, except Missouri. The 2007 data is the first year in
which the ozone season emissions represent all NBP states, including Missouri.
Source: EPA, 2009
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
7
The NOx Budget Trading Program: 2008 Emission, Compliance, and Market Analyses
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.
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 gasfired 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 gasfired units, and 28 percent of oil-fired units. The relatively
low percentage for oil-fired units was consistent with the
8
decline in oil-fired heat input, as most of these units were
used infrequently and qualified for reduced monitoring.
Compliance Options
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.
How Controls Work
• Combustion Controls — 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.
• SCR — Selective Catalytic Reduction (SCR) is an addon 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.
• SNCR — 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).
The NOx Budget Trading Program: 2008 Emission, Compliance, and Market Analyses
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 as-
Table 3: NBP Operating Units by Control Type in 2008
Control Type
Number of Units
Percent of
Total
Non-controlled
762
30%
Combustion
803
31%
SCR
435
17%
SNCR
101
4%
Other Control
462
18%
Source: EPA, 2009
0.40
0.30
0.20
0.10
2003
2004
2005
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
Number of Non-Controlled Units
Units
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.
NOx Rate for Non-Controlled Units
0.50
400
350
300
250
200
150
100
50
2003
2004
2005
Heat Input for Non-Controlled Units
Heat Input (billion mmBtu)
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.
0.60
0.50
Emissions (thousand tons)
Of the 2,563 units that operated in 2008 (out of a total of
2,568 affected units), approximately 30 percent were noncontrolled (see Table 3), a share that has remained stable
since the start of the program in 2003. As 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.
Emission Rate (lb/mmBtu)
Figure 7: Summary Ozone Season Data, 2003–2008
NOx Controls in 2008
140
0.40
0.30
0.20
0.10
2003
2004
2005
NOx Mass for Non-Controlled Units
120
100
80
60
40
20
2003
2004
Coal Units
2005
Oil Units
Gas Units
All Units
Source: EPA, 2009
9
The NOx Budget Trading Program: 2008 Emission, Compliance, and Market Analyses
sumptions 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 noncontrolled, 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.
Market Activity
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 $592 per ton (see Figure 9).
In 2008, the final year of the NBP before CAIR went into
effect, NBP emissions were 5 percent below 2007 levels.
Not surprisingly, the downward tendency of allowance
prices that occurred from 2003 to 2007 continued into
2008 (although there was a sharp price spike in August
following the court decision to vacate CAIR). During the
ozone season, NBP sources emitted 47,033 tons fewer than
their overall budget, and the allowance bank increased to
273,208. This increase contributed to the lower allowance
prices. These banked allowances have been converted to
CAIR NOx ozone season allowances as of January 1, 2009
and will be available for compliance purposes under CAIR.
In a cap and trade program, sources may purchase allowances as part of their compliance strategy. Because abatement costs are not the same for all sources, the flexibility
offered by cap and trade programs (e.g., choice of controls,
efficiency, buy/sell/bank allowances) allows sources to
achieve emission targets at a lower cost than through a
command and control program. By allowing sources to
buy, sell, and bank allowances in order to comply with the
Figure 9: NOx Allowance Spot Price (Prompt Vintage), January
2008–November 2008
Nominal Price ($/ton)
Average NOx Rate
Figure 8: Comparison of Ozone Season NOx Emission Rate for Retired versus Active Non-Controlled Coal Units, 2003–2008
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
2003
2004
2005
2006
2007
2008
Non-Controlled Coal Units that Retired by 2008
All Non-Controlled Coal Units
Note: Non-controlled coal units that retired by 2008 did not report
emissions in 2008.
Source: EPA, 2009
10
$1,500
$1,400
$1,300
$1,200
$1,100
$1,000
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Date
Note: Prompt vintage is the vintage for the “current” compliance
year. For example, 2008 vintage allowances were considered the
prompt vintage until the true-up period closed at the end of November 2008.
Source: CantorCO2e’s Market Price Indicator (MPI), 2009; see
The NOx Budget Trading Program: 2008 Emission, Compliance, and Market Analyses
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.
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. 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
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.
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
10
9
8
Allowances (millions)
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.
What Is the Difference between Marginal
Cost, Operating Cost, and Capital Cost?
7
6
5
4
3
2
1
1998
1999
2000
2001
2002
2003
Year
EPA Transfers to Account
Source: EPA, 2009
2004
2005
2006
2007
2008
Private Transactions
11
The NOx Budget Trading Program: 2008 Emission, Compliance, and Market Analyses
Figure 11: Breakdown of Private NOx Allowance Transfers,
2003–2008
900
237
800
228
Allowances (thousands)
700
247
600
194
400
300
200
Role of Brokers and Their Fees
608
544
500
131
459
425
404
131
199
100
0
2003
2004
2005
2006
2007
2008
Year
Allowances Transferred Between Economically Distinct Parties
Allowances Transferred Between Related Parties
Source: EPA, 2009
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 trades
in 2007 to 131,000 in 2008 (see Figure 11).
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
1
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.
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.
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-andTrade 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.
12
The NOx Budget Trading Program: 2008 Emission, Compliance, and Market Analyses
Appendix A: State Trading Budgets, 2003–2008
STATE
2003
2004
2005
2006
2007
2008
AL
0
34,459
25,497
25,497
25,497
25,497
CT
4,950
4,477
4,477
4,477
4,477
4,477
DC
233
233
233
233
233
233
DE
5,395
5,227
5,227
5,227
5,227
5,227
IL
0
53,245
35,557
35,557
35,557
35,557
IN
0
75,644
55,729
55,729
55,729
55,729
KY
0
49,744
36,224
36,224
36,109
36,109
MA
13,334
12,861
12,861
12,861
12,861
12,861
MD
19,306
15,466
15,466
15,466
15,466
15,466
MI
0
41,154
31,247
31,247
31,247
31,247
MO
0
0
0
0
19,089
13,459
NC
0
42,184
41,547
34,632
34,713
34,703
NJ
9,750
13,022
13,022
13,022
13,022
13,022
NY
44,161
41,388
41,380
41,397
41,397
41,385
OH
0
72,366
49,975
49,978
49,974
49,842
PA
66,606
50,843
50,843
50,843
50,843
50,843
RI
936
936
936
936
936
936
SC
0
25,022
19,678
19,678
19,678
19,678
TN
0
42,045
31,480
31,480
31,480
31,480
VA
0
26,699
21,195
21,195
21,195
21,195
WV
0
46,215
29,501
29,507
29,507
29,507
Totals:
164,671
653,230
522,075
515,186
534,237
528,453
Note: Totals include base budget, compliance supplement pool, and opt-in allowances, as applicable, for a given year and state. Some states
may not issue all budget allowances, and so the total budgets presented in this file may be higher than the total allowances allocated as presented in report tables and graphics that depict allowance allocations and allowance bank totals (see, e.g., Figure 6).
Source: EPA, 2009
13
The NOx Budget Trading Program: 2008 Emission, Compliance, and Market Analyses
Appendix B: Ozone Season NOx Emissions (Tons) from NBP Sources, 1990–2008, and 2008 State Trading Budgets
State
1990
2000
2003
2004
2005
2006
2007
2008
2008
Budget
AL
89,758
84,560
50,895
40,564
33,632
27,812
28,744
30,221
25,497
CT
11,203
4,697
2,070
2,191
3,022
2,514
2,152
1,721
4,477
DC
576
134
72
35
279
115
76
133
233
DE
13,180
5,256
5,414
5,068
6,538
4,763
5,454
4,285
5,227
IL
124,006
119,460
48,917
40,976
37,843
36,343
35,630
34,126
35,557
IN
218,333
145,722
100,772
68,375
57,249
55,510
56,374
57,838
55,729
KY
153,179
101,601
63,057
40,394
36,730
37,461
40,210
39,386
36,109
MA
40,367
14,324
9,265
7,481
8,269
5,464
3,666
3,230
12,861
MD
54,375
28,954
19,257
19,944
20,989
18,480
16,521
10,667
15,466
MI
120,132
80,425
45,614
39,848
42,157
40,353
34,354
34,358
31,247
MO
64,272
34,058
29,407
16,190
18,809
15,917
12,961
12,777
13,459
NC
92,059
73,082
51,943
39,821
32,888
30,387
28,390
27,105
34,703
NJ
44,359
14,630
11,003
10,807
11,277
8,692
7,773
7,139
13,022
NY
84,485
43,583
34,815
34,157
36,633
26,339
24,728
20,934
41,385
OH
240,768
159,578
133,043
67,304
54,335
52,817
57,862
54,644
49,842
PA
199,137
87,329
51,530
52,140
51,125
52,806
57,615
56,747
50,843
RI
1,099
288
209
177
253
181
187
161
936
SC
56,153
39,674
34,624
25,377
18,193
18,376
18,418
17,552
19,678
TN
115,348
69,641
55,376
31,399
25,718
23,930
23,261
21,711
31,480
VA
51,866
40,043
32,766
25,448
22,309
20,491
22,957
19,596
21,195
WV
149,176
109,198
69,171
41,333
30,401
28,852
28,967
27,089
29,507
All NBP States
1,923,831
1,256,237
849,220
609,029
548,649
507,603
506,300
481,420
528,453
Notes:
• Emissions for Alabama, Michigan, and Missouri are for units in the portion of the state that became subject to the NBP in 2004 (Alabama and
Michigan) and 2007 (Missouri).
• The 2008 state budget values include opt-in allowances, where applicable (New York, Ohio, and West Virginia).
• Emissions for prior years reflect emission resubmissions as of April 1, 2009, and may differ slightly from numbers that appear in previous
progress reports.
Source: EPA, 2009
14
| File Type | application/pdf |
| File Modified | 2018-08-17 |
| File Created | 2009-10-05 |