Air Emissions Trading Program (Market Based)

The United States has pioneered the use of emissions reductions trading for more than 25 years. Emissions reductions trading can take different forms and can be used in different sectors to meet regulatory requirements. There are two general types of emissions reductions trading programs: cap and trade allowance programs and project-based (credit or offset) programs. Both types of emissions reductions trading programs are meant to work in conjunction with existing regulations. Any emissions reductions trading program should be designed and undertaken to complement basic safeguards for public health and the environment under the Clean Air Act and other environmental laws. For both types of emissions reductions trading, the basic concept is similar: trading provides companies with the flexibility to develop cost-effective emissions reduction strategies.

Cap and Trade Allowance Programs

In a cap and trade program, sources of air emissions are allocated a fixed number of allowances. Each allowance represents an authorization to emit a specific quantity of a pollutant (e.g., one ton). The number of allowances is capped in order to reduce emissions to the desired level, and sources are required to meet stringent, comprehensive emission monitoring requirements. At the end of the compliance period, emission sources must hold sufficient allowances to cover their emissions during the period. Sources that do not have a sufficient number of allowances to cover emissions must purchase allowances from sources that have excess allowances from reducing emissions. Cap and trade programs have been applied to large electric power plants. These programs do not require case-by-case review of allowance trades because of the certainty provided by the emissions cap, the fixed number of allowances available, and the stringent monitoring and tracking of all emissions. Examples of cap and trade programs include: (A) the Federal Acid Rain Program for sulfur dioxide or SO2; (B) the New Hampshire Seasonal Nitrogen Oxides or NOx Budget Trading Program; and (C) the annual New Hampshire Clean Power Act.

(A) Federal Acid Rain Program

Title IV of the federal Clean Air Act Amendments of 1990 set a goal of reducing annual SO2 emissions by 10 million tons below 1980 levels. To achieve these reductions, the law required a two-phase tightening of the restrictions placed on fossil fuel-fired power plants. Phase I began in 1995 at the largest, higher emitting plants, mostly coal-burning electric utility plants. Phase II, which began in the year 2000, tightened the annual emissions limits imposed on these large, higher emitting plants and also set restrictions on smaller, cleaner plants fired by coal, oil, and gas. The federal Acid Rain Program affects existing utility units serving generators with an output capacity of greater than 25 megawatts and all new utility units. The only affected power plant in New Hampshire under Phase I was PSNH Merrimack Station in Bow. Additional facilities in New Hampshire affected under Phase II include Newington Station’s dual fuel oil or natural gas-fired unit in Newington and three coal units at Schiller Station in Portsmouth.

The highly successful federal Acid Rain Program has achieved significant reductions in SO2 emissions and has led to the development of other trading programs for other pollutants. It represents a dramatic departure from traditional command and control regulatory methods that establish specific, inflexible emissions limitations with which all affected sources must comply. Instead, the Acid Rain Program introduces an allowance trading system that harnesses the incentives of the free market to reduce pollution. Under this system, affected utility units are allocated allowances based on their historic fuel consumption and a specific emissions rate. Each allowance permits a unit to emit 1 ton of SO2 during or after a specified year. For each ton of SO2 emitted in a given year, one allowance is retired, that is, it can no longer be used. Allowances may be bought, sold, or banked. Anyone may acquire allowances and participate in the trading system. However, regardless of the number of allowances a source holds, it may not emit at levels that would violate federal or state limits set under Title I of the Clean Air Act to protect public health. During Phase II of the program (now in effect), the Act set a permanent ceiling (or cap) of 8.95 million allowances for total annual allowance allocations to utilities. This cap firmly restricts emissions and ensures that environmental benefits will be achieved and maintained.

The Acid Rain Tracking system is administered by EPA.

(B) New Hampshire’s Seasonal Nitrogen Oxides Budget Trading Program
New Hampshire rules (Env-A 3200) were adopted to implement the Ozone Transport Commission Memorandum of Understanding (OTC MOU), an agreement among Northeast and Mid-Atlantic states signed on September 27, 1994, to reduce nitrogen oxide (NOx) emissions. The OTC MOU called for regional reductions in seasonal (summertime) NOx emissions from power plants beginning in 1999, implemented through a market-based budget (or cap) and trading program. Similar to the federal Acid Rain Program, New Hampshire’s NOx Budget Program has been highly successful in reducing seasonal NOx emissions.

Seasonal NOx Allowances Tracking System:

• Seasonal NOx Allowance Transactions Report
• Seasonal NOx Allowances Held Report

(C) New Hampshire’s Annual Four Pollutant Clean Power Act

New Hampshire rules (Env-A 2900) were adopted to implement New Hampshire’s Clean Power Act, which became law on July 1, 2002. The Act calls for annual reductions of multiple pollutants (sulfur dioxide, nitrogen oxides, and carbon dioxide) beginning in 2007 implemented through cap and trading programs. Trades are recorded in the NH Clean Power Act Allowances Tracking System (see below). The Act also provides incentives for emissions reductions, and power plants could earn bonus allowances in various ways for various pollutants.

The Clean Power Act was amended in 2006 to incorporate provisions for mercury reductions. While mercury trading is prohibited, provisions were added to allow mercury credits to be converted to sulfur dioxide allowances and used for compliance with the above trading program.

In 2008, House Bill 1434 was passed to amend the Act to incorporate the Regional Greenhouse Gas Initiative for further carbon dioxide reductions.

NH Clean Power Act Allowances Tracking System:

• Annual Multi-Pollutant Transaction Report
• Annual Multi-Pollutant Allowances Held Report

Project-Based (Credit or Offset) Programs

In a project-based program, also referred to as a credit or offset program, sources earn credit for projects that reduce emissions more than is required by a pre-existing conventional regulations or other benchmarks. These credits can then be traded to other facilities where they can be used for compliance with a conventional regulatory requirement. The decision to generate these credits is voluntary. Credit programs impart flexibility to existing programs, but do not require reductions (except to the extent some percentage of credits generated may be retired for environmental benefit). In the past, the need to determine whether these types of credits represent real emission reductions has sometimes been time-consuming, costly and uncertain. However, credit programs may include a larger variety of sectors and source types than do cap and trade programs. Examples of these types of programs include open market trading programs.

Open Market Trading Programs

In addition to the above mandatory cap-and-trade programs for power plants, there are two voluntary "open market" programs. Subject to some restrictions, any source can voluntarily reduce its emissions of ground-level ozone precursor pollutants [volatile organic compounds (VOCs) or NOx] and register credits in accordance with either of two open market systems: Discrete Emissions Reduction Trading (under Env-A 3100) or Emission Reduction Credits Trading (under Env-A 3000).

Discrete Emissions Reductions Trading is an open market system of trading for discrete emissions reductions (DERs). DERs are mass-based units (1 DER = 1 ton) representing discrete, retrospective emission reductions. Emissions Reduction Credits Trading is a system of trading for emissions reduction credits (ERCs). ERCs are rate-based units (1 ERC= 1 ton/year) representing continuous, permanent emission reductions. Available DER and ERC credits are recorded in the Emissions Reductions Trading Registry.

DER and ERC trading systems are intended to give Reasonably Available Control Technology (RACT) sources and sources subject to New Source Review (NSR) compliance flexibility and the opportunity to reduce compliance costs. Although they are not intended to reduce emissions (i.e., they are not attainment strategies), they do provide both environmental and economic benefits. For example, 10 percent of all DER credits must be retired (discounted) before they are used. In addition, an economic development aspect of the ERC system includes a provision that shutdown credits can only be used by the generator (they cannot be traded). If the generator cannot use them, they become "public ERCs" in a state-controlled account. The state can then use these ERCs for purposes of job retention (highest priority), economic development, and job creation.

A notable difference between DERs and ERCs is the fact that DERs can be banked for future use, and they do not require EPA approval before use. However, the buyer may be liable if EPA finds any shortfalls. ERCs cannot be banked for future use (though continuing, multi-year ERCs can be used to offset continuing, multi-year emission exceedances) and they require EPA approval before they can be registered (and used) (i.e., they must be pre-certified).

NOx for VOC trading is permitted at a 1:1 ratio, but not vice versa. This is intended to encourage NOx reductions, which contribute more than VOC reductions to ozone improvement in New Hampshire, which, as a rural state, is NOx-limited.

• NH Emissions Reductions Trading Registry