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. For 

more information on the NBP, please visit: <http://www.

epa.gov/airmarkets/progsregs/nox/sip.html>. Detailed 

emission results and other facility and allowance data are 

also publicly available on EPA’s Data and Maps Web site at 

<http://camddataandmaps.epa.gov/gdm>. To view emission and other facility information in an interactive file 

format using Google Earth or a similar three-dimensional 

platform, go to <http://www.epa.gov/airmarkets/progress/interactivemapping.html>.

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 alterAt 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)

July 2009

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.

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 allowThe NOx Budget Trading Program:

2008 Emission, Compliance, and Market Analyses
2

The NOx Budget Trading Program: 2008 Emission, Compliance, and Market Analyses

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 

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. 

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. 

May 1, 2003

May 31, 2004

May 1, 2007

Compliance Deadline

Figure 1: NOx SIP Call Program Implementation

Source: EPA, 2009
3

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.

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. 

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.

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.

Figure 3: Ozone Season NOx Emissions from All NBP Sources

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2008

Emissions (thousand tons)

Ozone Season

1,924

1990

1,256

2000

849

2003

609

2004

549

2005

508

2006

506

2007

481

528

Total State Trading Budgets 

Ozone Season NOx Emissions

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

Figure 2: Number of Units in the NBP by Type in 2008

Unclassified EGUs 

3 (<1%) 

Gas EGUs

1,098 (43%)

Industrial Units 

319 (12%)

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
4

The NOx Budget Trading Program: 2008 Emission, Compliance, and Market Analyses

Units by 

Fuel Type

Ozone Season NOx Mass Emissions 

(thousand tons)

Ozone Season Heat Input 

(billion mmBtu)

Ozone Season NOx Emission Rate 

(lb/mmBtu)

2003 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

Table 1: Comparison of Ozone Season NOx Emissions, Heat Input, and NOx Emission Rates for All NBP Sources, 2003–2008

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 

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.

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 
5

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, KenFigure 4: State-level Ozone Season NOx Emissions from NBP to 

CAIR, 1990–2010

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

1990 Emissions

2000 Emissions

2008 Emissions

2010 Projection

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 <http://www.epa.gov/airmarkets/progress/progress-reports.html>.

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/
6

The NOx Budget Trading Program: 2008 Emission, Compliance, and Market Analyses

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.

Compliance Results

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. 

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 

Figure 5: Comparison of Ozone Season Daily NOx Emissions for 

All NBP Units, 2003–2008

Note: The relatively high May 2004 daily emissions represent the 

delayed May 31st compliance date that year for non-OTC states.

Source: EPA, 2009 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 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

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

Emissions (tons)

1000

2000

3000

4000

5000

6000

7000

8000

May Jun Jul Aug Sep

Month

2003 2004 2005 2006 2007 2008
7

The NOx Budget Trading Program: 2008 Emission, Compliance, and Market Analyses

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 

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

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

Figure 6: NOx Allowance Allocations and the Allowance Bank, 

2003–2008

0

100

200

300

400

500

600

700

Tons (in thousands)

Banked Allowances from Previous Year

Allowances Allocated for Current Year*

Ozone Season Emissions**

Year

2003 2004 2005 2006 2007 2008

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 
8

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 

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).
9

The NOx Budget Trading Program: 2008 Emission, Compliance, and Market Analyses

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 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.

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.

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 asTable 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%

Figure 7: Summary Ozone Season Data, 2003–2008

Source: EPA, 2009

Source: EPA, 2009

Coal Units Oil Units Gas Units All Units

2003 2004 2005 2006 2007 2008

Heat Input (billion mmBtu)

0.50

0.40

0.30

0.20

0.10

2003 2004 2005 2006 2007 2008

Emission Rate (lb/mmBtu)

0.50

0.40

0.30

0.20

0.10

0.60

NOx Rate for Non-Controlled Units

2003 2004 2005 2006 2007 2008

Units

400

350

300

250

200

150

100

50

Number of Non-Controlled Units

Heat Input for Non-Controlled Units

100

80

60

40

20

120

140

2003 2004 2005 2006 2007 2008

NOx Mass for Non-Controlled Units

Emissions (thousand tons)
10

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.

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 

<www.emissionstrading.com>

Figure 9: NOx Allowance Spot Price (Prompt Vintage), January 

2008–November 2008

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

$1,300

$1,400

$1,500

Nominal Price ($/ton)

Jan

Date

Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Figure 8: Comparison of Ozone Season NOx Emission Rate for Retired versus Active Non-Controlled Coal Units, 2003–2008

Note: Non-controlled coal units that retired by 2008 did not report 

emissions in 2008.

Source: EPA, 2009

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 

Non-Controlled Coal Units that Retired by 2008

All Non-Controlled Coal Units

2003 2004 2005 2006 2007 2008

Average NOx Rate

0.70

0.60

0.50

0.40

0.30

0.20

0.10

0.80

0.90
11

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. 

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 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 

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.

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.

Figure 10: Cumulative NOx Allowances Transferred, 1998–2008 Allowances (millions)

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

1

2

3

4

5

6

7

8

9

10

EPA Transfers to Account Private Transactions

Source: EPA, 2009
12

The NOx Budget Trading Program: 2008 Emission, Compliance, and Market Analyses

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 

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.

Figure 11: Breakdown of Private NOx Allowance Transfers, 

2003–2008

2003 2004 2005 2006 2007 2008

900

800

700

600

500

400

300

200

100

0

Allowances (thousands)

131

199

194

425

228

544

237

608

247

459

131

404

Year

Allowances Transferred Between Economically Distinct Parties

Allowances Transferred Between Related Parties

Source: EPA, 2009

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-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.
13

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
14

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