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A Mass-based Approach with Voluntary Trading for States Implementing Section 111(d)

Franz T. Litz

To date discussions around implementation of federal 111(d) standards have tended to focus 

on a handful of implementation mechanisms that have been used in the past, or that 

resemble approaches that have been used in the past in other contexts. Mass-based 

approaches are attractive to states and stakeholders because mass-based approaches are 

easier to implement and capture all emissions reductions no matter how those reductions 

occur. While trading of emissions reductions among regulated entities and across state lines 

is generally seen as the most cost-effective approach, some states may be reluctant to

embrace a mandatory trading program. This paper proposes an emissions budget approach 

with optional trading that can be implemented by a single state or as a multi-state approach. 

The approach outlined here borrows from two other mass-based approaches under 

consideration by states and stakeholders: the utility budget approach and emissions budget 

with trading approach. Under both of these mass-based approaches, the aim is to provide 

flexibility for owners and operators of covered power plants (“affected units” in EPA’s 

parlance) to achieve emissions reductions in a least-cost manner. The proposal is 

essentially a “utility” portfolio approach with voluntary trading. Owners of affected units 

would choose whether they opt in to trading with other owners of affected units that likewise 

opt in. States—ideally with EPA assistance—could create the infrastructure for trading to 

occur across state lines.

The approach can be summarized in the following steps:

1. EPA issues the final 111(d) guidelines to states, including the state goals and the 

timeline for achieving those goals.

2. The state converts the rate-based state goal to emissions budgets for each year.

3. The state allocates shares of its state emissions budget to each utility or other owners 

of affected units. In deregulated states the owners will be merchant owners.

4. Owners of affected units are required to measure, monitor and report their carbon 

emissions. Emissions for each affected unit are tracked in an emissions tracking 

system that states can create—ideally with EPA assistance.

5. Because the budget is allocated to the utility or other owner entity, it covers the utility’s 

fleet. The utility can manage its portfolio to determine the optimal approach to 

reducing emissions, whether through a change in dispatch, heat rate improvements, a 

shift to low or zero carbon generation, investments in end-use energy efficiency, or

any other that has the effect of reducing emissions across its entire portfolio.
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6. At the end of the prescribed time period—often referred to as the compliance period—

the owner of the affected units must demonstrate that the aggregate emissions from 

all of its affected units remains at or below its emissions budget for those units. If the 

emissions are less than the prescribed budget, the state can allow the owner to carry 

any “unspent” allowances forward to subsequent years—i.e., allow the unused tons to 

be “banked”.

7. If an owner’s affected units emit more carbon emissions than the prescribed budget, 

then the owner is out of compliance and subject to enforcement by the state (and 

ultimately EPA or a citizen’s group if the state fails to enforce).

8. Owners that do not opt into the trading mechanism cannot transfer unused tons to 

other owners, nor can they purchase unused tons from others and use them for 

compliance. 

9. If the owner of affected units opts into a trading mechanism, then:

9.1. The state issues the owner emissions allowances in an amount equal to the 

number of tons in its emissions budget for each year. Allowances are deposited 

by the state into the owner’s allowance account, which is part of the allowance 

tracking system.

9.2. At the end of each compliance period, the owner of the affected units must 

surrender enough allowances to cover its emissions during the compliance 

period. The state extinguishes the surrendered allowances from the owner’s 

account in the allowance tracking system. This is handled electronically.

9.3. Allowances that are not surrendered are bankable and can be saved for future 

compliance periods. Or those allowances may be transferred to other owners of 

affected units that need those allowances (or to other entities with accounts in 

the allowance tracking system).

10.States will erect the voluntary trading mechanism, which consists of an emissions and 

allowance tracking system, or EPA could erect a national system that states and their 

affected units can opt into.

11.Each individual state can choose to allow its affected units to surrender allowances 

from other states. Allowances could be accepted from states with a voluntary or 

mandatory trading mechanism, so long as EPA has approved the emissions budgets 

for those states and the systems in the other states are approved as having integrity. 

A system has integrity if there is no “printing” of unauthorized allowances, and the 

tracking of allowances occurs in a manner that prevents no double counting or double 

surrender of the same allowance.