NOX BUDGET TRADING PROGRAM

2003 Progress and Compliance Report
Office of Air and Radiation

Clean Air Market Programs

EPA-430-R-04-010

1200 Pennsylvania Ave, NW

(6204J)

Washington, DC 20460

www.epa.gov/airmarkets

August 2004
Introduction

The NOx Budget Trading Program (NBP), is a market-based cap and trade program created to reduce emissions of nitrogen oxides (NOx) from power plants and other largecombustion sources in the eastern United States. NOx is a prime ingredient in the formation of ground-level ozone (smog). 

Building on prior efforts to reduce summertime NOx emissions in the Northeast, eight northeastern states and the District of Columbia implemented the NBP in 2003. Eleven additional

states joined the program in May 2004. NOx emission levels and baselines for states that

complied with the program in 2003, as well as for eleven additional states beginning compliance in 2004, are presented in this report. When fully implemented the NBP is expected to

achieve significant reductions in summertime NOx emissions across much of the eastern U.S.

This report finds that, in states that participated during the first year of the program, ozone

season (May through September) NOx emissions from power plants and other large combustion sources were reduced by more than 30 percent from 2002 levels. These emission

reductions occurred despite an increase in heat input (a measure of power generation) at

affected sources. Emissions have also been reduced by 70 percent from 1990 levels due to

the combination of the NBP and other NOx control programs. In 2003, of the total affected

population of approximately 1,000 units, all but 7 were in compliance. NOx emissions were

reduced on days with peak emissions. In addition, the NOx allowance market has been active.

In anticipation of entering the NBP and in response to other NOx control programs, particularly annual NOx reductions under the Acid Rain Program, the eleven states that did not

participate in the program until 2004 have also made progress in reducing NOx emissions.

NOx emissions in these states were approximately 50 percent below 1990 levels. In addition,

sources successfully monitored and reported emissions for the first time in 2003.

Ground-level ozone, or smog, is formed from oxides of nitrogen (NOx) and volatile organic

compounds (VOCs) in the presence of sunlight and heat. Levels are highest during the hot

summer months when sunlight is strongest. Ozone aggravates asthma, increases susceptibility to respiratory illnesses, and contributes to permanent lung damage. It can also damage

forests, reduce the productivity of agricultural crops, and lead to the decay of monuments

and buildings.

Ozone continues to be a pervasive air pollution problem. In April 2004, EPA released a list of

126 areas that do not meet the new health-based 8-hour ozone standard. In most cases, the

Agency’s findings are based on air quality data from 2001 through 2003. The ozone nonattain2003 Progress and Compliance Report

NOx Budget Trading Program:

1
ment areas, shown in Figure 1, include 474 counties that are home to 159 million people—more

than half of all Americans. The majority of these areas are in the NOx SIP call states. As many of

the states with nonattainment areas plan for the future, the NBP emission reductions will be an

essential component of their strategies for attaining the 8-hour ozone standard.

This report presents the results of the first year of the NBP for affected sources in states with

compliance requirements in 2003, as well as emissions data for NBP sources in other states

that reported their emissions in 2003. Along with the results of the first year of the NBP, this

report presents baseline NOx emission levels prior to the program (for 1990 and 2000). As the

program matures and as EPA continues to assess progress, these baselines will help EPA 

analyze emission trends and the impact of NOx reductions achieved by NBP sources.

8-hour Ozone Standard Attainment and Nonattainment Areas in the U.S. as of

April 2004

2

Figure 1

Many counties in the NBP region do not meet the 8-hour ozone standard.

Source: EPA

8-Hour Ozone Standard (promulgated in 1997):

The 8-hour standard is met when the 3-year average of the annual fourth highest daily maximum 8-hour average

concentration is less than 0.08 ppm (parts per million).

What Does It Mean?

EPA collects ozone data on an hourly basis. Essentially, 8-hour average ozone concentrations at a monitor cannot

exceed 0.08 ppm more than three days per year. For compliance purposes:

■ Hourly ozone measurements are used to compute 8-hour average concentrations.

■ The daily maximum 8-hour average is recorded for each day.

■ For each year, the fourth highest daily maximum concentration is calculated.

■ These annual fourth highest daily maximum concentrations are averaged over three-year periods. 

■ If the average exceeds 0.084 ppm (0.085 rounds up), the area is designated as a “nonattainment area.”
What Is the NOx Budget

Trading Program?

3

EPA and the States Have Taken Steps to

Address Regional Transport

Created after years of scientific research and air quality data showed that

upwind NOx emissions can contribute significantly to ozone nonattainment in

downwind states, the NOx Budget Trading Program (NBP) follows several other

major efforts to reduce NOx from large, stationary sources. These initiatives

include the Acid Rain Program, the Ozone Transport Commission’s (OTC) NOx

Budget Program, New Source Review, New Source Performance Standards,

application of Reasonably Available Control Technology to existing sources, and

other state and local efforts.

Title IV of the 1990 Clean Air Act Amendments created the Acid Rain Program.

This program, which achieved large SO2 reductions from power plants through

a cap and trade program, also required coal-fired power plants throughout the

country to reduce their NOx emission rates (NOx emissions per unit of heat

input). The goal of the Title IV NOx program was to achieve and maintain an

annual 2 million ton reduction in NOx emissions from what emissions would have

been in 2000 without the program. This goal has been surpassed. In 2002, due

A Quick Snapshot of National and Regional NOx Control Programs

■ Acid Rain NOx Reduction Program (ARP)—Annual, national program controlling NOx emissions from electric generating units.

Sources are required to meet certain rates of NOx emissions. There is no cap on emissions or allowance trading. The program

began in 1996 with a second phase beginning in 2000. 

■ Ozone Transport Commission (OTC) NOx Reduction Programs—States in the Northeast collaborated to achieve ozone-season

NOx reductions in several phases. In Phase I, sources were required to reduce their annual rates of NOx emissions to meet

Reasonably Available Control Technology requirements. In Phase II, states participated in a cap and trade program, the OTC

NOx Budget Program, to achieve additional reductions during the ozone season. In 2003, the OTC NOx Budget Program was

replaced by the larger NOx Budget Trading Program.

■ NOx State Implementation Plan (SIP) call—Building upon analyses done by the Ozone Transport Assessment Group (OTAG),

this rule was finalized by EPA in 1998. It required states significantly contributing to ozone nonattainment problems in other

states to reduce their NOx emissions during the ozone season beginning in 2003. This rule gave states the flexibility to reduce

emissions through various means and gave them the option to participate in the NOx Budget Trading Program.

■ NOx Budget Trading Program (NBP)—An ozone season cap and trade program intended to help states meet their NOx SIP call

required reductions. States in the OTC began to comply in 2003 and many other states across the East and Midwest began to

reduce emissions in 2004. Twenty-one states and the District of Columbia are participating or will participate in the future.
4

to Title IV and other state actions, annual NOx emissions from Acid Rain

Program sources were more than 3 million tons lower than what they would

have been without Title IV. However, because there is no cap on Acid Rain

Program NOx emissions, NOx emissions may increase in the future as demand

for electricity continues to grow.

The 1990 Clean Air Act Amendments also established the OTC to mitigate

interstate transport of pollution in the Northeast. In September 1994, eleven

states and the District of Columbia signed a Memorandum of Understanding

(MOU) committing to reduce NOx emissions throughout the region. In 1995,

the OTC states required existing sources to meet Reasonably Available Control

Technology (RACT) limits, and in 1999 through 2002, most of the OTC states

achieved deep NOx reductions through an ozone season cap and trade program for NOx called the OTC NOx Budget Program. The OTC states that

participated in this trading program included Connecticut, Delaware, Maryland,

Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode

Island, and the District of Columbia.1

Separate from the activity in the OTC, EPA and the Environmental Council of the

States formed the Ozone Transport Assessment Group (OTAG) in 1995. This workgroup brought together interested states and other stakeholders, including

industry and environmental groups. Its primary objective was to assess the ozone

transport problem and develop a strategy for reducing ozone pollution throughout

the eastern half of the U.S.

The NOx SIP Call Requires Significant

Summertime NOx Reductions across Eastern

States

Based on the findings of OTAG, EPA proposed the NOx SIP call in 1997 and finalized

it in 1998. This rule concluded that NOx emissions in twenty-two states and the

District of Columbia contribute to ozone nonattainment in other states, and the rule

required affected states to amend their state implementation plans (SIPs) and limit

NOx emissions. EPA set an ozone season NOx budget for each affected state,

essentially a cap on emissions from May 1 to September 30 in the state. The first

control period was scheduled for the 2003 ozone season. 

The NOx SIP call did not mandate which sources must reduce emissions but, rather,

required states to meet an overall cap (or budget) and gave them flexibility to develop control strategies to meet the cap. The NBP was developed to help states

achieve highly cost-effective NOx emission reductions.

1 Vermont and Maine also signed the MOU but chose to meet their NOx reduction goals outside of the trading

program. Northern Virginia is also part of the OTC but did not sign the MOU and has not participated in the

OTC NOx reduction programs. This report, therefore, does not refer to Virginia as one of the OTC states in

terms of trading program implementation.
The NBP is a cap and trade program for large electric generating units (EGUs) and

large industrial boilers, turbines, and combined cycle units. In this type of program,

the emissions budget sets a “cap” on emissions at a

specified level. Sources are provided “allowances”

(each allowance represents one ton of emissions),

and each year the source must hold sufficient

allowances to cover all NOx tons the source emits

during the ozone season. To monitor emissions,

sources use continuous emission monitoring systems

(CEMS) or other approved monitoring methods under

EPA’s stringent monitoring requirements (40 CFR

Part 75). If a source’s emissions are less than the

allowances it holds, the source can sell the unused

allowances or bank the allowances for use in a future

ozone season.

The NOx SIP call faced many legal challenges.

Although the U.S. Court of Appeals for the D.C. Circuit

largely upheld most of the final rule, the court’s decision resulted in Wisconsin and portions of Georgia

and Missouri being removed from the list of areas

where reductions are required (decreasing the number of affected states to 21 states and the District of

Columbia).2 In addition, the initial deadline for emission

reductions under the NOx SIP call was delayed until May 31, 2004. The OTC states

had been set to achieve additional reductions in May 2003 under the OTC trading

program. With the exception of New Hampshire, these states instead began to

implement the NBP in May 2003.3 New Hampshire is not affected under the NOx

SIP call and is not part of the NBP. 

The OTC states were joined in the NOx SIP call by Alabama, Illinois, Indiana,

Kentucky, Michigan, North Carolina, Ohio, South Carolina, Tennessee, Virginia, and

West Virginia on May 31, 2004 (see Figure 2). All of these states have chosen to

meet the NOx SIP call requirements through participation in the NBP. Affected

portions of Georgia and Missouri will be required to comply with the NOx SIP call in

2007. In Alabama, Georgia, Michigan, and Missouri, only a portion of each state is

subject to the NOx SIP call. Because Georgia and Missouri are not yet participating in the program, this report does not discuss results for these states.

5

2 Due to litigation, EPA stayed the NOx SIP call findings with respect to the 8-hour ozone standard for all affected

states (65 FR 56245). On April 21, 2004, EPA’s final NOx SIP call Phase II Rulemaking determined that Wisconsin

would not be included in the rule based on the 1-hour ozone standard (69 FR 21609). However, in the future,

EPA may still consider lifting the stay with respect to the 8-hour standard for all affected states, including

Wisconsin (69 FR 21608).

3 The overall reduction goals set for the NBP under the NOx SIP call are generally consistent with reduction levels

planned for 2003 in the OTC states, and many program features, such as allowance tracking and reporting, are

consistent between the two programs.

NOx SIP Call Region

Figure 2

Participation in the NBP is phased in across the region.

Source: EPA

May 2003

May 2004

May 2007

Compliance Deadline
Progress in reducing emissions under a cap and trade program can be evaluated

primarily in two ways. NOx Budget Trading Program (NBP) emissions can be compared to:

■ A baseline level of emissions (emissions from a period prior to the start of the

program), or

■ The reduction goals—or budgets—set for the NBP in the rules of each affected

state.

EPA believes both assessment approaches can provide valuable insights on emission reductions achieved by the program, and the following sections clarify the

assumptions and approaches used to derive baseline and budget levels for purposes of program evaluation. EPA plans to assess emission changes under the

NBP on a regular basis. 

Understanding Emission Levels Prior to the

Program Can Help Us Measure Progress

To measure progress in reducing ozone season NOx emissions, it is helpful to understand how emissions under the program compare to emissions prior to the program.

EPA has chosen 1990 as a baseline year because it represents emission levels before

the implementation of the 1990 Clean Air Act Amendments, and can document

progress achieved under the amendments. The 1990 baseline period also was used

throughout the Ozone Transport Assessment Group (OTAG) process, which led to the

development of the NOx SIP call. 

For the 1990 ozone season emission estimates, data were derived from annual 1990

National Emission Inventory (NEI) data. The Ozone Transport Commission (OTC) states

used the 1990 NEI data to develop a refined 1990 ozone season inventory as part of

their efforts to reduce ozone in the region.4 In this report, EPA is using the OTC’s

refined NEI inventory for the OTC states, and EPA has developed an ozone season

inventory directly from the NEI for the non-OTC states. 

Emissions have been reduced greatly since 1990, but many of these reductions result

from control programs other than the NBP. To better reflect the reductions that can

6

Understanding Baselines

and Budgets: Guidelines for

Program Evaluation

4 1990 OTC NOx Baseline Emission Inventory, U.S. EPA, EPA-454/R-95-013, July 1995.
7

be attributed to the NBP, emissions from the 2000 ozone season are also presented

here. The year 2000 was chosen because most of the reductions due to the implementation of earlier NOx regulatory programs under the 1990 Clean Air Act

Amendments had already occurred by 2000, but sources were not yet implementing

the NBP at that time. Emissions in 1990 and 2000 both provide valuable information

for evaluating the extent to which the NBP and other control programs are providing

reductions in NOx levels.

In 2000, the stringent emissions reporting requirements for Acid Rain Program and

OTC NOx Budget Program sources provide accurate ozone season NOx data for most

of the NBP units, and those units account for well over 90 percent of all the emissions

from affected sources in most NBP states in 2000. There is no comparable, qualityassured emissions monitoring data for units that are not affected by either of these

programs. These units include industrial units and non-Acid Rain Program electric generating units outside the OTC region. Therefore, to approximate these 2000 ozone

season NOx emissions for industrial units, EPA has used the most recent NEI data

available (1999). To approximate 2000 emissions for non-Acid Rain Program electric

generating units, EPA used data developed to set the NOx SIP call state budgets.5

Figure 3 shows the total 1990 and 2000 baseline ozone season NOx emissions.

Between 1990 and 2000, affected sources in the

region reduced ozone season NOx emissions by approximately 600,000 tons (34 percent), mainly due to the

requirements of the annual Acid Rain Program and seasonal OTC program.

States Were Required to

Reduce Emissions to Meet 

a Budget

States were given budgets, or caps, on their ozone season emissions. These are the target levels they are

expected to achieve under the NBP. The actual number

of allowances a state allocates to sources for a certain year under the program may not be equal to the

state’s budget. States may hold back some of the

budget to set aside allowances for new units, energy

efficiency or renewable energy projects, or other pur5 These data represent ozone season emission estimates for the 1995 or 1996 ozone season. However, EPA is

using these data instead of NEI data because of difficulty in identifying non-Acid Rain electric generating units in

the NEI. Because the emissions from these units represent only a small percentage of the overall emissions (typically less than 1 percent of the non-OTC states overall EGU emissions), EPA believes that the use of the

1995/1996 data will not significantly change the total 2000 ozone season emissions estimates presented in

this report.

Total Ozone Season NOx Emissions 

in NBP States in Baseline Years 

(All Sources)

Figure 3

Ozone season NOx emissions were reduced by over one

third between 1990 and 2000 in the NBP region.

Source: EPA
poses. Another factor that affects the amount of allowances allocated by each

state is the Compliance Supplement Pool (CSP). The CSP is a pool of extra

allowances included in the NOx SIP call to help sources comply with the trading

budgets in the first two years of the program. EPA established the CSP pool to

address concerns about electricity reliability at the beginning of the program.

States may distribute their respective CSP allowances based on early reductions,

directly to sources based on a demonstrated need, or by some combination of the

two methods. In the OTC states, CSP allowances generally were distributed to

sources based on a pro rata share of banked allowances that the sources held in

the OTC NOx Budget Program. Allowances from the CSP in a given state may be

used to cover emissions during the first two control periods in that state. For the

states that began to comply in 2003, CSP allowances can be used only in the

2003 and 2004 ozone

seasons, while in most of

the remaining NBP states,

the allowances can be

used only in the 2004 and

2005 ozone seasons.6

Figures 4 and 5 help illustrate the levels of

reductions that would be

needed to meet the emission reduction goals set by

the NBP. Emissions for

1990 and 2000 show

progress in reducing NOx

prior to the program.

Budgets are presented to

demonstrate the overall

reduction goals of the program, and budgets with

CSP allowances demonstrate the reduction goals

in the early years of the

program. By comparing

baselines and budgets, it is

easy to see how much further each state would be

expected to reduce emissions to meet their target

levels of emissions.

8

Baseline Emissions and Target Reduction Levels in OTC States

Participating in the NOx Budget Trading Program*

Figure 4

Through the OTC NOx program, the Acid Rain Program, and other Clean Air Act

requirements, the OTC states have made significant progress in reducing ozone season NOx emissions from 1990 levels.

* New Hampshire participated in the OTC program but is not affected by the NBP.

Source: EPA

6 In North Carolina, the state allowed certain sources to use CSP allowances to meet state reduction requirements in 2003, but those

allowances would be deducted from their 2004 allowance allocations under the NBP.
9

Figures 4 and 5 show that all states in the NBP were required to achieve substantial reductions from 1990 levels to meet their budgets. By 2000, the OTC

states had made significant progress toward that goal. They reduced emissions

approximately 55 percent in the region through the OTC NOx program, the Acid

Rain Program, and other Clean Air Act requirements. Because of this, overall, the

OTC states generally only had to achieve small reductions between 2000 and

2003 to meet the target reductions for the NBP.

While the OTC states

were well on their way

to meeting their budgets by 2000, the

non-OTC states generally still had more

work to do to meet

their budgets.

Between 1990 and

2000, the non-OTC

states had reduced

NOx emissions by

approximately 27 percent through the Acid

Rain Program and

other Clean Air Act

requirements, but

they still had to

reduce emissions substantially to meet

their target reductions for the NBP.

Note that the scale in

Figure 5 reflecting

NOx emissions in

states outside the

OTC is different from

the scale in Figure 4

for the OTC states.

Baseline Emissions and Target Reduction Levels in Non-OTC States

Participating in the NOx Budget Trading Program as of May 2004*

Figure 5

Through the Acid Rain Program and other Clean Air Act requirements, the non-OTC states

have achieved more than a 25 percent reduction in ozone season NOx emissions from

1990 levels and are poised to realize further significant reductions.

* Georgia and Missouri will not enter the NBP program until 2007.

Source: EPA

Based on the information in Figures 4 and 5, the overall NOx allowance budgets with

and without Compliance Supplement Pool NOx allowances are:

OTC states: 139,593 (plus 25,031 CSP) allowances = 164,624 allowances

Non-OTC states: 366,475 (plus 141,152 CSP) allowances = 507,627 allowances

Regional total: 506,068 (plus 166,183 CSP) allowances = 672,251 allowances
The NBP Affects a Significant Number of Units

Based on data reported to EPA, there are nearly 2,600 affected and operating

units in the NBP states, including the states that joined the program in 2004.

About 1,000 of these units are in states in the OTC that complied in 2003, while

about 1,600 are in non-OTC states that did not have to comply in 2003. 

The term “unit” means a fossil fuel-fired combustion boiler, turbine, or combined

cycle unit. At a given facility, there may be multiple units. Electric generating units

(EGUs) provide electricity for sale. Many EGUs in the NBP are also covered by the

Acid Rain Program, although the NBP also includes other EGUs (such as some

simple combustion turbines, cogenerators, and independent power producers)

that are exempt from the Acid Rain Program. About 62 percent of all units in the

NBP are also affected by the Acid Rain Program, while other EGUs comprise

about 25 percent of the total units, and non-EGUs make up the other 13 percent. 

Industrial units are sources that provide electricity or

steam for use at their industrial facility, with little or no

electricity generated for off-site use. The Acid Rain

Program covers EGUs but not industrial units.

However, the OTC trading program included industrial

units, and EPA also decided to include industrial boilers,

turbines, and combined cycle units in the NBP. Of the

total affected NBP population of nearly 2,600 units,

approximately 350, or about 13 percent, are industrial

units. This is an increase from the OTC trading program, where about 6 percent of the sources were

industrial units. Figure 6 provides a detailed breakdown

of the classification of NBP units.

The NBP includes boilers, turbines, and combined cycle

units from a diverse set of industries. Some of the OTC

states also have included other combustion units, such

as cement kilns and process heaters. This diversity has

contributed to a wide range of compliance strategies

as facilities faced varying control costs and compliance

needs to meet the requirements of, first, the OTC trading program and, later, the NBP. The various industrial

sources participating in the program have also created additional trading flexibility for EGU compliance. So

far, the inclusion of industrial sources appears to have

been beneficial to the trading programs without creating disproportionate burdens

on these sources. These sources have followed the same monitoring and reporting requirements as EGUs and have participated in the market, buying and selling

allowances. 

10

Units Affected by the NBP—

A Comparison of Electric Generating

Units and Industrial Units for OTC 

and Non-OTC States

Figure 6

About 60 percent of the units affected by the NBP are

also affected by the Acid Rain Program. In addition, the

NBP incudes many other electric generating units,

which were not included in the Acid Rain Program.

Source: EPA
11

Performance under the NBP

in 2003 Already Shows

Positive Results 

In 2003, only sources in the Ozone Transport Commission (OTC) states were

required to hold allowances to cover NOx emissions during the ozone season. In

most of the other states affected by the NOx SIP call, states required sources to

begin monitoring and reporting

ozone season emissions and heat

input data in May 2003, even

though the first control period

did not begin for them until May

31, 2004.7 Thus, the following

sections generally focus on

results in the OTC region,

although there is a brief review of

the reported 2003 emissions in

the other states.

Summertime NOx

Emissions Have

Declined across

the Region

Figure 7 shows the combined

1990 baseline, 2000 baseline,

trading budget, and 2003 emission levels for both the OTC states

and the other NOx Budget Trading

Program (NBP) states. The

2003/2004 trading budget levels

in Figure 7 are presented with and

without the Compliance

Supplement Pool (CSP) allowances.

The budgets for OTC states represent the 2003 budgets, while the

budgets for the other states represent the first control period in 2004.

Regional Baselines, Trading Budgets, and 2003 NOx

Emissions*

Figure 7

In 2003, ozone season NOx emissions were down 56 percent from 1990

levels across the entire NBP region.

* Total emissions in the non-OTC states in 2003 were higher than the budget levels for those

states because the first control period in those states did not begin until 2004. In the OTC

states, 2003 emissions were lower than the budget with or without Compliance Supplement

Pool (CSP) allowances.

Source: EPA

7 In North Carolina, sources were not required to monitor and report data in 2003, although many sources did

so voluntarily (over 75 percent of the sources provided data).
Despite the fact that the 2003 ozone season was not a control period in the non-OTC

states, the universe of sources in the entire NBP area reduced emissions in 2003 by

more than 50 percent from year 1990 baseline levels and by about 33 percent from

year 2000 baseline levels.8 In 2003, OTC states had reduced emissions 70 percent

from 1990 levels and 33 percent from 2000 levels. While many of the reductions

from the 1990 baseline represent other programs implemented under the Clean Air

Act (such as NOx reductions under the Acid Rain Program, the OTC trading program,

and other state rules), the significant decrease since the 2000 baseline documents

additional reductions that, at least to some degree, reflect early reductions as

sources begin to implement controls and other operating changes in anticipation of

the NBP.

OTC States Continue to Reduce below Total

Allocated Allowances

During the OTC trading program, emissions were less

than allowances in every year of the program (1999-

2002). That trend continued under the NBP in 2003. In

the participating OTC states, ozone season NOx emissions in 2003 were approximately 134,000 tons, 18

percent less than the number of NBP allowances allocated in 2003. In addition, 2003 emissions in these

states were more than 30 percent less than their emissions in 2002.

Emissions in many of the OTC states were below allocations in 2003 (see Figure 8). Exceptions included

Delaware, where emissions were essentially the same

as allowances allocated by the state (emissions were

only about 20 tons higher than allocations). In addition,

emissions in Maryland and New Jersey in 2003 were

higher than allocations by about 1,750 tons in Maryland

and about 1,250 tons in New Jersey. However, Maryland

chose to only allocate about 2,200 of its CSP

allowances, while New Jersey allocated about 5,000

fewer allowances than the budget authorized in the NOx

SIP call. New Jersey is using a smaller budget to ensure

that local areas will reach attainment with the ozone

standard. While sources in Maryland and New Jersey acquired allowances from

sources in other states to comply with the program in 2003, emissions in all states,

including Maryland and New Jersey, were significantly lower than 2002 levels.

12

8 Note that the information available in the non-OTC states excludes several North Carolina units that did not monitor in 2003. The reported emissions for North Carolina in 2003 reflect roughly 90 percent of the total ozone

season emissions for affected sources, so the reductions from baseline levels shown in Figure 7 still generally hold

even if all North Carolina sources had reported ozone season emissions in 2003.

OTC States in the NOx Budget Trading

Program: Ozone Season NOx 1990

and 2000 Baselines, Budget, and

2003 Emissions

Figure 8

NOx emissions from NBP units in the 2003 ozone

season in the OTC region were below allocations.

Source: EPA

1990 Baseline

2000 Baseline

Budget

2003 Allowances

2003 Emissions

100,000 tons
13

Other NBP States Will Need to Reduce

Emissions in 2004

In 2003, ozone season emissions were substantially

lower than the 1990 and 2000 baseline levels even for

the states that did not begin to comply with the program until 2004. Figure 9 shows budget levels for

2004 and beyond in these states. A comparison of

2003 emissions with 2004 budgets demonstrates that

some additional reductions will be necessary for these

states to eventually reach their budgets. 

Due to litigation, the 2004 control period for these

states began on May 31, instead of May 1. The

allowance allocations for 2004, however, are based on

a full five-month ozone season. Because of the shorter

control period in 2004 and CSP allowances distributed

in 2004 to help sources comply with the program, EPA

anticipates that these states will have to achieve only

modest reductions in 2004 to comply with the program. In 2005 and subsequent years, the control

period will begin on May 1, and deeper reductions will 

be necessary.

Daily Emission Trends in OTC

States Continue to Show

Significant Decreases

Studies indicate that many of the health effects associated with ozone are attributable to short, peak

exposures. The ozone standard was developed to protect against such short-term exposures. The NBP, however, is a seasonal program

that ensures significant average regional NOx reductions in the ozone season, and

there have been concerns that a seasonal cap would not sufficiently reduce shortterm, peak NOx emissions that may occur on hot, high electricity demand days,

when ozone formation often is a concern.

In the OTC states, the data from the OTC trading program in 1999 through 2002

and the NBP results for 2003 indicate that these trading programs have reduced

average daily emissions, as well as the highest daily NOx emissions in the ozone

season. Average daily emissions and highest daily emissions from affected units

declined significantly in 2003 as sources began to comply with the NBP (see

Figure 10). This decline provides evidence that a seasonal trading program can

Non-OTC States in the NOx Budget

Trading Program: Ozone Season NOx

1990 and 2000 Baselines, Budget,

and 2003 Emissions

Figure 9

In the non-OTC states, 2003 ozone season NOx

emissions were far below 1990 and 2000 baseline

levels, although further reductions will be necessary

in 2004 to achieve compliance.

Source: EPA

1990 Baseline

2000 Baseline

Budget

2003 Emissions

120,000 tons
14

reduce peak daily emission levels. Although ozone formation is a complicated process that is strongly influenced

by the weather, reducing peak daily emissions is expected to help reduce peak ozone concentrations. 

These findings are consistent with a 2003 analysis of

OTC emissions during ozone episodes between 1999

and 2002.9 The study found that, while NOx emissions

from OTC sources tended to be higher during ozone

episodes, these emission increases were related to

increased electricity demand, and such increases would

also have occurred even under a rate-based or command and control program. That study found that plant

operators did not change or relax control strategies

during high ozone periods.

Emissions Reductions Were

Achieved Despite Increases 

in Generation in the Control

Region

Under a cap and trade program, there are many ways that sources can reduce

emissions. One method is to utilize units with high emissions less and to shift

generation to lower-emitting units within the program

or to sources that are not affected by the program.

For example, a plant operator could choose to run a

unit with high emissions less often. The generation

could be taken up by a lower emitting unit at the

plant, by a plant outside of the control region that

would not be affected by the program, or by a generator in another sector of the power industry (e.g., a

new gas-fired unit). In the NBP, if generation shifts to

units upwind of the control area with high rates of

NOx emissions, ozone would be transported into the region and the effectiveness of the program would be reduced. In 2003, with only a portion of the NBP

states complying with the program, the potential for this type of shifting was 

a concern.

Heat input is the heat derived from the combustion of fuel in electric generation.

It is a way to track utilization of affected units. Heat input levels from affected

sources in the OTC states increased between 2002 and 2003 without the addiFor the 2002 ozone season, OTC sources reported

1.6 million mmBtu of heat input. In 2003, that number increased to 1.7 million mmBtu. By comparison,

heat input for Acid Rain Program units in non-OTC

states declined from 4.9 million mmBtu in 2002 to

4.7 million mmBtu in 2003.

Daily Ozone Season Emission Trends

for Former OTC Trading States Only*

Figure 10

Emissions data for NBP units show that daily emissions have been reduced, even on the days with the

highest emissions.

*1997 and 1998 data for Acid Rain Program units only; 1999-

2003 data represent those units plus all other affected units.

Source: EPA

9 Farrell, Alex. (2003) Temporal Hotspots in Emission Trading Programs: Evidence from the Ozone Transport

Commission’s NOx Budget. Presented at Market Mechanisms and Incentives: Applications to Environmental

Policy Conference. Washington, D.C.
tion of a significant number of sources. This indicates that, on average, sources in

the OTC region were able to increase their generation while still complying with

the NBP. Meanwhile, in the non-OTC NBP states, total heat input levels declined

between 2002 and 2003 (based on data available for Acid Rain Program units

only). While some sources in the OTC may have shifted their generation to

sources in non-OTC states in response to the first year of the NBP, it appears that

this generally was not a preferred compliance strategy. Sources in the OTC

appear to have achieved the emission reductions from 2002 levels through

means other than reducing utilization of affected sources and increasing power

generation outside the region.

Sources Achieved a High Rate of Compliance 

in 2003

Under the NBP, sources must hold sufficient allowances to cover their ozone season

emissions each year. Sources can maintain the allowances in compliance accounts

(established for each unit) or in an overdraft account

(established for each facility).10 The overdraft account

allows greater flexibility in “bubbling” between units,

managing banked allowances from previous years,

managing transferred allowances from other sites,

or managing allowances purchased from other NBP

participants. The sources have a two-month window

after the end of the control period to move

allowances between accounts (and buy or sell additional allowances) so that they can ensure their

emissions do not exceed allowances held. Once that

period ends, allowances may not be transferred into

or out of these accounts while EPA reconciles emissions with allowance holdings and identifies the

appropriate allowance deductions from the accounts

for program compliance.

Nearly all of the NBP sources that participated in

2003, both EGUs and industrial units, held sufficient

allowances to cover their emissions at the time that

EPA performed reconciliation. There were seven

sources that had allowance deficiencies (a total of

75 allowances). In cases where the source does not

hold enough allowances to cover their emissions, the

program requires a penalty deduction (3 allowances for each excess ton of emissions) from these sources’ allocations for the next control period. Figure 11

summarizes the allowance reconciliation process for 2003.

Source: EPA

NOx Allowance Reconciliation Summary

in 2003 (OTC States Only)

Total Allocated 2003 Allowances 162,152

Allowances Held in Compliance and 

Overdraft Accounts 148,938

Allowances Held in Other Accounts* 13,214

Allowances Deducted for 2003 Emissions 133,659

Banked Allowances** 28,493

Allowances Held in Compliance and 

Overdraft Accounts 15,279

Allowances Held in Other Accounts* 13,214

Penalty Allowances Deducted*** 225

(from future year allowances)

* Other Accounts refer to general accounts in the NOx Allowance Tracking System (NATS) that can be held by any

source, individual or other organization, and state accounts.

** Does not reflect take back of 1,315 allowances by

Pennsylvania for underutilization of specific sources.

*** These penalty deductions are made from future vintage

year allowances, not 2003 allowances.

10 New Jersey does not use overdraft accounts.

15

Figure 11
16

At the start of a cap and trade program, it is worthwhile to evaluate how different

components of the program are beginning to perform because a new market is

becoming established, new sources are beginning to comply with the program, and

many sources are facing more stringent requirements than ever before. This section examines some of these features, including how the NOx allowance market is

maturing, how sources are complying with the monitoring requirements, and what

types of control technologies sources are beginning to install to meet long-term

program requirements. 

A Healthy Market in NOx Allowances Continues

under the NOx Budget Trading Program

Allowance transfer activity can involve three main types of transfers:

■ Transfers to or from the state as allowance allocations or allowance 

surrenders;

■ Transfers within a company or between related entities (holding company

transfers to an operating subsidiary, for example); and

■ Transfers between separate economic entities. These transfers are categorized broadly as “economically significant trades.”

In 2003, economically significant trades represented approximately 40 percent of

the total transfers between entities other than a state. The economically significant trades provide the strongest indicator of true market activity because they

represent an actual exchange of assets between unaffiliated participants.

Since 2003 is the first year of the NOx Budget Trading Program (NBP), there are

no previous data for all participating states to which the volume of trades can be

accurately compared. The 2003 trading activity was higher than any year under the

Ozone Transport Commission (OTC) program, and EPA expects a significant

increase in 2004 as more sources comply with the program. As in the OTC trading

program, industrial sources have actively traded allowances, and industrial sources

represent about 8 percent of the economically significant trades at this time.

Market Activity, Banking,

and Compliance Costs
17

The price for NOx allowances continues to fluctuate as companies evaluate

ongoing trends in control installations, energy demand, and other factors that

affect the overall costs of control under the NBP. Recent prices are down appreciably from early 2003 (see Figure 12). This suggests that, as the program

progresses and the uncertainty of allowance availability decreases, further price

reductions may occur. This result is consistent with price behavior observed during implementation of the OTC trading program. 

There may have been other factors that account for the drop in allowance

prices. Uncertainty of natural gas prices may have led to higher allowance

prices early in 2003. Prices then may have dropped due to increases in the supply of allowances. Extra allowances were available because CSP allowances were

given for early reductions and because the start of compliance in the 2004 season was delayed from May 1 to May 31.

Banking Occurred in 2003 but Did Not

Trigger Flow Control

Under the NBP, banking provisions allow companies to decrease emissions

more than required early in the program, and save unused allowances for

future use. This creates an economic incentive for sources to achieve deeper

reductions early in the program. Banking allows for earlier environmental and

health benefits and provides a pool of allowances available to address unexpected events or smooth the transition into deeper emission reductions.

Vintage Year NOx Allowance Prices by Month of Sale

Figure 12

NBP allowance prices have fallen sharply after some early price spikes.

Source: Evolution Markets, LLC and Cantor Environmental Brokerage
18

If sources use a large number of banked allowances in one year, the elevated

emissions could potentially reduce the environmental effectiveness of the NBP.

The NBP’s “progressive flow control” provisions were designed to discourage

extensive use of banked allowances in a particular ozone season. Flow control is

triggered when the total number of allowances banked for all sources exceeds

10 percent of the total budget for the next year. When flow control is triggered,

EPA calculates the flow control ratio by dividing 10 percent of the total budget

by the number of banked allowances (a larger bank will result in a smaller flow

control ratio). The resulting flow control ratio indicates the percentage of

banked allowances that can be deducted from a source's account in a ratio of

one allowance per ton of emissions. The remaining percentage of banked

allowances, if used, must be discounted and deducted at a rate of two

allowances per one ton of emissions.

Because emissions were below allowable levels in the

first year of the NBP, participating sources banked

over 28,000 allowances, nearly 18 percent of the

allowances they were allocated in 2003. Banking of

greater than 10 percent of allowances would normally

trigger flow control. However, in 2003, only the OTC

states participated in the NBP control requirements.

Given the entry of many additional states in 2004, the

overall regional budget grew substantially, above

500,000 tons. Therefore, the number of allowances in

the bank is less than 10 percent of the budget and flow control will not apply in

2004. If the broader universe of sources bank a comparable percentage of

allowances in 2004, however, flow control is likely to be triggered in 2005.

Nearly All Sources in NBP States Began

Monitoring and Reporting in 2003

NBP units are required to comply with monitoring provisions specified in the

Code of Federal Regulations (40 CFR Part 75, subpart H). The original focus of

Part 75 was on electric generating units (EGUs), but EPA has broadened the

rule over time to encompass industrial combustion units as well. The industrial

units affected under the NBP have successfully met these monitoring requirements as part of their NBP compliance efforts.

Several options are available for NBP units to meet their monitoring requirements. These options are based on the type of unit, the type of fuel combusted,

its operating status, and its level of emissions. NBP units are generally required

to use a NOx continuous emission monitoring system (CEMS). CEMS sample,

analyze, and directly measure flue gas components on an ongoing basis. In addition to measuring NOx concentration, units also must measure heat input to

Why No Flow Control in 2004?

Total number of banked allowances/Total NOx

Budget for 2004 season =

28,493/506,068 = 0.06

Because ratio is < 0.10, flow control is not triggered.
19

calculate NOx mass. To calculate heat input, any

unit can use a stack flow CEMS, but oil- and gasfired units instead can use fuel flow meters under

Part 75. In addition to the basic NOx CEMS option,

alternative methods of quantifying NOx emissions

are available for certain types of units or for monitoring systems that meet specific criteria,

including: 

■ Part 75, Appendix E, which may be used only by

gas and oil-fired peaking units (i.e., units that

operate principally when electricity demand is

at its highest). Under Appendix E, the NOx emission rates and the heat input rate for the

peaking unit are determined at a minimum of

four loads covering the unit’s operating range,

and the test results are used to establish a

correlation curve. Then, when the unit is running during the ozone season, NOx emission rates are estimated based on

the values on the curve that correspond to the unit’s measured heat input

rates. These Appendix E units all use fuel flow meters to measure heat input

under Appendix D so that they do not use any CEMS. 

■ The low mass emissions (LME) methodology in section 75.19, which allows

certain small or infrequently-operated gas and oil-fired units to use conservative fuel-specific default emission rates and estimates of hourly heat input to

calculate the hourly NOx emissions.

■ Other monitoring alternatives approved by EPA on a case-by-case basis 

(subpart E). 

As Figure 13 shows, of all the NBP units that are currently operating and that

have submitted a monitoring plan, the majority (71 percent) use a NOx CEMS to

comply with the monitoring requirements (these units also use either a stack

flow CEMS or Appendix D fuel flow meters to calculate heat input). Nine percent

use Appendix E (with fuel flow meters), and 20 percent use the LME methodology. Less than 1 percent (only 4 units) currently use an approved alternative

monitoring system under subpart E. 

Use of Monitoring Methods as a Percent

of Total (number of units)

Figure 13

The vast majority of NBP units use NOx Continuous

Emission Monitoring Systems (CEMS) to comply with

the monitoring requirements.

Source: EPA
20

In general, although many units use the non-CEMS

monitoring options, the highest emitting sources tend

to use CEMS. About 96 percent of all ozone season

emissions can be attributed to units that use CEMS as

a monitoring method (see Figure 14). 

Sources Are Investing in NOx

Controls for Many Units

To meet the emission reduction targets of the NBP,

sources can choose from a variety of compliance

options. These options include decreasing generation

from units that emit NOx, modifying the basic combustion process to control the formation of NOx, optimizing

boiler operation to minimize NOx production, using addon controls, or purchasing allowances from other

market participants. Sources can use any one or a combination of these options in a way that best fits their own circumstances.

To meet the NOx emission limits of the Acid Rain Program, many electric generating units installed combustion controls, including low NOx burner and overfire

air technologies, which modify the combustion process to reduce formation of

NOx from the nitrogen present in the boiler combustion air and fuel. Advances in

combustion control technologies continue to provide a cost-effective means of

reducing emissions even further for many units.

Add-on control technologies, such as selective catalytic reduction (SCR) or selective non-catalytic reduction (SNCR), are frequently applied for NOx control. SCR

is typically used on larger units in the power sector that can achieve significant

emission reductions in a highly cost-effective way. SCR and SNCR are control

technologies that achieve NOx reductions by injecting ammonia (or urea for

SCR) into the flue gas within or downstream of the combustion unit to react

with NOx, forming nitrogen and water. SCR uses a catalyst to improve the efficiency of NOx removal and to allow reactions to occur in a lower temperature

range. For units that cannot use other methods to control NOx, reburning of

gas or coal is also an option. In this technique, gas or coal is injected downstream of the primary combustion zone to remove NOx.

EPA analyses in support of recent NOx reduction initiatives assume a 90 percent reduction efficiency for SCR on coal-fired boilers (down to 0.06 lb/mmBtu)

and an 80 percent reduction efficiency for oil and gas units. For SNCR, EPA

assumes a 35 percent reduction for coal-fired boilers and a 50 percent reduction for oil and gas units.11

NBP Ozone Season NOx Emissions Based

on Monitoring Methodology

Figure 14

Units with a CEMS account for nearly all of the

ozone season NOx emissions.

Source: EPA

11 Documentation of EPA Modeling Applications (v2.1) Using the Integrated Planning Model, U.S. EPA, 

EPA 430/R-02-004, March 2002.
21

Sources report pollution control information, including installation dates, in monitoring plans submitted to EPA. EPA examined these data to determine which

units had installed controls. While it is difficult to isolate the reason that a source installed a control, EPA

assumed that most, if not all, installations in the last

few years that were not in response to other programs (such as New Source Review permitting for new

facilities or the Ozone Transport Commission trading

program) were likely to be in response to the NOx

Budget Trading Program. Based on that review, there

appear to be 75 coal-fired units that report using SCR controls to meet the

NBP requirements. Nineteen coal-fired units (only 4 of which are industrial units)

appear to have installed SNCR for the NBP. Most of this activity has been in

states outside the OTC region, which will require the most significant reductions

to meet the NBP requirements. However, since October 2002, when the OTC

program was replaced by the NBP, sources in the OTC states have installed

SCR controls on 5 units with approximately 4,300 MW capacity, and SNCR on 5

units with about 300 MW capacity. These data indicate that the implementation

of the NBP appears to have been an impetus for many units to reduce their NOx

emissions through the use of add-on controls, especially in the states where significant reductions are needed to comply with the NBP.

The combined megawatt capacity of the add-on 

control installations implemented to meet the NBP

requirements is over 47,000 MW (out of over

270,000 MW capacity for affected EGUs in the

NBP region).
22

Ozone Levels Are

Decreasing and NOx

Reductions Will Help States

Meet the Ozone Standards

Ozone Levels Have Been Decreasing In Most

Areas since 1990

EPA released a report on ozone trends in April 2004, finding that ozone levels nationwide were lower in 2003 than they have been since 1980 (The Ozone Report:

Measuring Progress through 2003, www.epa.gov/airtrends/ozone.html). EPA’s

Ozone Report concluded that ozone improvements in 2003 were primarily due to

favorable weather conditions across many parts of the nation. In addition, national

NOx and volatile organic carbon (VOC) emissions were at their lowest levels since

1970, due to successful programs controlling NOx and VOCs. 

Figure 15 shows national trends

in the fourth highest daily maximum 8-hour ozone concentration (ppm, parts per million)

from 1990 to 2003. Nationally,

this measure of ozone exposure

has been reduced by 9 percent

since 1990.

In the East, many metropolitan

areas have exhibited an overall

improvement in ozone levels

since 1990. In most areas, a

temporary increase in ozone levels occurred during the

mid-1990s, but this increase

was followed by decreases in

ozone levels beginning in 1998.

The improvement in ozone levels

in the late 1990s corresponds

temporally with reductions in

NOx emissions from stationary

sources (mainly through the

annual NOx requirements under

National 8-Hour Ozone Air Quality Trend, 1990-2003, Based

on 3-Year Rolling Averages of Annual Fourth Highest Daily

Maximum Ozone Concentrations

Figure 15

National ozone levels have decreased from 1990 to 2003.

*Black line indicates 8-hour ozone standard. Green band indicates the range of ozone levels from

1990 to 2003.

Source: EPA
23

the Acid Rain Program and the ozone-season NOx

reductions in the OTC states), along with the NOx and

VOC reductions from mobile sources that occurred

during this time period.

A closer look at trends in measured ozone values on a

regional level shows differences in progress made

since 1990 in the NOx Budget Trading Program

(NBP) states. Figure 16 shows trends in fourth highest daily maximum 8-hour ozone concentration in EPA

Regions that include NBP states. The greatest

progress in reducing ozone concentrations since

1990 in the NBP states was achieved in the

Northeast and Mid-Atlantic states (Regions 1 through

3). This may be partly due to the NOx reductions

achieved by the Ozone Transport Commission (OTC)

states from 1999 through 2003. Region 1 (13 percent decrease from 1990 levels) and Region 2 (11

percent decrease) reduced ozone concentrations

greater than the national average, while Region 3 (7

percent decrease) has significantly decreased ozone

concentrations. Regions 4 and 5 had reductions in

ozone concentrations of 6 percent but had lower

ozone levels in 1990 and, therefore, less room for

improvement. Even small improvements in ozone concentrations, however, are

expected to result in substantial benefits to public health when a large population

is exposed.

Additional NOx Reductions Will Help States

Meet the Ozone Standards

Despite improvements in ozone air quality in many areas of the country, ozone

continues to be a pervasive air pollution problem, with nearly 159 million people

still living in 474 counties across the nation that are in nonattainment areas

that do not meet the 8-hour ozone standard. The reductions anticipated under

the NBP will help reduce emissions of NOx and improve air quality. 

New national mobile source regulations will also help local areas meet the 8-

hour ozone standard by reducing NOx from heavy-duty diesel engines, highway

vehicles, and other mobile sources. Finally, to address the regional component

of the residual ozone nonattainment problem, as well as the year-round problems of fine particles, regional haze, and acid deposition, EPA recently proposed

the Clean Air Interstate Rule, which by 2015 would reduce annual NOx emissions from the power industry in 29 eastern states and the District of

Columbia by approximately 64 percent from 2002 levels.

Trend in Fourth Highest Maximum 8-Hour

Ozone Concentration (ppm) by EPA Region

(1990-2003)

Figure 16

Ozone levels have decreased significantly from 1990 to

2003, especially in the northeastern United States.

*Black line indicates 8-hour ozone standard. Green line indicates ozone

levels in the region from 1990 to 2003.

Source: EPA
Conclusions

When fully implemented, the NOx Budget Trading Program (NBP) is expected to achieve

a significant reduction in ozone season NOx emissions across much of the eastern U.S. 

In 2003, affected sources already had reduced ozone season emissions by over one

million tons from the estimated 1990 baseline levels and by over 400,000 tons from

2000 ozone season levels, even though the first control period in many states was not

until 2004. In the Ozone Transport Commission (OTC) states where 2003 represented

the first control period, sources emitted almost 20 percent below the required 2003

budget levels and more than 30 percent below their emissions in 2002. Of the total

affected population of approximately 1,000 units, all but seven were in compliance.

These achievements occurred despite a small increase in total heat input (plant utilization) in the affected OTC region. 

Additional sources joined the program on May 31, 2004, and most of these sources

already have at least one year’s experience with NBP monitoring and reporting. 

The review of control data shows that many sources have been actively engaged in

installation of pollution control equipment to achieve additional emission reductions. The

NOx allowance market remains active and allowance prices appear to have stabilized

from early price spikes. Meanwhile, ozone levels have decreased in the past two

decades, although ozone nonattainment remains a persistent problem. The NBP, along

with additional control programs being proposed or implemented, should help address

this problem. EPA will continue to evaluate all of these issues as additional NBP states

begin the control requirements of the program in 2004.

24

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