Document ID: EPA-HQ-OAR-2002-0076-0388
Agency: epa
Document Type: Supporting & Related Material
Title: 
Posted Date: 2005-06-13T04:00Z

Developing
an
Emissions
Trading
Program
for
Regional
Haze
Dr.
David
Harrison
Senior
Vice
President
May
6,
2005
­
1­

Overview

Background
and
Objectives

Potential
Gains
from
Emissions
Trading

Lessons
from
Experience
with
Emissions
Trading

Key
Elements
of
an
Emissions
Trading
Program
for
Regional
Haze

Next
Steps
­
2­
Background
and
Objectives
­
3­

Background

NERA
Economic
Consulting
 
Firm
of
about
500
professionals
with
10
offices
in
U.
S.

and
six
offices
abroad
 
Extensive
experience
assisting
public
and
private
groups
with
regard
to
emissions
trading
programs,

including
Acid
Rain,
RECLAIM,
NOX
SIP
Call
and
most
recently
EU
program
for
CO2

Regional
Haze
Regulations
 
EPA
Proposed
Rule
provides
regulatory
framework
and
guidelines
for
BART
 
EPA
supports
use
of
a
regional
trading
program
instead
of
source­
by­
source
BART
determination
­
4­

Presentation
Objectives
1.
Clarify
emissions
trading
and
the
nature
of
its
potential
gains
2.
Provide
lessons
from
experience
in
previous
emissions
trading
programs
3.
Outline
the
major
features
of
a
trading
program
for
regional
haze

Note
that
we
do
not
consider
how
the
overall
cap/
budget
should
be
set
4.
Identify
next
steps
in
deciding
whether
to
pursue
the
emissions
trading
option
­
5­
Potential
Gains
from
Emissions
Trading
­
6­

What
is
Emissions
Trading?


Flexibility
to
find
and
to
choose
the
lowest
cost
means
for
reducing
emissions

Allows
plants
to
transfer
emission
reductions
from
relatively
high
cost
plants
to
lower
cost
plants

Works
only
when
costs
differ
among
plants

Assumes
requirement
to
reduce
emissions
and
effective
enforcement
­
7­

Potential
Environmental
and
Economic
Gains
from
Emissions
Trading

Environmental
gains
 
Emission
budget
must
achieve
greater
visibility
progress
than
BART
 
"
Cap"
provides
greater
certainty
that
the
visibility
progress
actually
will
take
place

Economic
gains
 
Cost
savings
from
trading
(
relative
to
uniform
"
command­
and­
control"
approach)

 
Dynamic
incentives
to
develop
cost­
effective
technologies
­
8­

Potential
Cost
Savings
from
Flexibility
Under
Emissions
Trading

Each
facility
has
three
major
options
1.
Reduce
to
level
set
by
initial
allocation
("
standard")

2.
Reduce
more
and
sell
allowances
3.
Reduce
less
and
buy
allowances

The
additional
options
(
2
and
3)
translate
into
lower
overall
cost
of
meeting
the
cap

Key
reason:
facilities
differ
in
the
marginal
costs
of
reducing
emissions
­
9­

Marginal
Cost
of
Meeting
a
Hypothetical
Standard
at
Two
Plants
$
500
$
3,000
$
0
$
500
$
1,000
$
1,500
$
2,000
$
2,500
$
3,000
$
3,500
Plant
I
("
Low
Cost")
Plant
II
("
High
Cost")

Marginal
Cost
of
Control
($

per
Ton)
­
10­

Gains
to
Plants
from
Trade
of
a
Single
Emission
Allowance
$
0
$
500
$
1,000
$
1,500
$
2,000
$
2,500
$
3,000
$
3,500
Plant
I
("
Low
Cost")
Plant
II
("
High
Cost")

Marginal
Cost
of
Control
($

per
Ton)
Gain
to
I
Gains
to
II
Market
"
Price"

($
2,000)
­
11­

Gains
are
Shared
Among
Sellers
("
low
cost")
and
Buyers
("
high
cost")

Buyer
of
allowance
gains
$
1,000
 
Face
higher
costs
of
control
 
Gain
$
1,000
from
buying
allowance
($
2,000)
rather
than
reducing
($
3,000)

Seller
of
allowance
gains
$
1,500
 
Have
lower
costs
of
control
 
Gain
$
1,500
from
selling
allowance
($
2,000)
that
only
costs
$
500
to
"
produce"

Sum:
Overall
gain
of
$
2,500
split
between
buyer
and
seller
 
Full
trading
is
more
complicated;
but
this
simple
example
illustrates
the
basic
nature
of
the
gains
and
their
split
between
buyers
and
sellers
­
12­
Lessons
from
Experience
with
Emissions
Trading
­
13­

Three
Major
Emissions
Trading
Programs
Reviewed
1.
SO2
Allowance
Trading
(
Acid
Rain
Program)

 
Most
prominent
program
2.
RECLAIM
NOx
and
SO2
Trading
Programs
 
Illustrate
how
to
include
multiple
sectors
3.
Northeast
NOx
Budget
Program
 
Illustrates
how
to
include
multiple
states
Note:
all
are
"
cap­
and­
trade"
programs
 
Other
trading
programs
include
credit­
based
programs
and
emissions
averaging
programs.
­
14­

Acid
Rain
Trading
Program

Best
known
emission
trading
program

Widely
regarded
as
success
and
prototype
for
other
programs

Program
to
reduce
SO2
emissions
from
existing
electric
generating
plants

Passed
in
1990
Clean
Air
Act
Amendments
­
15­

Basic
Elements
of
Acid
Rain
Trading
Program

National
cap
on
SO2
emissions
from
electric
generating
plants

Phase
1:
1995­
1999
 
Cap
reduced
emissions
by
3.5
million
tons
per
year
 
263
largest
emitters

Phase
2:
2000­

 
Cap
reduced
emissions
by
about
9
million
tons
per
year
 
Covers
virtually
all
generating
units
­
16­

Considerable
Concerns
When
Program
Developed

Cost
savings
may
not
materialize
 
Regulated
utilities
incentives?

 
Allowances
not
"
property
right"

 
EPA
oversight?

Environmental
effects
may
be
perverse
 
Adverse
effects
on
the
Northeast
 
No
constraints
on
trading

Administrative
costs
may
be
excessive
 
Experience
with
EPA
ET
programs
 
New
program
­
17­

Concerns
Not
Borne
Out
in
Experience

Active
Market
for
SO2
Allowances
 
Generators
did
trade
allowances
 
Restructuring
in
some
states
helped

Banking
Substantial
in
Phase
1
 
Use
of
scrubbers
lead
to
"
overcontrol"

Environmental
performance
not
perverse
 
Modeling
suggests
no
increase
in
Northeast
air
pollution
due
to
trading

Administrative
costs
not
excessive
 
Evidence
suggests
costs
of
setting
up
and
administering
the
program
have
been
modest
­
18­

Accelerated
Reductions
through
Banking
for
Acid
Rain
Phase
I
Units
0
2
4
6
8
10
12
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Million
tons
SO
2
ALLOWANCES
EMISSIONS
­
19­

Prices
for
SO
2
Allowances
Show
an
Efficient
Market
$
0
$
50
$
100
$
150
$
200
$
250
$
300
$
350
Jan­
92
Jan­
93
Jan­
94
Jan­
95
Jan­
96
Jan­
97
Jan­
98
Jan­
99
Jan­
00
Jan­
01
Jan­
02
Ear
ly
Sales
Cantor
Fitzgerald
Emission
Exchange
Fields
ton
EPA
Auction
Price
(

nominal
$/

ton)
SO
2
Allowance
Prices
1993­
2003
­
20­

Acid
Rain
Trading
Estimated
to
Reduce
Cost
by
About
50
Percent

Estimating
cost
savings
complicated
 
Equivalent
"
command
and
control"

regulations?


MIT
careful
study
including
all
sources
of
cost
savings
 
Spatial
flexibility
in
Phase
1
and
Phase
2
 
Temporal
flexibility
(
banking)


Some
evidence
of
overcontrol
in
Phase
1
that
reduced
savings
somewhat
­
21­

RECLAIM
Program
in
Los
Angeles

Cap­
and­
trade
program
developed
at
the
same
time
as
national
acid
rain
program

More
complex
than
acid
rain
trading
 
NOx
and
SO2
 
Many
sectors,
not
just
electric
generators
 
Two
trading
zones,
coastal
and
inland
 
Detailed
allocation
formulas

Did
not
include
banking,
creating
problems
in
2000
when
prices
increased
substantially
­
22­

NOx
Emissions
and
RECLAIM
Trading
Credits
(
RTCs)
Over
Time
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Compliance
Year
NOx
Emissions
(

tons/

yr)
Total
RTC
Supply
Reported
Emissions
RECLAIM
NO
RECLAIM
NO
X
Emissions
and
RTC
Supply,
1994
Emissions
and
RTC
Supply,
1994­
2000
(
tons/
year)

2000
(
tons/
year)
­
23­

Dramatic
Increase
in
RTC
NOx
Prices
in
2000
$
0
$
7,500
$
15,000
$
22,500
$
30,000
$
37,500
$
45,000
1993
1995
1997
1999
2001
2003
2005
2007
2009
RTC
Compliance
Year
Price
($/

ton)
1994
1995
1996
1997
1998
1999
2000
2000
1999
­
24­

High
NOx
Prices
Triggered
Backstop
Provision

Price
exceeded
"
trigger
price"
of
$
15,000
per
ton

White
Paper
to
evaluate
causes

Major
cause:
increased
demand
by
electric
generation
sources

Cost­
effective
control
options
exist
(
e.
g.,
SCR)
but
cannot
be
installed
quickly
­
25­

2001
Changes
in
RECLAIM

Power
plants
separated
temporarily
from
RECLAIM

Power
plants
pay
mitigation
fee
 
$
15,000
per
ton
 
Fees
used
to
reduce
emissions

Power
plants
must
submit
compliance
plans

Temporary
credit
programs
for
mobile
and
area
sources
­
26­

Lessons
from
RECLAIM
Experience
in
2000

Uncertainty
over
allowance
prices
under
cap­
and­
trade
program

Mitigation
fee
similar
to
"
safety
valve"

recommended
to
avoid
price
spikes

Prices
have
declined
and
compliance
plans
have
been
submitted

Too
early
to
determine
full
effects
of
the
changes
­
27­

Northeast
NOx
Budget
Program

Provide
cap­
and­
trade
flexibility
to
reduce
NOx
 
Power
plants
 
Other
large
stationary
sources

Covers
summer
(
May­
September)
emissions

Three
phases,
two
with
caps
 
Phase
2:
55­
65
percent
reduction
 
Phase
3:
65­
75
percent
reduction

Requirements
differ
within
the
region
­
28­

Implementation
by
Individual
States

EPA
Model
Rule
 
Provides
template
for
trading
program
 
Allocation
by
states
 
Banking
permitted,
but
use
of
banked
emissions
limited
("
flow
control")


Considered
different
requirements
for
different
days
within
the
summer
 
No
practical
option
­
29­

NO
x
OTC
Prices
Have
Varied
Considerably
Market
Price
Index
for
the
OTC
NOx
Budget
Program
­
30­

Early
History
Suggests
NOx
Budget
Achieving
Goals

Cost
savings
 
Estimated
at
30
percent

Market
participation
high
 
Eight
states
participated
 
15
percent
of
allowanced
traded

Environmental
performance
good
 
Emissions
reduced
 
No
evidence
of
"
wrong­
way
trades"
­
31­

Lessons
from
Emissions
Trading
Experience
Can
be
Put
in
Five
Categories
1.
Economic
performance
2.
Environmental
performance
3.
Initial
allocation
and
"
equity"

4.
Trading
flexibility
with
banking
5.
Enforcement
and
monitoring
­
32­

Lesson
1:
Economic
Performance

Cap­
and­
trade
programs
have
lowered
the
cost
of
meeting
environmental
goals
 
Best
evidence
is
 
50%
cost
savings
in
SO2
acid
rain
program
(
relative
to
no
trading)


Significant
trading
in
other
programs
implies
cost
savings

Evidence
of
some
impetus
for
technological
innovation
(
e.
g.,
scrubber
technology)


No
evidence
of
excessive
administrative
costs
­
33­

Lesson
2:
Environmental
Performance

Trading
has
enhanced
 
not
compromised
 
achievement
of
environmental
goals

Automatic
"
offset"
for
high­
cost
situations
instead
of
relaxed
emissions
standards

Banking
accelerates
emission
reductions

Flexibility
facilitates
consensus
on
demanding
environmental
goals
­
34­

Monitored
reductions
in
wet
sulfate
deposition
due
to
the
Acid
Rain
Program
1989­
91
1997­
99
­
35­

Lesson
3:
Initial
Allocation
and
Equity
Concerns

Clear
allocations
critical
to
success
 
Must
know
"
where
you
start"

 
Allow
for
efficient
markets
to
develop

Contentious
and
difficult
because
allowances
have
substantial
value

Many
different
allocation
methods
applied,
but
without
perceptible
effect
on
economic
or
environmental
performance

Allowance
allocation
can
address
equity
and
political
concerns
that
arise
in
adoption
and
implementation
­
36­

Lesson
4:
Trading
Flexibility
with
Banking

Temporal
flexibility
is
undervalued
but
important

Provides
incentive
for
early
reductions
in
phased­
in
programs

Provides
flexibility
in
dealing
with
sourcespecific
adjustment
costs
and
unexpected
cost
shocks

RECLAIM's
NOx
experience
illustrates
importance
of
temporal
trading
­
37­

Lesson
5:
Enforcement
and
Monitoring

Environmental
integrity
critical
to
success

Accurate
emissions
monitoring
 
Continuous
emissions
monitors
(
CEMs)
for
large
sources
 
Flexibility
for
lower
cost
options
for
smaller
sources
(
RECLAIM)


Significant
penalties
for
cheating
 
Provide
for
"
true
up"
period
­
38­

Summary:
Key
Lessons
from
Experience
with
Emissions
Trading
1.
Emissions
trading
has
been
successful
in
reducing
the
cost
of
meeting
emissions
targets
2.
Emissions
trading
has
enhanced
achievement
of
environmental
gains
3.
Acceptable
initial
allocations
can
be
set
without
impairing
cost
saving
and
environmental
objectives
4.
Banking
has
played
a
major
rule
in
improving
the
economic
and
environmental
performance
of
emissions
trading
5.
Accurate
monitoring
and
enforcement
are
critical
to
the
integrity
of
the
programs
­
39­

Prominent
Successes
Mean
that
Emissions
Trading
Has
Become
the
Norm

CAIR
 
Provides
for
interstate
cap­
and­
trade
programs
for
NOx
and
SO2

Mercury
Rule
 
Provides
for
interstate
cap­
and­
trade
program
for
mercury
 
Caveat:
concern
for
"
hot
spots"
in
potential
litigation

EU
Emissions
Trading
Scheme
 
Establishes
a
EU­
wide
cap­
and­
trade
program
for
CO2
­
40­

Key
Elements
of
an
Emissions
Trading
Program
for
Regional
Haze
­
41­

Application
of
Emissions
Trading
to
Regional
Haze

Successful
examples
suggest
emissions
trading
is
a
promising
approach

But,
details
matter!

Need
to
consider
specific
features
of
a
program
for
regional
haze
 
Specific
elements
identified
and
organized
 
Likely
performance
relative
to
technology­
oriented
approach
for
all
relevant
sources
 
Note:
the
presentation
does
not
consider
the
level
of
the
cap,

but
rather
how
to
design
and
implement
a
trading
program
to
achieve
whatever
cap
is
ultimately
set

Existing
information
 
EPA
preamble
in
final
Regional
Haze
rule
(
July
1999)

 
Western
Regional
Air
Partnership
(
WRAP)
backstop
Market
Trading
Proposal
(
August
2003)

 
CENRAP
Emissions
Trading
Subgroup
(
February
2005)
­
42­

Trading
Features
Can
Be
Put
into
Three
Broad
Categories
1.
Threshold
Features
 
Facilities
included
 
States
included
 
Opt­
in
possibilities
 
Cap/
budget
and
timing
2.
Design
Features
 
Initial
allocation
 
Trading
rules
 
"
Hot
spots"
Trigger
 
Banking
 
Safety
valve
3.
Implementation
Features
 
Monitoring/
reporting
 
Tracking/
registry
 
True­
up
period
 
Compliance
 
Enforcement/
Penalties
 
Program
audit
­
43­

Facilities
Included

BART­
eligible
sources
 
26
specific
source
categories
listed
under
CAA
 
Constructed/
placed
in
operation
between
August
1962
and
August
1977
and
potential
to
emit
250
tons
or
more
of
visibility­
impairing
pollutant

Non­
BART­
eligible
sources
 
Sources
included
to
achieve
"
reasonable
progress"

 
E.
g.,
WRAP
includes
facilities
with
SO2
emissions
100+
tons
(
subject
to
case­
by­
case
review)
and
new
sources
with
potential
to
emit
100+
tons
 
Caveat:
accurate
measurement/
tracking
necessary

Caveat:
inclusion
not
required
if
installed
BART
and/
or
source
included
in
CAIR
 
But,

Emission
requirements
can
be
more
stringent
than
BART

CAIR
does
not
apply
to
facilities
in
Western
states
­
44­

States
Included

States
to
be
included
 
Cost
savings
greater
with
more
states
 
Some
elements
(
e.
g.,
allocation)
can
differ
among
states
 
Geographic
differences
among
sources
more
important
with
larger
trading
area

Use
of
"
model
rule"
can
reduce
the
administrative
costs
to
states
of
participating
­
45­

Opt­
In
Possibilities

Opt­
in
candidates
 
Beyond
those
included
specifically
(
BART­
eligible
and
linked
to
"
reasonable
progress"
requirement)

 
Should
influence
regional
haze
to
be
considered

Gains
from
allowing
opt­
in
1.
Environmental
gains
if
require
"
contribution
to
the
environment"
to
opt
in

Caveat:
want
to
avoid
"
anyway
reductions,"
i.
e.,

reductions
that
would
have
occurred
without
opt­
in
2.
Cost
saving
gains
from
introduction
of
additional
credits
­
46­

Cap/
Budget
and
Timing

Emission
cap/
budget
is
limit
on
total
emissions
for
sources
in
the
program
 
Set
separately
for
each
state,
with
total
cap
depending
upon
which
states
participate
 
Many
technical
and
legal
issues
related
to
setting
the
cap
and
determining
its
timing
(
including
"
progress"
milestones)

Technical
considerations
include
 
BART
technologies
and
effectiveness
 
Growth
projections
 
Emissions/
dispersion
modeling

Legal
considerations
include
 
EPA
forthcoming
response
to
court
remand
related
to
2002
American
Corn
Growers
v.
EPA
decision
invalidating
EPA
method
of
determining
BART
 
WRAP
response
to
February
2005
CEED
v.
EPA
decision
declaring
WRAP
determination
of
cap
invalid
under
American
Corn

Level
and
timing
of
overall
cap
are
important
considerations
but
they
are
not
the
focus
of
this
presentation
­
47­

Initial
Allocation

Typically
the
most
contentious
element
 
Allocation
of
shares
of
fixed
cap
a
"
zero
sum
game"

 
But
sometimes
confused
with
setting
overall
cap
(
e.
g.,

controversies
in
Europe
over
Member
State
NAPs)

State
leeway
to
determine
for
in­
state
facilities
 
Different
formulas
among
states
generally
do
not
affect
the
success
(
e.
g.,
cost
savings)
of
the
program
 
Some
complications
could
affect
program
performance
(
e.
g.,

new
source
set
asides,
updating)

Following
slides
provide
information
on:

1.
Basic
choices
2.
Difference
between
facility
allocation
and
control
decision
3.
Set
asides
and
early
action
credits
4.
Other
complications
related
to
allocations
­
48­

Basic
Allocation
Choices

The
table
below
summarizes
basic
allocation
alternatives
Free
Auctioning
Non­
updated
Maximum
5%

Updating
Other
Emissions
Product
Output
Fuel
or
other
Inputs
Capacity
1998
1999
2000
2001
2002
Other
Years
Single
Year
Average
Max
Specific
Data/
Formula
Basic
Allocation
Type
Metric
Used
Years
Used
­
49­

Framework
for
Considering
Incentives
for
Firms
to
Control
CO
2
Emissions
$/
Ton
Market
Allowance
Price
Allocation
Marginal
Abatement
Cost
Curve
Baseline
Emissions
Controlled
Emissions
­
50­

Why
Grandfathered
Allocations
Don't
Affect
Firm
Decisions
on
Emission
Control

Two
different
allocation
levels 

 
 
but
facility
emissions
levels
are
the
same

Note,
however,
that
the
distributional
effects
are
very
different!

Controlled
Emissions
Controlled
Emissions
CO
2
Emissions
£
/
Ton
Market
Allowance
Price
Allocation
Marginal
Abatement
Cost
Curve
Baseline
Emissions
CO
2
Emissions
£
/
Ton
Market
Allowance
Price
Allocation
Marginal
Abatement
Cost
Curve
Baseline
Emissions
$/
ton
$/
ton
­
51­

Set
Asides
and
Early
Action
Credits

Set
asides
 
Take
some
of
the
cap
and
use
for
specific
circumstances
 
Frequently
used
for
new
sources

WRAP
includes
a
new
source
set­
aside
for
both
new
sources
and
for
existing
sources
that
increase
their
capacity
 
Does
not
affect
the
overall
cap,
but
does
decrease
the
number
of
allowances
allocated
to
direct
participants

Early
action
credits
 
Provide
allowances
for
reductions
before
the
cap­
and­
trade
program
begins

WRAP
includes
early
reduction
bonus
allowances
(
below
floor
established
in
the
plan)
from
2003
to
the
program
trigger
year
 
Early
action
credits
create
banked
allowances
that
can
be
used
to
meet
requirements
 
Increases
the
overall
cap
(
when
the
program
takes
effect)

 
Procedures
need
to
be
developed
to
ensure
that
the
credits
represent
"
real
reductions,"
i.
e.,
reductions
from
business­
as­
usual
emissions
­
52­

Additional
Allocation
Issues
Various
other
issues
can
arise
in
determining
the
initial
allocation
of
allowances

Allocations
to
non­
emitters
 
E.
g.,
"
indirect
emissions",
"
Sky
Trust"

Relationship
to
other
programs
 
Renewable
programs,
energy
efficiency
programs

Changes
over
time
in
allocation
choices
 
E.
g.,
shift
in
percentage
of
auctioned
allowances

Other
changes
tied
to
allocations
 
E.
g.,
Public
Utility
Commission
decisions
on
electricity
rates
and
"
opportunity
costs"
of
using
"
free"
allowances
­
53­

Trading
Rules

Inter­
pollutant
trading
 
Tentatively
not
allowed
in
WRAP
 
Possibility
if
equivalence
(
visibility
effects)
can
be
determined

Trading
across
states/
geography
 
Consider
whether
to
include
geographic
differences
(
e.
g.,
trading
ratios
depending
on
distance
from
Class
I
areas)

 
Caveats:

(
1)
need
to
keep
system
relatively
simple
to
avoid
high
transactions
costs
(
and
no
trading)

(
2)
Overlay
of
state­
specific
controls
may
be
better
means
of
dealing
with
hot
spots
than
restrictions
or
trading
ratios

Interaction
with
CAIR
 
Co­
mingling
of
trading
programs?
­
54­

"
Hot
Spots"
Trigger

Related
to
geographic
restrictions
on
trading

Trigger
mechanism
for
source­
specific
BART
if
visibility
at
a
particular
Class
1
area
is
exceeded
 
"
Certification
of
impairment"
by
federal
land
manager
or
state
if
visibility
goals
not
met
 
Existing
element
in
EPA's
1980
rulemaking
provides
precedent
for
this
approach

Trigger
would
constrain
the
market
and
thus
potentially
reduces
cost
savings
 
Useful
to
clarify
need
for
source­
specific
BART
as
soon
as
possible
 
Mechanisms
for
early
warning
include
public
meetings
to
share
information
on
possible
concerns
early
in
the
implementation
(
WRAP)
­
55­

Banking

Allows
facilities
to
use
excess
allowances
to
cover
emissions
in
future
years
 
Provides
environmental/
economic
gains

Flow
controls
possible
 
Limits
number
of
banked
allowances
that
can
be
used
on
1:
1
basis
 
Beyond
limit,
some
ratio
required
(
e.
g.,
2:
1)

 
WRAP
prohibits
use
of
banked
allowances
for
final
compliance
year
(
2018)

Consider
whether
flow
controls
necessary
to
avoid
excessive
emissions
in
a
single
year
­
56­

Safety
Valve

Represents
a
maximum
value
for
the
price
per
ton
 
Set
to
provide
protection
against
unlimited
allowance
prices,

which
can
exceed
the
value
of
reductions
 
Revenue
can
be
used
to
obtain
emission
reductions
elsewhere
(
e.
g.,
South
Coast
Clean
Air
Investment
Fund)

Allows
for
increases
in
emissions
beyond
the
cap
 
Caveat:
if
revenues
used
to
acquire
emission
reduction
credits

Differs
from
penalty
 
Set
on
basis
of
"
value"
of
emission
reductions
 
No
civil
liability/
onus
attached
to
exceedences

Differs
from
"
trigger
review"

 
E.
g.,
South
Coast
RECLAIM
sets
price
of
$
15,000
per
ton,

which
triggers
a
review
of
the
program
­
57­

Monitoring

Monitoring
actual
emissions
can
be
done
with
different
techniques
but
different
costs
 
Continuous
emission
monitors
(
CEMs),
most
costly
 
Mass
balance
 
Fuel
meters

Required
monitoring
techniques
 
Useful
to
allow
less
costly
techniques
for
smaller
sources
 
E.
g.,
WRAP
allows
for
some
flexibility
for
non­
Part
75
sources

Monitoring
Plan
 
Clarify
method
and
accuracy
of
monitoring
information
 
Subject
to
initial
certification
and
recertification
to
validate
accuracy

Substitute
data
procedures
 
Required
to
provide
for
missing/
invalid
data
 
Typically
require
use
of
maximum
concentration/
flow
rate
values
­
58­

Reporting

Account
Representative
 
Selection
of
Account
Representative
with
authority
to
submit
legally
binding
information

Quarterly
and
annual
emissions
reports
 
Include
information
on
emissions
and
allowances
held/
used
 
Submitted
within
period
(
e.
g.,
30
days
of
end
of
quarter
or
compliance
year

Allowance
Transfers
 
Submit
relevant
information
on
purchases/
sales
(
e.
g.,
serial
numbers,
names,
dates)

 
Use
of
allowances
banked
in
previous
years

Compliance
Report
 
Submit
within
certain
period
(
e.
g.,
60
days)
to
show
that
allowances
held
are
equal
to
or
greater
than
emissions
­
59­

Tracking/
Registry

Tracking
system
for
ownership
and
transactions

Registry
to
provide
information
on
emission
allowances
held
by
individual
facilities
subject
to
the
cap­
and­
trade
program
 
Include
opt­
in
sources
­
60­

True
Up
Period

Provide
period
after
the
compliance
year
to
allow
for
purchases/
sales

Typically
60­
90
days

Avoids
end­
of­
year
problems
 
Inadvertent
non­
compliance
 
Run
up
(
or
run
down)
in
price
because
of
excess
of
buyers
(
or
sellers)
­
61­

Compliance

Basic
requirement:
hold
allowances
(
by
end
of
true­
up
period)
equal
to
or
greater
than
total
emissions
(
as
monitored/
reported)

Based
upon
data
provided
to
program
administrator
1.
Monitoring
data
2.
Compliance
account
balance

Allowances
(
serial
numbers)
retired
based
upon
relevant
emissions
­
62­

Enforcement/
Penalties

Net
debit
(
after
true
up)
triggers
penalties
 
Emissions
greater
than
allowances
held

Penalties
can
include
two
types
1.
"
Make
up"
debits
with
some
ratio
(
e.
g.,
2:
1)

2.
Financial
penalty
(
e.
g.,
$
5,000
per
ton)


Recorded/
enforced
by
agency
administering
the
program
 
Could
involve
civil
liability
­
63­

Program
Audit

Program
reviews/
audits
provide
opportunities
to
review
performance
 
Environmental
performance
 
Administrative
considerations
 
Cost
savings
achieved

Caveat:
audit
should
not
"
second
guess"

technology/
control
choices
 
Interference
with
market
choices
would
undermine
the
trading
program

Part
of
ongoing
effort
to
make
sure
that
"
performance
equals
promise"
­
64­

Next
Steps
­
65­

Next
Steps
1.
Consider
any
general
issues/
concerns
with
use
of
emissions
trading
for
regional
haze
 
Any
general
concerns?

 
Issues
left
out?

2.
Develop
background
information
for
the
specific
region
 
Distribution
of
sources
and
potential
for
"
hot
spots"

 
Number/
characteristics
of
relevant
sources
 
Likely
cost­
effectiveness
variations
(
and
thus
gains
from
emissions
trading)

 
Likely
monitoring/
administrative
costs
(
relative
to
BART/
other
controls)

3.
Develop
evidence
to
decide
whether
emissions
trading
would
be
desirable
 
Likely
visibility
protection
 
Likely
cost
savings
 
Likely
administrative
costs
(
or
savings)
­
66­

For
more
information,
contact
David.
Harrison@
nera.
com
617.621.2612