acid rain and nox cap and trade program experience cap and trade programs for air emissions...

Acid Rain and NOx Cap and Trade Program Experience

Cap and Trade Programs for Air Emissions

Presentation for NARUC Winter Meeting 2008

Joint ERE-Electricity Committees Session

Clean Air Markets DivisionU.S. Environmental Protection Agency

Office of Air and RadiationFebruary 19, 2008

Introduction

Programs

Next Generation Programs

Elements

Lessons Emerging Issues

2

Overview

• Cap and trade: An innovative approach• Successful U.S. cap and trade programs

– Acid Rain Program (ARP)– NOX Budget Trading Program (NBP)

• Next generation cap and trade programs– Clean Air Interstate Rule (CAIR)– Clean Air Visibility Rule (CAVR)

• Why has cap and trade worked for U.S. emissions?• Key lessons learned• Emerging cap and trade issues for greenhouse gas programs

Introduction

Programs


Elements


3

Cap and Trade: An Innovative Approach

Government• Sets a mandatory cap on aggregate air

emissions from a select group of sources or industrial sector(s)

• Distributes allowances to emit equal to the mandatory cap to the affected sources

• Allows trading of allowances between sources and others under fairly unrestrictive ground rules

• Tracks allowance transfers and holdings• Compares allowance holdings and

emissions to assess compliance and, in the event of noncompliance, levies automatic penalties for each excess ton of emissions

Industry• Holds sufficient allowances to cover total

emissions• Develops a compliance strategy to lower

emissions – If emissions are below holdings, a source

can trade or save (bank) allowances for future use

– If emissions are above holdings, a source can purchase allowances

• Reduces overall costs because sources that have the lowest abatement costs generally sell allowances and sources with high abatement costs generally buy allowances

Introduction

Government and industry have different but complementary responsibilities to lower air pollution

Because of the cap, the government does not need to define how or where emission reductions are made. Government sets the goal, ground rules, and monitors compliance. Industry determines how to comply

Introduction

Programs


Elements


4

Successful Programs Emerged in the 1990sProgra

ms

Acid Rain Program (ARP) covers annual sulfur dioxide (SO2) emissions from most fossil fuel electric generation units. Program implemented in two phases: 1995 for largest SO2 emitters; 2000 for all others.

NOx Budget Trading Program (NBP)

covers ozone-season (summer) nitrogen oxide

(NOX) emissions in selected eastern states for fossil-fuel

electricity generation and other large stationary

sources. Program phased in from 2003 to 2007.

Programs rely on an emissions cap with air emission allowances that can be traded – cap and trade

Introduction

Programs


Elements


5

Acid Rain Program for SO2

• Program Phases:– 1995:

• Monitoring: Most fossil fuel electric generation units >25 MW

• Annual cap: Largest 300 emitters– 2000: Most fossil-fuel electric generation

units over 25 MW under annual cap of ≈ 10 million tons that dropped to 9.5 million tons after that year

– 2010: New annual cap = 8.95 million tons

Programs

ARP Units

ARP-affected Units’ Annual SO2 Emissions

• Currently about 3,500 units covered.

• Majority of emissions (>90%) from 1,100 coal-fired units (≈420 power plants); units use Continuous Emission Monitors (CEMS) subject to detailed operating and QA requirements

• Other units often have monitoring that is less costly, but structured to assure emissions are conservatively estimated

• Quarterly emissions reporting and annual reconciliation of facility emissions and allowances – “true up”

SO2 Allowances Transferred under the Acid Rain Program

Introduction

Programs


Elements


6

Programs

SO2 Emissions Have Fallen in Most States

Acid Rain Emissions of SO2

0

5

10

15

20

1990 1995 2000 2006

Mill

ion

Ton

s

State-by-state SO2 Emission Levels from Acid Rain Program-affected Sources (1990-2006)

Introduction

Programs


Elements


7

-6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0

Sulfate (μeq/L/year)

Nitrate (μeq/L/year)

ANC (μeq/L/year)

Aluminum (μq/L/year)

Slope of Regional Trend

New England Lakes Adirondack Lakes

North Appalachian Streams South Appalachian Streams

Acid Rain Program Progress

Programs

Substantial Gains: • Reduced “Acid Rain” • Improved Air Quality• Improved Health (lives extended and

ailments reduced)• Lowered Regional Haze• Provided Other Benefits

2004-2006 Average1989-1991 Average

Annual Mean Wet Sulfate Deposition

Water Quality Improvements, 1990-2005

ANC = Acid Neutralizing Capacity

Introduction

Programs


Elements


8

Control Costs: Lower than Predicted

0

1

2

3

4

5

6

7

8

9

1990 2004

Bil

lion

Dol

lars

(in

2006

dol

lars

)

Edis

on E

lect

ric

Inst

itut

e

EP

A

EP

A

Programs

Estimated SO2 Program Costs in 2010

-60%-50%-40%-30%-20%-10%

0%10%20%30%40%50%

1990

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Per

cen

t C

han

ge R

elat

ive

to 1

990

E lectricity Retail Price NOx Emissions

SO2 Emissions Electricity Generation

Trends in Electricity Generation, Electric Prices, and SO2 and NOX Emissions

Source: EPA, 2007

Source: EPA, 2007

2004

Introduction

Programs


Elements


9

0

500

1000

1500

2000

1990 2000 2003 2004 2005 2006

Tho

usan

d T

ons

Ozone Season NOX Emissions

Total State Trading Budget

NOX Budget Trading ProgramProgra

ms

• The NOX Budget Trading Program (NBP) is a market-based cap and trade program created to reduce seasonal NOx emissions from power plants and other large combustion sources in the eastern United States. EPA started NBP in 2003 with phase-in of state groups

• NBP affected 2,570 units in 2006

Ozone Season NOx Emissions (May 1- September 30)

Ozone Season NOx Emissions

Eastern Control Area

Introduction

Programs


Elements


10

Ozone Attainment Has Improved Dramatically

Programs

Changes in 8-Hour Ozone Nonattainment Areas in the East 2001-2003 (Original Designations) Versus 2004-2006

• In 2004, EPA designated 104 areas in the East as 8-hour ozone NAAQS nonattainment areas

• 2004-2006 data show ozone air quality improvements in virtually all of these areas, bringing cleaner air to over 55 million people

• In 2006, four out of five of the original nonattainment areas met the ozone standard

The NOX Budget Trading Program is the most significant contributor (of EPA and state programs) to ozone improvements in the East

Introduction

Programs


Elements


11

Next Generation Programs: Clean Air Interstate and Visibility Rules


States Covered in Clean Air Interstate Rule (CAIR) and Clean Air Visibility Rule (CAVR)

for SO2 and NOX

Note: On February 8, 2008, the U.S. Court of Appeals issued a decision vacating the Clean Air Mercury Rules (CAMR) and thereby suspending the program that allowed mercury emissions trading. EPA is now evaluating the Court’s decision.

CAVR

Outside of CAIR Region – BART controls or States can create trading programs

Introduction

Programs


Elements


12

Benefits of Acid Rain and CAIR Programs

• Majority of benefits result from:– Avoidance of premature deaths– Reduced aggravation and incidence of

heart and lung ailments

• Other benefits include increased worker productivity, reduced absences from school and work, and visibility improvement in some parks

• Benefits not included in estimates:– Acid rain environmental benefits– Mercury co-benefits– Remaining visibility benefits from

parks and urban areas– Others

Monetary Benefits

Acid Rain - US

CAIR - US

Acid Rain -Canada

CAIR - Canada

0

50

100

150

200

250

300

350

2010 2020

Bill

ion

Dol

lars

200

6

Source: EPA 2007 and 2008


Introduction

Programs


Elements


13

Key Elements of Cap and Trade

• Emissions Cap: Establishes a fixed quantity of allowances for each compliance period (yearly, seasonally, or other)

– Cap is the mechanism to achieve and maintain the environmental goal

• Coverage: Determines sources and/or sector(s) included (existing and new)– Coverage should minimize shifting of production and emissions (“leakage”) that may

reduce the environmental effectiveness of the program– Coverage should capture large share of emissions but be administratively feasible

• Emission Monitoring, Reporting and Verification: Requires complete, accurate measurement and timely reporting of emission assures accountability and provides public access to data – leading to program integrity and confidence

• Allowance Distribution: Provides initial allowances to regulated community and others (based on political decisions)

• Allowance Trading: Allows companies to choose (and change) compliance options under modest rules – leads to significant cost savings

• Stringent, Automatic Penalties: Ensures the environment is made whole and penalizes non-compliance

• Assessment: Determines achievements of program and whether additional actions needed

Elements

Introduction

Programs


Elements


14

Allowance Distribution

• Considerations: Equity, incentives, certainty, efficiency, revenue impacts, price effects, profitability– Allowance allocation should balance the need for certainty and changing

circumstances

• Experience: The vast majority of allocation approaches that EPA has considered all lead to the same level and distribution of emission reductions; the emission caps and banking drive reductions

• Approach: Many options, none are perfect– Direct allocation to sources based on historical and/or current emissions,

energy use (input), or production (output, e.g. MWH) with the option of set asides for certain sources and/or actions (new sources, renewables, demand side efficiency)

– Auction– Hybrid– Auction phase-in starting with direct allocation

Elements

Introduction

Programs


Elements


15

Monitoring, Reporting, and Verification

• Considerations: Equity, incentives, accuracy, timeliness, certainty, transparency, public perception, and confidence in program

• Experience: EPA collects high-quality SO2, NOX, and CO2 data from about 3,500 emission sources in the Acid Rain Program

• Approach: Focus on complete and accurate emission data– Most accurate methods required of largest emitters with flexibility through

alternative, less-costly measurement approaches for other emitters

– Built-in incentives for greater accuracy and completeness

– Standardized quality assurance tests for every emission value through standardized tests and statistical analyses

– Petition process to accommodate unexpected situations

– Heart of process is maintenance of CEMS on major emitters (all coal-fired units and others) that monitor emissions (at high reliability and accuracy levels) hourly and report to EPA every quarter

Elements

Introduction

Programs


Elements


16

• Official record of allowance transfers and holdings

• Each allowance has a serial number

• Parties reach agreement, then transfer allowances online, or authorize EPA to transfer allowances

• CAMD Business System is not a trading platform

Allowance Accounting

E-government at work…

Some Details of Operations…

Elements

Introduction

Programs


Elements


17

Some Details continued…

EPA just completed major “reengineering” of systems

Internet Query Capability

Elements

Routine Public Access to Emissions and Allowance Data

Type of transfer (auction, private)

Seller name and account info

Buyer name and account info

Confirmation date, serial numbers and total allowances transferred

Introduction

Programs


Elements


18

Assessment

• There are annual program assessments

• EPA considers results from multiple sources; an urban monitoring network and a rural network developed for ARP

Temporary Integrated Monitoring of Ecosystems/ Long Term Monitoring System(Surface Water Monitoring)

• Measure results through broad monitoring networks

– Changes to deposition, water quality, ambient air quality

• Compare to program goals; assess need for further action

Elements

Introduction

Programs


Elements


19

• Offers alternative to traditional regulation and credit trading– Not simply a trading feature added to existing regulation

• Provides certainty that a specific emission level is achieved and maintained• Leads to regulatory certainty, compliance flexibility, and lower permitting

and transaction costs for emission sources• Fewer administrative resources from industry and government (if program

keeps a simple design)– Government focused on setting goals & assuring results, not on

approving individual compliance actions• Creates incentives for innovation and early reductions• Compatible with other mechanisms• Lower costs makes further improvements feasible

Advantages of Cap and Trade

Lessons

Introduction

Programs


Elements


20

Why Has Cap and Trade Worked?• Cap on emissions

– Focuses on environmental goal– Provides certainty to allowance market

• Full-sector coverage of existing and new emission sources– Focuses on sources with heterogeneous compliance options and costs– Focuses on sources with capability to monitor and report emissions reliably and

accurately– Limits ability to shift generation and emissions to non-converted sources– Eliminates need to conduct case-by-case review of emission reductions

• Complete and accurate emission measurement and reporting– Assures accountability and program credibility

• Limited restrictions on trading and banking complemented by source-specific limits where needed to protect local air quality

– Allows companies to choose compliance options– Addresses “hotspots” through local requirements for direct controls, if necessary– Reduces costs

Lessons

Introduction

Programs


Elements


21

Key Lessons Learned

• Greatest reductions occurred where the highest emissions existed• Trading provides regional emissions reductions, which can (and are)

augmented with local direct controls • Caps protect the environment, not the allowance allocation• “Banking” enables early emission reductions that provides early benefits

and flexibility for sources that reduces compliance costs• Implementation should be kept in mind when designing programs

– Setting the goal– Verifying emission data– Administering and enforcing the program– Helping affected sources understand their options and obligations

• Good legislation makes the job much easier• Virtually 100% compliance can result• Start and pace of control matters, especially to gain cost advantages• Cap and trade can work outside of the power sector

Lessons

Introduction

Programs


Elements


22

Key Lessons Learned continued

• Accountability and transparency essential to program integrity– Require accurate, complete emissions measurement– Provide transparent emission and allowance data– Create predictable and, preferably, automatic consequences for noncompliance

• Simple and effective design and operation focused on key objectives reduces administrative burden and costs, and improves compliance and timeliness

– Establishes a minimal, but effective role for government– Provides industry with compliance flexibility with accountability – this unleashes

incentives for better, cost-effective controls – Facilitates market development to maximize flexibility and cost savings– Ensures environmental results through clear objectives, strong monitoring and

predictable penalties– Requires a relatively small number of government staff to produce results (especially

when advanced information management technology is used) • Assessment routinely enables programs to stay environmentally on track• Accurate baseline emissions inventory critical to effective design• The program’s flexibility with industry responsibility for compliance unleashes

innovation and lowers cost and inputs• Valuable to program structure that is readily adaptable

Lessons

Introduction

Programs


Elements


23

A Better Look at a Lesson Learned: The Biggest Emitters Achieved the Steepest Annual Reductions

Introduction

Programs


Elements


24

Emerging Issues for GHG Programs

• Levels and timing of control– Cost containment

• Scope and scale

• Federal and state roles

• Technology development and deployment

• Equity

• Linkage to cheaper GHG tons– Energy efficiency

– International programs

– International and domestic offsets

• Cap and trade vs. tax

Emerging Issues

Introduction

Programs


Elements


25

To Learn More…..

On emissions trading go to EPA’s

Clean Air Markets Division Website at:

http://www.epa.gov/airmarkets/

Introduction

Programs


Elements


26

To Learn a lot More…

Office of Atmospheric Programs: http://epa.gov/air/oap.html

– Clean Air Markets Division: http://epa.gov/airmarkets/

– Climate Change Division: http://epa.gov/air/ccd.html

– Climate Protection Partnership Division: http://epa.gov/cppd/

– Stratospheric Protection Division: http://epa.gov/ozone/

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