2007 APR Table of Contents

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Emissions Reduction Market System

Annual Performance Review Report - 2007

1  Introduction

1.1 Nonattainment in the Chicago Area

Northeastern Illinois, including the counties of Cook, DuPage, Kane, Lake, McHenry and Will, plus the townships of Aux Sable and Goose Lake in Grundy County and Oswego in Kendall County, has been designated as a moderate nonattainment area (NAA) for the eight-hour ozone National Ambient Air Quality Standard (NAAQS).  Under the provisions of the Clean Air Act (CAA), as amended in 1990, the area must be in attainment with the eight-hour standard by 2010.  Extensive air quality modeling has shown emissions of volatile organic material (VOM), a component involved in the formation of ozone, must be reduced.  Most VOM emissions are already controlled by technology-based rules, and further reductions in emissions using such “Command and control” measures are potentially very costly.  As such, The Illinois EPA proposed the Emissions Reduction Market System (ERMS) VOM emission trading program that would reduce these emissions overall in the Chicago NAA.  The Illinois Pollution Control Board adopted the ERMS program as a rule in November 1997 and the rule appears in Title 35 of the Illinois Administrative Code, Subtitle B (Air Pollution), Part 205 (35 Ill. Adm. Code 205).

1.2  Basics of ERMS

The ERMS program is designed to operate on a seasonal basis, from May 1 through September 30, to correlate with the time of year when ozone formation occurs.  The program allows trading among participating sources in order to meet a reduced cap on their overall VOM emissions.  Each participant has been given a baseline according to what they were actually emitting in specified previous years, adjusted for their compliance or noncompliance with existing rules.  ERMS is the first cap-and-trade system in the United States for VOM.  Unlike the situation in some open market trading systems, sources must continue to adhere to all other state and federal emission limitations.

Based on their baseline emissions, sources were given allotment trading units (ATUs) corresponding to a reduction of 12 percent, with some exceptions for units with emissions that could not be reduced further.  Section 205.405 provides that units falling into one of the following categories are not required to reduce their emissions by 12 percent:

• Units subject to a Maximum Achievable Control Technology (MACT) or National Emission Standard for Hazardous Air Pollutants (NESHAP)
• Units that have demonstrated Lowest Achievable Emission Rate (LAER)
• Units that have demonstrated Best Available Technology (BAT)
• Space heaters and fuel combustion units
• Internal combustion engines

The baseline is the emissions from the units required to make a reduction plus the emissions from the units not required to make a reduction as exempted above.  When these exemptions are factored into the area-wide allotment, the actual aggregate allotment has been calculated to be 9.5 percent less than the baseline.

ATUs are retired by the Illinois EPA after each trading season to account for all of the source’s emissions during that season.  Sources may either reduce their emissions by the use of emission controls or process changes, or they may buy ATUs from other sources to account for any emissions in excess of their initial allotment.  Any source that reduces its VOM emissions below the allotment level may sell its excess ATUs to another source.  In this way, overall VOM emissions in the Chicago NAA are reduced while providing another mechanism for sources to use in achieving their individual reductions.

ERMS contains a number of features that distinguish it from traditional command and control programs and other market systems:

• Most command and control rules are in-force for the entire year.  However, since ozone is a problem in Illinois only during the summer season, and this program goes beyond the traditional “Reasonably Available Control Technology” (RACT) rules, the ERMS program is seasonal and restricts emissions during May 1 through September 30, when the ozone problem exists.
• Many regulations limit emission rates rather than actual emissions.  The ERMS program places a cap on sources based on their actual emissions, which provides certainty it will reduce VOM in the nonattainment area.
• The ERMS program, as noted above, goes beyond RACT.  Unlike other emission trading systems across the country, Illinois does not allow sources to avoid other emission limits by participating in ERMS.  Sources must comply with the ERMS rule and all other applicable limits.
• Some trading programs have created trading units with an unlimited life, which allow those units to be accumulated for long periods of time.  The ERMS rule provides that ATUs have a limited two-year life.  This helps to ensure a robust market, allows some saving for companies, but prevents excessive accumulation of active trading units.
• Because the ERMS rule is associated with the Clean Air Act Permit Program (CAAPP), monitoring and record keeping provisions are linked to avoid duplicative efforts for sources to ensure the use of standardized methods for determining emissions.
• Illinois EPA has created a specific reduction requirement in the ERMS rule, requiring most units to reduce VOM emissions by at least 12 percent.  This provides Illinois with a specific, creditable VOM reduction in the Chicago NAA.
• Sources which fail to reduce their emissions or obtain the proper number of ATUs are held accountable for their actions as a part of the ERMS rule itself.  Indeed, such sources are penalized at a higher rate for repeated failure to hold the required ATUs.  This discourages noncompliance on the part of participating sources and provides the Illinois EPA with some certainty the VOM reductions will be achieved.

1.3  ERMS Contribution to the Rate of Progress and Attainment

Figure 1-1 shows the actual levels of VOM from 1990 to the present year and target and projected levels through 2007.  Illinois EPA has relied upon VOM emission reductions from the ERMS program as part of the ROP reduction measures for the 2000-2002 milestone period as required under the one-hour ozone NAAQS.  Illinois EPA has estimated in its ROP plans that the ERMS program will achieve a VOM reduction of 12.6 tons/day.  This represents nearly seven percent of the total VOM ROP reduction needed for that milestone period.

Regarding the attainment demonstration for the one-hour ozone NAAQS in the Chicago NAA, Illinois EPA submitted amendments to the Illinois SIP on December 26, 2000.  That submittal supplemented the attainment demonstration submitted to USEPA in April 1998.  Illinois EPA’s attainment demonstration included air quality modeling and a strategy for reducing emissions which relies on the ROP Plans and USEPA’s NOx SIP Call.  The air quality modeling was performed in cooperation with the Lake Michigan Air Director’s Consortium (LADCO) and the States of Indiana, Michigan and Wisconsin.  The results demonstrated that implementation of the VOM and NOx control strategies, including ERMS, will result in the Chicago area attaining the one-hour ozone NAAQS by 2007.

On June 15, 2004, the USEPA designated the Chicago Metropolitan Area as a moderate nonattainment area for the eight-hour ozone standard.  The deadline for attaining the eight-hour standard is 2010.  Although the ERMS program was established under the one-hour ozone standard, Illinois EPA will continue to rely on this program to meet the requirements of the eight-hour standard.

Figure 1-1:  ROP Target, Projected and Actual VOM levels (tons/day)