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Emissions Reduction Market System

Annual Performance Review Report - 2007

Executive Summary

Northeastern Illinois – the Chicago area – is designated as a moderate nonattainment area (NAA) for the eight-hour ozone National Ambient Air Quality Standard (NAAQS).  Under provisions of the Clean Air Act (CAA), as amended in 1990, the area must be in attainment of the eight-hour standard by 2010.  Ozone is formed by the photochemical reaction of volatile organic materials (VOM) and nitrogen oxides (NOx) on very warm summer days.  Extensive air quality modeling has shown emissions of both VOM and NOx must be reduced in order to meet air quality standards.

VOM emissions come from a wide variety of industrial activities, from painting and printing to chemical manufacturing and even some types of food production.  Most VOM emissions are already controlled by technology-based rules, which are typically applicable year-round, irrespective of air quality conditions.  Further reductions in emissions using such “command and control” measures are potentially very costly and would have involved determining how each individual industry could reduce emissions even further.  As such, Illinois became the first state in the nation to adopt and operate a market-based, cap and trade program for emissions of VOM, the Emissions Reduction Market System (ERMS).  The ERMS program was designed as an emission trading program to reduce overall VOM emissions in the Chicago NAA while allowing sources to best determine how to reduce their own emissions in the most cost-effective manner.

The ERMS program operates from May 1 through September 30, correlating with the time of the year when ozone formation is most significant in Illinois.  The program allows trading among participating sources in order to meet a reduced cap on their overall VOM emissions.  Each participant is given a baseline according to what they actually emitted in previous years, adjusted for their compliance or noncompliance with existing rules.  It is important to note that ERMS participants must still adhere to all other state and federal emission limitations.  From that baseline, sources were given a number of allotment trading units (ATUs) corresponding to an overall area-wide reduction of 12 percent, with some exceptions for units with emissions that could not be further reduced.

ATUs, each of which represents 200 pounds of VOM, 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.  Such trading is aided by the Illinois EPA’s ERMS website which provides an area for buyers and sellers to post their needs.  Furthermore, trading between sources can be accomplished over the Internet.

As sources either make reductions or buy ATUs from those who have, overall VOM emissions in the Chicago NAA are reduced while providing a variety of mechanisms for sources to use in achieving their individual reductions.  For the 2007 season, sources in the ERMS program emitted 62.8 percent less VOM than their baselines would have allowed them to emit and 58.8 percent less than their actual ATU allotments.  The ERMS program was designed to ensure companies could not accumulate ATUs indefinitely, which would have left open the possibility of a source having more emissions than anticipated in a single season.  Instead, ATUs have a limited life and expire at the end of two years if they are not utilized.

Illinois EPA is required by the ERMS rule to prepare an Annual Performance Review Report addressing the effect of ERMS on VOM emissions, reviewing trends and patterns that have emerged in the operation of ERMS and looking at nine specific areas of the program for the previous seasonal allotment period.  The structure for this report was prepared in consultation with industry, environmental groups, USEPA and economists from the University of Illinois at Chicago, all of whom participated in an open dialogue that has helped to frame the information reported.

The eighth year of ERMS market operation produced 23 seasonal trades and 2 new long-term transfer agreements in addition to 24 already in effect.  These involved a total of 36 sources as sellers and 36 as buyers, with 13,441 ATUs changing hands.  This amounts to 13.4 percent of the total ATU allotment for the area and 32.5 percent of the ATUs retired for compliance purposes.

In studying the available data, Illinois EPA finds the ERMS program is operating successfully.  Emissions are significantly lower than baseline and allotment levels, both locally and in the overall region.  Indeed, the allotment itself is 9.5 percent below the baseline level, indicating that even if every company used its entire allotment, the area would still see a significant reduction from the baseline.  Furthermore, ATUs have been readily available for sources needing to buy and the market has operated effectively.