Emissions Reduction Market System
A Brief Overview
Background
Illinois faced a challenge in achieving the next set of reduction in
volatile organic material (VOM) emissions required by 1999 by the federal
Clean Air Act for the Chicago ozone nonattainment area. If Illinois had
continued with "command and control" rules to reduce VOM emissions
from stationary sources, the costs would be very high. This is because
rules have already been adopted requiring sources to implement less costly
measures to reduce VOM emissions. (These requirements are not altered
by the adoption of the ERMS.) The remaining control measures now available
for further "command and control" rules for stationary sources
are costly.
As a consequence, Illinois has been pursuing a market-based approach
to minimize the cost of further VOM reductions. This market-based system
relies on the fact that in a group of sources, each individual source
has different options to reduce its emissions with a range of costs associated
with such options. The trading program establishes an overall level of
emission reduction for the group of affected sources as a whole as well
as an obligation that individual sources contribute to achieving such
reduction. However, the specific means by which reductions are achieved
is left to the sources' judgement, assisted by a market in emission reductions
that can target the least costly means to lower emissions. In particular,
a source facing high cost control options may trade with other sources
to take advantage of the less costly emission reductions that are available
at such sources. The other sources receive compensation for their efforts
from the source that selects not to reduce its emissions. Because the
market-based program provides flexibility and accommodates innovation,
the costs of reducing emissions are minimized.
Illinois has been working on a market-based program since 1993 and the
program is expected to be finalized in mid-November. The Illinois legislature
specifically mandated that such a program be proposed for the Chicago
area and identified a number of features that should be and have been
addressed in the design of the program.
Overview
The ERMS is a "cap and trade" market system in which participating
sources must hold "trading units" for their actual VOM emissions.
Each year, starting with the 2000 ozone season, participating sources
will be issued trading units based on the initial allotment set during
issuance of the sources' Clean Air Act Permit Program (CAAPP) permit.
The allotments will be established from historical VOM emissions or "baseline
emissions" lowered to provide the emission reduction required from
stationary sources in 2000. At the end of each ozone season (May 1 through
September 30), sources must hold sufficient trading units to cover their
actual VOM emissions during the season.
Surplus allotment trading units (ATUs) may be sold to other sources or
banked for use in the following season. Sources with low costs to reduce
emissions will have an incentive to reduce more VOM emissions and sell
the surplus trading units to other sources that would otherwise have to
spend more money to reduce their own VOM emissions. The sources with high
costs save money by purchasing the surplus ATUs rather than actually making
reductions at their sources. Overall, the amount of VOM emissions to the
atmosphere in the Chicago area is reduced as required by the Clean Air
Act to make incremental progress toward complying with the ozone air quality
standard.
Ozone Season
A key feature of the ERMS, as compared to other emission control programs,
is the ozone season. Since the focus of the ERMS is ambient ozone air
quality, it addresses the time period, May 1 through September 30 of each
year, in which excursions of the ozone Air Quality Standard now occur.
This period is referred to as the "seasonal allotment period"
or "ozone season." This is the period for which affected sources
must hold trading units for actual VOM emissions. As a result, possible
methods of complying with the ERMS include adjusting operations during
the ozone season to use lower emitting material, shifting certain production
outside the ozone season, or scheduling maintenance outages during the
ozone season. While these methods are not possible for many sources, they
are examples of the way the ERMS can provide flexibility and reduced costs.
Affected Sources
The ERMS is directed at only major stationary sources in the Chicago
area. Such sources must be located in the Chicago ozone nonattainment
area (Cook, DuPage, Kane, Lake, McHenry, and Will Counties, Aux Sable
Township and Goose Lake Township in Grundy County, and Oswego Township
in Kendall County). They must be required to obtain a CAAPP permit, as
this will be the mechanism by which allotments will be established. Finally
such source must have baseline VOM emissions of 10 tons/seasons. Such
sources are referred to as "participating sources." Sources
that do not meet these criteria do not have to participate in the ERMS.
There are two ways in which a source that meets the above criteria may
still be exempt from direct participation in the ERMS. One way is for
the source to request, and accept, a 15 ton/season VOM limitation in the
source's CAAPP permit. The second way is for a source to request and accept
a reduction of 18% from its baseline emissions. This will result in a
season limit on the source's VOM emissions.
Baseline Emissions
For affected sources, one of the most important aspects of the ERMS is
the establishment of "baseline emissions." It is important that
this step be done properly because it will determine a source's future
under the ERMS, i.e., whether a source will have a surplus of trading
units or need to evaluate possible ways to further reduce VOM emissions.
The "baseline emissions" are a participating sources actual
average VOM emissions during two ozone seasons based on historical operation
as adjusted for voluntary overcompliance or non-compliance. A source may
freely select the two seasons to be used from the 1994, 1995, and1996
seasons. Since there are factors that may have affected the operations
or emissions such that one of the seasons is not representative of typical
operation of the source, a source may propose the use of alternative emission
data from 1990-1993 and 1997 seasons provided that a demonstration is
made that shows the 1994-1996 seasons is not representative.
Adjustments must be made to account for emission units that were not
in compliance with the applicable regulations effective in 1996. If in
1994 a source was not complying with an applicable rule, and the actual
emissions from a unit were 20 tons/season, but if operating in compliance
with the 1996 rule the emissions would have been 15 tons/season, the baseline
must be reduced by 5 tons to reflect what the unit would have emitted
if complying. This adjustment is necessary because the ERMS does not reward
sources for operating out of compliance with applicable regulations.
Additionally, sources may claim adjustments to their baseline emissions
to take credit for voluntary overcompliance. This allows sources to take
credit for measures taken after 1990 that result in a reduction of VOM
emissions beyond that required by applicable 1996 regulations. For example,
if a source had an emission unit that was allowed to emit 20 tons/season
of VOM emissions based on the applicable 1996 rule, but the source added
control equipment in 1992 that resulted in the unit only having VOM emissions
of 15 tons/season, the source can add the additional 5 tons/season of
VOM emissions above their actual emissions into the baseline. As a result,
a source that added control after 1990 above and beyond what was required
by applicable 1996 regulations will not be "penalized" for their
efforts towards environmental control as compared to a source that takes
such action after the ERMS is in place. The adjustment for voluntary overcompliance
assures that there will be surplus ATUs upon startup of the ERMS in 2000.
Allotment of Trading Units
A trading unit under the ERMS is termed as an "Allotment Trading
Unit" or ATU, and each ATU will be equivalent to 200 pounds of VOM
emissions. Once the baseline emissions have been established for a source,
a source's allotment of trading units or ATUs will be set. This allotment
will generally be set in a quantity equivalent to the source's baseline
emissions reduced by 12%. For example, if a source has a baseline of 100
tons of seasonal VOM emissions, and they operated no equipment that was
excluded from further reduction, the source's yearly allotment of ATUs
would be or 88 tons of VOM emissions (880 ATUs). This will provide the
reduction in VOM emissions from stationary sources required by the Clean
Air Act for 2000.
During the development of the ERMS, the Agency recognized that there
were certain emission units at participating sources for which it would
not be reasonable to expect a source to further reduce VOM emissions.
These units include installations that have been through New Source Review
since 1990 and are currently operating with the Lowest Achievable Emission
Rate, units that are complying with NESHAP or MACT standards, fuel combustion
emission units, internal combustion engines, and units for which the source
has proposed, and the Agency concurs that best available technology (BAT)
is already being utilized. Emissions from these units must be included
in the baseline emissions for a source, but they are not subject to the
12% reduction when determining a source's allotment. For example, if a
source has baseline emissions of 100 tons of seasonal VOM emissions for
units subject to the 12% reduction and 100 tons of baseline emissions
from emission units that are excluded from further reduction, the source
would be issued ATUs for 188 tons of VOM or 1880 ATUs {100 tons × (1-0.12)
+ 100 tons = 188 tons}.
Market Operation
In the ERMS, the period of October 1 through December 31 of each year
is termed the "reconciliation period." During this period, each
source must compile its actual emission data for the ozone season, check
its current ATU holdings, and make any additional purchases of ATUs as
necessary to assure that sufficient ATUs are held. During the reconciliation
period, sources may also sell off surplus ATUs, which will not be needed
for their actual seasonal emissions.
Participating sources may enter into agreements to transfer ATUs during
the rest of the year as well. These agreements may address both ATUs already
issued to a source and ATUs which a source is scheduled to receive in
the future. Thus sources may make multi-year or permanent transfer agreements
to accommodate a source's long-range plans. If these sources then find
themselves with a surplus of ATUs, the sources may transfer the ATUs still
to other sources.
The ERMS also allows sources to go "outside" the ERMS to obtain
ATUs. A source may have ATUs issued to it based on VOM emission reductions
at a permitted source that is not required to participate in ERMS. ATUs
may also be issued for reductions from mobile or area sources. In both
cases, ATUs will only be available to the extent that the emission reductions
go beyond all applicable rules and the amount of reduction can be accurately
determined. In addition, unlike other ATUs, these ATUs may not be able
to be banked (so as to be usable in a second season) depending on the
nature of the underlying emission reduction.
At the close of the reconciliation period, sources will be required to
demonstrate compliance with the ERMS by holding ATUs in a quantity sufficient
to account for the actual VOM emissions during the previous ozone season.
Sources that do not hold sufficient ATUs will have experienced an "emissions
excursion" and will be required to make monetary compensation determined
from the amount of excursion.
Alternative Compliance Market Account
In the extraordinary event that there are no ATUs available through the
market, the ERMS establishes a safety net by the creation of the Alternative
Compliance Market Account (ACMA). This is a reserve of ATUs managed by
the Agency. The account will start with ATUs equivalent to 1% of the entire
program's allotment of ATUs to participating sources. This 1% is accounted
for in the overall 12% reduction.
The monetary compensation for emission excursions relates to the ACMA.
A source will be required to purchase ATUs from ACMA at the rate of 1.2
times the emission excursion for a first time excursion. In the event
that a source has two consecutive emission excursions, the rate will be
1.5 times the excursion. Keeping in mind that the purchase price for ATUs
from ACMA will be at a minimum the lesser of the following; $1,000 or
2 times the average market price of an ATU, it is in a company's best
financial interest to secure the appropriate ATUs during the reconciliation
period.
Conclusion
The ERMS represents the common-sense application of a market-based approach
to the further reductions in stationary source VOM emissions required
for the Chicago area by the federal Clean Air Act. The program is radically
different from the command and control rules that have previously been
relied upon. It provides enormous flexibility to sources and creates and
enhances incentives for sources to identify, develop, and implement cost-effective
measures to reduce VOM emissions. The administrative effort needed to
start-up the program is not trivial but it is minimized by linking the
program to major sources that are already subject to more rigorous CAAPP
permitting. The program will benefit both sources and public as it achieves
desired VOM emission reductions with significantly less impact on the
overall economy of the Chicago area.
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