Economic Instruments - Tradeable PermitsNOx SIP Call Budget Trading Program (US)
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NOx SIP Call Budget Trading Program, US
Background The NOx SIP Call Budget Trading Program superceded the OTC programme in 2003(See Footnote1). This new programme was created in response to the EPA's call for State Implementation Plans (SIPs) to reduce the transport of ozone pollution over broad geographic regions of the north-east of the United States. Under the SIP Call Program, the NOx Budget Trading Program, which was developed under the OTC programme has expanded considerably in terms of its coverage.
Aims The aim of the NOx SIP Call Budget Trading Program is to reduce the transport of ozone pollution over broad geographic regions of the country.
Design Coverage Under the SIP Call Program, the NOx Budget Trading Program, which was developed under the OTC programme, has expanded considerably in terms of its coverage. The States that will now be involved in NOx trading under the SIP NOx Trading Program include Alabama, Connecticut, Delaware, Illinois, Indiana, Kentucky, Massachusetts, Maryland, Michigan, North Carolina, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Virginia, West Virginia and the District of Columbia. Parts of Georgia and Missouri are expected to join in future years as well. Under the SIP Call Program, all wholesale electric generating units (EGUs) with an output capacity of 25MW or more, large industrial facilities such as steel, chemical, pulp and paper, and refining that have boilers with heat inputs of 250 mm Btu per hour and larger (non-EGUs), and in some states, cement kilns are affected. The emissions reduction obligations are differentiated by industry sector, with EGUs making roughly 80-85 per cent of the reductions from the baseline level in 1995, while non-EGUs are obliged to reduce NOx emissions by roughly 65 per cent from the same baseline and cement kilns are required to make 35 per cent reductions
Trading Program Classification The NOx Budget Program is a cap-and-trade programme.
Introduced The first phase of the NOx SIP Budget Trading Programme was introduced on May 1st 2003. The NOx SIP Call Program is implemented in two phases. On May 1st 2003, facilities that were regulated under the previous regulatory regime (the OTC NOx Budget Sources) were required to reduce emissions by 35 - 40 per cent as the standard was reduced to 0.15lbs NOx/mm Btu from approximately 0.23lbs mm Btu. In 2004 the NOx SIP Program enters a second phase. On May 1st 2004 (and May 1st each year thereafter), affected sources in all states covered by the SIP Call Program will be required to control NOx emissions to the same levels as sources in the original OTC programme. UNITS The unit of the NOx Budget Program is the "NOx Allowance". One allowance permits its holder to emit one tonne of NOx during an "Ozone Season" (1st May - 30th September) for a given vintage year. Unit Allocation Participating sources are allocated allowances by their respective state governments depending on their share of the region-wide NOx budget for each ozone season.
Monitoring and Enforcement Allowances and transactions are recorded in the EPA NOx Allowance Tracking System. At the end of the ozone season of each year budget sources must hold enough allowances to cover their actual ozone season emissions so that they remain in compliance with the programme. Compliance is determined by ensuring that allowances held by a source at the end of each control period meet or exceed the emissions for that source for the given control period. Where a source does not have sufficient allowances to cover their emissions then they must enter the allowance market and purchase allowances from those sources that have reduced their emissions below their allocated levels, are else face the imposition of a penalty for being non-compliant.
Banking and Borrowing The borrowing of allowances from future allocations to meet current compliance needs is not permitted. However, participating sources have the option of banking any unused allowances for future use. The use of banked allowances could allow emissions to exceed the emissions budget in a particular year. The NOx SIP Program uses the same safety valve that was used in the OTC programme to address this concern - the "Progressive Flow Control"(PFC). This control discourages the "excessive" use of banked allowances by establishing a discount rate on the use of banked allowances over a certain level. Under the NOx SIP Program, a 2-for-1 (two banked allowances for one tonne of emissions) surrender rate is applied to the use of a portion of banked allowances when the total number of banked allowances in the program exceeds 10 per cent of the allowable NOx emissions for all sources covered in an ozone season. If an owner uses banked allowances for compliance when the PFC applies, then only a portion of the source's banked allowances can be surrendered on the customary 1:1 basis (one allowance for each tonne of emissions). If additional allowances must be withdrawn for compliance, then allowances will be used on a 2:1 basis (two banked allowances for each tonne of emissions). The PFC ratio is calculated at the beginning of each Ozone season. The PFC ratio is calculated as follows: Year 2005 PFC Ratio = (0.10 x total NOx budget for 2005 season)/total no. of banked allowances for 2003-2004. If the PFC ratio for 2005 is 0.27, this means that if you hold 100 vintage allowances (i.e. you have banked 100 allowances over the course of the 2003-2004 ozone seasons) at the end of 2005 season, you can use the first 27 banked allowances at a 1:1 rate for 2005 compliance. The remaining 73 banked allowances can only then be used at a 2:1 rate for 2005 compliance. Effectively this means that the yield of having vintage 2003-2004 allowances for use in 2005 is 0.635 (0.27 + [1 -0.27]/2) i.e. each banked allowance now permits its holder to only emit 0.635 of a tonne of NOx.
Footnotes1. Refer to the Ozone Transport Commission(OTC)NOx Budget Program entry on this website.
References The information contained here on the NOx SIP Call is taken from the Clean Air Markets section of the US EPA website -
Useful Information Sources Additional information on the NOx SIP Call and other cap-and-trade programmes in the US can be obtained from the US EPA website - http://www.epa.gov/airmarkets/trading/index.html |
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