Design & Implementation of
the
U.S. Cap and Trade Programs
Avanzando hacia un Diseño Integral de un
sistema de Compensaciones Atmosféricas
para la Región Metropolitana de Santiago
Jeremy Schreifels, US EPA
May 28, 2009
Acid deposition (rain, sleet, & snow)
(1989 – 1990)
Emissions Standard =
500 grams/gigajoule
10,000 tonnes
Emissions Cap =
12,000 tons
7,000 tonnes
3,000 tonnes
10,000 tonnes
Emissions Cap =
12,000 tons
1,000 tonnes
1,000 allowances 4,000 allowances 3,000 allowances
3,000 tonnes
1,000 tonnes
3,000 allowances
Government Authority
• Collect data
• Quality assure data
• Audit data
• Inspect facility
• Publish data
1,000 allowances
3,000 allowances
Results
Design
Operation
Revision
Cap and trade:
The U.S. Acid Rain Program
• Environmental
results
• Design elements
• Program operation
• Revisions to
address health
impacts of PM2.5
• Lessons learned
Lessons
Results
Design
Operation
Revision
Lessons
Generation is up, electricity prices are down,
and pollution is down significantly
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
Electricity Retail Price
SO2 Emissions
SO2
NOx
NOX Emissions
Electricity Generation
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
-60%
1990
Percent Change Relative to 1990
50%
Results
Design
Operation
Revision
Lessons
States with the highest SO2 emissions in 1990
saw the largest reductions by 2007
Results
Design
Operation
Revision
Lessons
States with the highest NOX emissions in 1990
saw the largest reductions by 2007
Results
Design
Operation
Revision
Lessons
Average wet sulfate deposition (rain & snow)
decreased significantly between 1990 and 2007
1989-1991
2005-2007
Results
Design
Operation
Revision
Lessons
Average wet nitrogen deposition (rain & snow)
decreased significantly between 1990 and 2007
1989-1991
2005-2007
Results
Design
Operation
Revision
Lessons
Average ambient sulfate (SO4)
decreased significantly between 1990 and 2007
1989-1991
2005-2007
Results
Design
Operation
Revision
Lessons
Compliance is near perfect and costs are lower
than other policy approaches
Compliance Costs - 2010
3
Billion US$
2.5
2
1.5
1
0.5
0
Technology Emission
Mandate
Rate
Standard
Cap &
Trade
Source: Burtraw, Palmer, Cropper, and Carlson
• Compliance rates are
≈100 % every year
• Compliance costs are
significantly lower
than technology
mandates (commandand-control) or
emission-rate
standards
Results
Design
Operation
Revision
Lessons
The programs are
effective, efficient, and credible
“Much has been written about the (SO2) program...
Suffice it to say that it has succeeded spectacularly.
Between 1995 and 2010, the SO2 trading program will
result in greater reductions on a much faster
schedule than likely would have been the case under
more traditional technology-based standards, and will
save more than $20 billion dollars cumulatively over
that period of time. Even the most vocal ex-ante critics of
emissions trading now agree that the program has been
a raging success.”
Paul Portney, President, Resources for the Future
Environmental Finance, October 2004
Results
Design
Operation
Revision
Designing and operating
the US SO2 cap and trade program
• Setting the emission cap
and distributing allowances
• Assigning responsibility for
meeting the emission cap
• Developing rules for
allowances, emission
measurement, and
compliance
• Operating the infrastructure
• Providing compliance
assistance
Lessons
Results
Design
Operation
Revision
Lessons
Distributing allowances
• Majority of allocation approaches lead to the same level
and distribution of emission reductions; the emission
caps and banking drive reductions
• Many options for allocation, but none are perfect
– Direct allocation to sources facilities on historical and/or current
energy use (input), production/generation (output), or emissions
– Auction with option to distribute revenues
Results
Design
Operation
Revision
Lessons
Assigning responsibility: Coal-fired power
plants are the dominant source of emissions
About 530 coal-fired
power plants (305
GW) with about 1,300
boilers generate the
vast majority of power
sector emissions:
- 95% SO2
- 90% of NOx
- 83% of CO2
Results
Design
Operation
Revision
Developing rules: Allowance use
•
•
•
•
•
One allowance offsets one ton of SO2
Allowances can be freely
transferred/traded with no restrictions
Official transfers/trades must be
recorded in EPA’s Allowance Tracking
System
Allowances issued for a specific
compliance year; each allowance has a
“vintage” (the first year in which it can
be used for compliance)
Surplus allowances not used for
compliance can be saved and used in
the future
Lessons
Results
Design
Operation
Revision
Lessons
Developing rules: Emission measurement,
reporting, and verification
• Consideration: Accurate, consistent
measurement methods are essential to
ensure environmental integrity, equity,
and credibility
• Coal-fired units install, operate, maintain,
and quality assure CEMS for SO2, NOX,
and CO2
– Daily calibration
– Semi-annual or annual testing
• EPA specifies
– Equipment and data quality assurance procedures
– Data substitution procedures for missing or invalid data
• EPA verifies CEMS operation and each hour of reported emission
data
• EPA provides a process for addressing unique or unusual
monitoring situations
Results
Design
Operation
Revision
Lessons
Developing rules: Compliance
• Automatic penalties for
excess emissions (i.e., noncompliance)
– Financial penalties
– Allowance offsets
Results
Design
Operation
Revision
Lessons
Operating the infrastructure: Data
collection, management, and publication
• Emission and allowance
data management
– Collect and quality assure
emission data from sources
– Track allowance allocation,
trades, and ownership
– Deduct allowances for
compliance
– Publish information in an
easy-to-understand and
easy-to-use format
Results
Design
Operation
Revision
Lessons
Providing compliance assistance
• Each EPA region has a
dedicated analyst
– Analyst answers questions
from power plants, statelevel EPAs, and the public
– Analyst provides guidance
on monitoring and data issues
• EPA informs power plants of their compliance
obligations, including allowance requirements
Results
Design
Operation
Revision
Lessons
Operating the program: Resources
• Personnel
– 8 monitoring experts with assistance from regional
and state inspectors
– 1 market operations expert with assistance during
auctions and compliance assessment
– Additional staff dedicated to environmental
assessment, design of new programs, developing and
operating IT systems, and administration
• Budget
– Approximately 1% of air pollution control budget
– Funding is from the general operating budget
Results
Design
Operation
Revision
SO2 and NOX have decreased,
but more needs to be done
Nonattainment Areas for Ozone and PM2.5
Nonattainment areas for
8-hour ozone pollution only
Nonattainment areas for
fine particle pollution only
Nonattainment areas for
both 8-hour ozone
and fine particle pollution
Source: EPA, April 2005
• 126 ozone nonattainment areas with 474 counties
• 39 PM2.5 nonattainment areas with 208 counties
Lessons
Results
Design
Operation
Revision
Lessons
The Clean Air Interstate Rule (CAIR)
would reduce SO2 and NOX emissions further
Emission Caps*
(million metric tons)
2010
States not covered by CAIR
States controlled for fine particles (annual SO2 and NOx)
States controlled for both fine particles (annual SO2 and NOx) and ozone (ozone season NOx)
States controlled for ozone (ozone season NOx)
2015
Annual SO2
(2010)
3.4
2.4
Annual NOX
(2009)
1.4
1.2
Seasonal NOX
(2009)
0.5
0.4
Results
Design
Operation
Revision
Lessons
CAIR would result in major retrofits of coal-fired
power plants in the US
Results
Design
Operation
Revision
Lessons
CAIR will provide significant air quality
improvements
Ozone and Fine Particle Nonattainment
Areas* (April 2005)
Nonattainment areas for
8-hour ozone pollution only
Projected Nonattainment Areas* in 2015 after Reductions
from CAIR and Existing Clean Air Act Programs
108 ozone
nonattainment
or early action
areas
6 ozone
nonattainment
areas
36 PM2.5
nonattainment
areas
14 PM2.5
nonattainment
areas
Nonattainment areas for
fine particle pollution only
Nonattainment areas for
both 8-hour ozone
and fine particle pollution
Results
Design
Operation
Revision
Lessons
Complexity and ambiguity increase costs and
create uncertainty
• Simple, clear goals and
rules save time and
money, reduce confusion,
and enhance compliance
• Clear legal authority for
government agency to
implement and enforce
the emission trading
program
Results
Design
Operation
Revision
Lessons
A well-designed program can address differences in
seasonal and geographic impacts of emissions, if necessary
• Different compliance rates for geographic regions or
zones affect the cost of emissions in “sensitive” or “highimpact” areas
• Different compliance rates based on when emissions
occur affect the cost of emissions during “critical”
seasons
• The most efficient approach for reducing PM2.5 in the US
is to control the precursors (SO2, NOX)
Results
Design
Operation
Revision
Lessons
Adaptability to new circumstances is essential
• The framework of the program should allow for changes
based on new information, practices, or standards
• Most changes to the US Acid Rain Program were
intended to :
– Streamline the program
– Improve the quality of emission data
– Take advantage of advances in information technology and the
Internet
– Reduce burden and costs for power plants, market participants,
and EPA
– Improve the environmental accountability and results of the
program
Results
Design
Operation
Revision
Lessons
Flexibility streamlines decision making and
reduces costs
• Flexibility to develop control strategies and make
decisions (technology, fuel, operations, and investment)
reduces costs to industry
– Strategies can be designed to complement, rather than conflict
with, business planning processes eliminating sub-optimal
investments
• Flexibility provides continuous incentive to customize
strategy and innovate to reduce costs
• Emission cap provides environmental certainty about
total emissions, therefore, no need for EPA to review
compliance strategies or trades
• Lower compliance costs makes it feasible to require
greater overall reductions
Results
Design
Operation
Revision
Flexibility streamlines decision making and
reduces costs (continued)
• Banking provides temporal flexibility
– Creates incentive to reduce emissions
earlier than required
– Provides a buffer for price volatility
– Provides a pool of allowances for
phased cap reduction and unforeseen
events
• Flexibility does not create “hotspots”
– Largest reductions were in places with
the highest emissions
– Broad, regional reductions occurred
where improvements were most needed
Lessons
Results
Design
Operation
Revision
Lessons
Accountability is the prerequisite for flexibility
• Accountability requires accurate emission data to ensure
all facilities are in compliance and achieving the
emission cap; it also establishes integrity of allowances
and confidence in the allowance market
– Standards for measurement, quality assurance, and reporting
• Strict and automatic penalties for non-compliance
– Provide predictable consequences for non-compliance
– Limit the discretion of regulators
– Ensures all facilities are treated equally
• Complete coverage of all sources within the sector
minimizes shifting of production and emissions
(“leakage”)
Results
Design
Operation
Revision
Lessons
Allocation methodologies are important, but do not affect
environmental outcome of a properly enforced program
• Choice of an allocation approach has financial impact on facilities,
but does not affect the environmental goal
• Majority of allocation approaches lead to the same level and
distribution of emission reductions; the emission caps and banking
drive reductions
• Different allocation approaches reward different types of facilties
– Input (fuel use) rewards facilities with low sulfur emissions per unit of
fuel (e.g., facilities with emission controls)
– Output (generation) rewards facilities with low sulfur emissions per unit
of fuel and efficient facilities (e.g., low fuel use per unit of output)
– Historical emissions rewards facilities with high sulfur emissions per unit
of fuel (e.g., facilities with no investment in control technologies
• Allowance allocations can be recalculated on a predictable schedule
to reflect changes at the facilities (e.g., shutdown, changes to
generation) and new facilities
• Allowance allocation should balance need for certainty and allow for
changing circumstances
Results
Design
Operation
Revision
Lessons
Information technology streamlines program
operation and reduces administrative costs
• The use of information technology and the
Internet makes it possible to collect, evaluate,
manage, and publish large amounts of data on
emissions, allowances, compliance, and
environmental results
– Reduces administrative requirements
– Improves speed and accuracy
– Makes computerized data audits feasible
Results
Design
Operation
Revision
Lessons
The government’s role should be focused on the
program’s achievement of the environmental goal
• EPA focuses on performance of the program, not
compliance strategy
– Enforcing emission measurement and quality assurance
protocols
– Verifying emission data
– Tracking allowance ownership
– Assessing compliance (allowance holdings vs. emissions)
• EPA provides compliance assistance to facilities
– Improves compliance rate
– Reduces errors
– Creates collaborative problem-solving relationship between
facilities and EPA
Results
Design
Operation
Revision
Lessons
The cap and trade program should create
incentives for facilities to “do the right thing”
• Performance-based approach creates strong
incentives
– Emission measurement requirements set
progressively punitive measures for incomplete or
invalid measurements
– Higher relative accuracy of emission measurement
equipment results in fewer quality assurance tests
– Non-compliance penalties are greater than the cost
savings from non-compliance
– Banking provisions encourage early reductions
– Long-term emission reduction goals (and allowance
allocations) facility planning and investment decisions
Results
Design
Operation
Revision
Lessons
Cap and trade policies complement programs
intended to protect local air quality
• Cap and trade provides broad, regional emission
reductions
• Cap and trade, if designed properly, can
complement programs designed to protect local
air quality (e.g., technology mandates, emission
standards)
– Compliance with one program does not substitute nor
guarantee compliance with other programs
Recommendations for the Santiago MR
trading program (1 / 2)
• Reduce complexity; keep the program design simple
– Implement the program in phases, starting with large stationary
combustion sources and, if appropriate, expand to include other
source categories
– Simplify procedures for processing transactions
• Focus on the pollutants with the greatest health impacts
– SO2 and NOX are precursors responsible for a large portion of
PM2.5 in Santiago MR (they are also easy to measure)
Recommendations for the Santiago MR
trading program (2 / 2)
• Enhance the emission monitoring program to provide
accurate data on actual emissions
– Include QA/QC procedures to enhance data quality
• Assess the options for addressing differences in
seasonal and geographic impacts of emissions
• Consider more than one policy instrument; develop
complementary policies
– Consider control requirements for pollutants or source categories
for which cap and trade does not seem appropriate
– Implement emission standards as a “backstop” on emissions
For More Information
• Visit the clean air markets web site to view
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Emission data and allowance information
Information on cap and trade programs
Program rules and guidelines
Studies and reports
Information about international cooperation
http://www.epa.gov/airmarkets/