GREENHOUSE GAS EMISSIONS TRADING IN U.S. STATES Observations and Lessons from the OTC NOx Budget Program

LAYOUT Each World Resources Institute report represents a timely, scholarly treatment of a subject of public concern. WRI takes responsibility for choosing the study topics and guaranteeing its authors and researchers freedom of inquiry. It also solicits and responds to the guidance of advisory panels and expert reviewers. Unless otherwise stated, however, all the interpretation and findings set forth in WRI publications are those of the authors. RACT Reasonably available control technology REC Renewable energy certificate RGGI Regional Greenhouse Gas Initiative RPS Renewable portfolio standard SCR Selective catalytic reduction SIP State implementation plan SO 2 Sulfur dioxide A number of U.S. states are considering market-based policies to reduce emissions of greenhouse gases (GHGs). The experience gained from emissions trading for sulfur dioxide (SO 2) and oxides of nitrogen (NO x) offers a useful body of information and data to draw on to design a GHG emissions trading system. While many studies have considered the SO 2 experience in detail, this report examines NO x trading under the Ozone Transport Commission (OTC) NO x Budget Program. Although this program was motivated by federal law and supported by the federal Environmental Protection Agency, it resulted from the leadership, decisions, and actions by a group of states, ultimately becoming the first multilateral cap-and-trade system for emissions of air pollutants. The OTC NO x Budget Program proved to be effective on economic, environmental, and administrative grounds. From 1999 to 2002, annual emissions were significantly reduced and consistently fell below the emissions cap. Compliance with the program was nearly perfect, and it appears that there was little if any leakage, or the displacement of emissions and/or economic activity, from the OTC region to other regions. The cost of reducing emissions was considerably lower than the initial forecasts, and industrial sources were able to reduce emissions more cheaply than electricity generating units. Despite short periods of price volatility, particularly during the start of the OTC NO x market, regulators did not intervene with a price cap, nor did participating sources seek regulatory relief in court, and the market routinely stabilized. The program had no discernable effect on the region's economic vitality. The apportionment of the emissions budget among the OTC states, or the establishment of the state caps, was accomplished in a uniform manner based on heat input. Distribution of allowances to regulated sources was decided by each state, however, with no apparent detriment to the …