NOx Allowances Trading

NOx allowances were originally created through the implementation of the Ozone Transport Commission (OTC) to control inter-state ozone pollution in the Northeastern states, including the District of Columbia. This was accomplished by creating a summertime (ozone season) cap for emissions (between May 1st and September 30th), which affected all major emission sources, including: utilities, electrical generators larger than 15 MW and industrial boilers with a heat input exceeding 250 MMBtus/hr.

Although a state program, NOx trading differs little from the Federal SO2 market’s cap-and-trade system. While the program is implemented on a state-by-state basis, there are no inter-state limitations on NOx emission allowances. As a result of state SIP NOx programs being quite similar, an allowance may be purchased in one state and used in another.

The OTC’s program was replaced by the SIP Call Budget program in 2003, in response to the EPA’s call for State Implementation Plans (SIPs), in an effort to reduce regional pollution in larger tracts of land. Since the transition, trading has expanded considerably. The SIP NOx program entered its second phase on May 31st of 2004. On May 1st 2004, an additional 11 states were added into the program and were required to control the NOx levels within their state to levels equal to those in the original eight states.

The NOx program operates similarly to the SO2 program. Sources that are affected by regulation are issued allowances by their state governments. An allowance allows for an affected source to produce one ton of NOx emissions during the control period for a given vintage year. All allowances are tracked by the EPA’s NOx Allowance Tracking System (NATS). Emissions are reviewed annually by the EPA and a number of allowances equivalent to the emissions are deducted from the NATS account of the affected source. Accounts for the current vintage year are frozen during this process and remain locked until the process is complete.

Prior to review by the EPA, affected sources short on allowances may purchase allowances to cover their emissions and sources that have reduced their emissions may sell them for a profit. Unused NOx allowances may be banked forward, but unlike SO2 allowances they do not maintain their value over time. If the total number of banked NOx allowances exceeds 10% of the current vintage year’s allocation, a value reduction will be carried out. This value reduction is called Progressive Flow Control (PFC). The value reduction is dependent upon the number of banked shares and the current year’s allocation; it is not cumulative or linear.

Banked allowances falling outside of the percentage useable at a 1:1 ratio may be used at a 2:1 ratio for one ton of NOx emissions.

NOx regulations under CAIR

CAIR established an Annual NOx program for those eastern and midwestern states to reinforce air pollution restrictions. Different from SIP Call NOx, or Ozone Season NOx, CAIR Annual NOx would have been a year-round compliance market for affected states. CAIR would have also changed the original SIP Call NOx program to remove progressive flow control (PFC), which was established by EPA to limit the use of banked allowances from years past to meet compliance for a given year. Now that the entire CAIR program has been vacated, flow control remains in place.