EPA: Northeastern States’ NOx Emissions Dropped 30 Percent in 2003

Published November 1, 2004

A cap-and-trade program begun last year in eight Northeastern states has cut nitrogen oxide (NOx) emissions there by 30 percent, according to EPA statistics.

More States Are Joining Program

The NOx Budget Trading Program (known as NBP) required emission caps and reductions from May through September 2003, but allowed flexibility in achieving those reductions. Eleven additional Northeastern and Midwestern states will join the program this year, and two more are expected to join by 2007, the September 3 edition of Greenwire reported.

EPA has reported that the program, when fully implemented by the 21 states that plan to participate eventually, “is expected to achieve significant reductions in summertime NOx emissions across much of the eastern U.S.” in addition to the gains made last year.

Emissions Cut Despite Production Increase

According to the EPA report, “These emission reductions occurred despite an increase in heat input (a measure of power generation) at affected sources. Emissions have also been reduced by 70 percent from 1990 levels. In 2003, of the total affected population of approximately 1,000 [power generation] units, all but 7 were in compliance.”

The 11 states that will be joining the NBP this year also have cut NOx emissions, though not as much as states already participating. According to the EPA report, the 11 states have cut NOx emissions 50 percent since 1990, versus the 70 percent cut in emissions made by the NBP states. EPA stated much of the progress of the 11 non-participating states is due to their ongoing participation in the national Acid Rain Program.

The 11 states’ upcoming participation in the NBP is expected by EPA to provide still greater clean air benefits.

Benefits of Cap-and-Trade Noted

“States were given budgets, or caps, on their ozone season emissions,” EPA noted. Flexibility and state government discretion are the keys to ensuring efficient and economical emission reductions, the report made clear. “There are many ways that sources can reduce emissions,” the reported noted. “One method is to utilize units with high emissions less and to shift generation to lower-emitting units within the program or to sources that are not affected by the program. For example, a plant operator could choose to run a unit with high emissions less often.” Power generation could then be allocated to a lower-emitting unit at the same plant.

Other options include “modifying the basic combustion process to control the formation of NOx, optimizing boiler operation to minimize NOx production, using add-on controls, or purchasing allowances from other market participants. Sources can use any one or a combination of these options in a way that best fits their own circumstances,” according to the report.

Market Incentives

Power companies that are able to achieve emission reductions at low cost have the option of reducing emissions more than required under the state cap, and then selling their emission credits to companies that otherwise have a difficult time making economically viable emission reductions. “The price for NOx allowance continues to fluctuate as companies evaluate ongoing trends in control installations, energy demand, and other factors that affect the overall costs of control under the NBP.”

“Recent prices are down appreciably from early 2003,” observed EPA in the report. “This suggests that, as the program progresses and the uncertainty of allowance availability decreases, further price reductions may occur. This result is consistent with price behavior observed during implementation of the OTC trading program.”

James Johnston, an energy economist and senior fellow with The Heartland Institute, noted the apparent cost of emission reductions in the NBP may appear to be low because the program is still in its early stages, and the required reductions are relatively inexpensive or can be achieved simply by averaging the emissions from multiple plants. Costs could be substantially higher when emission abatement devices must be purchased and installed.

The EPA report also noted market incentives inherent in the cap-and-trade program encourage firms to make emission reductions as soon as possible. “Under the NBP,” the report noted, “banking provisions allow companies to decrease emissions more than required early in the program, and save unused allowances for future use. This creates an economic incentive for sources to achieve deeper reductions early in the program. Banking allows for earlier environmental and health benefits and provides a pool of allowances available to address unexpected events or smooth the transition into deeper emission reductions.”

But Johnston warned, “the government denies property right status to the allowances. This means it can change the regulations in such a way as to decrease the value of allowances and there will be no obligation to compensate the victims for the government taking. Finally, there are a limited number of ways to reduce the NOx emissions. This, in turn, means the abatement-cost differences are minimal. Thus, the notional basis for trading appears to be very limited.”

High Price to Pay?

Johnston is not the only economist and policy expert to raise important questions about the cost of, and even need for, the cap-and-trade approach.

“The view that emissions trading schemes are more cost-effective than simply increasing energy taxes is not widely accepted by those who have studied the issue,” noted Christopher Horner, a senior fellow at the Washington, DC-based Competitive Enterprise Institute (CEI). “Such a ‘market mechanism’ may be an efficient way to manage an emissions cap, but this is distinct from being the most cost-effective method of reducing emissions.”

“EPA’s report is a valuable confirmation of the dramatic progress being made in reducing air pollution emissions and the role market-based policies such as emissions trading can play,” noted Joseph Bast, president of The Heartland Institute and publisher of Environment & Climate News. “There is some risk, however, that people might read this report as saying emissions can be reduced at little or no cost, and therefore EPA can continue to ratchet downward emission standards without damaging businesses and consumers. That is not true.

“Businesses spend billions of dollars a year complying with environmental regulations, much of it wasted on compliance activities that don’t reduce emissions or on reducing emissions that are nonhazardous. Cap-and-trade is no substitute for basing environmental policy on sound science– which means setting scientifically defensible standards–and relying on true markets, not government-created regulatory schemes,” said Bast.

CEI President Fred Smith agreed. “Before endorsing a technique, we should ask whether that technique is being used to do the right things. To argue that we’ve reduced the costs of bad actions may simply make bad actions more likely.”

Added Marlo Lewis, a senior fellow at CEI, “Climate alarmists have become so enamored of cap-and-trade’s efficiency compared to command-and-control that they forget to ask whether it is smart to do dumb things in efficient ways. Real markets ration scarce goods but, in addition, they also create incentives to increase supply. Real markets alleviate natural scarcities; cap-and-trade creates artificial scarcities.”

James M. Taylor ([email protected]) is managing editor of Environment & Climate News.

For more information …

see EPA’s report, “NOx Budget Trading Program 2003 Progress and Compliance Report,” available online at http://www.epa.gov/airmarkets/cmprpt/nox03/noxreport03.pdf.