Emissions trading programs have been implemented worldwide in order to achieve clean air goals while providing industry with the flexibility needed to make the best economic decisions. But not all such trading programs are created equal. The scope of the program, allowable emissions, creation of credits, time period to settle accounts, changes in the program, and other regulatory programs shape the compliance strategy for corporations and force ongoing evaluation of those strategies.

Emission trading is a regulatory approach to control emissions by providing economic incentives to achieve reductions. The regulatory approach seems straightforward – determine the clean air goal, establish an emission cap for a given area or industry in order to achieve the clean air goal, and allow each member of the regulated community to decide the most economical way to meet their collective obligations.

Regulatory agencies have agreed on some basic tenets of emission trading rules, such as the need for the certainty of reductions, and corresponding monitoring, recordkeeping and reporting requirements. Other tenets of the trading program can differ widely – the type of trading program, the affected industry, the determination of emissions, and the creation of emission credits or allowances.

The two main types of trading programs are cap-and-trade, and so called “emissions rate” or “performance-standard rate.” Some programs are a blend of the two. In some cases, the cap or rate may be gradually lowered to allow the regulated community more time to plan and complete reductions activities. Planning current and future year emitting strategies becomes key to cost containment.

A third type of reduction program that uses economic incentives to achieve reductions is the taxation of emissions. This type of program looks to modify the behavior of emitting entities to reduce pollution by leveling taxes on the emissions or emitting activity such as energy use.

Emissions trading is not as straightforward as it might seem. Since emissions have value, new dynamics are introduced. The planning of the most cost-effective reductions must include the prospect of buying emissions to achieve the required results, the selling of emissions, initiating a variety of control measures, and potentially shutting down a unit or facility. The proceeds from selling emissions can differ for private companies versus public companies, thus affecting the planning decisions. Many companies are concerned about the public stigma of selling pollution and must weigh those potential perception problems. Consultants are hired to assist with the technical, economic and political planning. In-house commodity brokers, analysts and the option to trade emissions all add to the dynamics.

Emission cap and trade programs

Enlarge this picture Table 1. Examples of Emission Trading Programs *The Texas Center for Environmental Quality (TCEQ) has identified a number of VOCs that are more reactive in photochemical reactions than others: ethylene, propylene, all isomers of butene, alpha-butylene and beta-butylene and 1,3-butadiene. These VOCs are now classified by TCEQ as HRVOCs in 30 TAC Chapter 115.

Many cite the EPA’s Acid Rain program as prescribed under the 1990 Clean Air Act Amendments as the original emissions trading program. While this was the first wide scale program, emissions trading began on a much smaller scale in 1976, when the EPA allowed Proctor and Gamble to purchase VOC emissions from 3M in Santa Monica, Calif. This trade influenced the 1977 Clean Air Act Amendment to allow the banking of emissions and the trading of emissions for New Source Review purposes.

Although cap and trade programs can differ, the basics are:

• The government agency sets a cap on the amount of a pollutant that can be emitted for a specific geographic area or by a specific industry.
• Each facility is given allowances that represent the right to emit a specific amount of a regulated pollutant. The total amount of allowances cannot exceed the cap, limiting total emissions to that level.
• A facility that pollutes beyond their allowances must buy credits from those who emit less than their allowances. When one facility obtains emissions from another facility this is referred to as a trade.

The baseline emissions cap at a facility is typically based upon the type of emission units, an emission factor and the past operating rates of the emission units. For example, under the SCAQMD’s RECLAIM program, each facility receives RECLAIM trading credits, or RTCs, based on past peak production, and the requirements of existing rules and control measures. Under the Texas NO_X MECT program, for emission units in operation prior to Jan. 1, 2006, the baseline NO_X emission cap was calculated based upon the average “level of activity” and the appropriate emission factor from 1997, 1998 and 1999. For facilities in operation after Jan. 1, 1997, the baseline NO_X emission cap is the highest two consecutive years of emissions during the first five years of operation.

Once the baseline emissions cap is established, gradual reductions are prescribed to reach the goals. Under the Acid Rain program, SO2 emissions from coal fired units have been reduced based upon a planned decrease in SO2 emission rate from existing to 2.5 to 1.2 lbs of SO2 per million Btu. In Texas, the NOX baseline emissions cap is reduced based upon final emission specification for each unit type and the tightening of a reduction factor from zero to 1 over a five-year period (see Table 2).

Emission rate or performance based programs

Enlarge this picture Table 2. Texas NOX Program Reduction Factors

In either type of emission trading program, the regulatory authority sets a constant or declining emission rate performance standard (e.g. kilograms of emissions per unit of production). Sources with average rates below the performance standard earn credits that they can sell to other emission sources. Sources with rates above the standard must obtain credits to cover the excess. Rate-based trading programs can lower emissions, but they can subsequently grow if activity grows.

The Dutch emissions trading program for NO_X was developed as part of national policy to comply with the European Union directive on National Emission Ceilings. The Netherlands are obliged to reduce overall NO_X emissions from 490 kilotons in 1995 to 260 kilotons in 2010. Negotiations with the major industrial sectors resulted in a 2010 target for major industries of 55 kilotons relative to a 1995 baseline level of 210 kilotons.

The Dutch program began in 2005 and is based on relative caps, directly related to the activity level of each unit at a facility. An installation builds up NO_X emission credits in the course of the year when the unit is operated at or below the assigned performance standard rate (PSR). The PSR and its decline over the implementation years differ for the different industrial categories (see Table 3) and are anticipated to result in the achievement of the goal of no more than 55 kilotons from the affected industries.

Three keys to make the most of an emissions trading program

Enlarge this picture Table 3. Netherlands Largest Industrial NOX Emitters and their Corresponding Performance Standard Rates

1. Know the program. As evidenced by the examples given, not all programs are created equal, and knowing the nuances of each program is essential for successful participation. Even emissions trading programs by the same regulatory agency are not consistent – the EU-ETS CO₂ trading program in the Netherlands is radically different from the NO_X trading program. Decommissioned units generate CO₂ - emission credits that can be transferred to other existing or new units, whereas no NO_X emission credits are generated.
2. Develop the plan to comply. Plan ahead for many years to reduce emissions below the emissions cap or performance rate by installing pollution control equipment or to buy emissions, which can take considerable time. Balancing control costs versus credits costs, coupled with future operating scenarios and the availability of credits to purchase, is a daunting task and involves many decision makers and consultants.
3. Execute the plan – plan to adjust. The first step to executing the plan is to implement the new emission control measures. The generation of bid specifications, the review of bids and the selection of vendors are not overnight matters. The installation of the emission control measures must be planned with operations and other desired maintenance activities. Once installed, the performance of the emission control measures versus the planned reductions must be evaluated. Any shortfall may mean more control or the purchase of more emission credits.

Another significant part of all emissions trading programs is monitoring. Again, the generation of bid specifications, the review of bids and the selection of vendors are not done overnight. Every agency creates monitoring requirements to ensure the accuracy of the emissions reported, and to account for all emissions. Not every subject unit is required to utilize a hardware continuous emissions monitoring system (CEMS). If this is assumed, the cost and complexity of the trading program can increase by 50 percent or more. The actual monitoring requirements are dependent upon the decisions of the regulatory agencies.

Most large emitting units of SO₂ and NO_X are required to install CEMS and some sort of fuel flow or flue gas flow rate monitoring device. Gas- and oil-fired units in NO_X trading programs are generally required to install CEMS but are also allowed to install predictive emissions monitoring, or PEM, systems.

Gas- and oil-fired units in SO₂ trading programs are allowed to perform fuel sampling and analysis coupled with fuel flow monitoring. CO₂ emission trading programs rely upon fuel monitoring systems and CO₂ emission factors. The Texas requirements for monitoring HRVOC emissions from flares, cooling towers, process vents and pressure relief valves allow a variety of monitoring techniques other than direct emissions monitoring.

Since monitoring is based upon monitors and electronic connections that can and will break down, most – but not all – regulations prescribe procedures for performing data substitution. The Acid Rain program is complicated and punishes companies that have consistent monitor performance problems. In Texas, the NO_X emissions trading program does not specify any data substitution requirements but the HRVOC emissions trading program does for some monitoring requirements. Their policy is for companies to be as accurate as possible when utilizing a substitute value under the NO_X program.

The creation of a site-specific monitoring protocol may be mandatory, but required or not, a protocol is paramount to the success of emissions data quantification efforts for each unit. Operators, technicians, engineers and managers need to know the requirements.

No known regulations specify how performance must be monitored, just how emissions and monitor status must be reported. No known regulations specify that emissions must be predicted into the future. Reliance upon traditional emissions quantification techniques for performance monitoring can prove detrimental. Utilizing spreadsheets on a monthly or quarterly basis to accumulate data may result in uncovering a performance problem too late, and thus a previously unforeseen need to purchase emissions. Real-time performance monitoring systems that actively acquire emissions, process and monitor data are replacing traditional spreadsheet systems. These performance monitoring systems can also predict future emissions and result in making the most of market opportunities. The cost to upgrade to a real-time, active performance management system pales in comparison to the cost of emission controls, emissions trades and emissions monitoring.

Be ready to trade

Many facilities are not using a trading system. But while the U.S. does not participate in the Kyoto Protocol, many states are considering such a trading program, and worldwide pressure to participate has not waned.

Participating in voluntary registers of greenhouse gases and other pollutants will establish some experience for the company, perhaps ensuring a better baseline for any future trading program. Installing an active performance management system can shed reliance upon spreadsheets. Besides emissions trading programs, Sarbanes-Oxley is driving many companies to a single version of the truth, something spreadsheets do not do.



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