&EPA
                 United States
                 Environmental Protection
                 Agency
                 Office of
                 Public Awareness (A-107)
                 Washington DC 20460
March 1980
OPA58/0
Environmental
Information
Controlled
Trading

What it is-
why we need it
                                                air
               and adnlstrtive hassle.  Since 1970 EPA
 within a re9u.l'**L'7tCfe*u i?th loCrces  that were easy targets,
 TaL'iMtfa? costs If control were relatively low. But for many
 Mania's ft'. 3' ore intra e?b,, ^Juunt, ^J.^ '^dlSl

 Su ipS!S"~0I-rS?%!ilM»^ that past 9a1ns My slow or
 be reversed.
                       There

                                                   plant managers  little room

                                             by resistance or delay.
                        ,  have shown its industry can do more.  For most firms, it
                     •   ?Llv not "o?of i table" to invest in innovative efforts to do
                     15 S £ n IhP Uw currently requires.  This point is critical, for
                     1°nP?h X hruna:nlUy"nno^tioeS can produce improved air quality
                     at reduced -- rather than increasing - costs.

                        Present regulation can  deal with these threats- to air quality
                     •n tJTwavs   It can try to  squeeze more emission reductions out
                     of reguUted s rce , imposing much heavier costs per pound than
                     fir iStlal reductions.  Or  it can reach out to regulate smaller

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sources.   Both-tactics mean .more^government iYitrtrs-io-n- and:  "
enforcement burdens,, as well (a,s-'£fflall-er? payoffs per-snegut-atory.
action.   Both mean, more ijidus.-tryt.res.-isrtffnce and;;pal"i&tcia,l~
problems.   Both< pos»e; direct conflicts .between growth a,rei—:,.
clean air.         •  -  ,  ;-/,  i.   .-.   ,.--"*$'-..,  -?  ••"    ;:*•?'--:     :

    ., Control led; trad-Ing- offers; a -way-out 0-f this rtratfciby i
putting*: the prof-it motive -to-twork .forriroll'Utl-oa •con-trfrl rxivtfrin
the present regulatb"ry ""system.  Most generally, it would allow
any source-to meet* fas*emission epitfroJ^espOTs.itHflit'i'es $ty, -•-
securing  required reductienssfromjany-jjo^'ntS; within-._ltS",;0wtv
or other  facilities, so le^as air qu-afi^ty anduthe
ability of the resulting trade in levels  of control
equivalent.   If a source can find or finance ways to remove
twice the  amount of a. releva^pp^utant  at.45>per-H30v^d ,-,-r-.  ^
either within itsrTnm~pj^t^.QfKfrom._fl^                       -
it can halve  the $10- pounds it-is'npW requfr'ed ,to rem^vev. ~l .-;,-••;
In short,  it  can" trade a"relaxation^^f  controls•",where; control "  c
costs are  very high-,, for increased controls where cps.ts,^.  r^f-;
either of  internal  reduction or,, external; pufc^ase:.«— are-'=,^r5 7fr
relatively  low..   '           ,fJ-   ."":  tic<-   -;;••      ••-••£•   icr::-,
     Thus controlled trading allows a source to  get someone; 5;;
else — or some  other process — to meet  required emission
reductions.  Agd,a  market for those; rgduct4pns wi 11.^ et sourp«S2
anticipate tfteir availabil ityhar5d;CQSt ,«cre§tingr grea-te^v
certainty .and more-.peductipnse.-'... ».*•> ;,:.-.    • '- '  *  -*•=-,
          r. -v j" • *v  > -        .   " "*- «i V r*' " n 'r " £ '"^"*  ^f^-^U ,l!" "^   ' v  ', „
     This simple .step^pan-cappy.iarge-benefits;..'  Fjrst^. a
studies of existing souFcesAand^r^the^ubb^e. indicaie,?'i#
can yield savings of "mitlions-pf. do! JarSjiTwitliouts,
impacts on ,ambient  air, qua! 2ty.ccPlant-man|ge»?S; w^
such savings i?y  re|i,stri bating eontrols will-eontinueits  3.
search forwfupther  jnexperisfve reductions -ri-an«(-;will ^ave
a personal sta.ke in thejnew-conffguration,  instead, .of viewing
controls as,-an interference -imposed from outside.       ;_r   ,
                           „         .
             -controlled tj?|d ing ^builds ,,on the.pl4ntrspecific'.&l:;.
expertise wfyich  90^0! ;.agencles -can never duplicate..   Instead-'
of stopping with enforcement of-a uniform rule,  it. encourages -•
plant managers to tailor nationwide requirements  by counter-
proposing^a different mix of controls that will  produce the •:-,.,
same result,. Since no IntrasQurce trade wi/IT  take  place unless -
savings -are /realized, and nq 1-ntersoupcg trad-e wilTctake placet,
unless  both parties benefits this leaves ;state agencies free-to '
focus on technic%l [air .quality, while.- reducing  wrangles^ ever.   :
industry costs*      t-',, •-  ?-•;••'   •    ,--•-•    -    '  ""»•.;•
              •if

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   -- Th-irdy-c&n^r&-14«d"tradTTrg makes "tt prof ttatsTe "—  for
 the  first  ttme -f-t tar firms- to fnridVste "by cdntroll4ng  ' --
 more than  r.eqtrtrechfc  Sources wtriofr< produce -such ex^r^a-     " ^~-
 emission retnem a't a profit-'-to new-plants    -
 in need of offsets.   These benefits can be magnified
 by banking, which  creates  a  continuous incentive for firms
 to control as tfaflr-" as  possible when^replacing* current" cdhtrelsv by
 allowing_:such fd'rtis' to  store redactions for future use- or sale-;
     Banktng aslsfc' provides "i'nnovatla'n insurance Tor %x~isting:~ ••
sources, wMchtccan* secure' Offsets' to'^make^p'^he^idifferencej if
a new mettotf of '-pollution 'control  falU^sti&K ef applicable'
requirements." •        •• --       '•:,•-,;•

     Fourth", £on'-tro13€d  tradi ng" encourages Voluntary extra    -
reductions by regulated  and unregulated*1 sources. "'The:  / y V
prospect of substant-tar savings  or' profits can induce many  '"'
firms to' fftstall? controls tha:t would  be  difficultHo mandate
by direct rsgula^'on.' The prospect can  also induce effective
but difficult te  require process  changes.   And it can 'make  further
reduction feasible  for those  low-control-cost but low-profit
sectors of the economy that have of ten. been treated lightly
under State p'lahs.  ""  "       o   .  -.«'             £
                                 '                       "
              controlled tradirig"' can-ease  political  a^d admini- •'
strative pressures on har^j?iressea:S^te air agencies.' : "H     -
injects needed flexibility  into  the  regulatory pr'bcfiss'i enlistfng
industry as an ally rather  than  an adversary.   It can sharply  „
reduce compel' a ncfilJSflsts ^withQut^ciRangin^ the  way emission
obligations are s:et:and enfSrcedV" Itfoffe!*§:.a 'route to'r!t-     ife •
attainment wtn'cn ^oes hot' involve additional  direct  regulation; s
With bankihg-,"4t can'" spread permit approvals -over time," "relieve- :
pressures to find -offsets' during poTitic1aT1y-charge"o'"new source -
reviews, and help communities plan* for growth  based  on Known    •""
amounts of emission credits.  It gives enforcement agertfiies     "
something positive to- distribute, not-additional "obligations.    ;
And it reverses present incentives for industry to delay rather
than speed neg£}tfat1'8n§.*''A soupce whicfi eafi' benefit^from^a.rj&'^de
is losing money ea£n"vday>'that trad^  is/deTa'yed, Ind rwiU dd *~i-:~
everything possible to ass'ure'a  prompt^resol'tTtion;      ' '    *"••'
            "~             fc. "  •   ^      '"             "'^     *"
     Controlled '-trading curfefitly consists of  the bubble;  new
source'^ offsets, and banking'.  EPA is.-exptoriag other steps
including marketabTe perrttits aJiSl-.nteth,pds of  allocating the clean
air increment in so-called*  PSD -areas"-'- that would Expand the   :?
universe of-traders and trades i  provided that  air qua-T-fty ffnd "
enforceability are preserved.  The important point is that    v •
these steps, like the existing ones, will give sources a range
of ways to meet air pollution requirements as  cheaply and
efficiently as possible, and that they must  reinforce each other
— and environmental  goals — alike.

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For further information on controlled trading, please
contact:
              Michael  Levin
              Chief, Regulatory Reform Staff
              Environmental Protection Agency
              401  M Street, S.W.   (PM-223)
              Washington, D.C.   20460
              (202) 755-2884

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