&ER&
United States
Environmental Protection
Agency
Office of
Planning and Management
Washington DC 20460
Novemeber 1980
Emission Reduction Banking and Trading Publication No. BA-115
Emission Reduction
Banking
An Annotated Slide
Presentation
Achieving and Maintaining
Air Quality Standards
while Accommodating
Economic Development
-------
EMISSION REDUCTION BANKING
An Annotated Slide Presentation
Prepared by:
Contributions by:
B3ited by:
Artwork by:
Typed by:
Jane Porter
EMISSION REDUCTION BANKING
& TRADING PROJECT
U.S. ENVIRONMENTAL PROTECTION AGENCY (PM-22Q)
WASHINGTON, D.C. 20460
John Hoffman, Carol McCoy, Stephen Seidel, Lex Richardson,
and John Wells
Joan O'Callaghan
Economic Analysis Division
Thomas Glover
Audiovisual and Public Support Branch
LaVora Holloway
Policy Planning Division
-------
TABLE OF CONTENTS
Title slide
WHAT IS BANKING? 3
HOW CAN BANKING BE USED? 5
Offset Policy 9
Bubble Policy 13
PSD Applications 15
WHAT ARE THE ADVANTAGES OF BANKING?
Advantages to Industry 17
Advantages to Communities 25
Advantages to Regulatory Agencies 29
WHAT IS INVOLVED IN SETTING UP A BANKING PROGRAM? 31
Qualifying the Emission Reductions 33
Quantifying the Emission Reductions 39
Certifying the Emission Reduction Credit 41
Banking the Emission Reduction Credits 47
Using Banked Emission Reduction Credits 51
HOW CAN TRADING ENHANCE THE BENEFITS OF BANKING? 53
WHAT IS THE STATUS OF BANKING?
Areas That Have Adopted Banking 57
Areas Interested in Banking 59
HOW CAN i START A BANKING PROGRAM? 60
i
-------
INTRODUCTION
Emission Reduction Banking is a regulatory reform initiated by the Environmental
Protection Agency to promote cleaner air while allowing for economic growth. Banking
gives a firm credit for reducing its emissions beyond the baseline level necessary to meet
national air quality standards. This emission reduction credit (ERG) becomes an important
asset to a firm and forms the basis for a banking program. A firm has the option of earning
a profit on its investment in pollution control by selling its ERCs to another firm, or it
can use these credits itself—in emission offsets, bubbles, or PSD applications.
By providing credit, banking gives firms an economic incentive to reduce their emis-
sions below required levels and thus spurs technological innovation. In addition, banking
minimizes the uncertainty and delay associated with obtaining offsets and therefore allows
firms to plan for expansion. For state air agencies and communities, the availability of
ERCs makes it easier to attract firms to locate in their area and helps to reduce the
costs of achieving cleaner air.
The following is an annotated version of a selection of the slides used in the
Emission Reduction Banking and Trading Team's presentation. This selection describes
banking and its advantages. It also outlines the steps involved in establishing a
banking system, and gives examples of systems in operation.
- 1 -
-------
WHAT IS BANKING?
Banking is a regulatory reform that aims to achieve clean air at the lowest cost. It
provides an incentive for firms to reduce their emissions beyond the required level—an
important incentive that is missing from our current regulatory program.
The Clean Air Act gives states the responsibility for designing plans to attain
national ambient air quality standards. These state implementation plans, or SIPs, specify
the degree to which each firm must reduce its emissions (Step B). If a firm in an area
with a banking program reduces its emissions beyond the level established in the SIP (Step
C), the surplus reduction can be banked, and the firm can receive an emission reduction credit
(Step D).
-------
WHAT IS BANKING ?
; P*
EXISTING
EMISSIONS
EMISSION
REDUCTION
REQUIRED
BY SIP
EMISSION
REDUCTION
EXCEEDING SIP
REQUIREMENT
SURPLUS
EMISSION
REDUCTION
DEPOSITED IN
BANK FOR
CREDIT
-------
HOW CAN BANKING BE USED?
Emission reduction credits are valuable assets to firms, as they can be used to
satisfy permit requirements for new and existing firms in:
o Emission Offsets Transactions,
o Bubble Applications, and
o PSD Permitting.
Firms can also sell or trade their ERCs to other firms for these permit requirements.
- 4 -
-------
EMISSION REDUCTION CREDITS HAVE
SEVERAL USES
OFFSET TRANSACTIONS FOR
NEW OR EXPANDING SOURCES
BUBBLE APPLICATIONS FOR
EXISTING SOURCES
PSD PERMITTING FOR
EXPANDING SOURCES
-------
Offset Policy
In an effort to meet air quality standards, the Clean Air Act of 1970 prohibited
industrial growth in dirty, or "nonattainraent," areas. This solution was straightforward
but impractical. In 1976, EPA adopted an attractive alternative: the emission offset
policy.
Under this policy, new sources desiring to locate in nonattainraent areas, or existing
sources planning to expand their facilities, must install the most advanced control technology
possible and arrange for reductions in emissions from existing sources that more than
"offset" their own emissions. This policy was incorporated into the 1977 amendments to the
Clean Air Act and has been adopted by most states as a means of allowing industrial growth
in nonattainment areas without compromising efforts to attain cleaner air.
- 6 -
-------
NEW FIRMS NEED OFFSETS TO LOCATE
IN NONATTAINMENT AREAS
130
TONS/YEAR
200 TONS/
YEAR
EXISTING FIRM A
IN COMPLIANCE
{200 TONS/YEAR IS
THE LEGAL LIMIT)
FIRM A REDUCES
EMISSIONS TO
CREATE AN
OFFSET OF 140
TONS
NEW FIRM B BUYS THE
140 TON OFFSET FROM
FIRM A AND IS ALLOWED
TO LOCATE
AFTER OFFSET
-------
Emission Reduction Credits May Be Used as Offsets
Banking facilitates the offset program. Because the credits are created and banked
before they are needed, both the buyer and the seller benefit. Sellers make the reductions
when it is economically advantageous — probably during retrofitting — and sell them at a
profit or use them later when they want to expand. Buyers benefit because they can simply
check a locality's central registry of emission reduction credits to discover available
offsets without having to contact all potential producers of emission reductions. As the
regulatory agency has certified these credits, buyers know they will be acceptable for an
offset transaction. Thus banking significantly reduces the delay and uncertainty frequently
associated with securing offsets.
- 8 -
-------
AVAILABLE ERCs ATTRACT NEW FIRMS
130
TONS/
YEAR
ERC
140 TONS
YEAR
200 TONS/
YEAR
EXISTING FIRM A
IN COMPLIANCE
FIRM A CREATES
A SURPLUS
EMISSION REDUCTION
FOR $100/TON
FIRM A RECEIVES
AN ERC FOR
THE SURPLUS
EMISSION REDUCTION
NEW FIRM B
BUYS THE ERC
FOR $150/TON
-------
Bubble Policy
Promulgated in 1979, the bubble policy* is aimed at helping existing plants lower
their costs of complying with the national ambient air quality standards. It gives plant
managers the flexibility of selecting the lowest-cost mix of emission controls, as long as
they met the facility-wide limit. They may relax controls at emission points with high
control costs in exchange for placing additional controls on points with lower costs.
It is as if a bubble were placed over the facility and a total emission limit were set.
Once the mix of controls under the bubble is selected, each emission point is given an
enforceable limit*
Firms are permitted to bubble within a facility or across facilities. Two different
firms can even arrange to bubble between their facilities within a given area. All that
is necessary is a demonstration that the surplus emission reduction is enforceable and the
inpact on air quality of the proposed change in the mix of controls is at least equivalent.
*Federal Register, vol. 44, no. 239 (December 11, 1979), pp. 71780-88.
- 10 _
-------
THE BUBBLE GIVES PLANT MANAGERS
FLEXIBILITY IN SELECTING A LOW-COST
MIX OF CONTROLS
OLD SIP
CONTROLS:
| BUBBLE
CONTROLS
UISIIT1
$400/TON
UNIT 2
$500/TON
UNITS
$100/TON
COST OF
CONTROL
11
-------
Emission Reduction Credits May Be Used In a Bubble
Banking adds a time dimension to the bubble process. With banking, instead of simul-
taneously applying for approval of an emission reduction and a control relaxation, firms
can make the reduction in advance and receive an ERC. With an ERG in reserve, firms gain
greater flexibility in deciding when to bubble and have a standardized commodity to sell
to other firms. Consider the following example. Firm X has received a 100 ton ERC for a
surplus emission reduction. Firm Y is located down the road from Firm X. One of firm's
Y's stacks goes out of compliance and emits 500 tons instead of the 400 tons prescribed in
the permit. Firm Y faces major overhaul costs to bring the stack into compliance. Instead,
it proposes a multiplant bubble with Firm X. Firm Y will pay Firm X to apply its ERC to
the bubble limit.
- 12 -
-------
BANKING FACILITATES A MULT I PLANT BUBBLE
FIRM X IS IN
COMPLIANCE. IT
CREATES A SURPLUS
EMISSION REDUCTION
OP 110 TONS.
FIRM X BANKS THE
SURPLUS REDUCTION
AND RECEIVES AN ERC
FOR 110 TONS.
FIRMX
LATER, FIRM X FORMS A
BUBBLE WITH FIRM Y. THE
OVERALL LIMIT IS ESTABLISHED
AT 550 TONS. RATHER THAN
REDUCE ITS EMISSIONS TO
400 TONS, FIRM Y PAYS FIRM X
TO APPLY ITS ERC TO THE BUBBLE.
13
-------
Emission Reduction Credits in PSD Applications
In addition to facilitating the offset and bubble policies, banking can be used in the
existing Prevention of Significant Deterioration {PSD} Regulations. In PSD areas, sources
planning modifications that involve net increases in emissions above de minimus levels are
subject to review. However, firms may apply internally generated ERCs against emission
increases, and if there is no resulting net increase in emissions, they are exempt from
review.
Banked ERCs can also be used by firms as PSD offsets where the air quality increment
for the area has previously been allocated.
- 14 -
-------
IN PSD AREAS ERCs CAN BE USED
TO NET OUT OF NEW SOURCE REVIEW
DEBIT
CREDIT
+400 TONS
ERC
MMMM
^^!
n n
n n
n n
•
•«
MAJOR SOURCE HAS BANKED
AND RECEIVED A 400-TON ERC
DEBIT
- 250
CREDIT
-400
+ 150
300
TONS
•••—
fc-
0 n
n n
n n
H
SOURCE APPLIES ERC AGAINST
250 TON PLANT MODIFICATION,
THUS, THERE IS NO NET INCREASE
IN EMISSIONS, AND REVIEW IS
UNNECESSARY
15
-------
WHAT ARE THE ADVANTAGES OF BANKING?
Banking provides advantages to all sectors — industries, communities, and regulatory
agencies.
Advantages to Industry
In general, banking helps industry save money by using the market system as a cost-
efficient means of meeting ambient air quality standards. The opposite page shows
specifically the ways to which banking saves industry money.
Banking Providesan Incentive to Create Surplus EmissionReductions
By giving firms credit, banking creates a financial incentive to reduce emissions
beyond SIP requirements. Firms can sell ERCs at a profit or use them to reduce their own
costs of control.
Banking Reduces Delay
With banking, the emission reduction credit is created and certified before it is
needed. Thus, the user or buyer does not lose time securing and negotiating emission reductions or
waiting for government approval — time that is likely to mean high interest costs and
contracts not met.
Bank ing Red uce s Uncerta inty
By legally protecting a firm's emission reductions, banking reduces the uncertainty
of whether the air agency will approve proposed reductions. In the past, firms have had
to abandon plans to locate in nonattainment areas for lack of acceptable offsets, losing
potentially significant front-end investments.
- 16 -
-------
BANKING OFFERS INDUSTRY MANY ADVANTAGES
PROVIDES AN INCENTIVE
TO CREATE SURPLUS
EMISSION REDUCTIONS
REDUCES TENSION
BETWEEN THE NEEDS
FOR INDUSTRIAL GROWTH
AND CLEAN AIR
ENCOURAGES
TECHNOLOGICAL
INNOVATION
REDUCES DELAY
REDUCES
UNCERTAINTY
HELPS NEW AND EXISTING
FIRMS LOCATE NECESSARY
EMISSION REDUCTIONS
REDUCES COSTS
OF ADDITIONAL
CONTROL
17
-------
Banking Reduces Costs Of AdditionalControl
If a firm projects a future need for offsets either for its own growth or for sale
to others, banking allows it to produce the reduction when it is most economical, for
instance during retrofit to meet current regulations, and bank the credit for later use.
For example, suppose a firm spends $2,000,000 for equipment to reduce its emissions by
60 percent to attain the level required by the SIP (point B). It is technically feasible
for the firm to reduce its emissions 20 percent further (Point C), but it would not do so
without banking becasue it would not receive credit for the surplus reduction.
With banking, however, the firm has the option to spend $3,000,000 to reduce its
emissions by 80 percent (Point C). The firm banks the surplus reduction, (the difference
between points B and C), and in the future when it needs a greater reduction to offset its
own growth or to sell, it can apply its ERG and save the $1,000,000 it would have had to
spend to re-retrofit (going from A to B to C).
- 18 -
-------
BANKING ALLOWS FIRMS TO TAKE
ADVANTAGE OF ECONOMIES OF SCALE
IN INSTALLING ADDITIONAL CONTROLS
O
O
»
60%
SIP
REQUIRED
CONTROL LEVEL
I
- 80%
EXTRA
CONTROL
POSSIBLE
AMOUNT
CONTROL
19
-------
Banking Helps New and Existing Firms LocateNecessary EmissionReductions
In localities that have adopted banking systems, managers of firms projecting expansions
or building new facilities can review the localities1 registers of available emission reduc-
tion credits (Step 1) and negotiate a price (Steps 2 and 3) before making major investments.
The firms are assured that the credits they purchase are available, and acceptable to the
air agency.
BankingEncourages Technological Innovation
The potential profit from creating surplus emission reductions will spur industry to
develop creative new approaches to controlling pollution.
Banking Reduces Tension Between the Needs for Industrial Growth and Clean Air
As producing ERCs can be profitable, existing firms have an incentive to make surplus
emission reductions available to new firms. Thus, growth occurs without deteriorating
air quality.
- 20 -
-------
BANKING MAKES LOCATING AND
SECURING ERCs A SIMPLE OPERATION
REGISTER OF AVAILABLE
EMISSION REDUCTION
CREDITS
FIRM
PLANNING
TO
EXPAND
OR TO
BUILD NEW
FACTORY
/~\
FIRM
A
FIRM
C
$150/TOIM $100/TON
FIRM
0
1, NEEDS OFFSET
TO BUILD
2. CONSULTS REGISTER
$200/TON $125/TON
3. CONTACTS SELLER
FIRMC
4. CHOOSES BEST
OFFER
. BUILDS NEW
PLANT WITH
APPROVED ERC
21
-------
Industry Should Consider Many Factors in Determining Whether to Create ERCs
Banking provides a mechanism for firms to evaluate investments in pollution control
in the same manner in which they review other capital projects. The following factors
will influence a firm's decision to invest in emission reduction credits:
ProjectedFutureExpansion — For firms planning to expand, banking guarantees the
ability to grow without delay and uncertainty in obtaining offsets.
Need for Future Internal Controls — For firms foreseeing more stringent SIP regulations,
banking permits them to make cost-effective surplus reductions now, taking advantage of
economies of scale and timing, and bank them for future use.
Expected Price of Emission Reduction^ Credits on the Market — When firms weigh the
expected market price of ERCs against the cost of producing them, they should bear in mind
that ERCs will appreciate in value as offsets are necessary for expansion and will become a
limited resource as growth continues.
Belief That Emission Reduction Credits Will Not Be Confiscated — If there is uncertainty
about a state implementation plan's ability to direct an area to attain the national
standards, then firms should assess the risk of confiscation against the holding value of
emission reduction credits. State banking rules should specify the procedure to be followed
in the event of a nonattaining SIP.
- 22 -
-------
MANY FACTORS
INFLUENCE THE DECISION
TO CREATE
AN EMISSION REDUCTION CREDIT
PROJECTED
FUTURE
EXPANSION
POSSIBILITIES
NEED FOR
FUTURE
INTERNAL
CONTROLS
EXPECTED
PRICE OF
EMISSION
REDUCTION
CREDITS ON
MARKET
BELIEF THAT
EMISSION
REDUCTION
CREDITS
WILL NOT BE
CONFISCATED
23
-------
Advantages to Communities
Emission Reduction Credits stimulate Growth
Banking aids economic development agencies in their efforts to retain existing jobs
and to attract new industry and jobs to their com muni ties. The cost of emission reduction
credits has become another factor of production—like the costs of land, labor, water, and
raw materials—that firms will have to consider in making location decisions. Communities
with banking have the advantage, as banking makes it easy for firms to assess the availability
and costs of needed offsets.
A Emission Reduction Credits Facilitate Planning
With banking, communities and development agencies have a clearer idea of available
air resources and can allocate them in the best way possible. For example, communities
may buy emission reduction credits as part of their economic development program and use
them to induce needed industry to locate in the area.
- 24 -
-------
BANKING BENEFITS THE COMMUNITY
aSS^
NEW JOBS
BANKING
SYSTEM
IN
NONATTAINMENT
AREA
INNOVATION/SHUTDOWN
CREATES NEW ERC
ECONOMIC DEVELOPMENT
AGENCY
^£4*
EXISTING SOURCE
25
-------
A Checklist for Communities to Determine whether Banking Will Benefit Them
If communities answer yes to more than two items on the opposite checklist, then
banking may be right for them. Considerable flexibility exists in designing a banking
program. Communities should carefully assess the characteristics of their present air
programs and economic development efforts and tailor their banking programs to their
specific requirements.
In general, for older industrial cities with slow growth rates, the greatest advan-
tage of banking is through use of emission reduction credits in the bubble. This approach
aids firms to reduce their costs of control and prolongs the useful life of facilities
without degrading air quality. Thus, it saves jobs for the community.
For high-growth areas, using emission reduction credits in the offset policy makes the
community attractive to new firms. For those areas, banking facilitates growth without
threatening air quality.
Most areas will want to adopt a banking program that incorporates both offsets and
bubbles in order to aid both new and existing firms.
- 26 -
-------
WILL BANKING BENEFIT
YOUR COMMUNITY?
DOES YOUR COMMUNITY:
D HAVE A SIGNIFICANT NUMBER
OF MEDIUM TO LARGE INDUSTRIAL
FIRMS WITH FACILITIES OF VARYING
AGES?
O WANT TO PREVENT INDUSTRIAL
FIRMS FROM CLOSING DOWN AND
LEAVING THE AREA ?
O WISH TO ASSIST NEW FIRMS WANTING
TO LOCATE IN THE AREA ?
Q FEAR THAT EXISTING FIRMS ARE
SELECTING ALTERNATIVE LOCATIONS
FOR EXPANSION ?
D THINK IT MAY NOT ACHIEVE AMBIENT
AIR QUALITY STANDARDS BY THE
LEGISLATED DEADLINES ?
D WANT TO MODERNIZE THE INDUSTRIAL
BASE BY ENCOURAGING MORE RAPID
REPLACEMENT OF EXISTING FACILITIES ?
-------
Advantages to Regulatory Agencies
Banking Sets Standardized Procedures for Handling Offset and Bubble Requests
By establishing straightforward methodologies for tracking the creation, certification,
and use of emission reduction credits, banking facilitates the work of regulatory agencies
and decreases the potential for litigation.
Banking Encourages Sound Management Procedures
A banking program strengthens existing permitting procedures by requiring firms to
commit themselves to emit at levels based on the actual level at which they are polluting,
not at some theoretical allowable level that now exists in most states' permits.
- 28 -
-------
ADVANTAGES TO REGULATORY AGENCIES
APCA
WITHOUT BANKING
APCA
WITH BANKING
ENTER
Q FIRM APPLIES FOR ERC
Q ERC IS CERTIFIED
FIRM POLLUTE AT ACTUAL
LEVELS vs ALLOWABLE
Q ERC IS TRACKED
Q FIRM SUBMITS BUBBLE APPLICATION
Q APCA APPROVES USE OF ERCl
THIS WAY TO CLEAN *
-------
WHAT IS INVOLVED IN SETTING UP A BANKING PROGRAM?
A banking program requires that emission reduction credits be qualified, quantified,
certified, banked, and used. These five steps produce a comprehensive system that regulates
the use of emission reduction credits.
For each step, firms will have to make critical design choices. In selecting among
the design options available for a banking program, communities must be careful to provide
industry adequate certainty and incentives to participate in the program, without sacrificing
progress toward meeting air quality goals.
In this section, we will review each step and describe some of the available design
options. The proposed banking regulation and the banking manual will elaborate on these
choices.
- 30 -
-------
STEPS TO A BANKING SYSTEM
QUALIFYING THrV QUANTIFYING \. CERTIFYING THEN, BANKING THE\^ USING BANKEoV
EMISSION \ THE EMISSION X EMISSION X EMISSION \ EMISSION >y
REDUCTIONS / REDUCTIONS / REDUCTION S REDUCTION / REDUCTION J
/ / CREDITS / CREDITS / CREDITS /
31
-------
Qualifying the Emission Reductions
The first step in the banking process is for the air pollution control agency to
determine what types of emission reductions qualify for credit. Potentially, any emission
reduction made beyond the limit specified in an approved state implementation plan could
qualify. In their banking rule, areas will establish criteria for acceptable emission
reductions. Types of possible criteria include:
o size of source (e.g., only those with emissions above 10 tons/year),
o compliance status of source,
o method used to create emission reduction (e.g., new controls, shutdowns,
or altering operating parameters or inputs), and
o sources for which additional control requirements are forthcoming.
Emission Reduction Must Be Real, Permanent, and Legally Enforceable in the SIP
To qualify for credit, emission reductions must be real. So-called paper reductions
that have no relation to an incremental physical reduction are generally unacceptable.
Emission reductions must also be permanent and not the result of a temporary cutback in
output or a seasonal adjustment. Finally, they must be legally enforceable to ensure the
integrity of the system and protect potential buyers of emission reduction credits.
32 -
-------
THE FIRST COMPONENT
QUALIFYING\
THE \
EMISSION /
REDUCTIONS/
1. EMISSION REDUCTIONS MUST BE REAL, PERMANENT,
AND LEGALLY ENFORCEABLE IN THE SIP.
2. PAPER REDUCTIONS GENERALLY WILL NOT BE ELIGIBLE
FOR CREDIT.
3. TO RECEIVE CREDIT, REDUCTIONS FROM SHUTDOWNS
MUST NOT ALREADY BE COUNTED IN THE SIP.
33
-------
Paper Redactions Are Seldom Eligible for Credit
In most states, a source's permit allows it to emit at higher levels than it has
historically operated. Firms may propose to change their permits to reflect their actual
emissions instead of the allowable emissions level specified in their permit and demand
credit for the difference. Because most attainment strategies are based on actual and not
allowable levels of emissions, granting credit for those paper reductions will result in a
violation of that area's demonstration of attainment. Only in those few areas where the SIP
attainment strategy was based on all firms emitting at allowable levels may agencies decide
to award credit for this type of emission reduction.
- 34 _
-------
PAPER REDUCTIONS ARE SELDOM ELIGIBLE FOR CREDIT
500/TONS
X
POLLUTION CONTROL
COMMISSION
PERMIT TO OPERATE
1.l80z_Bil_
TONS
AVERAGE ACTUAL
EMISSIONS
PERMITTED
ALLOWABLE
EMISSIONS
ALLOWABLE
EMISSIONS
ACTUAL
EMISSIONS
PAPER REDUCTION
1,000
-500
500
PAPER
REDUCTION
35
-------
Credit from Shutdowns Must Not Be Double Counted
Shutdowns are a likely source of emission reductions in roost states. Before
establishing a rule that allows firms to receive credit from shutdowns, agencies should
affirm that credit from shutdowns has not already been accounted for in the SIP. Ebr
example, some demonstrations of attainment are designed to include an average industrial
turnover. In these instances, to award credits for shutdowns would be double counting and
may, therefore, jeopardize reasonable further progress toward attaining cleaner air.
- 36 -
-------
CREDIT FROM SHUTDOWNS ARE ELIGIBLE
ONLY IF THEY ARE NOT ALREADY IMPLICITLY
COUNTED IN THE SIP
STATE IMPLEMENTATION PLAN
EXPECTED
1. AVERAGE INDUSTRIAL/,'/AT 5%/ EMISSION REDUCTION
TURNOVER /•":/ VEAH 10.000 TOMS
37
-------
Quantifying the Emission Reduction
Before granting firms credit for emission reductions, control agencies must take two
steps.
The Quantity of the Emission Reduction Must Be Verified
If verifying the emission reduction is impossible, it may not be banked. Air pollution
control agencies must establish acceptable, consistent procedures to follow in calculating
the emission reduction. They must define the initial baseline and confirm the magnitude and
permanence of the reduction claimed. With clear guidance and procedures set forth, industry
will be responsible for documenting reductions.
The Quantity of the Emission Reduction Must Be MadeLegally Enforceable
To ensure enforceability, the control agency must
1. Change the operating permit. A firm is either operating under a permit or brought
under a permit to participate in the banking program. The permit provides an
administrative record that clearly identifies the source, quantity, and characteristics
of emission reductions. The permit change has the effect of legally binding the
source to emit at or below this new level.
2. Change the state implementation plan. Under provisions of the Clean Air Act, all
major sources must comply with federally enforceable emission limits. This
requirement is satisfied by the incorporation of source-specific emission limits
or state operating permits in the state implementation plan issued under a SIP-
approved banking program.
- 38 -
-------
THE SECOND COMPONENT
QUALIFYING
EMISSION
REDUCTIONS
QUANTIFYING
THE EMISSION
REDUCTIONS
1. THE QUANTITY OF THE EMISSION
REDUCTION MUST BE VERIFIED
2. THE QUANTITY OF THE EMISSION
REDUCTION MUST BE MADE LEGALLY
ENFORCEABLE
39
-------
Certifying the Emission Reductions
The third step of the banking system, certifying the emission reductions involves two
steps: transforming the emission reductions into emission reduction credits and establish-
ing a central registry to track the use and sale of these credits.
The Emission Reductions Must Be Transformed Into Emission Reduction Credits.
The distinction between an emission reduction and an emission reduction credit is
critical. The emission reduction is a physical reduction in pollutant emissions. An
emission reduction credit is an entitlement to a certain set of rights subject to ambient
limitations that can be applied against future permit requirements for controlling pollution.
Control agencies will establish explicit rules for how much credit to award different
types of emission reductions. Thus they can develop different "conversion ratios" that
reflect valid public policy concerns and the uncertainty of methods of measurement.
Alternatively, they can certify credits on a less than one-for-one basis (1) to accumulate
publicly owned credits to use in accordance with public purposes or (2) to help stimulate
reasonable further progress toward attaining cleaner air. Of course, a less than one-for-one
conversion ratio would discourage the production of voluntary emission reductions.
Once the credit is defined by the air agency, the source will be issued an ERC
certificate documenting its claim to this asset.
- 40 -
-------
THE THIRD COMPONENT
QUALIFYING THE
EMISSION
REDUCTIONS
QUANTIFYING^v
THE EMISSION ^V
REDUCTIONS S
CERTIFYING THE
EMISSION
REDUCTION
CREDITS
1 THE EMISSION REDUCTION MUST BE
TRANSFORMED INTO AN EMISSION
REDUCTION CREDIT
2. A CENTRAL REGISTRY MUST BE ESTABLISHED
TO TRACK THE USE AND SALE OF EMISSION
REDUCTION CREDITS
41
-------
The Emission Reduction Credit Legally Protects the Emission
Sources are always free under the law to control their emissions more than required.
However, no legal status is attached to those reductions, and firms are not entitled to use
the reduction, as its use may violate the SIP. When reductions are certified and converted
into emission reduction credits, sources are legally bound to reduce their emissions. In
exchange, sources receive an intangible though valuable asset—ERCs
While valuable, an ERG is not a "right to pollute. " It entitles the owner to certain
administrative privileges but does not circumvent the requirements for obtaining a valid
emission permit for using the public air.
- 42 -
-------
SPECIMEN CERTIFICATE OF EMISSION REDUCTION CREDIT
EMISSION REDUCTION CERTIFICATE * x x x x
LEGAL DESCRIPTION
CLASS TYPE
POLLUTANT
TYPE
CHEMICAL ANALYSIS
SIZE
EMISSIONS
AMOUNT
LOCATION OF RELEASE
LONGITUDE
LATITUDE
HEIGHT
GAS FLOW
EQUIPMENT
ADDED TO PRODUCE REDUCTION
CHANGE IN PROCESS
LIMITATIONS USE
OWNERSHIP TRANSFER RECORDING
-------
A Central Register for Emission Reduction Credits Must Be Established
A central registry is necessary to track the use and sale of emission reduction credits.
The registry should include a log of credits, cumulative tallies by pollutant, and cumulative
tallies by owner and should be available for public use. Without such a registry, firms
could sell the credits more than once, resulting in lawsuits and environmental degradation.
- 44 -
-------
EMISSION REDUCTION CREDIT REGISTERS
ALLOW AIR POLLUTION CONTROL AGENCIES TO TRACK
AND ACCOUNT FOR THE CERTIFICATION,
BANKING, AND USE OF ERCs
Part 1: ERG Log
Part 2: Banked ERCs By
Pollutant
<:
ERC REGISTRY LOG
80-1 CERTIFICATE NO. 80-1
ISSUED TO (OWNER)
SOURCE LOCATION (ADDRESS)
FOR (AMOUNT)
SOURCE CLASS.
PERMIT I
<*
<9
«•
<<•
80-2 CERTIFICATE NO. 8O2
':
ISSUED TO (OWNER)
SOURCE LOCATION (ADDRESS)
FOR (AMOUNT)
OF (POLLUTANT)
SOURCE CLASS.
PERMIT REF. _
CERTIFICATEREF..
€RC REGISTRY:(POLLUTANT)
ENTRY NO. AMOUNT
TOTAL
80 • • +1000 TONS 1000 TONS
80 • 9 +2200 TONS 3200 TONS
80 - 10 +520 TONS 3720 TONS
80 • 15 -900 TONS 2820 TONS
81 . 2 +3°0 TONS 3120 TONS
81-11 -520 TONS 2600 TONS
Part 3: Banked ERCs
By Owner
ERC REGISTRY:(OWNER)
JIMTRY NO. POLLUTANT AMOUNT
80 • 1 VOC +1000 TONS
80 2 TSP +817 TONS
80 • 10 VOC +520 TONS
81 • 11 VOC -520 TONS
*=•
< +
-------
Banking the Emission ReductionCredits
The fourth step of the banking system is the "banking" or storage phase. The
emission reduction credits are banked until they are used — that is, until they are
converted into physical pollution allowances as part of bubble or new-source permits,
at which time the credits no longer exist.
A Policy Must Be Established For Treating ERCsiftheSIP Changes
One of the biggest concerns about banking is whether the emission reduction
credits will be confiscated to correct a deficient attainment strategy in the state
implementation plan.
There are various options short of confiscation, but it is important to under-
score that emission reduction^credits represent a right to use a set portion of air
under prescribed conditions, not a permanent right to pollute. Thus, a banking rule
must clearly state that the creation or use of ERCs cannot impede an area's efforts
to reach attainment. The rule must include provisions specifying what actions
affecting ERCs will be taken should additional controls be required to reach attainment.
- 46 -
-------
THE FOURTH COMPONENT
QUALIFYING THE
EMISSION
REDUCTIONS
QUANTIFYING
THE EMISSION
REDUCTIONS
CERTIFYING THE
EMISSION
REDUCTION
CREDITS
BANKING THE
EMISSION
REDUCTION
CREDITS
1. A POLICY MUST BE ESTABLISHED
FOR TREATING ERCs IF THE SIP
CHANGES
47
-------
The_re__are four options for treatment of emission reduction credits if the state SIP changes;
1. Forfeit the credits* Because emission reduction credits are not permanent rights
to pollute, and because the public health must be protected, forfeiture is legally
acceptable. However, few firms would voluntarily bank under these conditions.
2. Selective forfeiture* The state may issue regulations that require firms to imple-
ment a particular control measure which previously had been used to produce ERCs.
Any firms that still had an account of ERCs that were produced from such measures
could be required to cede those ERCs to the state as part of RFP. If a state does
choose to lay claim to emission reductions that previously were unknown to the
state and were only revealed due to the initiative of firms, firms will be
reluctant to experiment with new control stategies.
3. Place a moratorium on the credits. For example, San Francisco's banking rule calls
for a moratorium on the creation of emission reduction credits if reasonable further
progress toward compliance with national air standards is jeopardized.
4. Discount the credits. A final option is to discount the emission reduction credits
by the percentage needed to achieve attainment. For example, if a pollution
control agency had to reduce emissions by 20 percent to reach ambient standards,
then the tonnage value of the credits would be reduced by 20 percent. The Puget
Sound Banking Program selected this strategy, which provides for equitable treatment
of banked emission reductions and emissions still part of the inventory.
- 48 -
-------
IF THE SIP CHANGES
DISCOUNT ERCs IN PROPORTION TO THE
NEEDED IMPROVEMENT IN AIR QUALITY
PERCENT
CURRENT 100
AIR QUALITY
NATIONAL
AIR QUALITY 80
STANDARDS
601
40
20
FURTHER
REDUCTION
REQUIRED
1980
1982
NORMAL VALUE
OF ERCs IS REDUCED
BY 20%
49
-------
Using Banked Emission Reduction Credits
The fifth step in the banking system is using the ERCs. To permit the use of these
credits in offsets, bubbles, or PSD applications, the air agency must:
1. review the proposed use to ensure it will not deteriorate the
ambient air,
2. apply the credit to the permit to bind the source to the new
emissions level,
3. alter the state implementation plan to make the reduction
federally enforceable, and
4. delete the credit from the registry after it has been used.
- 50 -
-------
THE FIFTH COMPONENT
QUALIFYING THE
EMISSION
REDUCTIONS
QUANTIFYING
THE EMISSION
REDUCTIONS
CERTIFYING THEX BANKING THE
EMISSION X^ EMISSION
REDUCTION y/ REDUCTION
CREDITS / CREDITS
USING BANKED
EMISSION
REDUCTION
CREDITS
51
-------
HOW CAN TRADING ENHANCE THE BENEFITS OF BANKING?
Areas may add a trading component to their banking system to reduce the costs of
bringing buyers and sellers of ERCs together. A formal trading system establishes a
definite and inexpensive means of arranging sales of emission reduction credits.
There are several alternative trading mechanismst
o a private trading system, in which a specific firm, either on its own or through a
broker, seeks out and trades with another specific firm. Government involvement
in this system is generally quite limited, apart from providing information and
possibly acting as a broker.
0 a public auction system, in which credits are sold periodically at auctions.
Some organization is given the responsibility of accepting credits for sale,
checking the eligibility of participants in the auction process, and conducting
the auction.
o a central trading system, in which the Central Trading Association is solely
responsible for buying and reselling emission reduction credits. This organization
is responsible for negotiating purchase prices and setting sales prices, and will
develop and maintain an inventory of emission reduction credits.
- 52 -
-------
THREE ALTERNATIVE
EMISSION REDUCTION TRADING
MECHANISMS
PRIVATE TRADING
WITH BROKER
PUBLIC AUCTION
CENTRAL TRADING
53
-------
Advantages of Markets in Emission Reduction Credits
Trading gives firms a cost-efficient means o£ satisfying emission control requirements.
By allowing firms to compare their internal control costs with the cost of purchasing
emission reductions from other firms, the trading system lets them use the least costly
means of achieving the necessary control.
Trading gives firms a mechanism for making a profit from creating emission reductions
credits. A trading system supplies firms with a vehicle for selling ERCs. With trading
a firm has the option to reduce emissions beyond the required amount and recoup control
costs by selling the surplus ERCs. The trading system gives the firm a clear means for
selling its credits rather than having to rely on the very costly process of independently
finding another source that needs them.
Trading provides firms with a financial incentive for innovation. With a ready market
established for ERCs, firms will find it in their interest to invest in innovative technology
to create ERCs.
Tradingcan encourage replacement of unprofitable or marginalsources. In the absence
of trading, an owner of a marginal or unprofitable source might be reluctant to close the
source if there were no party immediately interested in purchasing the ERCs that would
result from the shutdown. A formal trading system will provide either an immediate buyer
or a mechanism to ease the burden of locating a buyer.
- 54 -
-------
ADVANTAGES OF MARKETS IN EMISSION
REDUCTION CREDITS
LESS DELAY AND
UNCERTAINTY
ERC
BANKING & TRADING
SYSTEM
-------
WHAT IS THE STATUS OF BANKING?
Areas That Have Adopted Banking Systems
Louisville (Kentucky), San Francisco (California), and the Puget Sound (Washington)
lead the country in incorporating banking systems in their air pollution control programs.
Louisville, Kentucky
The Jefferson County Air Pollution Control District, which encompasses Louisville,
adopted regulations on June 13, 1979, that established the first full-fledged banking
system in the country. At this time, 20 deposits have been recorded in the district's
banking ledger. The deposits have been made by six companies, which include B.F. Goodrich,
General Electric, and the Ford Motor Company. Six withdrawals and one external offset
trade have occurred to date.
San Francisco, California
The Bay Area's banking system officially began operating in January 1980. Its
development was the result of joint efforts by the area's air pollution control agency
and interested industrial representatives. A series of workshops have been held to
educate local business representatives on how the system functions and the first
application for banking is currently being evaluated.
Puget Sound, Washington
Puget Sound adopted its banking rule on June 12, 1980, and its implementation is under
way. Background materials explaining the features of the new rule and the rationale for why
a firm should be interested in banking have been sent to industries and interested parties
in the area. In the first months of operation, over 90 applications to bank were received.
56
-------
AREAS THAT HAVE
ADOPTED BANKING SYSTEMS
57
-------
Areas Interested in Banking and Trading
During August 1980, EPA's Emission Reduction Banking and Trading Team reviewed
ongoing activities in 24 areas that had expressed interest in banking. Among the team's
findings are:
o in many areas, even in those without comprehensive rules, firms want to receive
credit for their surplus emission reductions and are sending letters to their
state air pollution control agencies in an effort to be awarded such credit.
o firms are finding the process of receiving credit very workable. Several have
added to their pool of ERCs more than once,
o areas with only summary banking provisions in their present SIPs are devoting
resources to developing comprehensive rules. These areas include COLORADO,
NEW JERSEY, WISCONSIN, ALABAMA, and Ventura County (CALIFORNIA).
o areas whose SIPs do not contain provisions on banking also have expressed interest
in developing comprehensive banking rules. These areas include: Boston, Portland,
San Diego, Cincinnati, Dayton, Toledo, South Coast District (CALIFORNIA), MICHIGAN,
VIRGINIA, and NEW YORK.
- 58 -
-------
CITIES, REGIONS, AND STATES THAT HAVE
EXPRESSED INTEREST IN BANKING
PUGET SOUND
£SAW**NC»Sco'
VENTURA COUNTY
S*
LOS ANGELES*
N
SAN DIEGO
BOSTON
WATERBURY/BRIDQEPORT
RICHMOND
SOUTH CAROLINA
* BANKING SYSTEMS ESTABLISHED
59
-------
HOW CAN I START A BANKING PROGRAM?
Establishing a banking system is relatively simple and straightforward. You should
first determine how banking can meet your firm's or community's specific needs. Then
present your ideas to relevant groups in your area and enlist their support. You will
want to include pollution control agencies, economic development groups, industry represen-
tatives, regional planning organizations, and environmentalists.
Banking offers communities and industry an attractive opportunity to reduce the costs
of achieving our national environmental goals. By incorporating the banking program into
ongoing regulatory efforts, these benefits can be realized. Members of the banking project
have developed a technical assistance program to support the establishment of banking
systems. Complete the order blank on the opposite page to receive more information.
- 60 -
-------
EMISSION REDUCTION BANKING & TRADING ORDER BLANK
Yes, I want to be on your mailing list
Name
Address
Phone
Occupation
Please send me the following materials:
AA001 Annotated Bibliography
BA120 Economic Advantages Paper
BA200 Banking and Trading Concept
Paper
BA600 Issues Paper on Shutdowns
BA300 Model Banking Rule
BA250 An Introduction to Emission
Reduction Trading
BG300 ERC Trading: Public Auction
Design Manual
BG400 ERC Trading: Central Trading
Design Manual
AH100 ERC Financing: Public Sources
of Funding
AH110 ERC Financing: Private Sources
of Funding
Send to:
Emission Reduction Banking & Trading Project
U.S. Environmental Protection Agency (PM-220)
401 M Street, S.W.
Washington, D.C. 20460
(202) 287-0731
- 61 -
* U.S. GOVRNMJNT MINTING OFMCt: l«l C_ 3«.-CiJ
------- |