United States
Environmental Protection
Agency
Office of Policy
Resource Management
Washington, D.C. 20460
April 1982
Emissions Trading Publication
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CONTENTS
Introduction I
What Is the Bubble1.1 2
Arc Firms I'smg the Bubble'' 4
Can Bubbles Be Ised Between Plants'
Hou Can a Source Get Its
Bubble Approved?
Hou Can Multi-Plant Bubbles Be Arranged'1 X
What Is the Relationship Between Banking
and the Bubble' 10
What Is f-mission Reduction Banking? 10
Hou Can Banked I RCs Be Tsed in Bubbles'.' 12
EPA policy governing the use of bubbles and banking is contained in the Emissions Trading Policy Statement
(47 Federal Register 15076, April 7, 1982).
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THE BUBBLE
AND ITS USE WITH EMISSION REDUCTION BANKING
Introduction
r
The U.SJ|£nvironmental tJrotectionlAgency and many
state air pollution control agencies are implementing a
series of steps to give industry increased flexibility in
meeting\£lean Air Act requirements. These Emissions
Trading steps leave industry free to find and use less costly
ways of controlling pollution. /
By providing the flexibility to control pollution at far
less cost, Emissions Trading can sharply increase the
productivity of the environmental sector of our economy,
freeing scarce capital for productive investments and
resulting jobs. In addition to netting and offsets,
Emissions Trading consists of two key components: the
bubble and emission reduction banking.
Instead of meeting uniform emission limits at each
source of emissions, the bubble allows firms to construct
an imaginary dome or "bubble" over their facilities and to
rearrange control requirements, decreasing controls where
control costs are high in exchange for compensating
increased controls where costs are low.
Banking lets firms make such trades over time by
receiving credit for reducing their emissions beyond the
amount required by law. The resulting emission reduction
credits (ERCs) can be "banked" (stored) and used in the
future to meet other requirements.
Emission reduction credits can be used by existing
plants in bubble applications to lower the cost of meeting
current or future emission limits. They can be used to
speed industrial growth by easing the siting of new plants
or the expansion or modernization of existing facilities.
They can also be sold to others for the same purposes.
Although firms can realize large cost savings by using
the bubble or banking independently, together these
trading steps can provide considerably greater compliance
flexibility and can achieve significantly greater economic
and air quality benefits. This brochure describes the
bubble and banking, and explains their interrelationships.
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THE BUBBLE
What Is the Bubble?
Conventional pollution controls set uniform emission
limits on similar industrial processes, but fail to take into
account widely varying costs of control due to age,
construction, or design. Because costs of controlling the
same pollutant from adjacent processes often vary by over
100 to 1, the potential savings of an alternative approach
are enormous, with no adverse effect on air quality. But
centralized agencies cannot write general rules which
allow hundreds of individual cost-saving variations. They
simply do not have the resources to acquire such plant-
specific information.
The bubble responds to this problem by allowing
managers of existing facilities — either within a plant or
among a number of plants — to reduce pollution
controls where costs are high in exchange for compen-
sating increases in controls where costs are low, so long as
air quality and enforceability are assured. (See Exhibit I.)
The bubble encourages industry to apply its own
information and expertise to develop more efficient
strategies for controlling air pollution. In particular, firms
can use the bubble to reduce their costs of meeting RACT
requirements now being imposed by many states. Because
it can produce large cost savings, the bubble also provides
an incentive for firms to measure emissions better and to
develop innovative pollution control technologies and
more efficient, less polluting processes.
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EXHIBIT 1
USE OF THE BUBBLE CAN REDUCE COMPLIANCE COSTS
EMISSION CONTROL COSTS:
PLANT A: $ 5,000 PER TON
PLANT B: $15,000 PER TON
BEFORE USE OF BUBBLE
TOTAL ALLOWED EMISSIONS: 200 TONS
CONTROL COSTS: $2 MILLION
AFTER USE OF BUBBLE
TOTAL ALLOWED EMISSIONS: 200 TONS
CONTROL COSTS: $1.5 MILLION
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THE BUBBLE
Are Firms Using the Bubble?
Since the original bubble policy appeared in the Federal
Register, more than 100 plants have developed bubble
applications. These bubbles average over $2 million in
cost savings, and many will produce extra environmental
and energy benefits,
EPA has approved twenty bubble applications repre-
senting collective savings of over $50 million. Under the
first EPA approved bubble, the Narragansett Electric
Company in Rhode Island will burn high sulphur fuel oil
at one facility, in exchange for burning natural gas or not
operating at another facility. Overall SO2 emissions from
the two facilities, located 1 /4 mile apart, would decrease by
10 percent. The bubble will save Narragansett customers
at least $3 million on an annual basis. In addition, by
burning domestic natural gas, Narragansett will reduce
fuel oil imports by approximately 600,000 barrels per year.
In another bubble, ARMCO Inc. will save more than
$15 million in capital — 10% of that corporation's pretax
profits — by controlling open dust in lieu of fugitive
emissions at a single Ohio steel plant, while producing six
times as many emission reductions and bringing the area
into attainment of the primary standard for TSP.
EPA's Emissions Trading Policy Statement makes the
bubble easier, simpler and faster to use. This policy
represents major changes in air quality management and
in EPA's relations with the states. The Agency has
endorsed a "generic" New Jersey rule which will let
states approve individual VOC (hydrocarbon) bubbles
without time-consuming Federal review. EPA has also
reduced the cases in which full-scale air quality modeling
is required to show the ambient equivalence of a trade.
Among other steps, EPA has expanded the bubble's
availability by extending this "generic" New Jersey
approach to other air pollutants (TSP, SO2), extending
the bubble to areas which currently lack approved State
Implementation Plans (SIPs), and giving plant managers
more time to implement bubbles. At least twenty other
states are currently drafting generic bubble rules; many
include banking components.
With these changes, many more bubbles will be
approved. The predicted savings are enormous. A large
3M plant in Pennsylvania will save about $5 million in
capital and operating costs. DuPont will save an esti-
mated $12 million and comply faster by overcontrolling
several large point sources of hydrocarbons in lieu of
many fugitive sources at a single New Jersey works. EPA
estimates that bubbles could be saving American industry
approximately $1 billion by the end of 1982, with better
air quality results than traditional regulation.
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MULTI-PLANT BUBBLES
fan Bubbles Be Used Between Plants?
Most firms are not aware that bubbles between plants,
even those under different ownership, are allowed.
Moreover, it is relatively easy for a plant manager to
evaluate internal facilities to determine the possibilities for
an alternative, less expensive mix of controls. Plant
managers are less likely to know of bubble opportunities
with other facilities, whether those facilities are owned by
the same or different firms. Multi-plant bubbles may also
be more difficult to arrange because the emission
reduction and increase occur at different locations, which
sometimes increases the complexity of demonstrating
ambient equivalence.
However, multi-plant bubbles can result in greater
flexibility and broaden the potential number of benefiting
firms. For example, multi-plant bubbles can allow smaller
sources and sources with only one emission point to take
advantage of the bubble. They can also multiply savings
because control costs are likely to vary much more widely
across emission points in different plants and industries.
EPA has taken steps to encourage multi-plant bubbles by
developing simplified procedures which sharply reduce the
air quality modeling requirements for evaluating most of
these bubbles, even if an approved state "generic rule" is
not yet in place. For VOC and NOX bubbles, generally no
modeling at all is required.
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THE CASE OF VORTEX INDUSTRIES
Let's take a simple example to see how this system can
work. Vortex Industries operates a refrigerator
manufacturing plant. The plant has two metal coating
lines. One line is fairly new and was designed to control
hydrocarbon (HC) emissions at 80 percent effectiveness,
as required by state regulations. The second line,
scheduled for reconstruction in five years, was also
controlling emissions at 80 percent. A recent accident
damaged the second line's carbon adsorption equipment.
It now has an effectiveness rate of only 60 percent, which
means it will release about 35 extra tons of hydrocarbons
per year unless it is further controlled.
To repair the adsorption system, Vortex would have to
spend $500,000, which would effectively amount to a total
overhaul of the equipment. Vortex is reluctant to make
this expenditure because the new control equipment
would last seven years more than the planned useful life of
the coating line.
While Vortex manager Don Upton is contemplating
this decision, he receives a memo from his boss asking
him to investigate the applicability of the bubble to their
facilities. Upton is skeptical but instructs his engineers to
audit the plant's emission sources to determine their
potential for creating surplus reductions. To his surprise,
they discover that by switching one line to a water-based
solvent, Vortex could reduce HC emissions by 40 tons per
year. Upton estimates the cost of producing this reduction
would be roughly $80,000 per year. While expensive, the
reduction could be used as part of a bubble and would
cost considerably less than an overhaul of the carbon
adsorption unit.
Upton calls his state air agency to learn about eligibility
requirements and details of the approval process.
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THE BUBBLE
How (an a Source (Jet its Bubble Approved?
In proposing a bubble, plant managers must
demonstrate that resulting air quality will be equivalent to
that produced by applicable State Implementation Plan
(SIP) requirements. The new emission limitations must
become legally binding through either a site-specific SIP
revision, or a permit change or similar state procedure
under a generic bubble rule. In states with a SIP which
includes an approved generic bubble provision, SIP
revisions are not required for individual bubble
applications which fall within the scope of the rule. In
those states, after the bubble application receives state
approval, the new emission limitations are immediately in
effect. If the applicable SIP limits are under development,
a firm can propose a bubble and, subject to the
demonstration of equivalence, have that bubble written
into the SIP.
Bubbles must generally satisfy the following requirements:
• Have the Same Impact on A ir Quality. The
emission reductions under the alternative approach
must be quantifiable and enforceable, and the
impact of the trade on ambient air quality must be
shown to be equivalent to existing requirements.
Depending on differences in location, method of
discharge, and other considerations, monitoring
and/or modeling may sometimes be required to
establish this equivalence. Bubbles must involve
comparable pollutants.
• Be No Less Enforceable. The surplus reductions
used in a bubble must be sufficiently reliable and
measurable to be permanent. Strategies
incorporating uncertain control techniques or
reductions may need a greater than 1:1 ratio of
reduction to relaxation to provide this certainty.
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How Can Multi-Plant Bubbles Be Arranged?
Vortex's Upton prepares and submits a bubble
application. Upton frequently brings up the subject of
Emissions Trading at local business meetings. One day a
friend introduces him to the manager of Happy Cooker at
a Chamber of Commerce luncheon. Happy Cooker is a
major producer of gas and electric ranges which operates
a large plant one-half mile from Vortex. Without controls,
Happy Cooker's single coating line would emit 800 tons of
hydrocarbon vapors per year. Although existing control
equipment is capable of reducing these emissions by 85
percent, the plant manager is now operating the
equipment at 80 percent effectiveness as required by the
SIP. Increasing control to 85 percent would cost an
additional $30,000 per year in operating expenses, and
would reduce emissions by 40 tons per year. As their
conversation progresses, it becomes clear to Upton that
Happy Cooker could further reduce emissions at a much
lower cost than Vortex's internal bubble strategy. It would
be cheaper for Vortex to pay Happy Cooker to reduce
emissions by 40 tons per year than for Vortex to reduce
emissions by 40 tons itself.
The two managers reach an agreement: Happy Cooker
will increase controls to the 85 percent level and Vortex
will pay Happy Cooker $50,000 each year to do so.
Vortex will save $30,000 per year in annualized costs over
an internal bubble, and Happy Cooker will receive a
$20,000 per year profit. The cost analysis is as follows:
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EXHIBIT 2
COST SAVINGS THROUGH A MULTI-PLANT BUBBLE
Company
Strategy
Annualized Costs
Tons Controlled
1. Vortex-
Totally overhaul carbon
adsorption equipment on
the damaged metal coating
line.
$110,000
35
2. Vortex-
Bubble within its facility by
switching one line to a
water-based solvent
$80,000
40
3.
Vortex-
Happy
Cooker-
Form a multi-plant bubble
with Happy Cooker
Increase controls to 85%
and sell reduction to Vortex
$ 50,000
(payment to
Happy Cooker)
$ 20,000
(profit)
40
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As the plant managers at Vortex and Happy Cooker
prepare their new multi-plant bubble proposal, Vortex's
manager begins to think, "is there some other plant in the
area that coutd achieve the emission reductions I need for
less cost than Happy Cooker?" At the same time, Happy
Cooker's manager thinks, "maybe some other plant could
have saved even more money than Vortex using my
surplus emission reductions, and would have paid me
more. But I do not want to make the investment in further
controls without a guaranteed buyer." Both think, "this
multi-plant bubble is a good idea, but we can only use it if
the reductions and relaxations happen at the same time.
Besides, if we hadn't known each other, we wouldn't have
known of the possibility of trading reductions between
our plants. What we need is a system that lets us locate,
purchase, and sell excess reductions like any other
commodity, and lets us store excess reductions for future
use or sale."
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EMISSION REDUCTION BANKING
What Is Kmission Reduction Banking?
Hanking simply lets firms receive credit lor surplus
emission reductions. 1'ruler state hanking rules. an\ firm
that reduces emissions beyond SI I* requirements and can
show that the reduction is surplus, quantifiable,
permanent, and enforceable, can receive emission
reduction credits (I R( s) and hold them over time in a
legally protected manner. These I K(\ are an otlicial
certification ol the reduction which specifies the type of
pollutant and the amount and location ol the reduction.
A firm holding HRCs can use them either now or in the
future to offset expanded production facilities or as part
of a bubble for existing facilities. I he firm can also sell
them as offsets to another compatu desiring to locate or
expand in a nonattainment area I urns may also appl\
internally created f R(\ against mcicascs in emissions
resulting from expansion or modernization within existing
plants to "net out" of new source review (See F'xhihit .1)
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BANKED ERCs CAN BE USED IN MANY WAYS
EXHIBITS
EAT
O Nf
URGE
ISTING SOURCES
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EMISSION REDUCTION BANKING
Louisville, Kentucky; the San Francisco Bay area; and
the Seattle-Puget Sound area are the first jurisdictions
with formal banking systems. About 20 other states or
localities throughout the country are developing generic
banking rules. Many of these banking rules are being
developed as part of generic bubble provisions.
Two recent bubble trades made possible by the
operating Louisville bank illustrate banking's ability to
facilitate use of the bubble. In one, GE negotiated and
later exercised an option to lease several hundred tons of
banked hydrocarbon reductions for $60,000 from
International Harvester. GE used those reductions to meet
October 1981 State RACT requirements for its coating
lines. The bubble avoided both a disruptive production
shutdown and purchase of a $1.5 million incinerator
which would have been worthless when the relevant lines
were replaced in 1983. In the other trade Borden Chemical
bought 25 tons of banked VOC reductions from B. F.
Goodrich for $1000/ton, and used these ERCs to meet
methanol-tank RACT requirements which would
otherwise have cost at least $3300/ton.
How C ;ui Banked F.KCs Be I'sed <" Bubbles?
The bubble lets firms develop a more cost-effective mix
of emission reductions. Extending the bubble to more
than one plant can greatly increase these potential cost
savings, because multi-plant bubbles can cover a wider
range of sources with greater control cost differences.
However, as Vortex and Happy Cooker discovered, it
takes time to locate buyers and sellers, and get both the
reduction and relaxation approved.
Banking can facilitate bubbles in several ways:
• Hanking introduces time flexibility into a firm's
compliance strategy. It allows firms to use present or
past emission reductions to comply with existing or
future requirements. Thus a firm may create surplus
emission reductions when it is most economical (for
example, when installing new control equipment)
and bank the credit to sell later or use in a bubble
application. Because the most cost-effective
combinations of increases and reductions seldom
occur at precisely the same time, banking increases
the potential savings of single and multi-plant bubbles.
• Hanking provides greater certainty. Firms wishing to
use their own reductions in a bubble to meet future
12
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control requirements can create and bank them in
advance, assured that they are valid and acceptable
to the State Air Pollution Agency. Banked ERCs are
also assured protection against confiscation as
specified by the banking rule. Firms using reductions
purchased from other firms will also benefit from
the ERCs defined legal status.
• Banking provides a central clearinghouse of
available emission reductions. A firm wishing to use
another firm's emission reductions under the bubble
can easily find a trading "partner" by examining the
register of banked credits. Trades are not limited to
firms that discover each other by chance.
• Banking facilitates the approval process. Because the
emission reductions are previously certified, part of
the trade is approved before the bubble application
occurs. The company and regulatory authority then
face a smoother workload, speeding permit approval
and reducing regulatory risk and uncertainty.
Because uniform point- and process-specific require-
ments are a central part of air pollution control at the
state level, Emissions Trading offers communities and
industry an attractive opportunity to reduce the costs of
achieving environmental goals. •
EPA's Regulatory Reform Staff can provide technical
assistance to help industry, State or local air agencies,
economic development groups, and other organizations
implement generic rules or other Emissions Trading steps.
For more information call (202) 382-2685 or write for
additional materials.
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