ERMS Overview

Background

Illinois faced a challenge in achieving the next set of reduction in volatile organic material (VOM) emissions required by 1999 by the federal Clean Air Act for the Chicago ozone nonattainment area. If Illinois had continued with "command and control" rules to reduce VOM emissions from stationary sources, the costs would be very high. This is because rules have already been adopted requiring sources to implement less costly measures to reduce VOM emissions. (These requirements are not altered by the adoption of the ERMS.) The remaining control measures now available for further "command and control" rules for stationary sources are costly.

As a consequence, Illinois has been pursuing a market-based approach to minimize the cost of further VOM reductions. This market-based system relies on the fact that in a group of sources, each individual source has different options to reduce its emissions with a range of costs associated with such options. The trading program establishes an overall level of emission reduction for the group of affected sources as a whole as well as an obligation that individual sources contribute to achieving such reduction. However, the specific means by which reductions are achieved is left to the sources' judgement, assisted by a market in emission reductions that can target the least costly means to lower emissions. In particular, a source facing high cost control options may trade with other sources to take advantage of the less costly emission reductions that are available at such sources. The other sources receive compensation for their efforts from the source that selects not to reduce its emissions. Because the market-based program provides flexibility and accommodates innovation, the costs of reducing emissions are minimized.

Illinois has been working on a market-based program since 1993 and the program is expected to be finalized in mid-November. The Illinois legislature specifically mandated that such a program be proposed for the Chicago area and identified a number of features that should be and have been addressed in the design of the program.

Overview

The ERMS is a "cap and trade" market system in which participating sources must hold "trading units" for their actual VOM emissions. Each year, starting with the 2000 ozone season, participating sources will be issued trading units based on the initial allotment set during issuance of the sources' Clean Air Act Permit Program (CAAPP) permit. The allotments will be established from historical VOM emissions or "baseline emissions" lowered to provide the emission reduction required from stationary sources in 2000. At the end of each ozone season (May 1 through September 30), sources must hold sufficient trading units to cover their actual VOM emissions during the season.

Surplus allotment trading units (ATUs) may be sold to other sources or banked for use in the following season. Sources with low costs to reduce emissions will have an incentive to reduce more VOM emissions and sell the surplus trading units to other sources that would otherwise have to spend more money to reduce their own VOM emissions. The sources with high costs save money by purchasing the surplus ATUs rather than actually making reductions at their sources. Overall, the amount of VOM emissions to the atmosphere in the Chicago area is reduced as required by the Clean Air Act to make incremental progress toward complying with the ozone air quality standard.

Ozone Season

A key feature of the ERMS, as compared to other emission control programs, is the ozone season. Since the focus of the ERMS is ambient ozone air quality, it addresses the time period, May 1 through September 30 of each year, in which excursions of the ozone Air Quality Standard now occur. This period is referred to as the "seasonal allotment period" or "ozone season." This is the period for which affected sources must hold trading units for actual VOM emissions. As a result, possible methods of complying with the ERMS include adjusting operations during the ozone season to use lower emitting material, shifting certain production outside the ozone season, or scheduling maintenance outages during the ozone season. While these methods are not possible for many sources, they are examples of the way the ERMS can provide flexibility and reduced costs.

Affected Sources

The ERMS is directed at only major stationary sources in the Chicago area. Such sources must be located in the Chicago ozone nonattainment area (Cook, DuPage, Kane, Lake, McHenry, and Will Counties, Aux Sable Township and Goose Lake Township in Grundy County, and Oswego Township in Kendall County). They must be required to obtain a CAAPP permit, as this will be the mechanism by which allotments will be established. Finally such source must have baseline VOM emissions of 10 tons/seasons. Such sources are referred to as "participating sources." Sources that do not meet these criteria do not have to participate in the ERMS.

There are two ways in which a source that meets the above criteria may still be exempt from direct participation in the ERMS. One way is for the source to request, and accept, a 15 ton/season VOM limitation in the source's CAAPP permit. The second way is for a source to request and accept a reduction of 18% from its baseline emissions. This will result in a season limit on the source's VOM emissions.

Baseline Emissions

For affected sources, one of the most important aspects of the ERMS is the establishment of "baseline emissions." It is important that this step be done properly because it will determine a source's future under the ERMS, i.e., whether a source will have a surplus of trading units or need to evaluate possible ways to further reduce VOM emissions.

The "baseline emissions" are a participating sources actual average VOM emissions during two ozone seasons based on historical operation as adjusted for voluntary overcompliance or non-compliance. A source may freely select the two seasons to be used from the 1994, 1995, and1996 seasons. Since there are factors that may have affected the operations or emissions such that one of the seasons is not representative of typical operation of the source, a source may propose the use of alternative emission data from 1990-1993 and 1997 seasons provided that a demonstration is made that shows the 1994-1996 seasons is not representative.

Adjustments must be made to account for emission units that were not in compliance with the applicable regulations effective in 1996. If in 1994 a source was not complying with an applicable rule, and the actual emissions from a unit were 20 tons/season, but if operating in compliance with the 1996 rule the emissions would have been 15 tons/season, the baseline must be reduced by 5 tons to reflect what the unit would have emitted if complying. This adjustment is necessary because the ERMS does not reward sources for operating out of compliance with applicable regulations.

Additionally, sources may claim adjustments to their baseline emissions to take credit for voluntary overcompliance. This allows sources to take credit for measures taken after 1990 that result in a reduction of VOM emissions beyond that required by applicable 1996 regulations. For example, if a source had an emission unit that was allowed to emit 20 tons/season of VOM emissions based on the applicable 1996 rule, but the source added control equipment in 1992 that resulted in the unit only having VOM emissions of 15 tons/season, the source can add the additional 5 tons/season of VOM emissions above their actual emissions into the baseline. As a result, a source that added control after 1990 above and beyond what was required by applicable 1996 regulations will not be "penalized" for their efforts towards environmental control as compared to a source that takes such action after the ERMS is in place. The adjustment for voluntary overcompliance assures that there will be surplus ATUs upon startup of the ERMS in 2000.

Allotment of Trading Units

A trading unit under the ERMS is termed as an "Allotment Trading Unit" or ATU, and each ATU will be equivalent to 200 pounds of VOM emissions. Once the baseline emissions have been established for a source, a source's allotment of trading units or ATUs will be set. This allotment will generally be set in a quantity equivalent to the source's baseline emissions reduced by 12%. For example, if a source has a baseline of 100 tons of seasonal VOM emissions, and they operated no equipment that was excluded from further reduction, the source's yearly allotment of ATUs would be or 88 tons of VOM emissions (880 ATUs). This will provide the reduction in VOM emissions from stationary sources required by the Clean Air Act for 2000.

During the development of the ERMS, the Agency recognized that there were certain emission units at participating sources for which it would not be reasonable to expect a source to further reduce VOM emissions. These units include installations that have been through New Source Review since 1990 and are currently operating with the Lowest Achievable Emission Rate, units that are complying with NESHAP or MACT standards, fuel combustion emission units, internal combustion engines, and units for which the source has proposed, and the Agency concurs that best available technology (BAT) is already being utilized. Emissions from these units must be included in the baseline emissions for a source, but they are not subject to the 12% reduction when determining a source's allotment. For example, if a source has baseline emissions of 100 tons of seasonal VOM emissions for units subject to the 12% reduction and 100 tons of baseline emissions from emission units that are excluded from further reduction, the source would be issued ATUs for 188 tons of VOM or 1880 ATUs {100 tons × (1-0.12) + 100 tons = 188 tons}.

Market Operation

In the ERMS, the period of October 1 through December 31 of each year is termed the "reconciliation period." During this period, each source must compile its actual emission data for the ozone season, check its current ATU holdings, and make any additional purchases of ATUs as necessary to assure that sufficient ATUs are held. During the reconciliation period, sources may also sell off surplus ATUs, which will not be needed for their actual seasonal emissions.

Participating sources may enter into agreements to transfer ATUs during the rest of the year as well. These agreements may address both ATUs already issued to a source and ATUs which a source is scheduled to receive in the future. Thus sources may make multi-year or permanent transfer agreements to accommodate a source's long-range plans. If these sources then find themselves with a surplus of ATUs, the sources may transfer the ATUs still to other sources.

The ERMS also allows sources to go "outside" the ERMS to obtain ATUs. A source may have ATUs issued to it based on VOM emission reductions at a permitted source that is not required to participate in ERMS. ATUs may also be issued for reductions from mobile or area sources. In both cases, ATUs will only be available to the extent that the emission reductions go beyond all applicable rules and the amount of reduction can be accurately determined. In addition, unlike other ATUs, these ATUs may not be able to be banked (so as to be usable in a second season) depending on the nature of the underlying emission reduction.

At the close of the reconciliation period, sources will be required to demonstrate compliance with the ERMS by holding ATUs in a quantity sufficient to account for the actual VOM emissions during the previous ozone season. Sources that do not hold sufficient ATUs will have experienced an "emissions excursion" and will be required to make monetary compensation determined from the amount of excursion.

Alternative Compliance Market Account

In the extraordinary event that there are no ATUs available through the market, the ERMS establishes a safety net by the creation of the Alternative Compliance Market Account (ACMA). This is a reserve of ATUs managed by the Agency. The account will start with ATUs equivalent to 1% of the entire program's allotment of ATUs to participating sources. This 1% is accounted for in the overall 12% reduction.

The monetary compensation for emission excursions relates to the ACMA. A source will be required to purchase ATUs from ACMA at the rate of 1.2 times the emission excursion for a first time excursion. In the event that a source has two consecutive emission excursions, the rate will be 1.5 times the excursion. Keeping in mind that the purchase price for ATUs from ACMA will be at a minimum the lesser of the following; $1,000 or 2 times the average market price of an ATU, it is in a company's best financial interest to secure the appropriate ATUs during the reconciliation period.

Conclusion

The ERMS represents the common-sense application of a market-based approach to the further reductions in stationary source VOM emissions required for the Chicago area by the federal Clean Air Act. The program is radically different from the command and control rules that have previously been relied upon. It provides enormous flexibility to sources and creates and enhances incentives for sources to identify, develop, and implement cost-effective measures to reduce VOM emissions. The administrative effort needed to start-up the program is not trivial but it is minimized by linking the program to major sources that are already subject to more rigorous CAAPP permitting. The program will benefit both sources and public as it achieves desired VOM emission reductions with significantly less impact on the overall economy of the Chicago area.