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The Environmental Protection Agency (EPA) has proposed a rule for limiting emissions of nitrogen oxides (NO_x) in 22 eastern states and the District of Columbia. That rule includes a voluntary program for trading emission allowances among certain NO_x sources in those jurisdictions. EPA estimates that a trading program will save the electric power industry about $800 million a year compared with a more traditional approach that imposes a specific limit on emissions from each source. At the request of the Ranking Minority Member of the House Committee on Commerce, the Congressional Budget Office (CBO) has examined the factors that could affect the relative success of the NO_x trading program in achieving those savings.

Terry Dinan and Natalie Tawil of CBO's Natural Resources and Commerce Division wrote the paper under the supervision of Jan Paul Acton and Roger Hitchner. CBO analysts Kim Cawley, Pam Greene, and Diane Rogers made valuable comments. In addition, several staff members of EPA's Office of Air Quality Planning and Standards provided useful information.

Sherry Snyder and Christian Spoor edited the manuscript, and Melissa Burman proofread it. Rae Wiseman prepared the paper for publication. Laurie Brown and Martina Wojak-Piotrow prepared the electronic version for CBO's World Wide Web site (www.cbo.gov).

June E. O'Neill
Director
June 1998
 
 

SUMMARY

ONE - THE PROPOSED NO_x CAP-AND-TRADE PROGRAM AND EPA'S ESTIMATE OF ITS COST

• Curbing NO_x Emissions
• EPA's Estimate of Savings Under the NO_x Trading Program
• Experiences of Previous Trading Programs

TWO - FACTORS AFFECTING THE SUCCESS OF A NO_x CAP-AND-TRADE PROGRAM

• A Competitive Market for Allowances
• Minimal Institutional Constraints
• Low Transaction Costs
• Allowance Auctions
• Flexibility in the Timing of Emission Reductions
• Could Trading Make Some Areas Less Likely to Achieve the Ozone Standard?
• Conclusion: How the NO_x Program Ranks According to These Factors

APPENDIX - Geographic Targeting of Trades
 

TABLES
1.	Proposed Seasonal Budgets of NOx Emissions for States Covered by the Ozone Transport Rule
FIGURES
1.	The Region Affected by EPA's Proposed Rule for Reducing NOx Emissions
2.	Sources of NOx Emissions in the Eastern United States on an Average Summer Day
BOXES
1.	An Existing Effort to Control Ozone Transport: The Ozone Transport Commission
2.	Flow-Control Banking

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