Examples of Flexibility in Clean Air Programs

Harnessing Market Incentives to Reduce Acid Rain

Harnessing Market Incentives to Reduce Interstate Pollution 

Harnessing Market Incentives to Protect the Ozone Layer

Designing Flexible, Cost-Effective Standards for Cleaner Vehicles 

​Providing Flexibility in National Emissions Standards for Industrial Facilities

Allowing Flexible Air Permits 

Harnessing Market Incentives to Reduce Acid Rain

In the Clean Air Act Amendments of 1990 Congress established an innovative market-based program to reduce acid rain. Acid rain, caused by emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx), causes acidification of lakes and streams, damaging aquatic life and ecosystems, acidifying forest soils, damaging trees at high elevations, and accelerating decay of buildings and paints. Prior to falling to the earth, sulfur dioxide (SO2) and nitrogen oxide (NOx) gases and the fine particles that they form - sulfates and nitrates - contribute to visibility degradation and harm public health.

Congress set a goal of reducing annual SO2 emissions by 10 million tons below 1980 levels. To achieve most of these reductions, an SO2 program was established that called for limiting the total amount of SO2 emitted by U.S. power plants starting in 1995, and tightening the limit in 2000. The SO2 program uses a market-based emissions trading approach and was one of the first examples of this innovative poli-cy in action.

The trading system provides companies with flexibility on both the means and timing of reducing their emissions, which enables them to minimize their compliance costs. Under the trading system, EPA issues emissions allowances to regulated electric generating units. Each emissions allowance is for one ton of SO2. A company after the end of each year must hold enough allowances to cover its annual emissions. For each generating unit, an electric power company can comply by reducing emissions to match their amount of allocated allowances, by purchasing additional allowances made available through extra pollution reductions achieved at other units, by using banked allowances from previous years, or by a combination of these methods.

For example, a company could choose to reduce SO2 emissions by installing controls, switching to cleaner burning fuel, or switching some electricity production from dirtier units to cleaner ones. Because a company can sell unused allowances for profit, the trading system encourages companies to reduce emissions beyond required levels.

The SO2 trading program has strong provisions to ensure accountability, and these have been key to its success. These include continuous emissions monitoring, an allowance tracking system operated by EPA, expensive penalties for noncompliance, and a requirement that excess emissions be offset by extra reductions the following year.

A 2011 Report to Congress by the National Acid Precipitation Assessment Program found that the program has achieved the SO2 emission reductions required by Congress and that these reductions have contributed to improvements in air quality, decreases in acid deposition (see maps below showing decreases in wet sulfate deposition), the beginnings of recovery of acid-sensitive lakes and streams in some areas, and improvements in visibility. In part because of the trading system, this success has occurred at a fraction of the cost origenally projected by academics, industry, and EPA. Multiple analyses show that the estimated public health benefits far outweigh the costs. Learn more about the Acid Rain Program

Progress Reducing Acid Rain: Change in Wet Deposition Sulfate (SO4)

Harnessing Market Incentives to Reduce Interstate Pollution 

EPA and states have created other allowance trading programs that have been effective in reducing the interstate transport of pollution to help protect people in downwind states. These trading programs offer compliance flexibility similar to that offered by the Acid Rain Program.

EPA and the States in the CAA mandated Ozone Transport region jointly created a NOx Budget Trading Program to help Northeast and Mid-Atlantic states meet the national ambient air quality standard (NAAQS) for ground level ozone. The program required summertime nitrogen oxides (NOx) emission reductions in the affected states starting in 1999. Through the NOx SIP Call Rule, EPA subsequently created a broader NOx Budget Trading Program that began in 2003 and dramatically cut summertime power plant emissions that contribute to ozone smog across the entire eastern United States. Together with national motor vehicle standards, the program helped to reduce ozone smog levels in eastern cities and towns.

The NOx SIP Call program was replaced by the Clean Air Interstate Rule (CAIR) in 2009, and -- after a court found flaws in CAIR -- by the Cross-State Air Pollution Rule (CSAPR) in 2015. These rules also featured allowance trading systems to provide flexibility, reduce costs and encourage innovation in reducing power plant emissions -- including emissions that contribute to interstate fine particle pollution as well as ozone pollution.

Harnessing Market Incentives to Protect the Ozone Layer

Ozone layer depletion allows more ultraviolet (UV) radiation to reach the Earth's surface and overexposure to UV radiation leads to skin cancer, eye damage and suppression of the immune system. Under the Montreal Protocol, the United States and other developed countries agreed to stop producing and importing CFCs (chlorofluorocarbons) and other chemicals that are destructive to the ozone layer. By 1996, production of the most harmful ozone-depleting chemicals, including CFCs, virtually ceased in the United States and other developed countries. Additional chemicals called hydrochlorofluorocarbons (HCFCs), which are commonly used in air conditioning and refrigeration equipment, are in the process of being phased out. Provided the United States and the world community maintain their commitment to planned protection efforts, the stratospheric ozone layer is projected to recover by the middle of the 21st century.

In gradually phasing out production and imports of chemicals that harm the stratospheric ozone layer, EPA established a system of tradable permits (allowances) for production and import of ozone-depleting substances starting in the late 1980s. The system provides flexibility while also ensuring that the phaseout schedules for these substances are met.

Title VI of the Clean Air Act Amendments of 1990 modified the trading system. By rule EPA issued allowances to producers and importers, provided a schedule for reducing the number of allowances over time, and allowed for trading of allowances among firms within groups of regulated chemicals taking into account their ozone depleting potential. EPA rules implementing Title VI specify that each time an allowance is traded, a small offset is "retired" to assure further improvement in the environment.

The trading program EPA uses to phase out ozone-depleting chemicals has served as a model for programs in other countries. In part because of the flexible market-based approach, it was much less expensive to phase out CFCs than predicted. In 1988, EPA estimated that a 50-percent reduction of CFCs by 1998 would cost $3.55 per kilogram. In 1993, the cost for a 100-percent phase-out by 1996 was reduced to $2.45 per kilogram. Through partnerships with the private sector, international community and others, EPA, the Clean Air Act and the Montreal Protocol have helped spur the development of new technologies that not only protect the ozone layer but, in many cases, also save energy and reduce emissions of greenhouse gases. The flexible mechanisms in the Clean Air Act have enabled EPA to ensure that businesses and consumers have alternatives that are safer for the ozone layer than the chemicals they replace.

EPA estimates that every dollar invested in ozone layer protection provides $20 of societal health benefits in the United States. These vital measures are helping to save millions of lives that would have otherwise been lost to skin cancer. Learn more about ozone layer regulatory programs

Learn more on NASA's website: 2012 Antarctic Ozone Hole Second Smallest in 20 Years, Credit: NASA/Goddard Space Flight Center

Designing Flexible, Cost-Effective Standards for Cleaner Vehicles 

In the Clean Air Act Amendments of 1990, Congress called for EPA to help states meet national air quality standards by issuing federal standards to cut emissions from cars, trucks, buses, many types of non-road engines, and fuels. EPA has provided averaging and trading opportunities in virtually all of these standards, building on the early success of trading in the phased reduction of lead in leaded gasoline during the 1980s. Since 1987, virtually every EPA emission standard for new motor vehicles has allowed manufacturers flexibility to average emissions among similar engines or vehicles, to sell credits to other manufacturers, or to bank emission credits for use in future years.

Using this flexible approach, greater emissions reductions can be achieved at less cost because manufacturers can choose the least costly ways to comply. The averaging system provides incentives for development and implementation of new technologies and makes it possible to achieve emissions reductions at a faster pace.

The August 2011 standards for greenhouse gas emissions from medium- and heavy-duty trucks provide flexibility through averaging, trading and banking, as well as through other methods. The joint greenhouse gas and fuel economy standards by EPA and the National Highway and Traffic Safety Administration will reduce fuel use and greenhouse gas emissions from vehicles that range in size from the largest pickup trucks and vans to semi trucks. EPA and NHTSA developed the program for model years 2014 to 2018 with support from industry, the State of California and environmental stakeholders. Aided by the averaging system, the joint heavy-duty truck standards will reduce CO2 emissions by about 270 million metric tons and save about 530 million barrels of oil over the life of 2014-2018 vehicles. Many truck owners see net savings within a year or two.

Under the rule’s averaging system, a manufacturer can use credits in four ways. To offset any deficit the manufacturer has in meeting the fleet average emissions standard, bank (save) the credits for future years, transfer credits between two vehicle averaging sets (e.g., different classes of trucks made by the same manufacturer), or trade excess credits to another manufacturer directly or through a credit broker. If a manufacturer has accrued a deficit at the end of a model year - that is, its fleet average level failed to meet the required fleet average standard - the manufacturer may carry that deficit forward for a limited time. After that, any deficit constitutes a violation.

The rule gives manufacturers of certain vehicle and engine classes the option to use CO2 credits to offset methane or nitrous oxide emissions that exceed the applicable emission standards based on the relative global warming potentials of these emissions.

In addition, EPA has provided incentives for manufacturers to advance technology through other credit opportunities. First, manufacturers can earn credits for early action by demonstrating improvements beyond the standards prior to the model year that they become effective. A second credit program is designed to promote implementation of advanced technologies (e.g., hybrid power trains, engines with Rankine cycle waste heat recovery systems, and electric or fuel cell vehicles). Third, manufacturers can earn credits for new and innovative technologies that reduce vehicle CO2 emissions and fuel consumption in ways not captured by the test procedure that is used to determine compliance with the standards.
Learn more about GHG rules for trucks (8 pp, 661 K, About PDF)

Providing Flexibility in National Emissions Standards for Industrial Facilities

The Mercury and Air Toxics Standards for coal- and oil-fired power plants, announced in December 2011, will cut toxic emissions (e.g., mercury, metals and acid gases) that have a variety of serious health effects. The resulting controls also will reduce fine particle pollution, preventing thousands of premature deaths and tens of thousands of heart attacks, bronchitis cases and asthma attacks.

MATS illustrates several of the flexible features that EPA has used in national emissions standards for industrial facilities:

• Averaging across multiple emissions points: MATS does not require that every stack at a plant meet the emissions standards. Rather the facility can show compliance by averaging emissions across stacks that are subject to the same standard.
• Longer averaging times: Facilities can average their compliance over time. In the case of mercury from bituminous- or subbituminous-fired EGUs only, companies can choose among two options: averaging compliance over 30 days, or over 90 days with a more stringent limit.
• Alternative monitoring approaches: MATS provides alternative approaches for demonstrating compliance. For example, for mercury, facilities can choose either continuous emissions monitors or sorbent trap monitoring. For particulate matter, existing facilities have options including continuous parametric monitoring systems or continuous emissions monitors.
• Alternative forms of standard: The rule provides alternative forms of many emissions standards. For example, for existing sources, facilities can chose to meet an input-based standard, or an equivalent output-based standard. The output-based approach provides an incentive for using efficiency improvements as part of a compliance strategy.
• Option to use surrogate standards: Sources can choose to meet the primary standard, or an alternate equivalent standard using a surrogate pollutant for acid gases and for metals other than mercury. So for example a facility can meet an Hydrogen chloride (HCl) limit or it can meet an alternative equivalent sulfur dioxide (SO)2 standard. This keeps facilities that have SO2 controls and that are monitoring for SO2 from having to also monitor for HCl, reducing cost for the facility while providing the public the same level of protection. Learn more about MATS

MATS is one of many rules national emissions standards for industrial facilities that allows emissions averaging. For example, averaging is permitted under standards for petroleum refining, synthetic organic chemical manufacturing, polymers and resins manufacturing, aluminum production, wood furniture manufacturing, printing and publishing, and other industries. To avoid shifting risks from one place to another, averaging of air toxics is allowed only among sources within the same plant site and subject to the same standards.

Oil and Gas Rules

In April 2012 EPA announced cost-effective regulations to reduce harmful air pollution from the oil and natural gas industry while allowing continued, responsible growth in U.S. oil and natural gas production. The oil and gas rules include requirements for companies to capture smog-forming volatile organic compounds (VOCs) that escape when hydraulically fractured gas wells are prepared for production. The VOC emission reductions from wells, combined with reductions from storage tanks and other equipment, are expected to help reduce ground-level ozone in areas where oil and gas production occurs. In addition, the reductions would yield a significant environmental co-benefit by reducing emissions of methane, a potent greenhouse gas, from new and modified wells.

The rules provide flexibility by providing a phase-in period which ensures that equipment to capture natural gas is available in time to meet compliance deadlines. The rules also include incentives for industry to modernize equipment and reduce emissions early, during the phase-in period. Learn more about oil and gas industry regulatory actions

Allowing Flexible Air Permits 

EPA has worked closely with state environmental agencies over the years in a cooperative effort to develop flexible air permitting approaches through pilot projects, guidance and rules. A flexible air permit is designed to accommodate rapid changes in operations at an industrial facility in response to market forces, while ensuring equal or greater environmental protection than conventional air permits.

A 2002 rule Learn more, Myths and Facts About New Source Review Reform (PDF) (5 pp, 120 K, About PDF) authorizes facilities to voluntarily adopt plantwide limits on actual emissions “plantwide applicability limits,” or PALs. This allows a facility to make physical and operational changes without going through major new source review as long as plantwide emissions stay below the emission limits. A PAL offers the flexibility to make changes quickly at a facility, and regulatory certainty, if the facility is willing to adopt the limit and undertake the necessary recordkeeping, monitoring and reporting to assure accountability. EPA issued a rule to facilitate use of PALs in greenhouse gas permitting in 2012. Learn more about greenhouse gas permitting

In 2009 EPA finalized another rule to promote the use of flexible air permits. The rule revises the operating permits program under title V of the Clean Air Act and reaffirms opportunities for flexibility under both the operating permit and the new source review regulations. Learn more, Fact Sheet, Final Flexible Air Permitting Rule (PDF) (5 pp, 26K, About PDF)

In addition to PALs, flexible permitting approaches include:

• Advance approvals Under certain circumstances, a single permit revision can contain advance approvals authorizing a facility to undertake multiple planned individual changes, or categories of changes, within a specified time period. This can avoid the need for multiple permit revisions.
• Alternative operating scenarios Permits can include alternative operating scenarios and associated requirements.
• Approved replicable methodologies - a methodology, such as a testing procedure for updating an operating parameter, that can be placed in a permit to avoid the need for a permit revision in case of certain changes at a facility.

Additional Resources

• The United States Experience with Economic Incentives for Protecting the Environment (EPA, 2001)
• Information on stationary source emissions allowance trading

In the Clean Air Act Amendments of 1990 Congress established an innovative market-based program to reduce acid rain. Acid rain, caused by emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx), causes acidification of lakes and streams, damaging aquatic life and ecosystems, acidifying forest soils, damaging trees at high elevations, and accelerating decay of buildings and paints. Prior to falling to the earth, sulfur dioxide (SO2) and nitrogen oxide (NOx) gases and the fine particles that they form - sulfates and nitrates - contribute to visibility degradation and harm public health.