Walls, Nelson, Safirova
Telecommuting and Environmental Policy
such as rate-based emissions standards, to establish a baseline level of pollution. Credits are generated
when firms reduce emissions below this baseline. The credits can then be used for other compliance
purposes, such as offsetting pollution from a new source, dealing with penalties, or avoiding
requirements to install reasonably available control technology (RACT). In the United States, there are
two major types of emissions credit programs: offset programs, which are used for compliance with the
Clean Air Act requirements for new large stationary sources in nonattainment areas; and open market
programs, adopted by some states to give firms flexibility in complying with certain state and federal
regulations. Offset programs primarily use emissions reduction credits (ERCs), which are denoted in a
mass of emissions per unit of time (e.g., tons of NOx per year). In contrast, open-market programs use
discrete emissions reduction (DER) credits. These are mass-based (e.g., tons of NOx) and are usually
generated from a one-off emissions reduction.
Emission reductions may be converted to ERCs or DERs if certain criteria are met. These
criteria have been set out in a series of EPA guidance documents dating back to the 1980s. Specifically,
the reductions must be surplus, permanent, quantifiable, and enforceable (U.S. EPA 1986):
• Surplus. To avoid double counting, the reductions must be additional to reductions required
by state and federal regulations. If the purpose of the trades is to allow for flexible
compliance, it must be shown that the trades do not end up increasing aggregate emissions.
• Permanent. The reductions must occur for as long as they are relied on in the state
implementation plan (SIP) or SIP-related requirements.
• Quantifiable . The emissions reductions can be reliably measured.
• Enforceable. Violations can be identified and liability can be determined. State and/or
federal agencies are able to apply penalties and secure appropriate corrective actions if
necessary.
If the above criteria are met, the emissions reductions are said to have “integrity”—that is, they do not
result in emissions above what would occur in the absence of a trading program.
3.3.a. Emissions Offsets
Under the New Source Review provisions of the Clean Air Act, new large stationary sources in
nonattainment areas (as well as existing sources that undergo major modifications) are required to
implement lowest achievable emissions rate (LAER) technology. In addition, they must more than
offset any increase in total emissions that results from their activity by securing emissions reduction
credits from existing sources in the same area. For example, if a new power plant emitting 100 tons of
NOx per year is built in a nonattainment area, it must secure more than 100 tons’ worth of ERCs to meet
its offset requirements. Federal law specifies trading ratios for offsets that can be as high as 1:1.5,
depending on source and nonattainment status. Thus, the firm in the example might be required to
purchase ERCs equivalent to 150 tons of NOx emissions per year.
The idea behind offsets is to enable economic growth without jeopardizing progress toward
attainment of air quality goals. However, new sources are required to comply with stringent technology
standards before purchasing credits from elsewhere, and therefore the compliance flexibility advantage
of trading is weakened. Offsets are available for a variety of pollutants, most prominently NOx and
VOCs.
Swift and Haites (2002) conclude that the use of ERCs for offset purposes has comparatively
high environmental integrity because of the “semicapped” nature of emissions from large stationary
sources in nonattainment areas. As long as ERCs are generated within the stationary sector (as has been
typically the case), New Source Review rules work to produce an implied cap on large stationary source
emissions.