Walls, Nelson, Safirova
Telecommuting and Environmental Policy
3.3.b. Open-Market Trading
In recent years, some states have attempted to expand emissions trading through “open-market”
trading programs.12 These programs were developed after in 1994 EPA released its proposed open-
market trading rule, which provided a framework for expanding emissions trading beyond electric
utilities and other large stationary sources. This rule was never finalized, but elements of it were
incorporated into EPA’s guidance for economic incentive programs, released in 2000. The open-market
trading programs rely on discrete emissions reductions—mass-based, one-time reductions in emissions
of pollutants (usually NOx or VOCs). DER credits are defined retrospectively, after the reductions have
taken place. Whereas ERCs are necessarily a stream of reductions, DERs are usually created from
activities of limited duration. An example of a DER is the reduction of NOx emissions that would occur
when a coal-fired cogeneration plant switches its fuel to natural gas. The estimated reduction could then
be banked and used or traded at a later date. According to EPA guidance, shutdowns and activity
curtailment are not approved methods for generating DERs; rather, DERs are generally created from
over-compliance with existing regulation and represent a reduction from an estimated baseline level of
emissions.
The most significant difference between open-market and offset trading is the use of the credits.
DERs are designed to be used where there is no offset requirement, such as for compliance with EPA’s
RACT standards, which apply to all large stationary sources in non-attainment areas, or for dealing with
state penalties and special circumstances.
The rationale for open-market programs has been to expand emissions trading beyond the
traditional constituency of large stationary sources and to provide a vehicle for inter-sector trading,
which many believe will open up new possibilities for cost savings. However, an open market does not
have the firm emissions cap generally associated with allowance trading or even the implicit cap
associated with New Source Review offsets. Because the open-market framework is explicitly designed
for inter-sector trading and for uses other than the strict federal new source requirements, there is a
higher risk that trades will lack integrity. For many types of sources often included in open-market
programs (such as area or mobile sources), there is no meaningful inventory of the covered sources or
reliable mechanism to monitor emissions at those sources. Thus, the universe of covered sources is not
as well defined as it is for allowance trading or new sources in non-attainment areas.
Swift and Haites’s (2002) survey of open-market programs contains several empirical findings
concerning the performance of the programs. First, the authors find that there has been insignificant
trading activity; credit generation far outweighs use, resulting in an oversupply of DERs. Second,
although the primary focus of DER programs was initially permit compliance, almost half the uses of
DERs have been for penalties and special circumstances. The use of DERs for permit compliance has
been less than 1% of stationary NOx emissions. Finally, in most states, more than 90% of the NOx DERs
have been created at a handful of large stationary sources. Swift and Haites conclude that open-market
programs suffer from inherently weak environmental integrity unless certain best practices are
instituted.
3.4 Emissions Trading with Mobile Source Credits
Although emissions reduction credits and discrete emissions reduction credits are
predominantly created by stationary sources, trades involving mobile sources are permitted under
federal law. EPA has allowed mobile source emissions reductions to be a source of tradable credits
since 1986. According to EPA’s (1993) Interim Guidance on the Generation of Mobile Source Emission
Reduction Credits, mobile emissions reduction credits (MERCs) can be used to comply with RACT
standards, to offset emissions under New Source Review, to address temporary emissions spikes or
temporary noncompliance with regulations, and to satisfy emissions reduction requirements that are
12 Texas, New Hampshire, Michigan, Connecticut, New Jersey, and Massachusetts all have programs, though New
Jersey recently rescinded its program.