Annual Performance Review Report 2002

Transcription

1 IEPA/BOA/ Illinois Environmental Protection Agency Bureau of Air 1021 North Grand Avenue East P.O. Box Springfield, IL May 2003 Annual Performance Review Report 2002 Emissions Reduction Market System May 15, 2003

2 ANNUAL PERFORMANCE REVIEW REPORT 2002 EMISSIONS REDUCTION MARKET SYSTEM AQPSTR ILLINOIS ENVIRONMENTAL PROTECTION AGENCY BUREAU OF AIR 1021 NORTH GRAND AVE., EAST P.O. BOX SPRINGFIELD, IL May 15, 2003

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4 Table of Contents Section Page Number List of Tables ii List of Figures iii List of Acronyms iii Executive Summary I. Introduction II. Scope of the Annual Performance Review Report A. Requirements B. Dialogue and Peer Review III. Rate-of-Progress Plan and Moving Towards Attainment A. Federal Reduction Requirements B. Post-9% ROP Submittal Actions C. ROP Requirements Through D. ERMS Contribution to the ROP and Attainment IV. Area-Wide Emissions Status A. Source Types B. Total Aggregate VOM Emissions C. Breakdown of ATU Use D. Expired ATUs E. ATU Vintage Summary F. Findings V. Evaluation of Trading Activities A. Account Officers B. Website Access C. Transaction Summary D. ATU Availability E. Average ATU Market Price F. Special Market Activity G. Findings VI. Alternative ATU Generation A. Summary of Emissions Reduction Generator (ERG) Proposals 20 B. Summary of Inter-Sector Proposals C. Finding i

5 Section Page Number VII. Performance Accountability A. Seasonal Emissions Reports B. Alternative Compliance Market Account (ACMA) C. Excursion Compensation D. Source Inspections E. Findings VIII. Distribution of Emissions A. Geographic Distribution of Transactions B. Type of Source C. Trends and Spatial Distributions of Hazardous Air Pollutants (HAPs) D. HAP Information Request Letters E. Findings IX. Conclusions Appendix A: Township Names and ID Numbers A-1 Appendix B: Township Data B-1 Appendix C: Errata Sheet for 2000 and 2001 Reports C-1 List of Tables Table Page Number 1. Source Emissions Breakdown Special Unit Emissions Breakdown Expired ATUs ATU Sellers ATU Buyers ERGs Receiving ATUs in ACMA Account Balance ACMA Purchases ATUs Traded by County ATU Comparison by County Total ATUs Expired and Retained by County Number of Sources per Township Township Areas ii

6 Table Page Number 14. ATUs Traded by Township Expired ATUs by Township Retained ATUs by Township Townships with Emissions Over Baseline Level Townships with Emissions Over Allotment Level Transactions by SIC Code Total ATUs Expired and Retained by SIC Code Reported HAP Emissions by Township Key Results on HAPs for Six Highlighted Townships List of Figures Figure Page Number 1. Illinois ROP Plan VOM Illinois ROP Plan NOx ATUs Traded Into and Out of Each County from Difference from Baseline Difference from Allotment Difference from Baseline and Traders Difference from Allotment and Traders VOM HAP Reporting Sources (Difference from Allotment/Baseline) Traders with VOM HAP Reporting Sources (Difference from Allotment/Baseline) Change in Report HAP Emissions (Difference from Allotment/Baseline) VOM HAP Reporters with Population Density (Difference from Allotment/Baseline) B-1 Actual Emissions Compared to Allotment B-4 List of Acronyms ACMA AER ATU BAT CAA CAAPP EPA ERG Alternative Compliance Market Account Annual Emissions Report Allotment Trading Unit Best Available Technology Clean Air Act Clean Air Act Permit Program Environmental Protection Agency Emissions Reduction Generator iii

7 ERMS HAP LAER MACT NAA NAAQS NESHAP RACT ROP SER TPD TRI VOM Emissions Reduction Market System Hazardous Air Pollutant Lowest Achievable Emission Rate Maximum Achievable Control Technology Nonattainment Area National Ambient Air Quality Standards National Emission Standard for Hazardous Air Pollutants Reasonably Available Control Technology Rate-of-Progress Seasonal Emissions Report Tons Per Day Toxics Release Inventory Volatile Organic Materials iv

8 Executive Summary Northeastern Illinois the Chicago area has been designated as a severe nonattainment area (NAA) for ozone. Under provisions of the Clean Air Act (CAA), as amended in 1990, the area must be in attainment by Extensive air quality modeling has shown that emissions of volatile organic materials (VOM), a component involved in ozone formation, must be reduced. Most VOM emissions are already controlled by technologybased rules, and further reductions in emissions using such command and control measures are potentially very costly. As such, Illinois adopted the Emissions Reduction Market System (ERMS), an emission trading program that would reduce overall VOM emissions in the Chicago NAA. The ERMS program operates from May 1 through September 30, correlating with the time of the year when ozone formation occurs. The program allows trading among participating sources in order to meet a reduced cap on their overall VOM emissions. Each participant is given a baseline according to what they were actually emitting in previous years, adjusted for their compliance or noncompliance with existing rules. (ERMS participants must still adhere to all other state and federal emission limitations.) From that baseline, sources were given a number of allotment trading units (ATUs) corresponding to an overall area-wide reduction of 12%, with some exceptions for units with emissions that could not be further reduced. ATUs are retired by the Illinois Environmental Protection Agency (Illinois EPA) after each trading season to account for all of the source s emissions during that season. Sources may either reduce their emissions by the use of emission controls or process changes, or they may buy ATUs from other sources to account for any emissions in excess of their initial allotment. Any source that reduces its VOM emissions below the allotment level may sell its excess ATUs to another source. Overall VOM emissions in the Chicago NAA are therefore reduced while providing a variety of mechanisms for sources to use in achieving their individual reductions. Illinois EPA is required by the ERMS rule to prepare an Annual Performance Review Report addressing the effect of ERMS on VOM emissions, reviewing trends and patterns that have emerged in the operation of the ERMS, and looking at nine specific areas of the program for the previous seasonal allotment period. The structure for this report was prepared in consultation with industry and environmental groups, the U.S. EPA, and economists from the University of Illinois at Chicago, all of whom participated in an open dialogue that has helped to frame the information reported herein. The third year of ERMS market operation trading produced 23 seasonal trades and four new long-term transfer agreements in addition to seven already in effect. These involved a total of 25 sources as sellers and 33 as buyers, with 4,483 ATUs changing hands. This amounts to 4.6% of the total ATU allotment for the area, and 8.8% of the ATUs retired for compliance purposes. While some of the data necessary to fully analyze the operation of the ERMS program is not yet available for trend analyses, Illinois EPA has compiled a great deal of information 1

9 for evaluation of the third operating year of the ERMS program. In studying these data, Illinois EPA finds that the ERMS program is functioning as intended. ATUs have been readily available, emissions are significantly lower than baseline and allotment figures on both a local level and in the overall region. Indeed, the allotment itself is 9.7% below the baseline level, indicating that even if every company used its entire allotment, the area would still see a significant reduction from the baseline. Key Findings The allotment shows a 9.7% reduction from the original baseline for sources. Sources were able to find trading partners, there was a sufficient supply of available ATUs, and market prices were conducive to trading. Alternative ATU generation did not play a role in market performance. The reconciliation and compensation processes performed as designed and operated in a timely and effective manner. Overall, sources in the ERMS program emitted 54.0% less VOM than their baselines would have allowed them to emit, and 48.1% less than their actual ATU allotments for Trading did not appear to influence HAP emissions. ATUs equivalent to 34.4% of those allotted to participating sources in 2002 expired without being used. Conclusions The ERMS program continued to achieve the desired emissions reductions. ERMS participants are performing significantly below the baseline and allotment levels. The Market System operated in an effective manner. No relationship is apparent between market activity and hazardous air pollutant levels. Time-based trends are not yet available. 2

10 I. Introduction Northeastern Illinois, including the Counties of Cook, DuPage, Kane, Lake, McHenry, and Will, and the Townships of Aux Sable and Goose Lake in Grundy County and Oswego in Kendall County, has been designated as a severe nonattainment area (NAA) for ozone. Under provisions of the Clean Air Act (CAA), as amended in 1990, the area must be in attainment by Extensive air quality modeling has shown that emissions of volatile organic materials (VOM), a component involved in ozone formation, must be reduced. Most VOM emissions are already controlled by technology-based rules, and further reductions in emissions using such command and control measures are potentially very costly. As such, the Illinois Environmental Protection Agency (Illinois EPA) proposed the Emissions Reduction Marketing System (ERMS), an emission trading program that would reduce overall VOM emissions in the Chicago NAA. The Illinois Pollution Control Board adopted the ERMS program as a rule in November 1997 and the rule appears in Title 35 of the Illinois Administrative Code, Subtitle B (Air Pollution), Part 205 (35 Ill. Adm. Code 205). The ERMS program is designed to operate on a seasonal basis, from May 1 through September 30, to correlate with the time of the year when ozone formation occurs. The program allows trading among participating sources in order to meet a reduced cap on their overall VOM emissions. Each participant has been given a baseline according to what they were actually emitting in previous years, adjusted for their compliance or noncompliance with existing rules. Unlike the situation in some open market trading systems, sources in ERMS, which is the first cap-and-trade system in the U.S. for VOM, must still adhere to all other state and federal emission limitations. From that baseline, sources were given a number of allotment trading units (ATUs) corresponding to a reduction of 12%, with some exceptions for units with emissions that could not be further reduced. Section provides that units falling into one of the following categories are not required to reduce their emissions by 12% below their baselines: units subject to a Maximum Achievable Control Technology (MACT) standard or a National Emission Standard for Hazardous Air Pollutants (NESHAP); units that have demonstrated Lowest Achievable Emission Rate (LAER); units that have demonstrated Best Available Technology (BAT); space heaters; fuel combustion units; and internal combustion engines. The baseline, therefore, is the allotment for these units. When such exemptions are factored into the area-wide allotment, the actual aggregate allotment is 9.7% less than the baseline total. ATUs are retired by the Illinois EPA after each trading season to account for all of the source s emissions during that season. Sources may either reduce their emissions by the use of emission controls or process changes, or they may buy ATUs from other sources to account for any emissions in excess of their initial allotment. Any source that reduces its VOM emissions below the allotment level may sell its excess ATUs to another source. In this way, overall VOM emissions in the Chicago NAA are reduced while providing a variety of mechanisms for sources to use in achieving their individual reductions. 3

11 Key Features of ERMS ERMS contains a number of features that distinguish it from traditional command and control programs and other market systems: Most command and control rules are in force year-round. However, since ozone is a problem in Illinois only during the summer season, and this program goes beyond the traditional Reasonably Available Control Technology (RACT) rules, the ERMS program is seasonal, and restricts emissions during May 1 through September 30, when the ozone problem exists. Many regulations limit emission rates rather than actual emissions. The ERMS program puts a cap on sources based on their actual emissions, which provides certainty that it will reduce VOM in the nonattainment area. The ERMS program, as noted above, goes beyond RACT. Unlike other emissions trading systems across the country, Illinois does not allow sources to avoid other emission limits by participating in the ERMS. Sources must comply with the ERMS rule and all other applicable limits. Some trading programs have created trading units with an unlimited life, which allow them to be accumulated for long periods of time. The ERMS rule provides that ATUs have a limited two-year lifetime. This helps to ensure a robust market, allows some saving for companies, but prevents excessive accumulation of active trading units with unlimited life. Because the ERMS rule is associated with the Clean Air Act Permit Program (CAAPP), monitoring and recordkeeping provisions are linked to avoid duplicative efforts for companies and to ensure the use of standardized methods for determining emissions. Illinois has created a specific reduction requirement in the ERMS rule, requiring most units to reduce VOM emissions by at least 12%. This provides Illinois with a specific, creditable VOM reduction in the Chicago NAA. Sources which fail to reduce their emissions or obtain the proper number of ATUs are held accountable for their actions as a part of the ERMS rule itself. Indeed, such sources are penalized at a higher rate for repeated failure to hold the required ATUs. This discourages noncompliance on the part of participating sources and provides Illinois with some certainty that the VOM reductions will be achieved. 4

12 II. Scope of the Annual Performance Review Report A. Requirements Section of the ERMS rule directs the Illinois EPA to prepare an Annual Performance Review Report addressing the effect of ERMS on VOM emissions, reviewing trends and patterns that have emerged in the operation of the ERMS, and looking at nine specific areas of the program for the previous seasonal allotment period. These areas, all of which are included in later parts of this report, are: 1. Total aggregate VOM emissions from all ERMS sources. 2. A breakdown of the number of ATUs retired for compliance purposes or air quality benefit, number currently banked, and the number used by new participating sources. 3. Evaluation of trading activities, including those sources that were net buyers, those that were net sellers, and those that did not trade. 4. The use of the Alternative Compliance Market Account (ACMA), including its balance and all transactions into or out of the account. 5. Summary of emissions reduction generator (ERG) and inter-sector proposals. 6. Distribution of transactions by geographic area or character of source. 7. Availability of ATUs for purchase. 8. Average market price for ATUs. 9. Trends and spatial distributions of hazardous air pollutants (HAPs). The Annual Performance Review Report must be prepared by May 15 of every year. This third report covers the 2002 ERMS season and all transactions pertaining to that season up to April 1, Many of the terms and technical information referred to in this document are based on the requirements in the ERMS rule. Readers who are unfamiliar with that rule should review it first for a better overall understanding of the program and the terminology used in this report. Some of the data necessary to fully analyze the operation of the ERMS program is not yet available. This is only the third year of the program and the second year for which specific company-reported data on actual HAP emissions are available. It generally takes several years of data to evaluate or identify trends. B. Dialogue and Peer Review The structure for this report was prepared in consultation with industry and environmental groups, the U.S. EPA, and economists from the University of Illinois at Chicago, all of whom participated in an open dialogue that has helped to frame the information reported herein. The overall framework of this report is the same as that used in the previous reports. 5

13 In order to ensure that the original report addressed all of the required aspects of the ERMS program, the 2000 report was sent for peer review to the Center for Clean Air Policy in Washington, D.C., and the Federal Reserve Bank in Chicago, Illinois. A number of their recommendations were incorporated into the 2001 report and continue in this report. A more complete discussion of those reviews can be found in the 2001 report. 6

14 III. Rate-of-Progress Plan and Moving Towards Attainment A. Federal Reduction Requirements Illinois was required, pursuant to Sections 182 (b)(1) and 182 (c)(2) of the CAA, to maintain reasonable further progress toward attaining the National Ambient Air Quality Standards (NAAQS) for ozone in the Chicago NAA. This required the State to develop a rate-of-progress (ROP) plan which outlined how reasonable further progress would be achieved. Illinois originally developed a 15% ROP plan pursuant to Section 182(b)(1), which covered the period from 1990 through This plan was approved by U.S. EPA on December 18, 1997, and provided for a total of 297 tons per day (TPD) of VOM emissions reductions, Illinois has implemented all of these measures and achieved reasonable further progress for that period. Further, Section 182(c)(2) of the CAA required each serious, severe, and extreme ozone NAA to submit a State Implementation Plan (SIP) revision which provided for an actual reduction in ozone precursors of at least 3% per year averaged over each consecutive 3-year period, for a total reduction of 9% per period. This requirement began in 1997 and continues until the area attains the 1-hour ozone standard. Illinois SIP revision that addressed this requirement in Chicago for the first three-year period ( ) is referred to as the 9% Rate-of-Progress Plan (9% ROP Plan). The Illinois EPA prepared the 9% ROP Plan for Chicago in the Fall of 1997 and submitted the plan to the U.S. EPA on December 18, 1997, as a revision to the Illinois SIP. B. Post-9% ROP Submittal Actions A number of actions occurred after the completion of the original 9% ROP Plan and resulted in Illinois EPA supplementing the original plan. Some of these actions stemmed from a U.S. EPA revised policy regarding implementation of the 1-hour NAAQS for ozone. Other actions involved changes in VOM emissions reduction credit allowed by U.S. EPA. In addition, delays in the implementation of several federal and state regulatory programs, including ERMS, necessitated an adjustment to the reduction credit previously claimed in the 9% ROP Plan for VOM, and included the addition of NOx reductions in the attainment area to substitute for some of the VOM reductions. The revised 9% ROP Plan incorporating these plan adjustments for the period was submitted to the U.S. EPA on February 17, 2000, and demonstrated that the federal ROP requirements were met by utilizing a reduction strategy of 2% VOM reductions from the ozone nonattainment area and 7% NOx reductions from the statewide ozone attainment area. The 9% ROP Plan was approved by the U.S. EPA on December 18, 2000, and provided 157 TPD of VOM emissions reductions and 262 TPD of NOx emissions reduction. Illinois has implemented all of these measures and has achieved reasonable further progress for this period. 7

15 C. ROP Requirements Through 2007 The Chicago ozone nonattainment area is required to attain the ozone standard by 2007, and must continue to meet ROP requirements for each three-year period until that date, or until such time as the area achieves the ozone NAAQS. As in the case with the 9% ROP Plan, Illinois is relying on both VOM and NOx emissions reductions to meet its ROP requirements for the remaining milestone periods (i.e., 2002, 2005, and 2007). Illinois EPA has found that a combination of 2% VOM reductions from the Chicago ozone NAA and 7% NOx reductions from the statewide ozone attainment area is sufficient to satisfy the remaining ROP periods, just as it was for the 9% ROP Plan. This ROP reduction strategy for the period was included in Illinois ozone attainment demonstration SIP revision, submitted to U.S. EPA on December 26, 2000, and approved by the U.S. EPA on December 13, Figures 1 and 2 show the planned reductions for VOM and NOx respectively, incorporating all of the elements of Illinois ROP Plans. The Target Level indicated on each of these diagrams represents the maximum amount of emissions allowed in each ROP milestone year necessary to satisfy the required CAA ROP reduction (i.e., 15% or 3% per year). The target levels are determined through a series of detailed calculations based on the 1990 CAA baseline inventory and adjustments for non-creditable ROP emissions reductions. For further information regarding ROP target levels, see U.S. EPA s Guidance on the Adjusted Base Year Emissions Inventory and the 1996 Target for 15 Percent Rate-of-Progress Plans and Guidance on the Post-1996 Rate of Progress Plan and the Attainment Demonstration. D. ERMS Contribution to the ROP and Attainment Illinois EPA has relied upon VOM emissions reductions from the ERMS program as part of the ROP reduction measures for the milestone period. Illinois EPA has estimated in its ROP plans that the ERMS program will achieve a VOM reduction of 12.6 TPD. This represents nearly 7% of the total VOM ROP reduction needed for this milestone period. Regarding the attainment demonstration for the Chicago NAA, Illinois EPA submitted amendments to the Illinois SIP on December 26, That submittal supplemented the attainment demonstration submitted to U.S. EPA in April Illinois EPA s attainment demonstration included air quality modeling and a strategy for reducing emissions which relies on the ROP Plans and U.S. EPA s NOx SIP Call. The air quality modeling has been performed in cooperation with the Lake Michigan Air Directors Consortium (LADCO) and the States of Indiana, Michigan, and Wisconsin. The results demonstrate that implementation of the VOM and NOx control strategies, including the ERMS, will result in the Chicago area attaining the ozone NAAQS by the 2007 attainment date. As noted previously, U.S. EPA approved Illinois attainment demonstration on December 13,

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17 IV. Area-Wide Emissions Status A. Source Types There are several different types of emissions sources involved in the ERMS program: participating sources, new participating sources, sources that are exempt, general participants, and special participants: Participating sources are those that are required to have a CAAPP permit, have baseline or actual emissions of at least 10 tons during the season, were operating prior to May 1, 1999, and are located in the Chicago ozone NAA. These make up the vast majority of emissions sources in the ERMS program, and they are required to hold ATUs for all of their VOM emissions during the season. New participating sources are located in the Chicago NAA, required to have a CAAPP permit, have actual seasonal emissions of at least 10 tons, but were not operating prior to May 1, They must hold ATUs for all of their VOM emissions during the season, but were not given baselines. They must acquire their ATUs through trades or long-term transfers. Exempt sources are those which would otherwise need to be participating sources, but have restricted their emissions in one of two ways. They may have used their CAAPP permit to limit seasonal VOM emissions to under 15 tons per season (TPS), or they may have already reduced their seasonal emissions by at least 18% of their baseline. General participants are people or companies other than participating sources or new participating sources who have obtained a transaction account and are allowed to trade ATUs. Examples may include brokers or companies that were participating sources but who shut down their operations and still want to retain control of their ATUs. For the purposes of this report, there are two different types of general participants. There are those who used to be participating sources and therefore continue to receive an allotment. These will be included in tables later in this report that discuss the geographical and industrial distribution of emissions because allotments were actually designated to go to these sources. The second group are those who were not previously classified as participating sources and who never received allotments. These are not included in the geographical and industrial breakdowns because they act more as holding accounts or brokers, and may be outside the nonattainment area or even the state. All trades for both types are still reported here, though. Special participants are any people or groups that register with the Illinois EPA to purchase and retire ATUs but not sell ATUs. Any ATUs given or sold to a special participant is automatically retired. 10

18 B. Total Aggregate VOM Emissions For 2002, Table 1, below, summarizes the seasonal VOM emissions from each of the source categories: Table 1: Source Emissions Breakdown Seasonal Category Number of Sources Tons VOM Participating Sources * 172 4,999.7 New Participating Sources Exempt due to 15 TPS Limit Exempt due to 18% Reduction *Emissions are for those participating sources that had a Title V permit, reported emissions, and went through reconciliation. As a subset of participating sources and new participating sources, some emissions may be covered by variances, consent orders, or CAAPP compliance schedules. Others may come from contingent units, which are those units for which a construction permit was issued prior to 1998, but for which three years of data are not yet available to determine a baseline. A third subcategory are units that had an emergency condition approved by the Illinois EPA as described in Section Emissions from the affected units are not included in the total for which ATUs are required in all of these situations. Thus, they are subtracted out before reconciliation is done. Other units may be part of a major modification to the source. Such a situation requires that the source provide 1.3 times the emissions from the applicable units, in order to account for new source review requirements. All of these are split out in Table 2, below, for additional information. Table 2: Special Unit Emissions Breakdown Seasonal Special Unit Type Number of Sources Tons VOM Contingent Units Emergency Variance, Consent Order, Etc Major Modifications Overall, there was a total of 10,871.8 tons of seasonal VOM emissions in the baselines of all participating sources. These sources had an allotment of 98,164 ATUs (9,816.4 tons). This represents an area-wide 9.7% reduction from the 11

19 baseline VOM total to the allotment total before actual emissions are even taken into account. The change in reduction to 9.7% in 2002 from 9.9% in 2001 is due in part to normal yearly variations in activity, but mostly to some participating sources leaving ERMS and others entering the program with different allotment levels compared to their baselines. The reduction was 9.6% in 2000, so it has remained in the same general range throughout the three years of the program to date. C. Breakdown of ATU Use ATUs are retired by the Illinois EPA to account for VOM emissions from participating and new participating sources during the season. ATUs have a twoyear life (except for some special circumstances) and can be retained if they are not used or traded during the year in which they are allotted. An ATU that is not used during this two-year period automatically expires. ATUs may also be donated or sold to a special participant for air quality benefit (immediate retiring), should a source so choose. As noted above, there were no new participating sources in the ERMS program during the 2002 season. Participating sources used 51,164 ATUs for compliance purposes (it should be noted that this is a larger amount than simply looking at the number of ATUs reported, due to four companies that went into excursion compensation). Participants are also retaining 82,358 ATUs for the 2003 season. In addition, 10 ATUs were donated to one special participant, 270 ATUs were bought by another special participant, and 248 ATUs were donated to ACMA. D. Expired ATUs At the end of the 2002 season 33,760 ATUs expired from non-erg sources. This represents 34.4% of the number of ATUs allotted in Table 3, below, shows where these expirations came from according to the type of source. General participants have been further split in this table to show those that have received ATUs from ERGs separate from those which did not. For more information on ERGs, see Section VI, below. Table 3: Expired ATUs Number of Sources Total Number Source Type With Expired ATUs of Expired ATUs Participating Sources 85 30,502 General Participants (Non-ERGs) 14 3,258 New Participating Sources 0 0 Total Non-ERG 99 33,760 ERGs 7 2,682 12

20 E. ATU Vintage Summary While some companies had year-2001 ATUs expiring without having been used in either 2001 or 2002, other companies were retiring year-2002 ATUs for compliance purposes. Of the 51,164 ATUs retired for compliance purposes after the 2002 season, 31,575 were originally issued in Since ATUs of different expiration dates could be traded, the average price by ATU vintage was analyzed. Only 106 ATUs traded in the 2002 season were issued in 2002 (and thus expire after the 2003 season). These trades averaged $31.04 per ATU. The trades involving ATUs that were issued for the 2001 season (and thus would have expired after the 2002 season) averaged $32.06 per ATU. The difference in price is only $1.02 per ATU and is the opposite of what would be expected if date were an issue newer vintage ATUs should be more expensive as they have more available use. Thus, there does not seem to be any market difference in the cost of ATUs by vintage. F. Findings 1. The initial design target for the ERMS program was a 12% reduction from the baseline, made up of 9% for ROP, 1% for ACMA, and 2% contingency. The resulting allotment for 2002 was 9.7% below the baseline, which satisfies the needed reduction for achieving reasonable further progress, given the net effect of exemptions, opt-outs, and contingency measures. 2. ATUs equivalent to a total of 34.4 of those allotted to participating sources expired in 2002 without being used. 13

21 V. Evaluation of Trading Activities A. Account Officers All sources required to participate in the ERMS program must have at least one account officer designated to represent their Transaction Account. Designated account officers are ultimately responsible for all information contained in each Account. Many sources budgeted for at least two account officers so that one individual could be the primary and the other could be the alternate. The ERMS rule specifies that all prospective account officers must participate in Agency-sponsored account officer training prior to representing a Transaction Account. As of the start of the 2003 seasonal allotment period, the Illinois EPA had developed and presented 18 account officer training sessions that were held from August 1999 to February Each training session was approximately five hours in length and all account officers were given a take-home manual that could be used as a reference tool. The training agenda included sections covering Title V permitting, ERMS program overview, ATU creation review, seasonal emissions reporting, emissions compensation process, functioning in the ERMS marketplace, Transaction Accounts, ACMA, and the ERMS Website. The ability to access and work with an assortment of information via the ERMS website would be a large part of many account officers' duties. Not only is the information on the website convenient to access, but it also provides the most upto-date data available in the ERMS program. Therefore, the Illinois EPA determined that it was important to provide access to a training version of this site during the account officer training to give participants hands-on opportunities. Account officers were able to post mock buy/sell postings and enter into mock trades via a training module on the site during the session. A total of 362 account officers have been trained to date, including 28 in Of these, 214 are currently designated to represent ERMS Transaction Accounts. B. Website Access There have been no significant problems with the ERMS website. Issues from the previous year have been taken care of by posting the solutions to some common account officer problems on the ERMS website. C. Transaction Summary During the 2002 season, the program generated 23 seasonal trades, four new longterm transfer agreements, and seven transfer agreements continuing from the previous years. These involved a total of 25 sources as sellers and 33 as buyers (including the transfers and excursion compensation). One general participant both bought and sold ATUs in 2002, receiving ATUs in a long-term transfer 14

22 agreement and then selling them. Most sold to other participating sources, but one source donated to a special participant, two donated to ACMA, and one sold to a special participant. More details on these transactions can be found in Section F, Special Market Activity, below. Tables 4 and 5 list the overall selling and buying of each source. Those sources not listed had no trading activity. Table 4: ATU Sellers Number of ATUs Sold on Donated to: Company Market Special Part. ACMA Abbott Labs (Abbott Park) 50 Acme Steel Co. (Riverdale) 221 American NTN Bearing Mfg. Corp. (Elgin) 180 Arlington Plating Co. 15 Berlin Industries (Elk Grove Village) 80 Brown Printing Company (Crystal Lake) 88 Candle Corporation of America (Chicago) 55 Caterpillar (Joliet) 248 Corn Products International, Inc. (Bedford Pk.) 259 Equilon Enterprises LLC (Arlington Heights) 2 FCL Graphics, Inc. (Harwood Heights) 100 Flexicon, Inc. (Cary) 200 Jefferson Smurfit Corp. (St. Charles) 102 Jefferson Smurfit Corporation (Carol Stream) 366 Marathon Ashland Petroleum (Willow Springs) 262 Meyer Steel Drum (Chicago) 13 Plastic Decorator (Elgin) 130 Precoat Metals (Chicago) 270 Rexam Relase (Bedford Park) 39 Rock Tenn Co. (Chicago) 611 Rock Tenn Co. (General*) 611 St. Clair Pakwell (Bellwood) 15 Sleepeck Printing (Bellwood) Stack-On Products (Wauconda) 204 Zenith Electronics (Melrose Park) 604 Totals: 4, *Sources marked General are General Participant accounts whose locations are wherever the account holder might be. 15

23 Table 5: ATU Buyers Number of ATUs Acquired Bought on Excursion ATU Buyers the Market Comp. Aargus Plastics (Des Plaines) 81 Abbott Labs (North Chicago) 50 Acme Finishing Co. (Elk Grove Village) 3 Acme Packaging Corp (Riverdale) 221 Berlin Industries (Carol Stream) 80 Brachs Confections, Inc. (Chicago) 247 Brakur Custom Cabinetry (Shorewood) 42 Brown Printing Company (Woodstock) 88 Central Can Co. (Chicago) 57 Chicago Steel Container Corp. (Chicago) 15 Dart Container Corp. of Illinois (N. Aurora) 200 Diversapack LLC (Marengo) 500 East Balt Commissary (Chicago) 75 Equilon Enterprises LLC (Bedford Park) 2 Field Container (Elk Grove Village) 15 Formel Industries, Inc. (Franklin Park) 26 Fort Dearborn Lithograph Co.(Niles) 55 Jim Pendergrass (General*) 204 Law Office of Katherine W. Delahunt (General*) 604 LTV-Copperweld (Chicago) 270 Marathon Ashland Petroleum (Elk Grove Twp.) 262 Meyer Steel Drum (Chicago) 13 Multifilm Packaging Corp. (Elgin) 100 National Baking Co. (Chicago) Nielson & Bainbridge LLC (Bridgeview) 111 Pepperidge Farm, Inc. (Downers Grove) Reichhold (Goose Lake Twp.) 259 Rock Tenn Co./Waldorf Corp. (General*) 611 S&C Electric Co. (Chicago) 30 Smurfit Flexible Packaging (Schaumburg) 45 University of Illinois Chicago (Chicago) 52 Wheatland Tube (Chicago) 12 Wincup Holdings, L.P. (West Chicago) 55 Totals: 4, * Sources marked General are General Participant accounts whose locations are wherever the account holder might be. 16

24 Thus, trades (excluding excursion compensation and donations) accounted for 4,483 ATUs. Trading activity made up 4.6% of the total allotment of 98,164 ATUs and 8.8% of the 50,985 ATUs that represent the emissions reported for compliance purposes. In studying the operation of the ERMS market, Illinois EPA has looked at which sources were buyers or sellers for both years of operation to date. Of those sources that bought ATUs in 2002, 16 of them had also bought ATUs in both 2000 and 2001, with nine others that had purchased in either 2000 or 2001 (buyers included those who purchased ATUs on the market, from ACMA, or in excursion compensation). Of those that sold ATUs in 2002, nine were also sellers in both 2000 and 2001 while 11 more sold ATUs in either 2000 or 2001 (sales include donations to ACMA or special participants as well as selling on the market). Thus, significant percentages of ERMS sources who bought or sold ATUs in 2002 (48% of buyers, 36% of sellers) also did so for both 2000 and 2001, while only a smaller percentage of those which bought or sold in 2002 (24% for buyers, 20% for sellers) had never done so before. With only three years of market operation completed, it is not possible to draw any conclusions yet from this information. However, the patterns of selling and purchasing of ATUs may be an important metric for market-based systems and will be the subject of further observation in future reports. D. ATU Availability There are several indicators of how accessible ATUs were to the ERMS participants. One indicator is the relative number of Buy and Sell postings to the ERMS bulletin board. There were a total of 19 Sell postings which showed 8,593 ATUs, and one Buy posting which showed 247 ATUs. The fact that there was such a high ratio of ATUs for sale as compared to only one source attempting to buy indicates that ATUs were readily available to those looking for them. A second indicator is the average price for ATUs. If ATUs are difficult to obtain, their price should rise as a function of supply and demand. If they are readily available, the price should generally decline. Prices declined steadily from the 2000 season through the 2001 and 2002 seasons. The average ATU price in 2000 was $75.87; the average in 2001 was $51.93; the average in 2002 was $ This indicates that there were enough ATUs on the market to satisfy all potential customers. A third indicator is that no source requested regular access to ACMA during the reconciliation period. Sources would likely request such access if they could not find the ATUs they needed on the market. Thus, it can be concluded that sources who were looking to acquire ATUs found the ATUs they needed in the market. 17

25 A fourth indicator is the number of sources that had to go into excursion compensation because they did not have enough ATUs to account for their emissions. Four sources went into excursion compensation after the 2002 season. However, all had circumstances that cannot be attributed to unavailability of ATUs. One of the sources miscalculated its emissions and did not realize the error until it was too late to buy ATUs on the market. The other sources simply did not undertake the necessary actions to obtain required ATUs. There has been no indication that any source that was actively looking for ATUs was unable to obtain the needed amount. A final indicator is the number of ATUs that expire. As discussed above, after the 2002 season, 33,760 non-erg ATUs expired without being used. This represents 34.4% of the ATUs allotted in If ATUs were in high demand, it is unlikely so many would have expired unused. E. Average ATU Market Price The market price of an ATU is determined through trading among the ERMS participants. The Illinois EPA uses information submitted with each trade to calculate the average market price by dividing the total price of all included transactions by the number of ATUs traded. Trades may not be included if the participants indicated that special considerations were involved for example, if one branch of a company trades ATUs to another branch without charging a fee. Using this method, the average market price for each ATU in the 2002 season was calculated to be $ ATUs ranged in price from $20 to $50 each. Eighteen of the 23 trades were included in determining this average. The others were excluded as described above. Long-term transfer agreements are not included in this price. There were four permanent transfers of ATUs that began in 2002, all of which involved special considerations. F. Special Market Activity Caterpillar donated 248 ATUs to ACMA. Donations to ACMA will remain in ACMA with an unlimited life until somebody buys them at a later date. For the present time, these donations ensured that the 24.8 tons of VOM represented by this donation would not be emitted to the atmosphere in 2002 but serves as insurance in case ATUs become scarce at some future date. One company donated 10 ATUs to a special participant as part of a Compliance Commitment Agreement (CCA) that resolves an enforcement issue. Those 10 ATUs will be donated every year as part of a long-term transfer agreement. 18

26 Another company resolved a CCA for a period of noncompliance by themselves becoming a special participant and buying and retiring 270 ATUs, an equivalent amount to the ERMS seasonal emissions they had not properly accounted for previously. This company will no longer be in the ERMS program now that they have resolved their issues, so it is expected to be a one-time occurrence. A third company has donated 39 ATUs to ACMA as resolution of another CCA that dealt with the way shutdowns and allotment transfers were improperly handled. This company is entering into a long-term transfer agreement such that these ATUs will be automatically transferred to ACMA every year. G. Findings 1. The data show that sources were able to find trading partners, there was a sufficient supply of available ATUs, and market prices were conducive to trading. Thus, the market system operated in the desired manner. 2. Previously-occurring minor problems encountered with access to the Website have been satisfactorily resolved. 19

27 VI. Alternative ATU Generation A. Summary of Emissions Reduction Generator (ERG) Proposals There were no new ERG proposals during In previous years, nine ERGs have been approved. Table 6, below, shows the ERGs that received ATUs in 2002 (one approved ERG has not yet created an account and thus did not receive ATUs). All ERG proposals to date have been shutdowns for which facilities have forfeited their permits to operate the affected units in order to receive ATUs. It is possible for sources to apply to become ERGs using other methods, but all must show actual reductions in VOM emissions. Any source wishing to get ATUs on a continuing basis must modify its permit to incorporate the limits, thus ensuring the actual reductions are achieved. Sources wishing only to get a single issuance of ATUs must prove actual VOM reductions for that season. Table 6: ERGs Receiving ATUs in 2002 Company ATU Allotment ATUs to ACMA Alumax Extrusions 63 CCL Custom Mfg General Mills 19 Industrial Coatings 82 Metal Box International 90 Pactiv 1, Sherwin-Williams Solo Cup 99 ATUs for ERGs equates to 2.7% of the total allotment to all sources in the ERMS program. All of the ATUs allocated for ERGs in 2002, with the exception of General Mills, went into general participant accounts and were not traded in that season. A total of 2,682 ATUs expired from these accounts after the 2002 season (the full allotments of all ERGs except General Mills). The ATUs for General Mills went to its sister facility in DuPage County. In the previous two years of the ERMS program (the lifetime of an ATU), a total of 38 ATUs has been transferred to General Mills due to this ERG. While the source did not have any ATUs expire this year, they are holding 167 ATUs in their account that will carry over to the 2003 season. Thus, the 38 ATUs from the ERG were not necessary to keep the company under their allotment and did not play any role in trading. 20

28 B. Summary of Inter-Sector Proposals There were no proposals for inter-sector trading in C. Finding Alternative ATU generation did not play a role in market performance during the 2002 season. 21

29 VII. Performance Accountability A. Seasonal Emissions Reports Illinois EPA identified 239 facilities that were required to submit seasonal emissions reports (SERs) for the ERMS program. These reports are based on federally enforceable permit conditions for recordkeeping, reporting, monitoring, and calculation methodology. Of these, 172 were expected from permitted participating sources. Follow-up calls were made to 35 facilities that did not submit their SERs by the deadline. Of these, all but one responded and sent in their SERs. The one remaining facility was sent a Violation Notice and then the Agency received its SER. Upon receiving the SERs, Illinois EPA consulted with a number of sources which had minor errors on their reports. In addition, Illinois EPA returned 30% of the SERs received from participating sources for correction due to a variety of errors. This compares to a return rate of 45% for the 2001 season and 51% for the 2000 season. Of those sources who had their SERs returned for correction in 2002, 39 of them (23% of the overall total) also had it returned in 2000 or Of these sources that were returned in 2002, 21 also had it returned only in 2001; 11 also were returned in both 2000 and The top five types of errors in 2002 were: 1. Failure to include all significant emission units covered by the CAAPP permit. 2. Improperly listing new units as contingent units. 3. Mathematical or rounding errors. 4. Failure to follow proper CAAPP permit procedures for calculating emissions. 5. Failure to report HAPs Sources that are subject to MACT, reported to TRI, or are major for HAPs had to report VOM HAP emissions on their SERs. Some sources continued to report pollutants that were not HAPs or that were HAPs but were not VOM. Information pertaining to these pollutants was not considered in this evaluation. B. Alternative Compliance Market Account (ACMA) As noted in the ERMS rule, the purpose of the ACMA is to serve as a secondary source of ATUs for participants. Unlike ATUs allocated to sources, those in the ACMA have an indefinite life as long as they remain within the ACMA; once they are bought, they must be used to account for either the preceding or next seasonal allotment period. The ACMA may receive ATUs in several ways. First and foremost, the ACMA account is given ATUs in an amount equal to one percent of each year s allotment 22