Federal Energy Projects - Emissions Markets Opportunities

July 28, 2004

Federal agency energy efficiency and renewable energy (EERE) projects may be able to take financial advantage of existing and emerging emissions markets. In some cases the emissions values may significantly improve EERE project cost effectiveness. This article provides basic emissions market information and describes two federal examples.

The 1990 Clean Air Act Amendments encouraged the development of emissions trading markets as a method to meet air quality goals. There are two main types of emissions trading programs:

  1. Cap and trade, and
  2. Emission reduction credits (ERCs)

Emissions markets for nitrogen oxides (NOx) and sulfur dioxide (SO2) are the most common and well established. There are also small markets for other types of emissions such as volatile organic compounds (VOCs), carbon monoxide (CO) and particulates (such as PM10).

Cap and Trade Emissions Markets

Cap and trade programs set an emission cap, and then allocate a corresponding number of emissions "allowances" to emission sources. Sources that reduce their emissions below their allocation can sell allowances to those sources in the trading region that emit more than their allotted amount.

The SO2 cap and trade program covers the entire United States. Cap and trade programs for NOx have been established to address summer ozone pollution in the Eastern U.S. Both of these programs are primarily focused on utilities and other large electricity generators. However, seven states (Indiana, Massachusetts, Maryland, New Hampshire, New Jersey, New York and Ohio) have included EERE set-aside provisions that will make certain EERE projects in their state eligible for NOx allowances. Massachusetts and New York are in the process of finalizing their rules that define what type of EERE projects qualify for EERE allowances. The other states do not have detailed rules. Emissions allowance market prices were as high as $5,000/ton during winter 2003, but have slipped to $2,500/ton or less since summer 2003. See www.epa.gov/airmarkets/progsregs/noxview.html#overview for more information and www. evomarkets.com/resources/index.php?xp1=1 for a monthly NOx price report.

Typically one ton of emissions reductions during the ozone season (May through September) will be required for emissions allowance applications. Therefore it takes a total of 1,333 MWh of renewable energy production and/or energy efficiency savings to be eligible for one allowance (using 1.5 lbs NOx reduction per megawatt-hour--the EPA recommended emissions factor). Emissions savings from several projects (federal or private sector) can be aggregated to meet the one-ton minimum.

FEMP and the EPA are exploring an emissions trading pilot project in Massachusetts that will include the EPA's Chelmsford laboratory, along with other interested federal (or private) sites with qualified EERE projects. A variety of methods are being considered to ensure that the federal sites retain the financial benefit of the emissions trade.

Emission Reduction Credit Markets

ERC programs are for major new or expanding emissions sources (typically NOx) in certain air quality non-attainment areas. These sources are required to "offset" their projected new emissions by procuring ERCs from sources that have eliminated or reduced emissions. ERC transactions are usually administered at the state or local levels, with each jurisdictional authority setting its own rules and procedures. Federal sites that reduce emissions from on-site generation sources, by replacing a diesel generator with solar or wind for example, may be able to sell the resulting emission reductions in these ERC markets. The NOx ERC price in some of these markets is significant--as much as $100,000/ton (or even more) in southern California. However, it is important to note that these markets are relatively inactive, with volatile prices. The most active and high value markets include several regions in California, Texas, New York, Pennsylvania and New Jersey. See the U.S. EPA Ozone Nonattainment Area Map, (August 2003). The Naval Facilities Engineering Command-Southwest Division (SWDIV) Energy Team has developed a method to include ERC market value in their $16 million Utility Energy Service Contract (UESC) Cogeneration Upgrade project at the Naval Medical Center San Diego. This project will result in 10 to 20 tons NOx reduction per year, with total emissions value estimated in the $1 to 1.5 million range. This value will be directly credited back to the financed amount of the contract, as part of the salvage value of the equipment removed.

Navy project details and additional information regarding emissions markets will be described in future FEMP Focus articles. Please contact Chandra Shah at 303-384-7557 if you are interested in learning more about emissions market opportunities. For information on SWDIV Energy Team, contact David. B. Deiranieh.